Communicating Technical Knowledge

Firms reduce the marginal cost of communicating technical knowledge by “formalizing” it in standards, dominant designs or other ways. But this only pays when new technology is sufficiently developed. In a simple model with endogenous communication costs, two equilibria emerge. With formalized knowledge, new technologies replace old and patents increase innovation. But without formalization, new technologies coexist with old, patents decrease innovation, and inventors might freely exchange knowledge. This affects policy and can explain why some innovation is highly localized despite global production and why some nations that innovate with mature technologies have difficulty moving to the innovation frontier.