Intellectual Property Rights and the Knowledge Spillover Theory of Entrepreneurship Zoltan Acs George Mason University Max Planck Institute of Economics and Mark Sanders Utrecht School of Economics Max Planck Institute of Economics RENT XXII 21 November 2008 Covilha, Portugal

Motivation Patents and the US Patent Reform: Patents and the Bargain over Rents Incentives for Knowledge Creation Incentives for Knowledge Commercialization Outcomes Growth and Ideas; the basic model structure Consumers Producers/Intermediates Invention, Innovation and Growth Schumpeter and Endogenous Growth Theory Innovation vs. Invention Who gets rents? Opportunities vs. Ideas The source of vs. the bottleneck in innovation

Patents Historical: Royal Favor and Revenue Inventions and Innovations Knowledge and Ideas Recent US reforms The Rationale: K nowledge creation is source of growth Patents reward knowledge creation Patent protection stimulates growth Incentives and Rewards: But what drives knowledge creation? And what drives invention? And what drives innovation?

Growth and Ideas Basic Structure: Consumers 1. Willing to save 2. Demand for innovations Basic Structure: Producers 1. Make profit (imperfect competition) 2. Demand production factors

Growth and Ideas Basic Structure: Inventors/Innovators 1. Make zero-profit (free entry) 2. Need to demand R&D factors Auction off ideas at willingness to pay: Produce ideas according to:

Growth and Ideas Basic Structure: 1. Growth is positive for positive R&D 2. Sub-optimal in case of spillovers Intra-temporal knowledge spillovers Inter-temporal knowledge spillovers Positive steady state growth requires: latent demand for innovation imperfect competition appropriation of rents by new knowledge creators increasing returns to scale in aggregate production Optimal growth requires: stimulation of knowledge creation patents to internalize part of the spillovers

A Model (Acs and Sanders 2008) Producers of final good C Consumers of final good C Producers of n intermediate goods Capital Market Labor Market Knowledge Commercialization Through Entrepreneurship Knowledge Creation and Commercialization through R&D

A Model (Acs and Sanders 2008) New Features: Captures spin-out/off Captures upstream spillovers (specialization) Captures downstream spillovers (opportunities) Residual rents reward commercialization Transfer of rents from innovators to inventors Results in line with new growth theory: Growth Sub-Optimal Case for R&D and Entrepreneurs subsidy R&D more than Entrepreneurs More patent protection means more R&D… Results in contrast to new growth theory: …but also less commercialization. Too much protection leads to lower innovation Distinguishing entrepreneurs makes a difference

In Conclusion In the tradition of Schumpeter we: …separate commercialization and invention, …allocate the residual rents to the entrepreneur, …assume opportunity to be a spillover. In the tradition of Romer we: …see patents as (imperfect) claims to rents, …that incentivize knowledge creation. But we show that: …patents are not needed to incentivize R&D and… …patent protection may overshoot the target, …as Jaffe and Lerner (2004) argue it has in the US.

A Model (Acs and Sanders 2008) Consumers (standard)

A Model (Acs and Sanders 2008) Final Goods Producers

A Model (Acs and Sanders 2008) Final Goods Producers (R&D)

A Model (Acs and Sanders 2007) Intermediate Goods Producers

A Model (Acs and Sanders 2007) Intermediate Goods Producers (Entry) Entry-Arbitrage:

A Model (Acs and Sanders 2008) Equilibrium in labor market:

A Model (Acs and Sanders 2008) Equilibrium A/n 1 A/n*

A Model (Acs and Sanders 2008) Equilibrium Steady State: