Impacts of Phase-out of Mining and Processing on Downstream Rare Earth

Innovations in United State: An Empirical Test of Innovation Ecosystem

Zhi Li

Ph.D. Option in Energy Management and Policy

Department of Energy and Mineral Engineering, Pennsylvania State University

Abstract: A balance of organizations within an innovation ecosystem can support and encourage successful innovation

activities. Since 1990s, there has been a significant disturbance in the upstream of rare earth value chain in United

States, including a gradual phase-out of REEs mining and production. We examine the effect of the removal of

upstream suppliers on rare earth innovations in U.S., particularly on downstream innovations. Using the patents dataset

from the Chinese Patent Office (SIPO) and the US Patent Office (USPTO), we investigate the change in patenting

activities by U.S. entities after such removal, in comparison to those by Japanese entities and European entities. We

find that dramatic drop and closing of domestic operation in rare earth mining and processing have a substantial

negative impact on innovations in U.S. rare earth industry, for both innovations on REE-containing components and on

REE-related end-use applications. Furthermore, our analysis on forward citations to patents at the USPTO suggests that

the quality of rare earth innovations in U.S. also suffered since the phase-out of upstream operations.

Keywords: Rare earth, Innovation system, supply chain, phase-out, patents

1 Introduction

Clean energy will be the next wave for United States economy, because of its importance

to economic increase, technology development, jobs boost and oil dependence decline. Rare earth

elements (REEs) are at the center of clean energy technologies. They are key material content of

permanent magnets, batteries, catalysts and phosphors, which are widely used in wind turbines,

hybrid vehicles, fluorescent lighting and petroleum refining. In U.S., REEs are classified as

“Strategic and Critical” to nation’s defense and industrial interests.

From 1960s to 1990s, United States used to be the leader in both REEs production and

rare earth related innovations. Since a large amount of light rare earth elements was discovered at

Mountain Pass in California in 1960s, Mountain Pass Mine became the paramount source of rare

earth elements. From late 1990s, China’s REE production increases rapidly. At the same time,

U.S. experienced a phase-out of its REEs mining and processing in response to both

environmental restrictions and price competition from China. Following with the phase-out of

domestic REEs supply, there was a significant offshoring – moving aboard of REEs-related

manufacturing – in rare earth industry, as firms seek locations to maximize their efficiency and

competitiveness.

Current literatures suggest that successful innovation occurs based on a balanced

innovation ecosystem that includes clients, upstream suppliers, downstream manufacturing firms,

R&D units and the financial system (Lundvall, 1992; Edquist, 1997; Chapman and Corso, 2005;

Mills et al., 2004). These studies emphasize the importance of an integrated ecosystem or

environment for innovation activities. Thus, based on this theory, our perspective is that the

phase-out of upstream segments will have the potential to disrupt the innovation ecosystem and

affect innovation abilities of downstream firms within the same innovation ecosystem.

Using patents at United State Patent and Trademark Office (USPTO) and invention

patents at State Intellectual Property Office in China (SIPO) from year 1985 to 2007, we

investigate the change in patenting activities by U.S. entities after the phase-out of mining and

processing of REEs, compared to those by Japanese or European entities. We find that the

movement of domestic REEs supply in U.S. after 1998 and 2003 is associated with a decline of

innovations in rare earth end-use technologies. The results hold for patenting activities in both

REEs-containing components and REEs-related end-use applications, indicating that U.S.

innovation capacity in rare earth industry is weakened when the innovation ecosystem is

disturbed.

Furthermore, we use forward citations as an indicator of a patent’s quality and examine

the change of quality. It is possible that the quality of U.S. patents may not decrease, even though

the quantity declined. While the result are the same as patenting activities, forward citations to

U.S. patents decrease relative to those to Japan and Europe patents after the phase-out of U.S.

domestic REEs production. This demonstrates that the quality of U.S. patents is also falling

behind.

