Patents and R&D as Real Options

This article develops and implements a simulation approach to value patents and patent‐protected R&D projects based on the Real Options approach. It takes into account uncertainty in the cost‐to‐completion of the project, uncertainty in the cash flows to be generated from the project, and the possibility of catastrophic events that could put an end to the effort before it is completed. It also allows for the possibility of abandoning the project when costs turn out to be larger than expected or when estimated cash flows turn out to be smaller than anticipated. This abandonment option represents a very substantial part of the project's value when the project is marginal or/and when uncertainty is large. The model presented can be used to evaluate the effects of regulation on the cost of innovation and the amount on innovative output. The main focus of the article is the pharmaceutical industry. The framework, however, applies just as well to other research‐intensive industries such as software or hardware development.
(J.E.L.:G31, O22, O32).     

The determinants of pharmaceutical research and development expenditures

Since the late 1970s, pharmaceutical R&D has grown at a rapid rate relative to sales and other variables. In this paper, we examine the determinants of pharmaceutical R&D using a pooled data sample of 11 major drug firms over the period 1974 to 1994. We find that expected returns and cash flows are important explanatory variables of firm research intensities during this period. This is consistent with our results for an earlier sample period characterized by very different growth patterns on R&D.     

An empirical analysis of patents flows and R&D flows around the world

In this article, we empirically investigate the effect of Research and Development (R&D) flows on patent flows around the world. We do this using an unbalanced panel consisting primarily of Organization for Economic Co-operation and Development (OECD) countries that have both patent and R&D expenditure information broken down by domestic and foreign sources. Our analysis shows that even among a fairly homogeneous group of countries, the sources of patents and R&D differ substantially. Using a dynamic panel framework, we find that domestic R&D per capita increases domestic patents per capita only for the European Patent Convention (EPC) countries that already have a decentralized approach to innovation. Foreign R&D per capita increases foreign patents per capita in all countries even though foreign R&D constitutes a very small fraction of total R&D. We find that some of these differences can be attributed to the locations of the patent applications, including those to the European Patent Office (EPO), United States Patent and Trademark Office (USPTO) and triadic patent applications to the EPO, USPTO and Japan Patent Office (JPO) simultaneously.     

MANAGING ADVANCED TECHNOLOGY SYSTEM DEPLOYMENT: AN OPTIMAL ALLOCATION BETWEEN R&D AND PROTOTYPE FUNDING

The research and development manager allocates R&D funds to maximize the expected discounted net value of the R&D programme. Because public R&D managers do not have the same market discipline (or rewards) as private R&D managers, public R&D managers require a methodology for maximizing the expected net benefits. The US National Research Council of the National Academies in Prospective Evaluation of Applied Energy Research and Development at DOE (Phase One): A First Look Forward (2005) proposed a cost-benefit methodology to evaluate US Department of Energy's Research, Development, and Demonstration (RD&D) programmes. This paper specifies and extends this methodology, e.g., by adding cost targets into each stage of the RD&D process. Expected benefits are modelled as a function of funding levels, stage durations, stage transition probabilities, and target costs. With this method, the paper determines an optimal allocation of pre-prototype R&D funding, given a total funding constraint for an advanced energy system.     

Patent Protection and R&D Incentives Under Incomplete Information

When tournament effect is negative, under complete information, whether patent protection increases the incentive for R&D is ambiguous. It depends on the extent of spillover of the new technology. In particular if that amount is less than a threshold value then patent protection increases the incentive for R&D, otherwise it does not. This note considers incomplete information framework where the spillover parameter is private information. In this framework it is shown that there are situations where patent protection unambiguously increases incentive for R&D. This happens if the distribution function of the spillover parameter is sufficiently skewed and the cost of doing research is sufficiently high even when tournament effect is negative.

     

R&D investments and corporate cash holdings

This paper presents evidence about how research and development (R&D) expenditures affect corporate cash holdings in European country groups that differ in their innovation capacity. In theory, one can expect intangible investments such as R&D to result in higher cash stocks than fixed investments, particularly because intangible capital is less suitable as collateral for obtaining external funds. The relationship can be expected to be particularly strong in innovative countries. These countries carry out a relatively high proportion of cutting-edge R&D, which tends to be particularly risky and may be associated with substantial gestation lags before becoming productive. These features tend to increase firms' precautionary cash holdings. To investigate this issue in a European context, we examine different groups of countries that are clustered based on differences in their innovative capacity. Our estimation results confirm a positive relation between changes in R&D investment and changes in cash holdings, whereas changes in fixed investment do not appear to be related to changes in cash positions. The impact of changes in R&D on cash tends to be higher for country groups characterized by a high level of innovative capacity than for countries with moderate levels of innovative capacity. However, the differences across country groups are less pronounced than expected.     

