The role of patents in technology markets: Issues pertaining to data collection and analysis
First Monday

The role of patents in technology markets: Issues pertaining to data collection and analysis by Dominique Guellec and Maria Pluvia Zuniga



Contents

Introduction
Patents and innovation
Patents and technology markets
Growing but under–exploited patents
Further analysis and data collection

 


 

Introduction

The increase in patents over the past two decades — in areas ranging from semiconductors and software to human gene sequences — has been well publicised and its sources and economic effects are widely discussed. The embracing of patenting by universities has also been a subject of debate, raising questions about the consequences of patenting on the progress of science and the advancement of technology. As technologies become more interdependent and innovation relies more and more on fragmented proprietary knowledge, concerns are emerging about innovation becoming more difficult and the commercialisation of technologies being held backed by patents. And yet, many patents correspond to a new wave of inventions (information and communication technology, biotechnology) and technological activities, which might have not appeared, or might have been delayed, without patent protection.

For this reason, there is an imperative need to better understand the obstacles which patents might generate to the diffusion of technology, how they can be overcome, and how patents may be used in contracts to ensure fluidity in technology markets. This short paper briefly discusses the multiples role played by patents in fostering innovation and the commercialisation of technology: how patents affect innovation incentives, the building of knowledge infrastructures and the development of technology markets. Lastly, it stresses the need to collect and analyse new data in order to design evidence–based policies in this field.

 

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Patents and innovation

When thinking about the role of patents in the production of knowledge, we need to think first about their incentive effect, related to the exclusive right they entitle their holder with, and second about how patents facilitate or hinder the diffusion of technology, through market and non–market transactions. Compared to other IP rights — e.g. copyrights and database rights — the particularity of patents lies in the criteria required to enjoy protection: i) obligation of disclosure, and ii) patentability criteria. The fact that inventions must be publicly disclosed implies that a detailed description of the invention must be submitted jointly with the patent application. To be patentable, a product or process innovation needs to be novel, involve an inventive step (non–obvious), and be capable of industrial application. There are several ways in which patents can influence the production of knowledge and speed of innovation (Guellec and van Pottelsberghe, 2007):

  • By providing protection and exclusivity [1], a patent is a policy instrument intended to encourage inventors to continuously invest in research and the subsequent innovative work that will put those inventions to practical use (Griliches, 1990) [2].

  • Because patents reveal new knowledge through disclosure of inventions, they diffuse information enabling other inventors to develop new technological innovations.

  • Through market transactions and contracting (i.e. licensing), patents enhance the exploitation and commercialisation of technology thereby fostering the diffusion of knowledge.

Patents do not only exclude third parties from the use of inventions. The patent system attempts to compensate inefficiencies associated with market exclusivity. By making public new knowledge through disclosure, patents contribute to making innovation more efficient by avoiding needless duplication of R&D efforts. From a social point of view, patents are therefore preferred to secrecy as they increase the stock of knowledge available to society. Another way through which patents foster knowledge diffusion is by encouraging markets for technology. By facilitating technology transactions and division of innovative activities amongst firms, patents help to make innovation and exploitation of technologies more efficient.

 

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Patents and technology markets

Research has shown that patents encourage the development of technology markets. By facilitating exchanges, patents contribute to making technology markets more fluent and well–organised. They help lower the cost of transactions (e.g. by providing information about the value of technologies, they reduce the search costs for partners and informational asymmetries), thereby fostering the diffusion of knowledge.

Recent research shows that patents can enhance the efficiency of knowledge transfer through licensing. Patents have been found to facilitate the provision of non–protected complementary tacit knowledge when technology contracting occurs (e.g. know–how, technical assistance, etc.), that can be crucial to accomplishing innovation (Arora, et al., 2001). In addition, the informative contents of patents (through disclosure of inventions) helps to define the market for technology — the inventions available for exploitation, for exchange or buying — which in turn makes the pricing of technology easier.

