IPR and Innovation Ashish Arora Heinz School, Carnegie Mellon University

IPR and Innovation Socially efficient level of R&D (conditional on existing firms) Efficient allocation of R&D input Commercialization Cumulative innovation and dynamics Institutions of knowledge generation

Socially efficient level of R&D Incentives to innovate – what is the role of patents –Patents less important than other first mover advantage and commercialization capabilities (e.g., Yale, CMU surveys) –Median patent of low value – patent renewal studies (e.g., Pakes, Schankerman) – 25% ESR –But average value of patents may be significantly higher (e.g., Gambardella et al.)

Patent Premium, selected industries Patents not used for a majority of innovations in the vast majority of industries Patent protection is valuable in all industries, even in industries that do not patent much. AverageConditional Drugs and medicines Biotech Computers and other office equipment Semiconductors Medical instruments Total Source: Arora, Ceccagnoli and Cohen, “R&D and the Patent Premium”, NBER, 2004

R&D Patent Applications Patent apps/ R&D Drugs and medicines Biotech Computers and other office equip Semiconductors Medical instruments Total Patents provides significant incentives for R&D: Elasticity w.r.t patent premium Source: Arora, Ceccagnoli and Cohen, “R&D and the Patent Premium”, NBER, 2004

Efficient allocation of R&D effort Entry – mixed evidence –Interaction between IPR and market power – retard entry (e.g., MSFT) –French org. chemical industry destroyed by excessively broad patents. –Patents used to coordinate cartels in chemicals in pre WWII –Patents by non producers promotes entry in chemicals (Lieberman) Patents promote vertical specialization –Pharma firms increasingly focusing on marketing rather than R&D Patents (and IPR broadly) may also be used to prevent vertical entry (e.g., software)

7 Commercialization – Patent Protection and Licensing: Mixed Evidence Find positive effect: Gans, Hsu, and Stern (RJE,2002): presence of patent increases the likelihood that startup licenses to an incumbent rather than enter commercializing Yang and Maskus (W.P., 2000): positive relationship between IPRs regimes and licensing by U.S. MNCs. Nagaoka (WP, 2002): using data for Japanese firms, find weak patent regimes associated with an greater fraction of transfers to an affiliate rather than unaffiliated firm Smith (JIE, 2001): US firms more likely to export or directly manufacture rather than license technology in countries with weak patent regimes. No Effect? Other studies cast doubts on the link between patent strength and the extent or form of international technology licensing –Fink (WP, 1997), using German data –Fosfuri (WP, 2003) in the chemical sector Cassiman and Veugelers (2002) do not find that the patent strength encourages Belgian firms to enter into collaborative R&D arrangements. Branstetter, Fisman, and Foley (NBER WP, 2002), using US data, find no evidence of an increase of technology licensing to unaffiliated parties for countries that strengthened patent protection. (But they see an increase in transfer to affiliate.) Impact of patents on licensing conditioned by presence of complementary capabilities

Complementary Assets Low High % change in licensing propensity % change in the propensity to license patented innovations 6%2% 1%  3% 10% Change in Patent Effectiveness Leads to: Source: Arora & Ceccagnoli “Patenting and Licensing”, Management Science, forthcoming

Dynamics Cumulative innovation (e.g., Scotchmer, Green and Scotchmer, Merges and Nelson) –Biotech produces anecdotal evidence of problems BRCA & Myriad Stem Cells and Geron –Murray & Stern; Sampat Anticommons (Heller and Eisenberg) –Empirical basis weak (e.g., Walsh et al, 2004 for commercial research and Walsh et al for large sample academic research) –Problem may arise in future with full genome screening and gene chips

Institutions: Biggest problem area Major threat to non market based institutions (e.g., David; Gambardella and Hall) Many (all?) of biomed problem patent in US are university / non profit based patents –BRCA – Univ of Utah –Stem Cells – Wisconsin –Canavan – Miami –Oncomouse – Harvard