Effects of a blocking patent on R&D with endogenous survival activities

This study analyzes the effect of strengthening patent protection for innovation and economic growth by introducing a blocking patent into the endogenous growth model developed by Furukawa (Econ Lett 121(1):26–29, 2013a), which features survival activity of patent holders in the R&D sector with a variety-expansion model. Results show that strengthening patent protection can raise the economic growth rate and social welfare through an endogenous survival investment. Additionally, this study examines the effects of increasing subsidies for R&D. We find that increasing R&D subsidy rate can negatively affect economic growth and social welfare because of the investment for survival activities. This result shows the novel role of a blocking patent in determining innovation effects of R&D subsidies. Furthermore, we analyze the effect of patent breadth which is another patent instrument in this model on innovation and economic growth. Results show that the growth and welfare effects of the profit-division rule and the subsidy rate for R&D may vary with the size of patent breadth.     

The struggle to survive in the R&D sector: Implications for innovation and growth

By allowing for investment activities by research and development (R&D) firms to prevent product obsolescence, we show that if legal patent protection is too strong, a higher R&D subsidy rate delivers insufficient investments for survival in the R&D sector, depressing innovation and growth in the long run.     

Strategic technology editing of the patent stage: lesson from a case of inkjet printer development

Patents are conventionally regarded as representing post-procurement of rights based on results of research and development (R&D). Patents can also be regarded as factors promoting R&D itself. In this study, the author examines the strategic meaning of patents in R&D through analyses of the R&D processes at Canon Inc., which is widely considered to submit patents strategically. The author identified characteristic behaviour related to patent acquisition in the R&D of inkjet printers. Canon constructed a strong patent group precisely by editing patents submitted earlier. Characteristic patent submissions were also identified: they elevated the obtained R&D results to higher concepts as milestones of R&D. These findings are discussed from the viewpoint of the meaning of patents for R&D and the possibility of effective R&D at the patent stage.     

Multistage R&D competition and patent policy

In this paper a model of multistage R&D patent policy is investigated. We study the impact of the duration of patent protection for intermediate products on R&D races when the discovery of the final product requires the accomplishment of an intermediate step. Using a multistage model where firms choose their levels of research investment at each stage, we find all subgame-perfect equilibria of the game. We also determine how competition affects a firm's level of research investment at different stages of the R&D competition.     

Input and output additionality of R&D subsidies

This article analyses the effects of public R&D subsidies on R&D input and output of German firms. We distinguish between the direct impact of subsidies on R&D investment and the indirect effect on innovation output measured by patent applications. We disentangle the productivity of purely privately financed R&D and additional R&D investment induced by the public incentive scheme. For this, a treatment-effect analysis is conducted in a first step. The results are implemented into the estimation of a patent production function in a second step. It turns out that both purely privately financed R&D and publicly induced R&D show a positive effect on patent outcome.     

Patents in a Model of Endogenous Growth

This paper examines patent protection in an endogenous-growth model. Our aim is twofold. First, we show how the patent policies discussed by the recent patent-design literature can influence R&D in the endogenous-growth framework, where the role of patents has been largely ignored. Second, we explore how the general-equilibrium framework contributes to the results of the patent-design literature. In a general-equilibrium model, both incentives to innovate and monopoly distortions depend on the proportion of industries that conduct R&D. Furthermore, patents affect the allocation of R&D resources across industries, and patents can distort resources away from industries where they are most productive.     

Patent claims and economic growth

This study introduces a blocking patent on horizontal R&D into the endogenous growth model of Chu et al. (2012), which features a blocking patent on vertical R&D. Results show that strengthening patent protection on horizontal R&D promotes vertical innovation (quality improvement) but hinders horizontal innovation (variety expansion). This effect of a horizontal blocking patent on directionality of innovation is opposite to that of the vertical blocking patent analyzed by Chu et al. (2012). Results also show that under mild conditions, strengthening a blocking patent on horizontal innovation as well as on vertical innovation can increase economic growth and social welfare.     

Effect Of Liquidity On Firms' R&D Spending

The effect of firms financial condition on their R&D investment is explored using a relatively long panel data set for five high-technology industries. We find that financial condition, whether measured as cash flow, the stock of liquid assets or the ratio of liquid assets to current liabilities, does affect the R&D spending of small firms. The effect persists after controlling for unobserved permanent firm effects, and the pattern of significance of lagged effects supports the interpretation of causality running from liquidity to R&D. For larger firms, there is no evidence of such an effect. Using these data, we cannot say whether the absence of an effect in larger firms results from better access to capital markets or from higher adjustment costs in R&D.     

