Intellectual Property Rights and the Knowledge Spillover Theory of Entrepreneurship Mark Sanders Utrecht School of Economics Max Planck Institute of Economics Max Planck Institute 9 September 2008 Jena

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

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

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?

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

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:

A Model (Acs and Sanders 2008) New Features: Captures spin-out/off Captures upstream spillovers (specialization) Captures downstream spillovers(opportunities) Residual rents reward commercialization Patents transfer rents from innovators to inventors Results in line with new growth theory: Growth Sub-Optimal Both R&D and Entrepreneurs should be supported 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 may lead to lower innovation Distinguishing entrepreneurs from R&D makes a difference

A Model (Acs and Sanders 2008) In the tradition of Schumpeter we: …separate commercialization and invention, …allocate the residual monopoly 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… …strengthening patent protection may overshoot the target, …as Jaffe and Lerner (2004) argue it has in the US.