Intellectual Property Rights and Firms
Chapter 5 discussed the gains to firms from innovation, mainly relating this discussion to their investment in R&D. This chapter explores how firms use IPRs in more detail and surveys the empirical studies on the value of IPRs. As we saw in chapter 2, firms hold some monopoly power during the period of their IPR (in the geographical territory within which the right is protected). Hence, on average, we expect to be able to demonstrate that acquiring IPRs is of value to firms. However, further investigation suggests that the gains from IPRs can arrive via different routes, depending on the type of innovation, the characteristics of the firm, and the use made of the IPR. It is also important to stress that there may be circumstances in which firms prefer to take alternative routes, such as maintaining secrecy, or contributing to “open source” development of knowledge. These are all possibilities for enhancing the value added of the firm. Also, in some cases, certain types of IPRs were not always an option: the finance industry, for example, has been innovating for decades, but it was only in 1998 with the State Street Bank court decision in the United States that patenting business methods became a possibility.1 During this discussion it is natural to consider some aspects of whether the current system of IPRs is optimal for promoting innovation; something we return to in chapter 11.
The structure of the chapter is as follows. The next section reviews the basic ideas of how firms benefit from IPRs. Section 6.3 explores the returns to IPRs, starting with the question of whether IPRs are critical to firms gaining value from innovation. It then looks at the skewness in returns from IPRs. The stylized fact is that a low percentage of IPRs generates the bulk of the returns. Section 6.4 looks at markets for IPRs. Many argue that a substantial benefit of the patent system is that it allows a
1For example, Tufano (1989) considers innovation in investment banks, while Lerner
(2002) reviews the developments in financial innovation prior to and following the State
Street Bank decision.