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Journal ArticleDOI

Patents and Innovation: Friends or Foes?

TL;DR: In this article, the authors tried to get a clearer picture on what economics enables us to say on the impact of patents on innovation by revisiting the basic question of whether patents freeze or spur innovation.
Abstract: Over 2 million patents are currently in force in the EU and in the USA Do they testify innovation is blockaded for they restrict freedom in research or do they give evidence innovation is flourishing for patent law provides incentives to invent new products and processes? In other terms do patents freeze or spur innovation? The question arises for massive anecdotal evidence shows the patent system may have turned on its head, eg, USPTO and EPO examiners spend less than 30 hours per application to assess whether the technical input is useful, novel and non-obvious; as a result, the list of trivial patents such as one-click online shopping is growing each day; some companies, so called patent trolls, have specialized in amassing patents just to litigate and get damage rewards; one of them has recently obtained $612,5 million from the manufacturer of BlackBerry to settle an alleged patent infringement; European patents are translated in several different languages, a costly burden for applicants, although nobody reads the translations The belief of the layman in the patent system has evaporated He is at best skeptical on the benefits of patents for society Economists are not innocent for this change in perception 50 years ago they established (Nordhaus, 1969) that patent law tends to stimulate RD they focus on a small number of parameters and trade-offs They do not pretend to embrace a whole system and being able to calculate a net gain for society in taking into account all phenomena they study in isolation This may misleadingly give the impression that economic theory has now proved that patent law hinders innovation rather than it stimulates it, that is, that absent patent law, innovation will be stronger The aim of this study is to try to get a clearer picture on what economics enables us to say on the impact of patents on innovation We are grateful to Air Liquide, Alcatel, Microsoft, Philips and SAP for the opportunity they give us to revisit this basic question This study has been carried thanks to their financial support Of course, its contents only engage their authors and not these companies

Summary (4 min read)

Introduction

  • Economists are not innocent for this change in perception. a).
  • The report addresses this question in surveying the economic literature that has flourished on patents over the past ten years.

Incentives to innovate

  • Whether patents stimulate innovation is critical to know.
  • Such a dynamic effect is required to counterbalance the static loss for users who will be confronted with the monopoly price the exclusive right may confer on the invention.
  • In fact, according to a US survey, secrecy and lead time are more popular than patents amongst R&D managers to protect product and process innovations.
  • The table below provides other figures from different studies carried out at different periods of time in different countries and with different methodologies.
  • It shows that the importance of patents to recoup investments, and thus their effects on innovation, depends on industrial sectors.

Information disclosure

  • Patents increase the amount of technological information that is publicly available because patent owners must deliver a precise description of their invention.
  • In turn, the information is used by other innovators and makes their R&D more effective and less costly.
  • A few empirical evidence documents this positive impact of patents.
  • According to an OECD survey on American, European and Japanese firms, 88% of respondents report that the information disclosed in patents are useful for designing and implementing their own R&D strategy.
  • Another comparative study shows that patent is the first information channel on R&D of competitors in Japan and comes third in importance after scientific publications and informal exchanges in the US.

Licensing technologies

  • Facilitating the transfers of technology is a major economic function of the patent system Cerna 12 although often overlooked.
  • As any property rights, patents can be sold or rented and thus contribute to increase wealth through trade and labor division.
  • Licensing ensures the invention will be used by those who value it most.
  • A European survey shows that SMEs license 26% of their patented technologies against 9% for large firms.
  • The EU market for technology transfers is smaller and underdeveloped.

Cumulative R&D

  • From a political perspective, patents have been highly disputed in biotechnology and software.
  • If, by contrast, information is excludable, e.g. thanks to a patent, and the producer charges for his service, nonrivalry implies the consumption is needlessly rationed.
  • Litigation is also more likely when the stakes are high.
  • Empirical evidence based on this approach suggests that the value of patent protection has increased over time and that patent protection has on average a small but significant positive effect on R&D spending.
  • Several studies have therefore used data on patent renewals as an indicator to estimate the value of patent protection (Pakes & Schankerman, 1984; Schankerman & Pakes, 1986; Schankerman, 1998; Lanjouw, Pakes & Putnam, 1998).

In kEuros. Source: PatVal, 2005.

  • Figure 5 above summarizes the PatVal survey results on the average value of patents for five “macro” technological fields.
  • Figure 6 below displays the distribution of patent value by “macro” technological class.
  • Since the results correspond to different historic periods and geographical areas, they must be compared and interpreted carefully.
  • Arora et al. (2003) provide evidence on the patent premium and its effect on R&D in various sectors.

