Do business cycles affect patenting? Evidence from European Patent Office filings

Abstract

This paper studies the sensitivity of patent filings to the business cycle using patent filings at the European Patent Office (EPO). Using a dynamic model of patenting and the Hodrick-Prescott (HP) filter method to separate the cyclical component of real Gross Domestic Product (GDP) from its trend component, we find that patent filings are strongly pro-cyclical. This supports the view that short term resource constraints affect patenting decisions, even if there are longer term factors that determine innovation. The study also has significance for forecasting patenting behavior, which is important for policy decision-making, institutional operations, and strategic business planning. Forecasts that rely only on trends prove to be less accurate amidst economic booms and recessionary shocks, such as the recent global financial crisis.