Optimal use of patents and trade secrets for complex innovations

This paper studies how an inventor protects a “complex” innovation that involves multiple complementary components. Each component can be protected through either patent or secrecy protection, so that the entire innovation may be protected through a patent-secret combination. Potential entrants might acquire these components either through costly imitation or licensing. I find that, first, secrecy is optimal when the patent length is relatively short; otherwise, a patent-secret combination is optimal; second, the inventor is over-rewarded compared to an inventor with an innovation that is equivalent except that it involves only a single-component so that the entire innovation can be protected through either patent or secrecy protection; and, third, a policy that precludes the use of a patent-secret combination enhances allocative efficiency ex-post but may stifle R&D incentives ex-ante.     

Patent Races with Secrecy

Firms do not always patent their innovations. Instead, they often rely on secrecy to appropriate the returns of innovations. This paper endogenizes firms’ patent propensity, and shows that when the equilibrium patent propensity is small, strengthening patent protection can decrease firms’ incentive to innovate. Paradoxically, this result holds precisely when a stronger patent policy induces more patent applications. Also, these results can arise even in the simplest patent race model with independent innovations as well as with complementary innovations.     

Incentives for labour-augmenting innovations in vertical markets: The role of wage rate

This article analyses the link between the wage rate and the incentives to develop and adopt a labour-augmenting innovation in a vertical market. In a model where an upstream monopolist sells the innovation to several downstream manufacturers, I show that the wage rate affects the incentives to innovate in different ways depending on i) the initial level of wage and ii) the timing of the policy’s implementation. Moreover, if the policy is introduced when the size and the price of innovation are common knowledge, then the policy-maker can elicit her preferred equilibrium by nudging more firms to adopt the technology. Instead, if the policy is introduced before the investment stage, then the increase of the wage rate generates two opposite effects: a positive cost-reducing effect and a negative output-contraction effect. If and only if the wage level is below a critical threshold, the former dominates the latter. I argue that, under certain conditions, a policy that raises the price of labour may be beneficial for both the incentives to invest in labour-augmenting innovation and the industry outcomes.     

Scope versus speed: Team diversity,leader experience,and patenting outcomes for firms

Research Summary: How does the organization of patenting activity affect a firm's patenting outcomes? We investigate how the composition of patenting teams relates to both the scope of their patent applications and the speed with which their patents are approved, by examining the main effects of team members’ intra‐organizational diversity (based on affiliations with formal organizational units and informal organizational communities) and the moderating effects of team leader experience. We test our moderated mediation model in a sample of 121 teams that filed patents in a Fortune 50 company's India R&D center between 2005 and 2015, using proprietary employee data combined with newly released micro‐data from the U.S Patent and Trademark Office (USPTO). Our findings illuminate the micro‐foundations of innovation in firms by highlighting a trade‐off between organizing patenting activity to maximize scope versus speed. Managerial Summary: Patenting is an important strategic tool that firms can use to protect and create value from their innovations. A firm can benefit from filing a patent application that gives it a wider possible set of claims related to an innovation. It can also benefit from faster approval of a patent application by the Patent Office. However, our study shows that there is a trade‐off between patent application scope and patent approval speed, which creates tensions for the organization of patenting activities inside firms. In particular, we find that the diversity of a patenting team is positively related to patent scope but negatively related to patenting speed, and that these relationships vary with the experience of the team leader.     

Patent management in entrepreneurial SMEs: a literature review and an empirical study of innovation appropriation,patent propensity,and motives

Managers make a number of strategic choices when trying to capture returns from innovation investments, including what appropriation strategy to use and whether or not to patent, strategic choices that depend among other things on firm size. Previous literature, being reviewed in this paper, shows that the patent propensity is lower in small and medium‐sized enterprises (SMEs) than in large firms and that patenting as means for appropriation is of less importance among SMEs. Chief executive officers (CEOs) and/or research and development (R&D) managers of 26 entrepreneurial SMEs have been interviewed to explain these differences and to provide insight on how patenting is used in SMEs. The patent competence was low among the studied SMEs, and internal patent resources were found to be important for effective and efficient use of the patent system, for application as well as monitoring and enforcement. While of limited perceived importance for protecting inventions in entrepreneurial SMEs, patents were used to attract customers and venture capital, which is of utmost importance for the survival and growth of these firms. Thus, patenting has an important role to play even in firms where the protective function of patents is secondary.     