Signaling financial value

  • Patenting the outcomes of their innovative activities is a way for firms to communicate vis-à-vis financial investors.
  • Indeed capital markets use firms’ patents as indicators of their inventive activities.
  • They usually assume that patents are correlated with companies’ capacity to innovate, but also with less observable characteristics such as the knowledge capital or the level and productivity of R&D spending (Long, 2002).
  • Hall et al.(1986) find a strong correlation between R&D expenditures and patenting in the U.S. manufacturing sector during the 1970’s.
  • Pakes (1985) finds that an unexpected addition of one patent to a firm’s patent portfolio induces an $810,000 increase in the market value of the firm.

Attracting venture capital

  • Patents also seem to constitute a key condition for start-up firms to attract venture capitalists (Lemley, 2000; Long, 2002, Kamiyama et al., 2006).
  • But [the] most important technological development of [FK Biotecnologia S.A.] has been in the field of vaccines for cancer.
  • Introduction Facilitating technology3 transfers is a major economic function of the patent system.
  • An important part of the literature explores how the design of licensing contracts can be fine-tuned to maximize the expected profit of the licensor – and hence her incentives to innovate – in various circumstances5.
  • Empirical studies, however, show that the trade of technology is expanding, thereby improving the diffusion of innovations in many industries, and increasing the innovator’s profits.

Source: Athreye & Cantwell (2005)

  • Stronger intellectual property rights also affect the channels of technology transfers.
  • Licensing seems to be more frequent in Pharmaceuticals and Information Communication Technologies (ICT).
  • They cannot result directly from public policies, although appropriate policies could facilitate their emergence.
  • When patents on complementary innovations are scattered, various types of initiatives can help address the problems of multiples marginalization and transaction costs.
  • Biotechnology and Computers and Electronics Although cumulative and complementary innovations can be found in most sectors, they are particularly frequent in Biotechnology and Information and Communication Technologies, where patents may therefore raise specific issues regarding the organization of R&D, also known as 4.3. Case studies.

Patent protection and innovation

  • Patents play a key role in providing the necessary incentives to invest in the development of Biotechnology inventions.
  • In an empirical work based on the Carnegie Mellon survey, Arora et al. (2003) calculate that the value of patents represents 22% of R&D expenses in Biotechnology, which is close to the average of all sectors (24%)8.
  • Finally, Arora et al. (2003) find that the firms would react to a 10% increase (or 8 See Chapter 1, Section and 3 and Box 2 for a more complete presentation of this work and its methodology.
  • It shows how the profits generated by biotechnologically engineered drugs are finally allocated between universities, biotechnology firms, and large pharmaceutical companies.
  • In both cases this may be due to the need to encourage follow-on research on innovations that are still far away from commercialization, so that the licensee will incur higher risk and R&D costs to reach the commercialization stage.

Do biotechnology patents impede innovation?

  • Several authors have expressed concerns that the multiplication of patents on research tools and genes might actually impede innovation in Biotechnology (Heller & Eisenberg, 1998; Mazzoleni & Nelson, 1998; Henry et a.i, 2003).
  • A recent survey of 1125 academic researchers (including university, non-profits and government labs) and 563 industry researchers confirms that patenting does not limit research activity significantly, except in some specific cases (Walsh et al., 2005).
  • Biotechnology has changed this pattern by allowing the introduction of new traits into plant varieties at the genetic level.
  • Besides the traditional seeds company, the industry is now characterized by the development of networks of alliances around large chemical companies, and by the important weight of public research patents: - Large chemical companies had entered the industry of agricultural seeds during the 1970’s, and absorbed many of the former seed companies.

Impact of patents on innovation

  • Available evidence suggests that patents globally have a positive effect on innovation in Computers and Electronics.
  • The expected and conditional patent premium are expressed as a percentage of the value of the unpatented innovation.
  • Their main results are summarized in Table 11.
  • Arora et al. (2003) find a positive elasticity of R&D with respect to the patent premium, which implies that patent protection has a positive effect of R&D.
  • Indeed, firms would react to a 10% increase (or decrease) of the patent premium by increasing (respectively, decreasing) their R&D expenses by 4.1% to 11.6% (respectively in Electronic Components and in Computers and other Office Equipment).

Cross-licensing and freedom to operate

  • The patent thickets observed in Computers and Electronics result to a large extent from aggressive patenting strategies.
  • They number recently increased in Hardware, Software and Biotechnology where they were seen as a way to tackle the “patent thicket’ issue.
  • Bekkers, R., Duysters, G. and B. Verspagen, (2002) “Intellectual Property Rights, Strategic Technology, Agreements and Market Structure.
  • Gallini, N. (2002) “The Economics of Patents: Lessons from Recent U.S. Patent Reform” Journal of Economic Perspectives 16.
  • “An intellectual property clearinghouse for agricultural biotechnology” Nature Biotechnology, 19, 1179-1180 (http://biotech.nature.com).

