1. The Economic Meaning of Patent Citations: Value and Organizational Form in Patenting Start-ups Oral Examination (Ph.D. in Business Administration) Edward J. Egan Monday May 9 th, 2011

2. Research Question What is the economic meaning of patent citations?

3. Approach advance theoriesUse the property right and informational aspects of patents to advance theories about what a relationship between patents could mean Test the predictionsTest the predictions these theories make about the value of successful start-ups that own patents, and their choice of organizational form

4. Why Successful Start-ups? Patents should matter to these firms and these should be ‘important’ patents –If the relationships between patents don’t have economic meaning here, they probably don’t anywhere We have a good measure of the long-term value of these firms, and the outcome of an organizational form choice as to how value is best realized.

5. What is a Patent? A property rightA property right –A right to exclude and to a monopoly, but not a right to use InformationInformation –A complete, useful, novel and non-obvious application of knowledge Useful facts from the literature: –Patents are used only 50% of the time (1) –The average value of a 1957 patent was $0.5m in 1988 prices (1) –Patents cost an average of $25,000 each to acquire (2) (1) Reported in Griliches (1998) (2) According to Lemley (2001)

6. Patent Characteristics CitationsCitations –Who adds citations? On an average patent, 65% of citations are added by the examiner (4) For 40% of patents, all citations are added by the examiner (4) –What do citations mean? 35% of cited patents are complements (5) 3% of cited patents are substitutes (5) What about the other 64%?What about the other 64%? (4) Data on who assigned citations is available from the USPTO for patents filed after 2000. Alcacer & Gittelman (2006) report these results. (2) From survey data presented in Harhoff, Scherer & Vopel (2003)

7. An Example: Citations Received More citations a patent received => the patent is of greater valueCommon claim in the literature: More citations a patent received => the patent is of greater value Evidence that this is true: Harhoff et al. (1999) – Survey Data Hall et al. (2001) – Weak evidence from Manufacturing Firms Indirect evidence: Trajtenberg (1990), Bessen (2008) Contradicting evidence: Sampat & Ziedonis (2004), Hall et al. (2007) Still on open question: Moser (2011).

8. Property Rights Example Patents as complementary inputs –The more citations received: the greater the rents accumulated Patents as substitute outputs –The more citations received: the lower the rents accumulated Mixes of complements and substitutes –Possibly no prediction at all

9. Some Results on Firm Value An additional patent increases firm value by 2%, or about $340,000. The number of citations received does not matter.Citation measures do not predict value above and beyond patents themselves. The number of citations received does not matter. Broader patents are not more valuable Jointly assigned patents are not more valuable The dependent variable is the natural log of firm value. The coefficients are estimated using Ordinary Least Squares regressions with a Huber-White sandwich adjustment to correct for heteroskedasticity. All columns estimate results using the full sample. Column 1Column 2Column 3Column 4Column 5 Log No. of Patents 0.207*** (0.026) 0.208*** (0.026) 0.240*** (0.036) 0.218*** (0.027) 0.212*** (0.027) Log Avg. No. Claims Made -0.012 (0.044) Multiple Corporate Assignees -0.119 (0.078) Log Avg. Citations Made -0.067 (0.043) Zero Citations Made Indicator 0.140 (0.160) Log Avg. Citations Recd. 0.004 (0.034) Zero Citations Recd. Indicator 0.289 (0.212) Avg. (Exit Year - Patent Year) 0.002 (0.007) 0.001 (0.007) 0.002 (0.007) -0.006 (0.008) 0.002 (0.007) Acquisition Indicator -1.010*** (0.063) -1.011*** (0.063) -1.012*** (0.063) -1.008*** (0.063) Exit Year Fixed Effectsyes Industry Fixed Effectsyes State Fixed Effectsyes Sub Cat. Fixed Effectsyes Constant 2.767*** (0.798) 2.794*** (0.799) 2.779*** (0.791) 2.872*** (0.791) 2.750*** (0.809) R-Squared0.3150010.31503640.31601350.31681660.315889 No. Observations1709 Standard errors are reported in parentheses. ***, **, and * indicate significance at the p=0.01, p=0.05 and p=0.1 levels respectively.

10. Next Steps Consider in-term vs. out-of-term citation effects Consider self-citation effects Robustness checks on firm values Report results for: – VC backed firms only –Firms with a single patent only –Firms in specific industries: IT, Biotech, Semiconductor, etc. (This may shed light on the importance of IP strength)

11. A Research Agenda Try to understand the nature of citations and code them –Read patent filings myself –Consider building Natural Language Processing software to read filings and code the relationship between them (e.g. complement, substitute, etc.) Consider developing network based theories of patent citations –This could provide a holistic approach –This might capture aspects of the landscape that are important