Intellectual Property Rights: The Role of Patents in Renewable ...
Patents: Their Effectiveness and Role
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Transcript of Patents: Their Effectiveness and Role
Patents:Their Effectiveness and Role
Wesley M. Cohen
Fuqua School of Business
Duke University
November 14, 2003
Presentation in the Information Ecology Series of the Center for the Study of the Public Domain
Collaborators: Ashish Arora, Marco Ceccagnoli, Akira Goto, Akiya Nagata, Richard R. Nelson, John P. Walsh
Sources of support: Alfred P. Sloan Foundation, National Science Foundation, Center for Global Partnership
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Background
• A strengthening and broadening of patent protection over the past 20 years– 1982 Creation of CAFC and pro-patent trends
in the courts– Expansion of what is patentable and who can
patent
• Dramatic growth in corporate patenting over past two decades, and growing emphasis on exploitation of IP among top management.
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Cause for questioning both public and private policies
• Forty year empirical legacy: patents not central to protection in most U.S. industries (except drugs)
• Growing concern over impact of increasing “strategic” uses of patents, as in semiconductors, on innovation and competition
• Concern over patenting of research inputs on subsequent discovery– Where innovation is cumulative, a foundational patent may block
access to key building block to subsequent research (e.g., human embryonic stem cells)
– Anticommons: As number of patents reading on a product innovation grow, negotiations across rights-holders become more difficult, threatening development of worthwhile therapies.
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Overview
• Survey-based evidence on effectiveness of patents in protecting inventions
• Uses of patents across industries
• The “quid pro quo”- a cross-national study of patent disclosures and their importance for innovation
• Impact of patenting on R&D incentives in U.S. manufacturing
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Data
• Carnegie Mellon Survey (CMS) administered to R&D lab managers in the U.S. manufacturing sector in 1994.
• 1478 of 3,240 labs responded; 46% response rate (54% adjusted rate)
• U.S. sample broadly representative of firm size distribution
• Also reporting on comparable Japanese survey (643 of 1,219 labs responded; 53%)
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Patent effectiveness
• Context: A variety of mechanisms are employed by firms to protect their inventions– Secrecy
– Lead time
– Complementary capabilities (e.g., sales and service, manufacturing)
– Patents
• Our measure of effectiveness of each of these– % of firm’s innovations for which a mechanism was
effective in protecting competitive advantage from that innovation
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Relative effectiveness of mechanisms
• For product innovations– Top mechanisms overall: Secrecy and lead time– Patents least effective overall
• Relatively effective in drugs and med. equipment.• Less effective in semiconductors & communications
equipment
– Larger firms report patents to be more effective (r = .22 for product patents)
• Since mechanisms not mutually exclusive, “effectiveness” reflects centrality to strategy
• Do not conclude from our findings that patents do not stimulate R&D, even where less effective
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Effectiveness of Appropriability Mechanisms for Product and Process Innovations
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21
51
53
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15
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0 10 20 30 40 50 60
Patents
Other Legal
Secrecy
Lead Time
ComplementarySales/Service
ComplementaryManufacturing
ProcessProduct
Mean % of Product/Process Innovations for Which Mechanism Considered “Effective”
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Effectiveness of mechanisms in four industries
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Limits on patent effectiveness: Why firms do not patent
• Most important reasons for not applying– Demonstration of novelty (32%)– Information disclosure (24%)– Ease of inventing around (25%)
• Negative partial correlation between firm size and defense cost (r = -.18) as reason not to patent suggests why larger firms report (product) patents to be more effective.
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Need to consider how patents are used across industries to help
understand how they may affect innovation.
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Reasons to patent for aggregate sample
• Reasons (nonexclusive) Products Processes – Prevent copying 96% 78%– Patent blocking 82 64– Prevent suits 59 47– Use in negotiations 48 37– Enhance reputation 48 34– Licensing revenue 28 23– Measure performance 6 5
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A source of industry differences
• Our analysis of differences across industries in uses of patents builds on the following observation:– When number of patents per
commercializable innovation are great, unlikely that any one firm holds all necessary rights, fostering mutual dependence and associated behaviors
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Distinguish between “complex” and “discrete” product industries
• Complex product industries: Where a product protected by numerous (e.g., hundreds) patents (e.g., computers, communications equipment), that is, more patents read on a product.