This conclusion is important at both firm and public policy levels. First, firms need direct

and indirect interactions with upstream material suppliers and downstream users to support

innovation activities. To manufacturing firms in rare earth industry in U.S., the phase-out of

mining and processing may have unintended negative impacts on their ability to innovate in their

domestic market. This would lead them to change their location decisions to pursuit

competitiveness by moving next to their business partners. At the policy level, results indicate

that any disturbance to an innovation ecosystem, such as the movement of material supply in rare

earth industry, may also jeopardize innovations in other areas. Further understanding of this

trade-off between firm’s competitiveness and industry development is critical to make a clear

perspective about how innovation ecosystem works at the level of the firm and overall economic

development.

The remaining of this paper is organized as follows. First, we introduce theory about

innovation ecosystem, and how it could impact innovations. Then we discuss history and

disturbances of rare earth industry in United State. In the fourth and fifth sections, we explain the

data and model used for empirical study of impacts of phase-out of upstream material supply on

downstream rare earth innovations. In the sixth section we present statistic results and discuss

implications. Finally, we draw conclusions from this analysis and suggest further work.

2 Innovation ecosystem

Innovation ecosystem is a network of organizations within a common boundary whose

activities and interactions can initiate, import, modify and diffuse technologies (Freeman 1987).

Organizations in this system include suppliers of raw materials, manufacturing firms, university

research laboratories, government agencies and customer service firms (Edquist and Johnson,

1997; Merges and Nelson, 1990; Nelson, 1988). Innovations are induced by integrating

knowledge and ideas from related organizations in an innovation ecosystem, thus the removal of

any one of these organizations may affect the innovation ability within the system boundary

(Brian, et al, 2008).

Generally, upstream materials suppliers and downstream manufacturing firms are critical

sources of knowledge for technical advances of the innovation ecosystem (Klevorick et al., 1995;

Council on Competitiveness, 2005). The innovation ability of an industry is strongly conditioned

on both of them (Levin et al., 1987; Klevorick et al., 1995; Linder et al., 2005; Chapman and

Corso, 2005). The linkage among them can improve efficiencies in innovation ecosystem through

a set of necessary routines, involving close communication, information sharing and joint

problem solving (Teece, Pisano and Shuen 1997).These direct and indirect interactions are critical

for innovations and could enhance innovations by: (1) increasing their problem solving skills that

lead to different alternatives (Perry-Smith and Shalley 2003); (2) leading to greater access to

domain-relevant; and (3) providing organizations with access to an enhanced breadth of

knowledge (Rindfleisch and Moorman 2001; Bustinza, Molina and Gutierrez-Gutierrez 2010).

These interactions are necessary paths for knowledge spillover and transfer, which can

benefit other parts in the same innovation ecosystem. Previous work suggests that knowledge

spillovers are geographically localized (Jaffe et al., 1993; Branstetter, 2006). Common arguments

conclude that knowledge transfers need both codified and tacit elements. Compared to that

codified knowledge can easily be transferred across distances, the transfer of tacit knowledge

depends on more direct face-to-face contracts between individuals (Hansen, 2002). Nonetheless,

both codified and tacit knowledge spillovers are among people, firms and institutions, so close

interactions between these physical entities and individuals are difficult to transfer and often

require close interactions. Thus these critical interactions can be jeopardized by the increasing of

geographic distance between different segments.

3 Rare earth industry and clean energy in United State

3.1 Rare earth production

Rare earths are a group of elements with some unique chemical and physical

characteristics. Rare earth materials include rare earth ores, oxides, metals, alloys, semifinished

rare earth products, and components containing rare earth materials. They are used in a variety of

high-tech applications, especially in clean energy, such as hybrid cars, petroleum refining and

wind power turbines.

United States used to be the dominant producer of REEs materials after a high-grade

deposit of REEs ore was found in Mountain Pass, CA in the early 1950s, which is operated by

Molycorp. This deposit was mined in a larger scale between 1965 and 1995 (Fig. 1). During this

time the mine supplied most of the world wide rare earth metals consumption (Castor, 2008). In

1998, chemical processing at Mountain Pass was stopped after a series of wastewater leaks.

