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Patent rights and innovative activity: evidence from national and firm-level data

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Abstract

Global standards of patent protection have been strengthened and harmonized in recent years. Despite the heated policy debates and theoretical controversies, empirical studies of the consequences for innovative activity are scant. This paper contributes to the debate by providing an empirical analysis of the effects of patent strength on different aspects of innovative activity, namely firm-level research and development (R&D), domestic patenting, and foreign patenting. The analysis employs an updated index of patent rights. The results show the complexity of evaluating the effects of patent reform on innovative activity, since the effects vary nonlinearly (depending on the initial level of patent strength) and vary by a country's level of economic development. Overall, for developing economies, patent strength negatively affects domestic patent filings and insignificantly affects R&D and foreign patent filings. For developed economies, patent strength positively affects R&D and domestic patent filings, and negatively affects foreign patent filings, after some critical level of patent protection is reached.

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Notes

  1. For the text of the TRIPS agreement, see http://www.wto.org/english/docs_e/legal_e/27-trips_01_e.htm

  2. The exception is that Yang and Maskus (2001), Kanwar and Evenson (2003), and Park and Lippoldt (2005) use an earlier version of the Patent Rights Index in their studies.

  3. For example, Bosworth (1980) uses dummy variables to indicate whether certain patent law features exist, such as duration, novelty, or compulsory licensing. Ferrantino (1993) uses dummy variables to indicate whether a country was a member of an international patent treaty. Rapp and Rozek (1990) consider additional features of patent systems, but do not incorporate enforcement mechanisms. A disadvantage with these previous measures, for the purposes of our research, is that they are limited to one year of record. Branstetter et al. (2004) follow the dummy variable method (giving a value of 1 if a reform has occurred, 0 otherwise). Some pitfalls with this approach are that reforms are not one-shot but ongoing over time, and that there are various magnitudes of reform (from major ones to minor ones). Lerner (2002) also looks at several features of the patent system, but does not aggregate them into an overall measure of the strength of patent rights. Mansfield (1994) and Sherwood (1997) rely on surveys of expert opinion or perceptions of the strength of patent rights. These surveys provide ratings for a few countries and a single time period. Moreover, issues can be raised about the comparability of different interviewees' perceptions, since there is no information on how to scale the responses. How does one expert's rating compare with another's?

  4. The 10 industries are: Beverages (3.6%), Construction Machinery (5.6%), Electrical Components (7.7%), Food (13.8%), Household Appliances (2.2%), Industrial Chemicals (11.4%), Nonferrous Metals (5.8%), Rubber (3.6%), Scientific Instruments (35.7%), and Semiconductors (10.6%).

  5. The Patent Rights Index data are available upon request from Walter Park.

  6. Data on the patent rights index are available from the corresponding author upon request.

  7. See the documentation in United Nations Conference on Trade and Development (UNCTAD) Handbook of Statistics, 2003 (http://www.unctad.org/en/docs//tdstat28_enfr.pdf). Only one country switched from the developing to developed group during the sample period – namely Israel in 1978.

  8. For example, membership of the Paris Convention grew from 70 members in 1970 to 97 in 1990 and 160 in 2000. Membership of the PCT grew from 20 members in 1970 to 123 in 1990 and 175 in 2000. Membership of UPOV grew from 4 in 1970 to 19 in 1990 and 46 in 2000. Membership of TRIPS grew from 113 in 1995 to 140 in 2000.

  9. In preliminary analyses, we also controlled for measures of industry munificence (i.e., resource abundance), dynamism (volatility of industry sales), and concentration (Herfindahl-type index for top 20 firms in an industry). However, these variables were insignificant determinants once the industry dummies were included.

  10. The LR test statistic, −2(ln L R −lnL U ), where L R (L U ) is the log-likelihood value of the restricted (unrestricted) model, is distributed as a chi-square distribution (with one degree of freedom).