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UC Berkeley Recent Work
Title
Patents and Innovation: Friends or Foes?
Permalink
https://escholarship.org/uc/item/2w8605xg
Author
Lévêque, François
Publication Date
2007-03-22
eScholarship.org Powered by the California Digital Library
University of California

Cerna, Centre d’économie industrielle
Ecole Nationale Supérieure des Mines de Paris
60, boulevard Saint Michel
75272 Paris Cedex 06 – France
Tél. : 33 (1) 40 51 91 73 – Fax : 33 (1) 40 51 91 45
leveque@ensmp.fr – http://www.cerna.ensmp.fr
Patents and Innovation: Friends or Foes?
François Lévêque and Yann Ménière
December 2006

Patents and Innovation: Friends or Foes? François Lévêque and Yann Ménière
Cerna 2
François Lévêque
François Lévêque is professor of law and economics at the Ecole des mines de Paris and visiting
professor at the University of California at Berkeley. He is Director at Cerna, the research centre of the
Ecole des mines de Paris in industrial economics.
François Lévêque has published several books in antitrust economics (Antitrust, Patents and Copyright,
Edward Elgar, 2005; Merger Remedies in American and European Union Competition Law, Edward Elgar,
2003), in economics of regulation (Economie de la réglementation, Editions La Découverte, 1999 and
2005; Transport Pricing of Electricity Networks, Kluwer Academic Publishers, 2003; Competitive Electricity
Markets and Sustainability, Edward Elgar, 2006) and in economics of intellectual property rights
(Economics of Patents and Copyright, Berkeley Electronic Press, 2004). In is the author of 50 articles in
the same areas.
François Lévêque taught economics of natural resources at the Ecole des mines de Paris (1984-1990),
environmental economics at EHESS (1997-2001) and at Pavia University (1999-2002). He created in 1999
a new major in law and economics at the Ecole des mines. He has taught industrial economics at the
Ecole des mines since 1996 and Energy economics since 2004. He has also taught EU Competition Law
at the Boalt School of Law, University of California at Berkeley, since 2002.
François Lévêque has been regularly commissioned by the French government, OECD and the European
Commission to undertake consultancy and participate to advisory committees. François Lévêque has
founded Microeconomix, a Paris-based boutique specialised in economic analysis of legal disputes.
François Lévêque is member of the French Council on Intellectual Property.
Yann Ménière
Yann Ménière is a research fellow at Cerna, Ecole Nationale des mines and Paris, and post doc research
fellow at CORE, Université Catholique de Louvain. His research interests are related to intellectual
property and innovation. A former student of the Ecole Normale Supérieure, he has a master’s degree in
Economics and Managements Sciences from the Ecole Normale Supérieure and a master’s degree in
Economics from University Paris 1 Panthéon-Sorbonne (2001). He got a PhD in Economics at the Ecole
des mines in 2005. His PhD thesis deals with the impact of patents on R&D investments in sectors such
as biotechnologies, computer software and hardware, or telecommunication equipments. It was
distinguished in 2006 by a Paritech Thesis Award. Yann Ménière wrote a textbook with François Lévêque
on the economics of intellectual property, which French and English versions are published respectively at
Editions La Découverte and Berkeley Electronic Press. Since September 2004, he has been involved in
several French and European research projects related to cooperative IP management.

Patents and Innovation: Friends or Foes? François Lévêque and Yann Ménière
Cerna 3
Foreword
Over 2 million patents are currently in force in the EU and in the USA. Do they testify
innovation is blockaded for they restrict freedom in research or do they give evidence
innovation is flourishing for patent law provides incentives to invent new products and
processes? In other terms do patents freeze or spur innovation?
The question arises for massive anecdotal evidence shows the patent system may have turned on
its head, e.g., USPTO and EPO examiners spend less than 30 hours per application to assess
whether the technical input is useful, novel and non-obvious; as a result, the list of trivial
patents such as one-click online shopping is growing each day; some companies, so called
patent trolls, have specialized in amassing patents just to litigate and get damage rewards; one
of them has recently obtained $ 612,5 million from the manufacturer of BlackBerry to settle an
alleged patent infringement; European patents are translated in several different languages, a
costly burden for applicants, although nobody reads the translations.
The belief of the layman in the patent system has evaporated. He is at best skeptical on the
benefits of patents for society.
Economists are not innocent for this change in perception. 50 years ago they established
(Nordhaus, 1969) that patent law tends to stimulate R&D too much in organizing races to patent
first with too many firms. By contrast, during the 1990s, they pointed out that patents hinder
innovation in reducing incentives for secondary inventors when research is cumulative and in
raising an anticommons problem whereby patents are allotted to a multitude of small owners.
For people unfamiliar with how economic theory goes, it may seem that economists also
changed their mind and burnt today what they incensed over the past. In fact, it is important to
know two features of development in economics. Firstly, economists are mainly interested in
pointing out what does not work rather than what does work. Market failures and public
intervention failures are what drive their curiosity. The light they cast on the world in their
papers is rarely pink. Secondly, economic models are local; they focus on a small number of
parameters and trade-offs. They do not pretend to embrace a whole system and being able to
calculate a net gain for society in taking into account all phenomena they study in isolation.
This may misleadingly give the impression that economic theory has now proved that patent
law hinders innovation rather than it stimulates it, that is, that absent patent law, innovation will
be stronger.
The aim of this study is to try to get a clearer picture on what economics enables us to say on
the impact of patents on innovation. We are grateful to Air Liquide, Alcatel, Microsoft, Philips
and SAP for the opportunity they give us to revisit this basic question. This study has been
carried thanks to their financial support. Of course, its contents only engage their authors and
not these companies.