Hundreds of thousands of gallons of water carrying radioactive waste spilled into and around

Ivanpah Dry Lake (Lisa Margonelli). The mine closed after 2002, in response to both

environmental restrictions and lower prices pressure for REEs.

Fig. 1 Rare earth oxides production in U.S. and the world (from USGS)

On the contrary, the production of REEs in China increased dramatically from 1990s (Fig.

1), attributing to rich ore deposits, lower labor cost and low environmental standards. Chinese

REE production comes chiefly from two sources. The most important is the Bayan Obo iron-

niobium-REE deposit, Inner Mongolia. Now China dominates in REE material production,

accounting for 97% of world REE supply. Nearly all of the separated REE used in the United

States was imported either directly from China or from countries that imported their plant feed

materials from China.

The rare earth supply chain (Fig. 2) generally consists of mining, separation, refining,

alloying, and manufacturing (devices and component parts). A Government Accountability Office

(GAO) report illustrates the lack of U.S. presence in the REEs global supply chain at each of the

five stages of mining, separation, refining oxides into metal, fabrication of alloys and the

manufacturing of magnets and other components (GAO, 2010). China produces 97% of the REE

raw materials, about 97% of rare earth oxides, and is the only exporter of commercial quantities

of rare earth metals (Japan produces some metal for its own use for alloys and magnet

production). About 90% of the metal alloys are produced in China (small production in the

United States) and China manufactures 75% of the neodymium magnets and 60% of the

samarium magnets. A small amount of samarium magnets are produced in the United States.

Fig 2. Rare earth supply chain (from Cindy Hurst)

3.2 Uses of rare earth in clean energy

It is believed that the nation that harnesses the power of clean and renewable energy will

be the nation that leads the 21st century. Investments in clean energy can help U.S. back in

control of national energy future, create millions of new jobs and lay the foundation for long-term

economic security. President Obama has already taken significant steps as part of a

comprehensive strategy that will pave the way toward a clean energy future for the country. REEs

are key elements in clean energy components and applications, including magnets, batteries and

phosphors.

Take the permanent magnets for example. Permanent magnets (PMs) are a key

component of lightweight, high-power motors and generators. PM generators are used in wind

turbines to convert wind energy into electricity, while PM motors are used in electric vehicles

(EVs), hybrid-electric vehicles (HEVs) and plug-in hybrid-electric vehicles (PHEVs) to convert

energy stored in the vehicle’s battery into mechanical power for propulsion. The use of rare earth

elements (REEs) in PMs significantly reduces the weight of the motor or generator for a given

power rating.

The PM supply chain begins with the extraction and separation of Nd and other REEs

from ore. The vast majority of REE mining currently occurs in China. REE ore can be separated

into a concentrate, processed into a mixed rare earth solution and elementally separated to oxides

by solvent extraction. Rare earth oxides are ultimately used to produce rare earth metals, alloys

and powders, which manufacturers use as the building blocks for components of clean energy

technologies.

3.3 Disturbances to rare earth innovation ecosystem in U.S.

U.S. previously dominated REEs production and performed all stages of the rare earth

material supply chain. This also strongly supported research and development on rare earth, and

consequently U.S. became the world leader in rare earth technology innovation (Brian, et al,

2008). But from the late of 1990s, U.S. lost ground in rare earth industry.

The disturbances to U.S. rare earth industry can be classified into two categories. First is

the phase-out of REEs mining and processing. In 1998, chemical processing at Mountain Pass

was stopped and the domestic production of REE in U.S. dropped to under 5,000 metric tons per

year. The mine closed in 2003, in response to both environmental restrictions and lower prices

pressure from China, and domestic REEs production turned to zero. Fig 3 presents the U.S. REEs

production and the ratio between domestic production and import from 1985 to 2007. There are

two significant changes. In the period 1985-1994, the U.S. domestic REE production was greater

than 10,000 metric tons per year and domestic production was the major source. In the period

1995-2002, the domestic production dropped to 5,000 metric tons per year and imports exceeded

domestic production. Since 2003, the domestic REEs raw material producing stopped.

