Do Patents Increase Innovation?

The answer, according to a new study, is NO.

There’s a lot of evidence that property rights in general lead to more successful economies: countries that have laws to protect individual property owners experience more rapid economic growth.  Some economists have argued that this should hold true for strong patents, too–after all, a patent is a property right, just like owning a farm or a house.  But even though strong property rights lead to higher growth, that’s not true for strong intellectual property rights.

A recent paper by James Bessen and Michael J. Meurer* collects a wide range of evidence.

Historical evidence: Most patents are granted in industries that demonstrate little innovation.  Through the 19th century, most inventions were not even patented (only 11% of British inventions displayed at the 1851 World’s Fair, for example).  A study of important innovations at the 1851 and 1876 world’s fairs found that countries with patent systems weren’t any more innovative than countries without.

Cross-country evidence: An “intellectual property rights index” was calculated for each country, and there was no relation between a country’s score on this index and its economic growth.  Increasing IP rights tend to be correlated with R&D spending, but it turns out the causality goes the other way: first a country starts spending more on R&D, and then later they increase IP rights strength.

Natural “economic experiments”: Following changes in IP law, what happens historically?  Japan increased patent scope in 1988, and this has not resulted in greater innovation nor in increased R&D spending (beyond what would have been expected without that change).  The U.S. changed its treatment of software inventions in the 1990s, but this did not result in an increase in patents by software firms.  (Instead, patents went up in companies known for “stockpiling large arsenals of patents to use as bargaining chips”.)

Surveys of companies find that most inventions are not patented; instead, companies rely on trade secrets and on their first-to-market advantage, or on complementary products and services.

The one exception is pharmaceutical companies, where patent protection seems to increase innovation.  But for other industries, it turns out that the costs of getting, enforcing, and defending a patent are much higher than the profits to be earned from it.  In 1999, for example, the total profits from patents in all U.S. public firms (excluding pharma) was about $3 billion, but their litigation costs associated with those patents were a whopping $12 billion!

The authors’ conclusion?  “in most industries today, patents may actually discourage investment in innovation.”

*Bessen & Meurer, August 2008, “Do patents perform like property?” Academy of Management Perspectives, pp. 8-20.

15 thoughts on “Do Patents Increase Innovation?

  1. I didn’t know of Hasslberger so I followed the link on the peswiki page about patents, here is the short proposal by Hasslberger from 1989:

    He advocates getting the government out of the business of enforcing patents, having them only file patents and having, for example, a private nonprofit association of inventors collect royalties and distribute them (on the model of how ASCAP and BMG collect royalties for public performances of songs).

  2. Hi Keith,

    Thank you for an interesting entry. What do you think of larger companies forming patent protection alliances?

    Google, Verizon, HP, Cisco Systems and Ericsson are thought to have come together to form the Allied Security Trust. The aim of the trust is to buy up patents before they are acquired by third parties and bypass the legal action completely.

    Each member will pay around $250,000 to join the group and then a further $5 million to put towards buying intellectual property rights. It is unknown whether other tech companies will be able to join the trust.

    The trust bypasses any antitrust issues because it is a non-profit venture and the companies involved just license the patents rather than owning them. Once licensed they also intend to sell the patents.”

    Read more at The Wall Street Journal blog site its the reference “What large companies are afraid of is innovation by small companies and individual inventors. Both the Allied Security Trust and Intellectual Ventures are mechanisms invented by large companies to make them safe from small, disruptive newcomers. Both enable large companies to buy up patents that might pose potential threats, and get them out of the hands of small firms and individuals.” Jim Moore’s blog.

    Rather than sending several links, one is sent that contains the text and links mentioned above.

    1. Allied Security Trust sounds a lot like Intellectual Ventures (which has been around since 2000 and has received a lot of media attention because of its famous founder, Nathan Myhrvold, former CTO of Microsoft). However, they both claim to be the good guys, playing only on defense: buying up patents to make sure that they don’t get sued by someone else, and swearing they won’t take “patent assertions against other companies” (that’s from the AST web site). The concern about Intellectual Ventures has always been that they might one day change their minds about that, but as long as their strategy is defensive, I’m fine with that because it’s consistent with my view that overly aggressive patent enforcement blocks innovation.

  3. Most of the evidence in this study shows that innovation does not lead to patenting, not the other way around. Surely the only evidence which could disprove the causal link between increased patenting and increased innovation would be an in depth comparison of national R+D expenditure and the number of innovations and inventions regardless of how effectively they have been exploited.

  4. The Economist (August 20, 2011, p. 10) cites this 2008 study of the costs of patents, in a story about Google’s purchase of Motorola for its patent pool of 17,000 patents. Google paid $12.5 billion, essentially to defend themselves from patent litigation. I agree with the Economist that this seems to provide additional support to this 2008 research.

  5. This software patent business seems a bit like nuclear cold war to me large corporations buying up huge stockpiles of nuclear “patents” and waiting just incase they need to defend themselves in a patent war. When the real solution like in the real world is to dismantle all of the patents and stop holding them over everyone’s heads just in case.

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