By facilitating transactions in technology, patents allow both small and large innovating firms to increase economic value gained from innovation. For the former, patents facilitate the licensing and the selling of technology to firms having the downstream capabilities. For the latter, patents help to leveraging economic value from intellectual assets, accessing and exchanging technologies. In other words, by facilitating the delegation of R&D or production tasks, patents facilitate the vertical specialisation of companies. They contribute thus to a better allocation of resources through a more efficient division of labour among firms, the best example being the transfer of technology between biotechnology firms and big pharmaceutical firms. By facilitating entry into the research and product markets (through licensing), patents help to prevent R&D duplication. Technology markets also contribute to increasing the diffusion of public and private R&D outcomes, and permit more competitive prices for consumers (Gambardella, 2002). Patents are also useful in diffusing technology, notably network technology where standards are crucial for generating economic returns.

Nevertheless, the large number of IP rights on increasingly fragmented knowledge (e.g. genes sequences, research tools, etc.) may raise considerable inefficiencies if transactions are too costly [3]. When licenses from too many individual intellectual property owners are required to develop a new product or technology, organisations may under–invest in the commercialisation of downstream technologies (“the anti–commons” tragedy, Heller and Eisenberg, 1998). It becomes very expensive and difficult to get into all the licensing agreements needed. Likewise, the increasing risk and costs related to litigation, in turn makes innovations more costly. These difficulties limit the economic returns from research activities and discourage further investment in technology [4]. It should be noted however that empirical evidence of “anti–commons” is restricted to very few reported cases (OECD, 2007b).

Patents, because they constitute an exclusive legal title, can also play a positive role in ensuring downstream development and transactions. They can serve as a basis for contracting and ensuring the commercialisation of technology. Patents help to reduce the gap between science and industrial innovation by ensuring finance in the later stages of development, exploitation by best positioned firms through licensing, and hence economic returns for research (OECD, 2007a).

 

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Growing but under–exploited patents

In spite of the impressive growth in the number of patents during the last decade, figures on licensing activity show that technology markets are still at the emergent stage. They suggest however that the economic value of technology licensing is increasing. World–wide licensing transactions averaged more than USD 36 billion per year between 1990 and 1997, compared to USD 5.6 billion in the 1980s (OECD, 2006). The most recent statistics (from the World Bank: World Development Indicators online database) indicate that the value of the cross–border licensing transactions was around USD 115 billion in 2005.

Other indicators from surveys suggest an under–exploitation of patents:

  • According to the PATVAL–European Union Survey on the value of patents, the share of patents that are not used at all is significant: 35 percent of patents are not used at all; 18.7 percent of inventions are actually patented with the aim of blocking competition, and 17.4 percent are considered as sleeping patents.

  • This survey also reports that less than 10 percent of patents are subject to licensing outside the company, 10–15 percent of inventions are candidates for license. According to the estimated economic value of these inventions (as declared by inventors), this would imply a non–negligible potential for increasing the value of licensing activity (50 percent potential increase in the size of the market). The inventions that have not been licensed but are candidates for license are not significantly different from other inventions in terms of quality.

  • A survey conducted by the Japanese Patent Office (JPO) on similar issues reports lower figures on licensing activity and willingness to license. Accordingly, 8 percent of JPO patents are licensed, while 7 percent are unsuccessfully offered to license. The reasons for such patterns have to do with embryonic stage of technology, underestimation of the value of inventions, e.g. underestimation when there is lack of awareness of commercialisation potential, lack of information on potential partners, etc.

While these figures evidence the importance of motivations other than the protection of innovation in patenting activity, they also suggest that there is still a lot to do regarding the development of technology markets. Given these trends, several policy concerns arises:

  • How to unlock the latent economic value of patents and increase exploitation of technology;

  • How to enhance licensing by technology producers in the interest of both buyers and sellers; and,

  • How to improve and accelerate access to technology.