Fig 3. U.S. REE domestic production and imports (the left axis represents domestic production in metric tons across year, and

the right axis represents the ratio of domestic production and imports, data from USGS)

With the movement of REEs supply, downstream manufacturing firms are also affected.

They may select another location to maintain their competitiveness. One of these observed

offshoring behavior is about Magnequench Inc.. Originally Magnequench is a business unit

within General Motors, and a key patent on the material composition of NdFeB permanent

magnets was assigned to this firm in 1982. They opened a large permanent magnet production

facility in Indiana and quickly became the major producer of neodymium magnetic powders and

magnets and leader in innovations with NdFeB permanent magnet. However, their location

decision changed with that China substituted U.S. position in REEs producing. In 2002, three

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years after establishing production facilities in China, Magnequech closed the Indiana production

facility. Meanwhile, the company established a centralized R&D technology center in Research

Triangle Park, North Carolina. Then in 2004, Magnequench finally offshored their R&D

technology center to Singapore. Geographic proximity to the source of raw materials and

downstream users is cited as the main reasons for their offshoring decisions (Magnequench,

2005).

Based on theoretical analysis and actual situation of U.S. rare earth industry, we speculate

that the phase-out of mining and processing we mentioned above have a negative effect on U.S.

rare earth innovation ecosystem and lead to a decline of innovation activities to downstream

manufacturing firms. In the next two sections, we will introduce data and model used to test our

hypothesis, and specify our question.

4 Date and sample characteristics

4.1 Patent data

This study uses patents as a proxy evaluation for innovation activities. Patents issued by

the United State Patent and Trademark Office (USPTO) and invention patents from State

Intellectual Property Office of the P.R.C. (SIPO) are collected to construct dataset. Only patents

filed from 1985 to 2007 are employed in dataset, as China did not have the intellectual property

institution until 1985. The keywords for the search are names of relevant rare earth elements. We

use patents filed by entities from U.S., Japan and Europe Union. The assignee’s location is

determined by the first assignee’s location information.

The critical information extracted from each patent includes application date, assignee,

country or state of assignee, main IPC number and issued date for patents from SIPO (used to

distinguish whether a patent was issued). Then some patents with missing value of critical

information are deleted. The complete dataset contains 12,767 issued patents from USPTO and

6,505 patent applications from SIPO, among which 2,897 were granted. For patents from USPTO,

we also collected their forward citations information, which are used to evaluate the quality of a

patent.

4.2 Sample description

The trends of rare earth patents in each region represented by patent applications from

SIPO, issued patents from SIPO and issued patents from USPTO are shown in Fig. 4, Fig. 5 and

Fig. 6. Patent applications (Fig. 4) from U.S., Japan and Europe in China are all increasing since

late of 1990s. The total amounts are roughly the same for these three regions from 1985 to 1995,

but in recent years, U.S. has fallen behind Japan and Europe. The trend of patents issued in China

(Fig. 5) presents the same pattern. The drops in 2005, 2006 and 2007 are caused by the examining

process. Generally, three to six years are needed for a patent to be issued.

Patents granted by U.S., Japanese and European entities at USPTO increased before 2000,

and then turned to going down. Such trends are the same for these three regions. The total

amounts after 2005 are also under-estimate because of the time lag of examination. Before 1990,

patents granted by U.S. entities in USPTO are much more than those granted by Japanese and

European entities. After 2000, patents granted by Japanese entities surpass those granted by U.S.

entities, and the difference between U.S. and European entities are still reducing.

