Patents and Follow-On Innovation: Evidence From Patent Renewal Decisions

Abstract

Patents motivate innovation by rewarding inventors with exclusivity rights over their inventions. But scholars have argued that this reward theory of patents is not sufficient to justify the patent system. When innovation is cumulative, patents can either promote or block follow-on innovation and knowing the conditions under which these effects prevail is key to understanding whether patents are, overall, desirable or not. In this paper, I study how patent protection on existing technologies affect follow-on innovation using data on patent renewal decisions in the U.S. To address the endogeneity of renewal decisions, I construct an instrument using the large increases in maintenance fees that took place in 2013 following the enactment of the America Invents Act. My findings show that, on average, patents have a strong blocking effect on follow-on innovation. But this average effect masks considerable heterogeneity. First, I explore variation across the three stages at which patents must be renewed over their lifetime and find that the blocking effect is entirely driven by patents in the first and second stages. At the third maintenance stage, patents appear, instead, to promote follow-on innovation. Second, I assess potential heteregeneity across different technology areas and find that patents block follow-on innovation more in discrete technology areas and when patent ownership is highly fragmented.