Patents and Innovation: Friends or Foes? François Lévêque and Yann Ménière
Cerna 4

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References
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Book ChapterDOI
TL;DR: In this article, the determination of optimal resource allocation for invention will depend on the technological characteristics of the invention process and the nature of the market for knowledge, which is interpreted broadly as the production of knowledge.
Abstract: Invention is here interpreted broadly as the production of knowledge. From the viewpoint of welfare economics, the determination of optimal resource allocation for invention will depend on the technological characteristics of the invention process and the nature of the market for knowledge.

7,747 citations


"Patents and Innovation: Friends or ..." refers background in this paper

  • ...The patent system has furthermore the advantage of being more decentralized than systems where innovation is public-funded. a) Patents to produce information goods Economic analysis assimilates works of the intellect such as innovation to the production of information (Arrow, 1962)....

    [...]

  • ...Paradoxically, information disclosure is at the same time the condition and the obstacle to its trade (Arrow, 1962)....

    [...]

Posted Content
TL;DR: In this paper, the determination of optimal resource allocation for invention will depend on the technological characteristics of the invention process and the nature of the market for knowledge, which is interpreted broadly as the production of knowledge.
Abstract: Invention is here interpreted broadly as the production of knowledge. From the viewpoint of welfare economics, the determination of optimal resource allocation for invention will depend on the technological characteristics of the invention process and the nature of the market for knowledge.

5,894 citations

Journal ArticleDOI
01 May 1998-Science
TL;DR: Privatization of biomedical research must be more carefully deployed to sustain both upstream research and downstream product development, because more intellectual property rights may lead paradoxically to fewer useful products for improving human health.
Abstract: The “tragedy of the commons” metaphor helps explain why people overuse shared resources. However, the recent proliferation of intellectual property rights in biomedical research suggests a different tragedy, an “anticommons” in which people underuse scarce resources because too many owners can block each other. Privatization of biomedical research must be more carefully deployed to sustain both upstream research and downstream product development. Otherwise, more intellectual property rights may lead paradoxically to fewer useful products for improving human health.

2,371 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation and find that semiconductor firms do not rely heavily on patents to appropriate returns to R&D.
Abstract: We examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation. Recent survey evidence suggests that semiconductor firms do not rely heavily on patents to appropriate returns to R&D. Yet the propensity of semiconductor firms to patent has risen dramatically since the mid1980s. We explore this apparent paradox by conducting interviews with industry representatives and analyzing the patenting behavior of 95 U.S. semiconductor firms during 1979‐1995. The results suggest that the 1980s strengthening of U.S. patent rights spawned ‘‘patent portfolio races’’ among capital-intensive firms, but it also facilitated entry by specialized design firms.

2,063 citations

Journal ArticleDOI
TL;DR: In this article, the authors report the results of an empirical investigation based on data obtained from a random sample of 100 U.S. manufacturing firms, providing new findings bearing on each of these questions.
Abstract: To what extent would the rate of development and introduction of inventions decline in the absence of patent protection? To what extent do firms make use of the patent system, and what differences exist among firms and industries and over time in the propensity to patent? These questions are in need of much more study. This paper, which reports the results of an empirical investigation based on data obtained from a random sample of 100 U.S. manufacturing firms, provides new findings bearing on each of these questions.

1,240 citations


"Patents and Innovation: Friends or ..." refers result in this paper

  • ...This may explain why, in two empirical studies led respectively in the U.S. semi-conductor industry (Hall & Ziedonis, 2000) and in the U.S. manufacturing sector (Mansfield, 1986), start-ups appear to have a higher propensity to patent than other firms (Long, 2002)....

    [...]