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.