Intellectual Property Regimes, Technology Adoption and Organization of Firms

Abstract

Recent debates have emerged in understanding the role of globalization on the demand for more skilled workers or executives and organization of firms, even in developing countries. However, there remains little or no evidence as to how a firm reacts to a change in the intellectual property regime in terms of demand for different types of workers and how does that further change the organizational design of a firm. To the best of our knowledge, this is the first paper to explore how shifting of intellectual property regimes affect within- and between-firm executive compensation and organizational design. We use the setting by Garicano (2000) to analyse how organization of firms, process and structure, changes because of stronger patent policy. Our work builds on the idea that stronger patent rights may induce a firm to use more technology in the production of goods as returns to technology-intensive goods are higher. This can encourage apriori high-tech firms to re-organize their production more towards technology-intensive tasks as compared to low-tech firms. Since higher value of technology adoption can give rise to more of non-routine problems, this can create demand for managers or executives. Using a novel dataset for Indian manufacturing firms, which reports detailed data on executive compensation (by different management levels) and utilizing a quasi-natural experiment in terms of the imposition of a patent reform, we show that firms which are high-tech, before the imposition of the stronger patent policy, demand more managers relative to non-managers after stronger patent regime. Firms which are closer to the technological frontier, demand more executives. This result highlights that stronger patent regime may not only create between-firm inequalities but within-firm as well. Our results also reveal that increase in compensation happens through an incentive-based approach rather than fixed-wage component. Finally, stronger patent rights increase the differences in the hierarchical layers between firms.