Can Public Policy Influence Private Innovation?

Abstract

Abstract Private innovation appears to have played a major if not dominant role in the growth of output per capita since the Industrial Revolution. Yet economic theory indicates that the level of investment in private innovation will generally be less than is socially optimal unless public policies such as patents encourage additional investment. Therefore, public innovation policy would seem to be critical to economic growth. Surprisingly, a large body of research fails to find unambiguously positive effects of patents on innovation and economic growth, even though patents have been used for hundreds of years. While some industries in some nations clearly benefit from patents, many other industries do not and patents might actually discourage innovation in some industries. Economic theory has provided valuable insights, yet real‐world policy apparently needs to reflect a richer set of behavior and a more complex legal environment. New research is developing a more nuanced understanding including research on alternative means of providing rewards to innovators, research on the costs of litigation and disputes arising from the failure of patents to provide clear boundaries, research on cumulative innovation and strategic uses of large blocks of patents, and research on the extension of patent coverage to new technologies and to developing nations. In addition, major new sources of data permit much more extensive empirical research.