Is Knowledge Diffusion Really Slowing Down? Exploring Determinants of Highly Diffused Innovation

Measuring the diffusion of innovation presents an important challenge for innovation policy as diffusion facilitates healthy competition between firms. Scholars have recently proposed that a slowdown of knowledge diffusion is the driving force behind the recent decline in business dynamism. This article examines whether the diffusion of innovation has slowed down and explores the determinants of highly diffused innovations over time. Critical for measuring diffusion, we employ a comprehensive firm- and patent-level dataset encompassing nearly the entire universe of firms that applied for patents in Germany between 1998 and 2015. First, we measure the rate and speed at which innovations diffused over time. Second, we explore the determinants of diffusible innovations by estimating which technology-, firm- and patent-level variables correlate with highly diffusible innovations by using an adapted double machine learning model. Our results show that knowledge diffusion has not slowed down on average between 1998 and 2012. Young firms introduced innovations that drive diffusion but have constituted a much smaller share of all firms that introduced breakthrough innovations over time. This emphasizes the importance of a supportive legislative environment for young firms as they introduce innovations that are influential and facilitate healthy competition. Determinants of diffusion are also inconsistent between different periods which is an important element to consider for innovation policy.