Patentability, Industry Structure, and Innovation

This paper presents a model of sequential innovation in which industry structure is endogenous and a standard of patentability determines the proportion of all inventions that qualify for protection (in U.S. patent law, this standard is called nonobviousness ; in Europe, it is called the inventive step ). The rate of innovation initially rises as this standard is raised from very low levels, but eventually falls as the standard is raised to very high levels. Hence, there is a unique patentability standard that maximizes the rate of innovation. Surprisingly, this critical standard is more stringent for industries disposed to innovate rapidly. The model suggests a number of important implications for patent policy.     

Patenting Activities and Firm Performance: Does Firm Size Matter?

Whereas prior research has provided valuable insights into the willingness of small and medium‐sized enterprises (SMEs) and large firms to engage in patenting, a comparison of the performance implications of patenting activities across small and large firms is still lacking. This gap is important because SMEs and large firms, having different resources and capabilities, might benefit from patenting activities in different ways. In particular, SMEs can be expected to benefit less from patenting activities in terms of protection against imitators than large firms. On the other hand, the propensity and ability of SMEs to license out their patents and generate additional revenue streams might be relatively higher than that of their large counterparts. This paper studies the impact of patenting on licensing, innovation, and financial performance for both SMEs and large firms, using multiple‐group path analyses on a sample of 358 manufacturing firms. Contrary to expectations, this study demonstrates that not only large firms, but also SMEs benefit from patenting in terms of commercializing product innovations. Moreover, for both SMEs and large firms, such increased innovation performance in turn contributes to higher profit margins. Patenting activities also increase the ability of SMEs and large firms to license out knowledge to external parties, and this positive effect is significantly stronger for large firms. However, neither in SMEs nor in large firms, these outward licensing activities generate short‐term financial benefits. Finally, the study demonstrates that patenting activities do not trigger significant cost disadvantages for either SMEs or large firms. Jointly, these findings provide unique insights in the value‐generating and cost‐increasing effects of patenting, suggesting that not only large firms, but also SMEs should consider patenting as a viable strategy to fully reap commercial benefits from their innovation activities. At the same time, they temper open innovation scholars’ expectations regarding the financial benefits of licensing out knowledge. Overall, these findings point to opportunities for optimizing the intellectual property management of both SMEs and large firms.     

A dynamic stochastic analysis of international patent application and renewal processes

This paper formulates a dynamic stochastic model to examine the joint patent application and renewal behaviors under an international patent-protection regime. The framework makes it possible to utilize both the cross-sectional (multi-country application) and the time-series (patent renewal) dimensions of available international patenting data to estimate the private value of patent protection, and allows us to distinguish more aspects of patent returns. The evolution dynamics of the value of European patents in pharmaceutical and electronics industries are examined. Estimation results indicate that pharmaceutical patents are endowed with higher initial returns, thus their owners tend to seek patent protection in more countries than electronics patent holders. However, pharmaceutical patents become obsolete at a much faster pace than electronics patents, and consequently they have lower renewal rates and shorter lives.     

Grantbacks,territorial restraints,and innovation

We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee's ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this “but for” defence and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations, which roughly correspond to infringing and non-infringing innovations. We show that grantback clauses do not increase the patent-holder's incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned – suggesting that the “but for” defence might be valid for severable innovations but not for non-severable ones, in direct contradiction to regulation in some jurisdictions. Moreover we show that, for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs. Our work extends the large literature on sequential innovation to an environment where information diffuses through licensing rather than through the mere act of patenting. In this different informational set up we show that Green and Scotchmer (1995)’s conclusion that the initial innovator should have a patent of infinite breadth no longer holds.     

Patent office in innovation policy: Nobody's perfect

The number of patent applications and “bad” patents issued has been rising rapidly in recent years. Based on this trend, we study the overload problem within the Patent Office and its consequences on the firms' R&D incentives. We assume that the examination process of patent applications is imperfect, and that its quality is poorer under congestion. Depending on policy instruments such as submission fees and the toughness of the non-obviousness requirement, the system may result in a high-R&D equilibrium, in which firms self-select in their patent applications, or in an equilibrium with low R&D, opportunistic patent applications and the issuance of bad patents. Multiple equilibria often co-exist, which deeply undermines the effectiveness of policy instruments. We investigate the robustness of our conclusions as to how the value of patent protection is formalized, taking into consideration the introduction of a penalty system for rejected patent applications, as well as the role of commitment to a given patent protection policy.     

