Specialization in a Knowledge Economy
December 2025
Working Paper Number:
CES-25-77
Abstract
Using firm-level data from the US Census Longitudinal Business Database (LBD), this paper exhibits novel evidence about a wave of specialization experienced by US firms in the 1980s and 1990s. Specifically: (i) Firms, especially innovating ones, decreased production scope, i.e., the number of industries in which they produce. (ii) Innovation and production separated, with small firms specializing in innovation and large firms in production. Higher patent trading efficiency and stronger patent protection are proposed to explain these phenomena. An endogenous growth model is developed with potential mismatches between innovation and production. Calibrating the model suggests that increased trading efficiency and better patent protection can explain 20% of the observed production scope decrease and 108% of the innovation and production separation. They result in a 0.64 percent point increase in the annual economic growth rate. Empirical analyses provide evidence of causality from pro-patent reforms in the 1980s to the two specialization patterns.
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investment,
production,
economist,
industrial,
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growth,
invention,
merger,
acquisition,
specialization,
innovation,
inventory,
patent,
patenting,
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innovating,
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innovation patenting
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Survey of Industrial Research and Development,
North American Industry Classification System,
Patent and Trademark Office,
Census Bureau Business Register,
Census Bureau Disclosure Review Board,
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Federal Statistical Research Data Center,
University of California
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