Has the USA overtaken Europe as the powerhouse of new medicines? If so, is this attributable to a flight
of business expenditure in R&D to the USA? This paper answers these questions using a methodology
that focuses on R&D productivity and patent quality as key indicators of innovation, accounts for R&D
price inflation, and examines the role of both 'performed' R&D and 'extra-mural' R&D. The study
provides three new insights: (a) the USA has outperformed Europe in R&D productivity but this is due to
Europe's superior performance in sales and patent quality; (b) government expenditure on R&D and
extra-mural R&D stimulate international patent collaboration, and (c) the latter is a crucial determinant of
patent quality.