In order to answer these questions, both private and public policy solutions are required. Private mechanisms for unlocking or increasing the economic value of patents are currently emerging (technology transfer intermediaries such as patent funds and auctions, IP consulting companies, etc.). They consist of a variety of services to intellectual property holders to enhance commercialisation of intangible assets and maximise economic value (OECD, 2007a): patent (portfolio) value assessment, logistic and financial services, searching for partners and assistance in establishing partnerships; insurance strategies (protection against litigation), monetisation of patents (proper accounting practices).

Public policy solutions include the integration of competition policies. These include mechanisms to promote and encourage licensing practices with careful attention to competition (reasonable and non–discriminatory practices). Patent pools have been found to be an efficient solution in some technology fields. And yet, careful attention must be given to ensure compliance with competition rules. Patent pools are procompetitive when they: i) integrate complementary technologies, ii) reduce transaction costs and iii) help to clear blocking positions (U.S. Department of Justice and the Federal Trade Commission, 2007). They are conceived to avoid costly infringement litigation and promote diseminnation of technology. Patents pools are anticompetitive when: i) excluded firms cannot effectively compete, ii) pool participants collectively possess market power, and iii) limitations on participation are not reasonable. They can also be anticompetitive if they deter or discourage R&D activities (U.S. Department of Justice and the Federal Trade Commission, 2007).

Hence, by facilitating transactions and delegation of innovation and production tasks, intellectual property rights are needed to ensure transformation of scientific advances into technological and economic progress. Best practices should be identified however to deal with “patent thickets” and reduce “anti–commons” problems.

 

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Further analysis and data collection

The difficulties of the patent system in fulfilling its mission in the current economic environment have spawned exchanges of arguments and attempts to reform the system in various ways, in Europe, Japan, the United States and other countries.

Thanks to recent progress made by the EPO (notably the worldwide patent statistics database — Patstat), the NBER database and the JPO–Tokyo University database, patent data have become increasingly accessible, allowing more in–depth analysis of the patenting strategy of firms and of broad trends in–patent systems. Patent data allow the tracking of companies’ patenting strategies, comparative trends across patent systems, and knowledge diffusion effects. And yet, information on technology markets and companies’ strategies for exploiting and managing IP portfolios remains very limited. In order to better understand the economic use and impact of the patent system, complementary information is required concerning the use of patents and non–patent appropriability mechanisms by companies (such as secrecy, first mover advantages or complementary capabilities), strategies for exploiting patents, and the economic impact of patents. The most practical way of obtaining such data on a broad basis is to conduct a business survey. Building on previous international experience, the OECD is planning to conduct a joint survey with the EPO and Tokyo University uncovering the uses of patents and strategies for exploiting patent portfolios [5].

The aim of the survey is to investigate the use of patents for licensing and raising capital: its development over recent years, its motivations, its articulation with other practices of companies, its outcomes, and the obstacles encountered [6]. Other issues for investigation issues are: the speed of expansion of the market for licensing, the differences between small and medium enterprises and large firms in terms of commercialisation strategies, the licensing behaviour of multinational firms, the role of patents in open innovation modes, the obstacles to licensing technology, and other uses of patents (strategic, financial). End of article

 

About the authors

Dominique Guellec is is senior economist at the Organisation for Economic Co–operation and Development (OECD) in Paris.
E–mail: dominique [dot] guellec [at] oecd [dot] org

Maria Pluvia Zuniga, Organization for Economic Co–operation and Development (OECD) in Paris.
E–mail: Maria–Pluvia [dot] ZUNIGALARA [at] oecd [dot] org

 

Notes

1. However, patent rights are not the sole means of precluding imitation and exercising market exclusivity. Non–legal strategies such as secrecy, rapid launching, short product development cycle times, low prices and other competitive approaches (production and marketing capabilities; after–sales services; long–term contracts), allow inventors to gain market exclusivity and appropriate rents from innovation.