• Discrete product industries: Where a product protected by relatively few patents (e.g., drugs, chemicals)
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Distinction implies different uses of patents by industry type
• Complex product industries: Patents used to block rival use of complements to– Assure inclusion or “player” status in cross-licensing
negotiations in order to gain access to rivals’ technologies
– Gain freedom to operate and design freedom via “mutually assured destruction”
• Discrete product industries: Patents used to block substitutes by creating patent “fences;” not to compel cross-licensing.
What uses did we find in discrete versus complex product
industries?
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Product patent uses across industry types
• Patent Uses Discrete Complex
(patent applic. wtd.)– Negotiations 33% 81%
– Player: Block and negots. 29 61
– Fences: Block but not negs./lics. 45 11
• There is, however, still substantial heterogeneity of uses even within industries.
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Social costs of “strategic” uses of patents in complex product industries
• Mutual dependence and associated “player strategy” may spawn patent non-cooperative portfolio races, resembling “arms races,” (cf. Hall and Ziedonis [2001] for semiconductors), raising cost of innovation
• Such strategic uses may increase litigation• May yield “patent harvesting” where firms patent
inventions that they would have generated anyway, suggesting patents may have little R&D incentive effect.
• Portfolio races may also deter entry and associated innovation
• The costs that strategic uses add to innovation may be troublesome if patents play little role in stimulating innovation to begin with.
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But--Possible benefits
• Extensive cross-licensing among incumbents may also:– Promote information sharing and associated
efficiencies and complementarities across rival R&D efforts
– Avert license stacking and possible breakdowns in negotiations over rights due to large number of claimants (predicted by the anticommons argument).
• Because strategic uses yield profits, such uses may provide incentive to conduct R&D
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Next study: The quid pro quo of disclosure
• Patents supposed to promote innovation in two ways:– Appropriability– Disclosure
• Disclosure often overlooked in U.S.
• Can patent disclosures importantly affect innovation?
• Compared patenting and related information flows in U.S. and Japan
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Importance of R&D-related information flows
• Saves on duplicative R&D• Complementarity effects, improving R&D
productivity and incentives• May promote entry• But can diminish appropriability and
associated incentive to invest in R&D• R&D information flows (spillovers)
contribute importantly to productivity growth
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Intraindustry R&D Information Flows and Appropriability in Japan and U.S.
• Measure #1: Whether information from rivals:– Suggests new R&D projects: J > U
– Contributes to completion of existing projects: J >> U
• Measure #2: When aware of rival’s major R&D project?– Japan: 44% of respondents aware prior to development
– U.S.: Only 16% aware prior to development
• Per more information flow, appropriability is less– For unpatented and patented process and product
innovations, imitation lags longer in U.S. by 40%-80%.
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Why more information flow and less appropriability in Japan?
• Patents may be key
• Policy differences (at time of survey)– Priority to first-to-file in Japan versus first-to-invent in
U.S.
– In 1994, disclosure 18 months after application in Japan versus upon grant in U.S.
– Pre-grant (and pre-examination) opposition period in Japan prior to 1996.
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Another reason for more disclosure due to patents in Japan
• Compared to U.S., in Japan patent claims interpreted more narrowly and there are fewer claims per patent (15 average in U.S. versus 5 in Japan)=> more patents per product.
• Implies mutual dependence across firms’ patent holdings more pervasive in Japan– Uses of patents across all Japanese industries
resemble strategic uses in U.S. complex product industries
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Product patent uses across industry types in Japan
• Patent Uses Discrete Complex
(patent applic. wtd.)– Negotiations 84% 86%
– Player: Block and negotiations 83 81
– Fences: Block but not negs./lics. 11 7
Therefore, would expect patents to contribute much more to
information flows across rivals in Japan
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Finding: Patents are a much more important information source for R&D in
Japan• Compared channels of R&D information flow
across rivals– Top five (of 10) in both nations: patents, informal
information exchange, products (e.g., reverse
engineering), publications, public meetings/confs. • One of top five channels stands out as much more
important in Japan: patents– First place in Japan, scoring 30% higher than next most
highly ranked channel, while in middle of pack in U.S., and absolute score 70% greater than in U.S.