Firm Patenting,Innovations, and Government Institutional Support as a Double‐Edged Sword

In 2012, China was ranked fourth in patent filing by region of origin. However, firm innovation quality is not comparable to such quantity. Evidence of this is that no Chinese organization was named as a Thomson Reuters 2011 or 2012 Top 100 Global Innovators. This paradox of firm patenting and innovations in China challenges the traditional understanding of the role of government in industrial innovation. This paper provides a theoretical lens through which to examine traditional protective and strategic patenting motives. Based on institutional theory and the ultimate goals of patenting motives, the paper posits that protective patenting motives are directly law‐based while strategic patenting motives are largely law‐derived. The paper also aims to empirically examine three questions: (1) What is the relative importance of various patenting motives to firm patenting behaviors? (2) What effects do patenting behaviors have on firm product and process innovations? (3) How, if at all, does governmental institutional support affect firm patenting and innovations? This paper uses dominant analysis, structural equation modeling, and regression analysis to analyze the survey data collected from a sample of 270 firms in China. The empirical results provide new evidence about firm patenting, innovations, and government institutional support. First, the order of relative importance of patenting motives to patenting behaviors was found to be (in the descending order of importance) reputation, exchange, blocking, and protection. Second, patenting behaviors were more relevant to product innovations than to process innovations. Third, more importantly, while government institutional support can enhance the effects of protective patenting motives on patenting behaviors, it can mitigate the effects of strategic patenting motives on patenting behaviors. Moreover, government institutional support reduces the positive effect of patenting behaviors on product innovations. These findings suggest that firm patenting and innovations are distinct activities, and that government institutional support acts as a double‐edged sword in firm patenting and innovations: On the one hand government institutional support—an extralegal formal institution—may work alongside the patent system—a law‐based formal institution—to advance science and technology, but on the other hand government institutional support may distract firms from commercializing patented knowledge into new products. This paper primarily contributes to institutional theory, new product development literature, and innovation management practice by revealing the dynamics between two different types of formal institutions—patent system and government institutional support—by establishing an institution‐based view of patenting motives, by empirically distinguishing firm patenting and innovations, and more interestingly by uncovering a double‐edged role of government institutional support in firm patenting and innovations.     

Pre-emptive patenting,joint ventures,and the persistence of oligopoly

Gilbert and Newbery (1982) have examined pre-emptive patenting and the persistence of monopoly. The present paper considers pre-emptive patenting when there are several incumbent firms, rather than just one. It is shown why the incumbent oligopolists, behaving non-cooperatively, might fail to deter entry. This suggests that a joint venture in R and D might be a useful entry-deterring device insofar as it pools the incumbents' incentives to prevent entry. This is indeed the case for ‘small’ innovations, but for ‘large’ innovations the formation of a joint venture weakens the incumbents' incentive to innovate by removing the competitive stimulus between them.     

Patent Protection and R&D with Endogenous Market Structure

In a model with endogenous number of innovating firms, we show that whether patent protection increases R&D investment is ambiguous, and depends on the market demand function and the cost of R&D. If the market size increases with number of firms, patent protection reduces R&D investment if the cost of R&D is sufficiently high, and higher product differentiation increases the possibility of lower R&D investment under patent protection. If the market size does not increase with number of firms, patent protection never reduces R&D investment. We find that welfare is lower under patent protection than under no patent protection.     

R&D and the patent premium

We analyze the effect of patenting on R&D with a model linking a firm's R&D effort with its decision to patent, recognizing that R&D and patenting affect one another and are both driven by many of the same factors. Using survey data for the U.S. manufacturing sector, we estimate the increment to the value of an innovation realized by patenting it, and then analyze the effect on R&D of changing that premium. Although patent protection is found to provide a positive premium on average in only a few industries, our results also imply that the premium varies across industries and with firm size. Patent protection also stimulates R&D across all manufacturing industries, albeit with the magnitude of that effect varying substantially.     

