Do patents stifle innovation?

Innovation, most people can agree, is a good thing. Continued advances in technology are critical for the long-run growth of the economy and rising living standards. The tricky thing is figuring out how to best promote innovation. One well-trodden policy tool is giving the creator of a new technology or process an incentive by providing her with a monopoly over the invention, also known as a patent. But can there be too much of good thing. Patents may help spur one innovation, but hurt overall innovation further down the line.

No innovation is an island. One advance helps spur several others, either directly or indirectly, with the resulting accumulation of knowledge and technology further boosting economic growth. But patents, if they hinder innovations based on the new innovation, may slow down the pace of follow-on innovation.

A paper presented at the recently completed annual Allied Social Sciences Associations meeting found a significant effect of patents on cumulative innovation. Alberto Galasso of the University of Toronto and Mark Schankerman of the London School of Economics look specifically at the effect of patent invalidations on citations of those innovations in future patents.

Patents in the United States can be invalidated by a federal court as well as a special appeals court, the U.S. Court of Appeal for the Federal Circuit, which has exclusive jurisdiction over appeals cases involving patents. The authors look at what happens to citations after the patent was struck down.

Galasso and Schankerman find a large effect from patent invalidations: Citations increase by about 50 percent on average in the five years afterward. But once they dig deeper into the data, they find that the effect isn’t the same for all patents. For many fields, such as pharmaceuticals, the effect was minimal to non-existent.

The fields that did see significant effects on cumulative innovation were computers and communications, electronics, and medical instruments. These fields are ones where the technology is complex and patent ownership is widely spread, making it more likely that patents can block follow-on innovations.

The authors also looked at the sizes of the firms affected by these decisions. They find that the effect is entirely about the patents of large firms being invalidated and the increased citations are by small firms. So these patents were seemingly restricting the innovative efforts of smaller businesses.

If patents are acting as a barrier, what is to be done? Remember that the effect is only for certain kinds of technology industries. So the authors point out that more efficient patent arrangements for certain industries should be considered. Other options for spurring innovation outside of the patent system, such as innovation prizes, exist as well. More federal spending on basic scientific research is fundamental, too. Regardless of the method, policymakers need to consider the best way to foster innovation now without hindering it in the future.

This article is published in collaboration with Washington Center for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Nick Bunker is a Policy Research Associate with the Washington Center for Equitable Growth.

Image: Honda’s latest version of the Asimo humanoid robot runs during a presentation in Zaventem near Brussels July 16, 2014. REUTERS/Francois Lenoir