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Observations
• Not only technology, but policy and norms associated with number of patents per product affect uses of patents
• These uses, such as cross-licensing, affect information flows across rivals
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Implications• Japanese experience suggests patent policy
may significantly increase R&D spillovers.• Also, such policies do not necessarily
diminish R&D incentives– In U.S. study, found positive effect of R&D
info. flows across rivals on industry R&D – Also Japan’s R&D intensity greater than that of
U.S. on average—despite lower appropriability
• Patent reform efforts in U.S. should give at least equal time to disclosure
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But do patents “promote the progress of science and the useful arts?”
• In light of finding that R&D relatively “unimportant” in protecting inventions across most U.S. industries, does patenting stimulate R&D, that is, do they increase the returns to R&D, even in such industries?
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• Direct appropriability incentive
• Indirect impact (via increasing effectiveness of rival patents)– May decrease average payoff to R&D
– Cumulative technologies: may reduce incentives for follow-on R&D
• Spillovers: Patent disclosures may enhance R&D productivity.
Impact of patents on R&D
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Does patenting stimulate R&D?• Conducted two-stage analysis to examine
effect of patenting on product R&D– Estimated average patent premium--the
proportional increment to the value of innovations realized by patenting• For “typical” innovations and for patented innovations
(conditional premium)
– Analyzed impact of increasing patent premium on incumbents’ product R&D and patenting
• Ignored:
– Patents may reduce entry reducing innovation
– Patents enhance efficiency of markets for technology which can increase R&D efficiency
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Novel data
• CMU Survey provides data on key variables:
– Patent propensity-- % of (product) innovations that firms patent
– Patent applications – self-reported number of patent applications
– Patent effectiveness -- % of firm’s (product) innovations for which a patent was effective in protecting competitive advantage from that innovation’s R&D expenditure (for product innovation)
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Patent Premium, selected industries
• Premium >1 => positive expected return to patenting
• Large variation across industries in patent premia
Average Conditional
Drugs and medicines
0.9 1.65
Biotech 0.97 1.66
Computers and other office equipment
0.7 1.58
Semiconductors 0.4 1.50
Medical instruments 1.12 1.72
Aggregate sample 0.49 1.53
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Average and conditional patent premia, by industry
0.70
0.900.97
1.12
1.41 1.46 1.49 1.51 1.53 1.56 1.58 1.65 1.66 1.72
0.20
0.620.610.490.420.420.400.350.340.340.320.290.23
0.03
1.511.491.49 1.491.47 1.50 1.56
1.46
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Average Patent Premium, Tot. Innov. Average Patent Premium, Patented innov.
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R&DPatent Appli-
cationsPatent apps/
R&D
Drugs and medicines 0.96 1.4 0.45
Biotech 1.02 1.46 0.44
Computers and other office equip 0.74 1.29 0.55
Semiconductors 0.46 1.07 0.61
Medical instruments 1.18 1.48 0.30
Aggregate sample 0.57 1.16 0.59
Elasticity w.r.t patent premium
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Implications• Positive effect of patenting on R&D overall
– Even in industries such as semiconductors where patents much less effective than other mechanisms and strategic uses pervasive.
• We find some “harvesting”--the patenting of inventions that would have been generated anyway--in all industries, but especially where patent premium is lowest
• Our study did not consider:– Negative effects of patents on entry – Positive effects due to markets for technology,
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Conclusions• Many ways to protect inventions• While patents not as featured as other mechanisms,
they stimulate R&D broadly, though more in some industries than others
• Patent disclosures can contribute importantly to R&D information flows, but apparently little such effect in U.S.
• Pervasive “player” strategy raises concerns (i.e., costs and barrier to entry) for both managers and policymakers
• To understand impact of patents on innovation, need more work on effects of patents on industry entry and markets for technology