  11. Bearing in mind that, since Eq. (1) is exponential, the critical value occurs at PRI*=−β̂1/2β̂2. Thus a U-shaped effect arises if β̂2>0 (and an inverse-U if β̂2<0), evaluated at PRI*.

  12. The F-statistic, F=(R U 2−R R 2)/[(1−R U 2)/(N−K)], where R U 2 (R R 2) is the unrestricted (restricted) R-squared, is distributed as an F-distribution with (1, N−K) degrees of freedom, where N−K is the number of observations less the number of RHS variables.

  13. As Murmann's (2003) study of the synthetic dye industry in Germany during the 19th century shows, the appropriateness of patent strength depends on the circumstances, including timing. The patent law of 1877 was successful because it ‘came after the industry had already developed strong firms and science was providing the tools to do systematic R&D on new dyes … Had the German patent law arrived in 1858, it is doubtful that as many German firms would have developed into strong competitors. Fewer firms would have entered the industry, and inefficient firms would have been more likely to survive’ (p: 33).

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Acknowledgements

The authors would like to thank Brian Silverman, Mike (Masaaki) Kotabe, Stephen Tallman, Scott Swan, Sully Taylor, Fritz Foley, and Smita Wagh for helpful discussions, and three anonymous referees for their thorough comments and review.

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Authors and Affiliations

  1. Mason School of Business, The College of William & Mary, Williamsburg, VA, USA

    Brent B Allred

  2. Department of Economics, American University, Washington, DC, USA

    Walter G Park

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Correspondence to Walter G Park.

Additional information

Accepted by Arie Y Lewin, Editor-in-Chief and Brian Silverman, Departmental Editor, 7 November 2006. This paper has been with the authors for three revisions.

Appendices

Appendix A: Index scoring methods

Patent Rights Index (PRI)

Table A1

Table 10 Table a1
Full size table

Explanatory notes on the Patent Rights Index

Membership in international agreements

Countries that participate in these international agreements indicate their willingness to provide national, nondiscriminatory treatment to foreigners. In addition, TRIPS obliges member states to make laws, regulations, judicial decisions, and administrative rulings transparent (Article 63). The fact that TRIPS has cross-cutting multilateral statutory and procedural obligations is why we include it under the membership component even though some of its individual provisions are captured in other parts of the index. Participation in each of these agreements receives a score of 1/4, for a total of 1 if the country participates in all four.

Coverage

Rather than list the universe of technologies that could be patentable, we focus on a few technological fields that provide maximum variability across countries. The score assigned to this component is the fraction of those fields that are patentable under national law.

Enforcement mechanisms

Preliminary injunctions require individuals to cease alleged infringements prior to a case hearing. Contributory infringement clauses aid in preventing third parties from contributing to infringement. Burden-of-proof reversals shift the burden to alleged infringers to prove non-infringement. Countries receive a score of 1/3 for providing each of these.

Loss of rights

This category measures whether loss of rights will not occur owing to: (a) ‘working’ requirements, (b) compulsory licensing, and (c) revocation of patents. Each area is scored 1/3, for a total of 1 if none of the three occurs. ‘Working’ requirements require the patent holder to exploit the invention by a certain period of time or forfeit rights. Compulsory licensing requires patentees to share the use of the innovation with third parties. If a country does not impose compulsory licensing within 3 or 4 years from the date of patent grant, it receives credit for this area. Countries that do not revoke patent rights owing to non-working or other reasons also receive credit for this area.

Duration of protection

A score ranging from 0 to 1 is awarded based on the percentage of the appropriate standard duration provided. For example, a country that allows 15 years of protection from the date of application date receives a score of 0.75 for this component.

Appendix B: List of countries in the patent sample

Table A2

Table 11 Table a2
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Allred, B., Park, W. Patent rights and innovative activity: evidence from national and firm-level data. J Int Bus Stud 38, 878–900 (2007). https://doi.org/10.1057/palgrave.jibs.8400306

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