2. The reasons for the need to provide a legal framework for protecting inventions are that information is a non–excludable and non–rival good. “Non–excludable good” means that it is impossible to exclude others, who did not bear the cost of the invention, from using the good (i.e. “free–riding” issue). “Non–rival” good means that consumption of the good by one person does not reduce the quantity available to other individuals i.e. the marginal cost is zero). The legal mechanism of conferring patent rights to individual deals with both the non–excludable and non–rival good problems.

3. In particular, the overlapping of rights in particular technology fields — semiconductors, gene sequences, research tools — makes the cost of transactions considerably higher.

4. A situation similar to that of the “patent thicket” occurs in the context of scientific research. The extension of intellectual property to tools for research and other inputs (e.g. databases and software), considered until recently as public or communal information for specific groups (scientists), may restrain the functioning of these open systems and in turn delay the progress of science.

5. The 1994 Carnegie Mellon Survey (Yale 2: USA) on the effectiveness of patents, the JPO Survey (Japan, Uses of IPR and types of licensing), the 2005/2006 EPO Survey: Motivations for patenting and proportion of patents in each category; the 2003 OECD–BIAC Survey: In and out–licensing strategies; the 2002–2003 PATVAL Survey on the Uses and Value of patents.

6. The point of view will be of out–licensing, rather than licensing–in, as the surveyed population is made of patent holders only.

 

References

A. Arora, A. Fosfuri, and A. Gambardella, 2001. “Markets for technology and their implications for corporate strategy,” Industrial and Corporate Change, volume 10, number 2, pp. 419–451. http://dx.doi.org/10.1093/icc/10.2.419

A. Gambardella, 2002. “‘Successes’ and ‘failures’ in the markets for technology,” Oxford Review of Economic Policy, volume 18, number 1, pp. 52–62. http://dx.doi.org/10.1093/oxrep/18.1.52

Z. Griliches, 1990. “Patent statistics as economic indicators: A survey,” Journal of Economic Literature, volume 28, number 4, pp. 1661–1707.

Dominique Guellec and Bruno van Pottelsberghe, 2007. The Economics of the European Patent System: IP Policy for Innovation and Competition. Oxford: Oxford University Press.

M. Heller and R. Eisenberg, 1998. “Can patents deter innovation? The anticommons in biomedical research,” Science, volume 280, number 5364, pp. 698–701, and at http://www.sciencemag.org/cgi/content/full/280/5364/698, accessed 7 June 2007.

Organization for Economic Co–operation and Development (OECD), 2007a. “Summary of the OECD–EPO–UKPO Conference on Patents: Realising and Securing Value: Summary Report, London (21 November 2006),” at http://www.oecd.org/dataoecd/23/4/37952293.pdf, accessed 7 June 2007.

Organization for Economic Co–operation and Development (OECD), 2007b. “Summary Report of the Conference on Research Use of Patented Inventions, Madrid (18–19 May 2006),” at http://www.oecd.org/document/46/0,3343,en_2649_34797_36060462_1_1_1_1,00.html, accessed 7 June 2007.

Organization for Economic Co–operation and Development (OECD), 2006. OECD Science, Technology and Industry Outlook 2006. Paris: OECD; and at http://www.oecd.org/document/62/0,3343,en_2649_34273_37675902_1_1_1_1,00.html, accessed 7 June 2007.

U.S. Department of Justice and the Federal Trade Commission, 2007. “Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition: A Report Issued By the U.S. Department of Justice and the Federal Trade Commission,” at http://www.ftc.gov/opa/2007/04/ipreport.shtm, accessed 7 June 2007.

 


 

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The role of patents in technology markets: Issues pertaining to data collection and analysis by Dominique Guellec and Maria Pluvia Zuniga
First Monday, volume 12, number 6 (June 2007),
URL: http://firstmonday.org/issues/issue12_6/guellec/index.html





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