Fig. 4 Rare earth patents trend from SIPO applied by U.S., Japanese and European entities1985-2007

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Fig. 5 Rare earth issued patents trend from SIPO granted by U.S., Japanese and European entities1985-2007

Fig. 6 Rare earth issued patents trend from USPTO granted by U.S., Japanese and European entities1985-2007

5 Empirical model

5.1 Control groups

Fig. 4 and Fig. 5 indicate that patent applications and granted patent (ignoring truncations

in the last three years) from U.S. entities in China are increasing over years. However, patents

from Japanese and European entities are also increasing with an even higher rate. Fig. 6 illustrates

issued patents from U.S. entities in United State are decreasing after 2000, as well as Japanese

and European entities. Neither of these two patenting activities trends at USPTO and SIPO can

give us a credible conclusion whether U.S. innovation capacity in rare earth increases or not. To

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solve this problem, control groups need to be involved as a base line of innovation level in rare

earth industry over years.

In this study, Japan and Europe are chosen as control groups to evaluate innovation

activities from U.S. entities. We compare U.S. with Japan and Europe rather than the rest of the

world for the following reasons: (1) U.S., Japan and Europe are basically on the same technology

level; (2) most of the consumption and trade of REE in the world come from U.S., Japan and

Europe; (3) Japan and Europe are two primary competitors in high-tech development to U.S., and;

(4) U.S experienced a dramatic drop and then close-down of REEs mining and processing,

whereas Japan and Europe did not. Thus the increase or decrease of U.S. innovation capacity

discussed in this study is relative to Japan and Europe.

5.2 The phase-out of mining and processing

As shown in the former section, two general sorts of disturbances to U.S. rare earth

innovation ecosystem are observed, the removal of upstream supplier and offshoring of

downstream manufacturing firms. It is possible that these two disturbances can both impact U.S.

downstream rare earth innovations. As we focus on U.S. rare earth innovation capacity relative to

Japan and Europe, therefore, these two factors need to be re-assessed.

Downstream offshoring happened in U.S., as well as in Japan and Europe. After China

became the largest REEs supplier in the world, foreign firms in downstream rare earth supply

chain would have more incentive to move to China to seek competitiveness. At the same time,

rare earth related production market in China also increase rapidly, which also lead foreign firms

to value highly about China. Other general factors, such as China’s opening-up policies to attract

FDI and low labor cost, are important for foreign firms to make location decision. With firm’s

offshoring activities to China, foreign patent applications in China are growing, which is

necessary for foreign firms to protect their intellectual property and ensure their profit (Albert and

Gary, 2009). Thus, offshoring activities and patent application from U.S., Japan and Europe in

China are expected to rise simultaneously. Comparing with China, U.S. has a developed market

and a pro-patent legislation environment, therefore patenting activities from Japanese and

European entities are roughly steady relative to those in their own countries. Based on these

reasonable assumptions, the ration of patent application in China and issued patents in U.S. can

be used to measure the difference of offshoring activities from U.S., Japan and Europe to China

(Fig. 7). This figure indicates that a growing trend of offshoring exists in U.S. as well as Japan

and Europe. Thus, downstream offshoring can be ignored if we only want to test U.S. innovation

activities in rare earth industry relative to Japan and Europe.

Fig 7. Ratio of patent application in China and patent in US (normalized the ratio in 1998 to1)

The disturbance of upstream supplier’s movement, however, is only observed in United

State, since both Japan and Europe have no rare earth reservation and can only rely on imports. In

this circumstance, upstream supplier’s movment is the only factor needed to be examined the

impacts on U.S. rare earth innovation activities relative to Japan and Europe. As discussed in the

third section, the phase-out of domestic REEs mining and production in U.S. started from 1998,

and such impact deepened from 2003.

5.3 Model

Based on the analysis above, the questions in this study are specified to that: (1) did U.S.

innovation activities in rare earth industry decline relative to Japan and Europe after the phase-out

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Ratio of patent application in China and patent in US (normalized the ration in 1998 to 1)

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of domestic REEs mining and processing, and (2) did the quality of U.S. rare earth innovations

decrease since the phase-out? To test these hypotheses, two empirical models are constructed as

follows.

