Do Patents Truly Promote Innovation?

By David Kline

Do patents actually promote innovation and economic growth?

We know from the historical record that in 19th century America, at least, most observers had no doubt that that the patent system was absolutely vital to U.S. economic success.

Sir William Thompson, a British inventor and scientist attending the 1876 Centennial Exhibition in Philadelphia, looked at the amazing array of American inventions — including Bell’s telephone, the Westinghouse airbrake, Singer’s sewing machines, and Edison’s improved telegraph — and told Scientific American that “if Europe does not amend its patent laws, America will speedily become the nursery of useful inventions for the world.”

Meanwhile, the Swiss Commissioner in attendance, the shoe manufacturer Edward Bally, offered a similar warning to his Old World countrymen. “American industry has taken a lead which in a few years may cause Europe to feel its consequences in a very marked degree.”

Then there’s Japan’s Assistant Secretary of State Korehiyo Takahashi, who visited the U.S. Patent Office. Upon his return home, he said: “What is it that makes the United States such a great nation? We investigated, and we found it was patents. And we will have patents.”

Even the British jurist and historian Sir Henry Sumner Maine, who had once argued that “the establishment of the masses in power is the blackest omen” for the future of invention, later changed his tune. He conceded that the U.S. patent system was “one of the provisions of the Constitution that have most influenced the destinies of the American people” and that it had made the United States “the first in the world for the number and ingenuity of [its] inventors.”

As economic historians Naomi Lamoreaux of Yale and the late Kenneth Sokoloff of UCLA concluded,“The U.S. patent system had a powerful impact on the patterns of inventive activity. Its provision of broad access to property rights on new inventions, coupled with the requirement of public disclosure, was extremely effective at stimulating the growth of a market for technology and promoting technological change.”

Or in Abraham Lincoln words, it ‘added the fuel of interest to the fire of genius.’

But that was then. What about now?

In recent years, a great many studies of the real-world impact of patenting on innovation and economic growth (many available for free on ssrn.com) point to its beneficial effects. Arrow (1962), Griliches (1963), Schmookler (1966), Kitch (1977), Reinganum (1981), Tirole (1988), Klemperer (1990), Romer (1990), Giulbert and Shapiro (1990), Grossman and Helpman (1991), Aghion and Howitt (1992), Scotchmer (1999), and Gallini (2002) all found that patents foster ex ante innovation — meaning, they induce people to invent because of the prospect of reward.

Invention, it has been shown, is driven primarily not by genius or happenstance but rather by markets and the expectation of the profit that can be gained by securing the patent rights to new technologies. Zorina Khan of Bowdoin College and the late Kenneth Sokoloff at UCLA found that among the “great inventors” of the 19th century, “their patterns of patenting were procyclical [and] responded to expected profit opportunities.” And as Khan noted elsewhere, “Ordinary people [are] stimulated by higher perceived returns or demand-side incentives to make long-term commitments to inventive activity.”

By contrast, in countries without patent rights, Barro (1995) found that people have an “excessive incentive to copy” and insufficient incentive to invent for themselves. Moser (2004), meanwhile, reported that “inventors in countries without patent laws focus on a small set of industries … while innovation in countries with patent laws [is] much more diversified.”

The evidence that patents foster innovation is not confined solely to the U.S. or even to developed countries. In 2008, a study by the Organization for Economic Co-operation and Development (OECD) found that “stronger levels of patent protection are positively and significantly associated with inflows of high-tech product [and] expenditures on R&D.”

And in a study that attracted wide attention, Shih-Tse Lo of Concordia University in Montreal reported that the reforms strengthening the Taiwanese patent system in 1986 “stimulated additional inventive activity, especially in industries where patent protection is generally regarded as an effective strategy for extracting returns, and in industries which are more R&D intensive. The reforms also seemed to induce additional foreign direct investment in Taiwan.” But such benefits did not accrue across all sectors of the economy. “For industries that chiefly use other mechanisms to extract returns from their innovations, such as [trade] secrecy, the strengthening of patent rights had little effect on their inventive activity.”