Inventing together: exploring the nature of international knowledge spillovers in Latin America

This paper studies the nature, sources and determinants of international patenting activity in Latin American countries (LACs) and examines the extent to which LACs benefit from R&D that is performed in the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). By using patents and patent citations from the United States Patent and Trademark Office, we trace sectoral knowledge flows from G-5 countries to LACs. We study the impact of three channels of knowledge flows: foreign R&D, patent citation-related spillovers, and face-to-face contact spillovers. Our results, based on data for Argentina, Brazil, Chile, Colombia and Mexico, suggest that international knowledge spillovers from the G-5 countries were a significant determinant of inventive activity during the period 1988–2003. We find that the stock of ideas produced in the USA has a strong impact on the international patenting activity of these countries. Moreover, controlling for US-driven R&D effects, bilateral patent citations and face-to-face relationships between inventors are both important additional mechanisms of knowledge transmission. Some of our results suggest that the latter mechanism is more important than the former.     

On R&D spillovers, multiple equilibria and indeterminacy

Empirical studies often find significant and positive R&D spillovers across firms. In this note, we incorporate this spillover effect into a scale-invariant quality-ladder model. We find that the modified model features multiple steady states (1) a high-R&D steady state, (2) a low-R&D steady state and (3) a zero-R&D steady state. As for dynamics, when R&D spillovers are small, only the zero-R&D steady state is stable, and it emerges as a no-growth trap. In this case, the economy is subject to sunspot fluctuations around this trap (i.e., local indeterminacy). When R&D spillovers are large, both the zero-R&D and high-R&D steady states are stable and locally indeterminate. In this case, increasing patent breadth may cause the high-R&D steady state to become unstable and the economy to converge to the no-growth trap. Therefore, strengthening patent protection may stifle innovation through the occurrence of a bifurcation.     

Unsuccessful patent application and cooperative R&;D

We show that uncertainty in patent approvals may induce the firms to do cooperative R&D. With an exogenous probability of success in patent application, we show that, if all firms apply for patents under non-cooperative R&D, the firms prefer cooperative R&D than non-cooperative R&D for moderate (high) probabilities of success in patent applications, if the cost of patenting is small (large). We also show the implications of entry of non-innovating firms and endogenous probability of success in patent applications.      

Preemption,leapfrogging and competition in patent races

This paper investigates when patent races will be characterized by vigorous competition and when they will degenerate into a monopoly. Undersome conditions, a firm with an arbitrarily small headstart can preempt its rivals. Such ‘?-preemption’ is shown to depend on whether a firm that is behind in the patent race, as measured by the expected time remaining until discovery, cant ‘leapfrog’ the competition and become the new leader. An example of an R&D game with random discovery illustrates how ?-preemption can occur when leapfrogging is impossible. A multi-stage R&D process allows leapfrogging and thus permits competition. A similar conclusion emerges in a model of a deterministic patent race with imperfect monitoring of rival firms' R&D investment activities.     

The impact of public R&D investments on patenting activity: technology transfer at the U.S. Environmental Protection Agency

ABSTRACT

This paper presents estimates of the impact of public R&D on patenting activity at the U.S. Environmental Protection Agency (EPA). Using a time series of public sector agency data, we estimate the per-capita R&D elasticity of new patent applications using a knowledge production function framework model that is an expanded version of what other scholars have used with private sector data. New patent applications are an important step in the technology transfer activities of a federal agency. We estimate this elasticity to be about 2.0. This elasticity value represents an initial estimate of the impact of EPA’s R&D investments on its technology transfer activity.     

Accounting for the recent surge in U.S. patenting: changes in R&D expenditures,patent yields,and the high tech sector

We decompose the recent patent increase into components representing (1) an increase in resources made available to research and development, (2) an across-the-board rise in the patent yield of an R&D dollar, and (3) changes in the patent yield in individual industries. Two high tech fields, computer hardware and pharmaceuticals, account for 22 percent of the patent increase. While these two industries had the fastest R&D growth among the industries we study, the pharmaceutical industry experienced a decline in its patent yield, limiting its patent growth. We show that increased R&D spending accounts for 70 percent of the patent increase. We discuss our results in the context of alternative hypotheses of the patent surge. We also compare our results to the anecdotal evidence of firm R&D performance at the industry level.