First, quantities of patents in each technology field over year by entities from U.S., Japan

or Europe are used to evaluate innovation activities. These patents are accounted into 4-digital

IPC subclasses. We drop the subclasses that are primarily classified into mining, separation and

refining (e.g. B01D, Separation), which are in the upstream in rare earth supply chain. Then the

subclasses that the sum of patents during this time period is less than 5 are dropped, since these

subclasses have a high probability to be noise to our model. Three sub-dataset, granted patents in

USPTO, granted patents in SIPO and patent applications in SIPO, are included in this model to

make robust results.

The model is as follows:

in which dependent variable Patenti,t,r is the account of patent in subclass i assigned by

entities from region r in year t; US is a binary variable is equal to 1 if assignee is from U.S., and 0

otherwise; d1 is a binary variable is equal to 1 if patent’s filing year is from 1998 to 2002, and 0

otherwise; d2 is a binary variable is equal to 1 if patent’s filing year is from 2003 to 2007, and 0

otherwise; Fyear_dummies and Subclass_dummies are used to identity fixed filing year and

subclass effects.

The coefficient β1 interprets that the quantities of patent in ith subclass from U.S. entities

is more than those from Japanese and European entities by β1 on average in each year. The

coefficient β2 interprets that the quantities of patent from U.S. entities in the ith subclass increase

by β2 (if β2 is positive) after year 1998 relative to those from Japanese or European entities. The

coefficient interprets such changes by β3 after year 2003. Negative estimators of β2 and β3 are

expected to support our hypothesis that U.S. innovation activities in rare earth industry are

decreasing relative to Japan and Europe.

Second, we use forward citations to evaluate quality of innovations. Based on patents

sub-dataset, we collect citations information of each patent. The accounts of average forward

citations for patents in each technology field over year by entities from U.S., Japan or Europe are

used as indicators. Only patents from USPTO have forward citations information, thus we can

only construct one sub-dataset for this analyze.

The model is as follows:

in which dependent variable Ave_Citationsi,t,r is the account of patent in subclass i

assigned by entities from region r in year t; US is a binary variable is equal to 1 if assignee is

from U.S., and 0 otherwise; d1 is a binary variable is equal to 1 if patent’s filing year is from 1998

to 2002, and 0 otherwise; d2 is a binary variable is equal to 1 if patent’s filing year is from 2003 to

2007, and 0 otherwise; Fyear_dummies and Subclass_dummies are used to identity fixed filing

year and subclass effects.

The same as in the first model, the two key independent variables are the interactions of

d1 times US and d2 times US. Under the hypothesis, the negative coefficients of these two

interactions indicate that the quality of U.S. rare earth innovations decrease after 1998 and 2003.

6 Estimation results

Table 1 shows the regression results of the patent quantity analysis using each sub-dataset.

Results using issued patents in USPTO, patent application in SIPO and issued patents in SIPO

confirm that U.S. is losing leadership in rare earth innovation. The coefficient of variable US

indicates the average patents in each subclass from U.S. entities comparing with those from

Japanese and European entities. In regressions using patents from USPTO, this coefficient is

significant positive, but significant negative in regressions using patents from SIPO. These results

are in accordance with graphs in the forth section. U.S. entities apply more patents than Japanese

and European entities in U.S., since entities will not apply all of their patents aboard. U.S. entities

apply less patents in China is an evidence that the overall rare earth innovation capacity of U.S. is

lower than that of Japan or Europe.

