Economic growth under two forms of intellectual property rights protection: patents and trade secrets

Abstract

This paper analyzes the effects on growth of strengthened patent protections, where trade secrets are introduced as an additional protection method. Strengthening patent protection decreases the amount of common knowledge, which has two asymmetric effects on incentives to innovate. First, as competitors cannot freely use technological information, it helps successful innovators earn higher profits. Second, less disclosure of information reduces R&D productivity. The model shows that the relative importance of patents versus trade secrets determines whether the former positive effect dominates the latter negative effect. As a result, strengthened patent protection can increase economic growth when the risk of leakage of trade secrets is high. Conversely, when the risk is low, stronger patent protection hinders growth. Similar opposing results are also found in welfare analysis.