Heterogeneous incentives for innovation adoption: The price effect on segmented markets

It is now commonly accepted that poverty alleviation and the development of agricultural value chains in low income countries require farmers to innovate. However numerous constraints to innovation adoption have been identified. In the literature, the market structures on which producers sell their output have received remarkably little attention. In this article, I argue that these can impact a producer’s choices with respect to the level of effort invested in changing agricultural practices. More specifically, due to transaction costs, contract farming and other market imperfections, output prices and production levels in rural areas are often jointly determined, leading to market segmentation. I develop a simple model to discuss how market segmentation induces non-trivial effects on incentives to innovate. Next, I rely on farm-level panel data from an extension project in the Peruvian highlands to test the empirical implications of the model. Producers that were not included in the formal market but close to it, performed better in improving agricultural practices. The indirect consequence of this investment is a higher price increase than the rest of the population, creating heterogeneous impacts of the programme, opportunities for economic mobility and a reduction in inequality. The evidence indicates how considering the effects of market structures leads to a more nuanced understanding of the process of agricultural innovation adoption in low and middle income countries.     

How mergers affect innovation: Theory and evidence

This article analyses how horizontal mergers affect innovation of the merged entity and its non-merging competitors. Using data on horizontal mergers among pharmaceutical firms in Europe and applying propensity score matching estimators, we find that average patenting and R&D of the merged entity and its rivals declines substantially in post-merger periods. We show that this result is consistent with the predictions from an oligopoly model with heterogeneous firms, as well as a patent race model, when pre-merger R&D intensity is sufficiently high. Consistent with our theoretical model, we find that negative effects of mergers on innovation are concentrated in markets with high R&D intensity and in technology classes with overlap in pre-merger innovation activities of merging and rival firms.     

Imperfect Patent Protection and Innovation

The paper studies the effect of strengthening protection on R&D incentives in the context of process innovation. It shows that for non‐drastic innovations, that do not render the pre‐existing technology obsolete, the innovator might favor imitation if the expected royalty rate determined by the court is sufficiently high. Since imitation is discouraged for very high levels of patent protection, R&D investment is maximized for an intermediate level of patent strength. This finding provides a theoretical explanation for emerging empirical evidence questioning the effectiveness of strengthening protection on innovation incentives. It also serves as a justification for the imperfections of the existing patent system that allows for some infringement.     

When do strategic alliances inhibit innovation by firms? Evidence from patent pools in the global optical disc industry

Research and development (R&D) consortia are specialized strategic alliances that shape the direction and scope of firm innovation activities. Little research exists on the performance consequences of participating in R&D consortia. We study the effect of patent pools, a unique form of R&D consortia, on firm performance in innovation. While prior research on alliances generally implies that patent pools enhance firm innovation, our study finds the opposite. Analyzing data on systemic innovation in the global optical disc industry, we find that patent pool formation substantially and significantly decreases both the quantity and quality of patents subsequently generated by licensors and licensees relative to the patenting activity of nonparticipants. Our empirical findings suggest that patent pools actually inhibit, rather than enhance, systemic innovation by participating firms. Copyright © 2011 John Wiley & Sons, Ltd.     

STRATEGIC INFORMATION DISCLOSURE AND COMPETITION FOR AN IMPERFECTLY PROTECTED INNOVATION*

The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free‐rider effect in the competition for the innovation that countervails the familiar business‐stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation.     

Typology of the patent troll business

Patent trolls have many faces, since the media uses this expression in various ways. The patent troll phenomenon thus seems to be an ambiguous term that is discussed in several directions. This paper reveals that a patent troll as such has no distinct shape or appearance. Our analysis redeems a troll classification solely from firms’ market position, such as being nonpracticing, and shows that a patent troll business can only be defined by the respective practice to enforce intellectual property rights (IPR). Using 10 case studies, of which five are treated in detail, the analysis reveals a distinct typology of IPR enforcement mechanisms and suggests a framework to assess the troll business and its effects. This paper furthermore identifies the nature of troll behavior to be: (a) a practice to enforce IP rights enabling repayments for earlier innovation investments and (b) a strategy that may create costs to affected industries. The differentiated troll analysis reveals negative but also positive effects of the troll business on incentives to innovate.