Table 1 Regression results using patents from 1985 to 2007

(1) (2) (3) (4) (5) (6)

VARIABLES Patents Patents Patents Patents Patents Patents

US vs. EU US vs. JP

US 0.944*** -0.0450* -0.0575*** 0.300*** -0.0489 -0.0927***

(0.0598) (0.0240) (0.0203) (0.0658) (0.0362) (0.0310)

US*d1 0.0104 -0.0669 -0.143** -0.408*** -0.616*** -0.886***

(0.116) (0.0645) (0.0615) (0.144) (0.116) (0.139)

US*d2 -0.278** -0.243** -0.217*** -0.532*** -1.782*** -1.358***

(0.120) (0.0975) (0.0687) (0.138) (0.191) (0.140)

Constant 0.00490 0.573*** 0.754*** 0.826*** 1.019*** 1.880***

(0.155) (0.124) (0.119) (0.182) (0.205) (0.203)

Observations 6,118 5,428 3,818 6,118 5,428 3,818

R-squared 0.533 0.381 0.332 0.619 0.350 0.325

Note: (1)Patents filing year from 1985 to 2007; (2) Regression (1) and (4) using patents from USPTO, regression (2) and (5) using

patent applications from SIPO, regression (3) and (6) using granted patents from SIPO; (3) *** p<0.01, ** p<0.05, * p<0.1

Two coefficients of the interactions (US*d1 and US*d2) are both significant negative,

suggesting that the rare earth innovation activities in U.S. are decreasing relative to in Japan and

Europe after 1998. Moreover, the coefficient of US*d2 is more significant or has an even more

negative value than the coefficient of US*d1 in each regression. This indicates the decline of U.S.

rare earth innovation activities is speeding after 2003 than after 1998. The shutting down of

Mountain Pass since 2003 has a worse impact than the producing reduction since 1998.

Furthermore, we only keep subclasses, in which patents are primarily used in end-use

applications to examine the impact on downstream firms on the rare earth supply chain. The

results (Table 2) are roughly the same, indicating that the removal of upstream rare earth supplier

affects the end-use innovations at a same significant level.

Table 2 Regression results using patents from 1985 to 2007

(1) (2) (3) (4) (5) (6)

VARIABLES Patents Patents Patents Patents Patents Patents

US vs. EU US vs. JP

US 0.904*** -0.0449* -0.0585*** 0.346*** -0.0449 -0.0872***

(0.0614) (0.0252) (0.0212) (0.0658) (0.0384) (0.0330)

US*d1 0.0144 -0.0459 -0.126* -0.509*** -0.561*** -0.849***

(0.118) (0.0682) (0.0655) (0.147) (0.124) (0.151)

US*d2 -0.251** -0.274*** -0.216*** -0.615*** -1.805*** -1.371***

(0.125) (0.102) (0.0727) (0.142) (0.203) (0.152)

Constant -0.0728 -0.0621 0.273** 0.920*** 0.228 0.904***

(0.132) (0.0900) (0.107) (0.236) (0.167) (0.157)

Observations 5,658 4,968 3,450 5,658 4,968 3,450

R-squared 0.534 0.388 0.336 0.626 0.347 0.321

Note: (1)Patents filing year from 1985 to 2007; (2) Regression (1) and (4) using patents from USPTO, regression (2) and (5) using

patent applications from SIPO, regression (3) and (6) using granted patents from SIPO; (3) Only including subclasses that are

primarily classified into end-use applications; (4) *** p<0.01, ** p<0.05, * p<0.1

To make sure our results are robust, we re-construct the sub-dataset. One way is to shrink

time period to from 1992 to 2007, since China’s first patent law is passed in 1984, and in 1992

China first amended its patent law. The intellectual property environment in China is becoming

mature after 1992. Another way is to restrict sizes of the subclasses in our sub-dataset to more

than 10 or more than 15. Under these constraints, the results also hold and can support our

hypothesis.

Then we examine if the quality of U.S. rare earth innovations decrease. In table 3, all

coefficients of the two interactions we mentioned above are negative and significant. We compare

citations for U.S. patents to those for Japan and Europe, with different size subclasses, indicating

that forward citations to U.S. patents are decreasing relative to Japan and Europe since 1998. This

result suggests that the tendency for the U.S. to be a knowledge source for rare-earth innovative

activities is decreasing over the study time period.