In addition to encouraging ex ante innovation, Acemoglu, Bimpikis, and Ozdaglar (2008) discovered that “patents [also] improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge across firms.”

Given that patents grant exclusionary rights, some will be surprised to learn that the patent system is actually one of the most effective tools for knowledge-sharing and technology transfer ever devised. A 2006 study by French economists Francois Leveque and Yann Meniere found that 88 percent of U.S., European, and Japanese businesses rely upon the information disclosed in patents to keep up with technology advances and direct their own R&D efforts.

This is hardly a new phenomenon. The inventor Elias E. Reis reported that when he read in the Official Gazette in 1886 about a patent issued to Elihu Thomson for a new method of electric welding, “there immediately opened up to my mind a field of new applications to which I saw I could apply my system of producing heat in large quantities.” And Thomas Edison was known to frequent the patent office to study other inventors’ patents and spark ideas of his own.

Indeed, new research published last year found that rather than blocking development, Thomas Edison’s seminal 1880 incandescent lamp patent  (No. 223,898) actually “stimulated downstream development work” that resulted in “new technologies of commercial significance [including] the Tesla coil, hermetically sealed connectors, chemical vapor deposition process, tungsten lamp filaments and phosphorescent lighting that led to today’s fluorescent lamps.”

As Sokoloff and Naomi Lamoreaux at Yale (1997) observe, “The very act of establishing exclusive property rights in invention not only protected patentees but also promoted the diffusion of information about technology. To see why, imagine a world in which there was no patent system to guarantee inventors property rights to their discoveries. In such a world, inventors would have every incentive to be secretive and to guard jealously their discoveries from competitors [because those discoveries] could, of course, be copied with impunity.

“By contrast,” they noted, “in a world where property rights in invention were protected, the situation would be very different. Inventors would now feel free to promote their discoveries as widely as possible so as to maximize returns either from commercializing their ideas themselves or from [licensing] rights to the idea to others. The protections offered by the patent system would thus be an important stimulus to the exchange of technological information in and of themselves. Moreover, it is likely that the cross-fertilization that resulted from these information flows would be a potent stimulus to technological change.”

One need only look at the extraordinary growth of the smartphone industry to see the truth of that analysis. Does anyone believe we would have witnessed the rapid emergence of smartphone devices requiring major contributions from four intensely-competitive industries — mobile phones, electronics, computing, and software — under a trade secret regime?

Impossible. Only a patent system enabling the cross-licensing of know-how across industries could have produced the extraordinarily-successful smartphone industry we see today.

CAUSATION VERSUS CORRELATION

The response of some academics to all this is, “Yes, but you cannot prove causation.

And it’s true, one cannot prove theoretically that the patent system by itself causes higher rates of innovation and economic growth. That’s because the exogenous factors — the dynamism of markets, the efficacy of legal and governmental institutions, the availability of capital, and the role of countless other factors — are far too complex and interdependent to isolate causation to patents alone. It’s like trying to pinpoint ultimate causation in the weather. It can’t be done.

But then no one can even prove that free market capitalism — isolated from all the legal, educational, economic, governmental and cultural institutions that surround it in any country — causes more economic growth than a socialist, government-run economy, either. All we can do is look at actual real-world experience, including the fact that 74 years of socialism in the Soviet Union failed to produce even a single decent refrigerator or consumer product, and conclude that free markets are strongly correlated with greater economic prosperity.

The same is true of the patent system: on balance and over the long term, it is strongly correlated with increased technology innovation, knowledge diffusion, and economic growth.

In addressing problems regarding patent quality and abusive “patent troll” litigation, therefore, we should proceed with caution in considering legislation that may have unintended consequences. Far better to focus on judicial reforms that “do no harm” to a patent system that for two centuries has been central to U.S. economic success.

[This post originally appeared at IP Watchdog.]

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