Table 3 Regression results using forward citations in USPTO from 1985 to 2007

(1) (2) (3) (4) (5) (6)

VARIABLES ave_citations ave_citations ave_citations ave_citations ave_citations ave_citations

US vs. EU US vs. JP

US 3.599*** 4.659*** 5.334*** 2.073*** 2.723*** 3.267***

(0.336) (0.471) (0.562) (0.362) (0.505) (0.598)

US*d1 -1.452*** -2.015*** -2.463*** -0.936** -1.303** -1.586**

(0.436) (0.605) (0.722) (0.451) (0.619) (0.728)

US*d2 -3.295*** -4.239*** -4.903*** -1.982*** -2.582*** -3.134***

(0.373) (0.519) (0.613) (0.404) (0.558) (0.655)

Constant 0.807 3.570 5.064*** 1.184** 3.030 5.648***

(0.717) (2.860) (0.911) (0.597) (2.898) (0.996)

Observations 6,118 4,186 3,404 6,118 4,186 3,404

R-squared 0.172 0.172 0.174 0.158 0.153 0.156

Note: (1)Patents filing year from 1985 to 2007; (2) Regression (1) and (4) using subclasses with patents more than 5, regression (2)

and (5) using subclasses with patents more than 10, regression (3) and (6) using subclasses with patents more than 15; (3) Only

including subclasses that are primarily classified into end-use applications; (4) *** p<0.01, ** p<0.05, * p<0.1

7 Summary and conclusions

This study looks at the innovations in clean energy technology that employs rare earth

materials. Using patents as a proxy for rare earth innovation activities, the phase-out of rare earth

domestic mining and processing leads to a decline of U.S. patenting activities, as well as forward

citations, related to rare earth technologies comparing with Japan and Europe. The result shows

that U.S. is losing ground in rare earth technology, not only innovation activities, but also the

innovation quality. This conclusion is supported by patents applied in United State and patents in

China. Such a decline happened in all sections on the REE industry supply chain. The results

support the theories suggesting that the movement of upstream supplier on supply chain relevant

for technology innovation may reduce the level of R&D and productivity of innovation processes

in the whole system.

There are two stages of the movement of domestic REE production in U.S., a dramatic

drop since 1998 and the shutting down since 2007. The results suggest that the decline of rare

earth innovation activities in U.S. after 2003 is stronger than that after 1998, indicating that the

close of Mountain Pass Mine had a more negative effect on U.S. REE innovation system. In

December 2010, Japanese firms Sumitomo and Mitsubishi signed agreements to be supplied with

rare earths by Molycorp, and Molycorp announced that construction will begin in January 2011,

and is expected to be completed by the end of 2012. Based on this study, it is believed that the

reopen of rare earth mine in United State will help to rebuild supply chain and support

innovations in this system.

Facing these conclusions, important challenges need to be considered both by business

entities and public policy. First, when making individual decisions, firms need to evaluate how

their behaviors would affect other partners on supply chain. The results of this paper indicate that

firms may look beyond individual development and question also effects to the whole innovation

system. Second, industry policy makers need to support a complete and balanced innovation

system to maintain or increase industry competiveness.

The close of Mountain Pass Mine in California jeopardized U.S. rare earth innovation

system. To some extent, U.S. rare earth innovation capacity is decreasing as a result of phase-out

of domestic mining and production. In this situation, industry policy may be needed to rebuild

rare earth supply chain and prevent U.S. falling behind in clean energy industry.

In this study, we discuss the overall innovation ability in U.S. rare earth innovation

ecosystem. However, REEs are used in widely high technology areas. U.S. may have advantages

or disadvantages in different fields. In future work, we aim to identify some specific supply

chains about rare earth related technology, such as magnets, phosphors and renewable energy,

and examine the changes of innovation ability in these technology areas.

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