Imperfect Appropriability Research Articles

A Look at Both Sides of the Coin: Investigating the Protective and the Disclosure Effect of Patenting

This paper presents a theoretical and empirical investigation of the two basic effects of patenting: the positive effect of temporarily mitigating competition, and the negative effect of mandatory disclosure of a patent application. Providing empirical evidence for the presented theoretical results we find that (i) a technological lead and the propensity to patent are negatively related as opposed to common intuition, (ii) in industries with imperfect appropriability in case of secrecy the extent of the technological lead is positively associated with the propensity to patent, and that (iii) the intensity of patent protection mitigates the competitive threat a patentee faces.

Patent-Free Innovation

Résumé Cet article est inspiré par l’observation du changement massif d’opinions de la part des économistes quant à l’efficience du mécanisme des brevets en tant que solution proposée au problème d’imparfaite appropriabilité des inventions et du savoir. Ce changement d’opinions est premièrement dû aux observations empiriques des dysfonctionnements du système des brevets, conduisant à des situations où la façon dont les droits de propriété intellectuelle sont utilisés crée plus d’obstacles à l’innovation qu’ils n’en éliminent. Mais ce changement d’opinions est aussi lié à l’observation que dans de nombreuses situations, l’innovation semble ne pas avoir besoin de recourir au brevet pour proliférer. C’est à ces derniers travaux que cet article est consacré. Il examine tout d’abord les travaux d’économie de l’innovation, de management de la technologie et d’économie historique qui étudient des systèmes d’innovation dans lesquels l’absence de propriété intellectuelle ou son affaiblissement ne semblent pas affecter les capacités d’invention. Il porte ensuite sur les travaux théoriques qui explorent les conditions dans lesquelles un marché concurrentiel peut être caractérisé par des propriétés optimales d’allocation de ressources dans le domaine du savoir et de l’innovation. Enfin, il présente un travail d’économie expérimentale qui tente de reproduire un processus d’innovation en laboratoire pour étudier les mérites respectifs de différentes institutions – brevet ou marché – dans leur capacité à stimuler l’innovation. JEL Code: O31; O34

STRATEGIC INFORMATION DISCLOSURE AND COMPETITION FOR AN IMPERFECTLY PROTECTED INNOVATION*

The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free‐rider effect in the competition for the innovation that countervails the familiar business‐stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation.

Knowledge spillovers in US patents: A dynamic patent intensity model with secret common innovation factors

During the past two decades, innovations protected by patents have played a key role in business strategies. This fact enhanced studies of the determinants of patents and the impact of patents on innovation and competitive advantage. Sustaining competitive advantages is as important as creating them. Patents help sustaining competitive advantages by increasing the production cost of competitors, by signaling a better quality of products and by serving as barriers to entry. If patents are rewards for innovation, more R&D should be reflected in more patent applications but this is not the end of the story. There is empirical evidence showing that patents through time are becoming easier to get and more valuable to the firm due to increasing damage awards from infringers. These facts question the constant and static nature of the relationship between R&D and patents. Furthermore, innovation creates important knowledge spillovers due to its imperfect appropriability. Our paper investigates these dynamic effects using US patent data from 1979 to 2000 with alternative model specifications for patent counts. We introduce a general dynamic count panel data model with dynamic observable and unobservable spillovers, which encompasses previous models, is able to control for the endogeneity of R&D and therefore can be consistently estimated by maximum likelihood. Apart from allowing for firm specific fixed and random effects, we introduce a common unobserved component, or secret stock of knowledge, that affects differently the propensity to patent of each firm across sectors due to their different absorptive capacity.

Strategic Information Disclosure and Competition for an Imperfectly Protected Innovation

The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free-rider effect in the competition for the innovation that countervails the familiar business-stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation.

On additive spillovers and returns to scale in R&D

This paper explores economically meaningful forms of cost functions for process research and development in the presence of imperfect appropriability of inventive output. We propose, as a central criterion to be satisfied by the knowledge production process, that a given R&D investment should always produce more cost reduction if devoted to one lab rather than two independent labs operated under natural spillovers. With input spillovers this postulate is broadly satisfied. However, with output spillovers this is generally not the case for R&D technologies having decreasing returns to scale. We identify economically plausible restrictions on the size of spillovers and on the properties of the R&D cost function so as to bring about compatibility with the above postulate. Some empirical evidence in support of both the criterion and of its theoretical implications is discussed.

Endogenous formation of coalitions in a model of a race

This paper examines the endogenous formation of coalitions among symmetric firms who are racing to innovate a new product or process. The probability of success depends on a coalition’s research intensity, which in turn depends on the R&D of member firms. Forming joint ventures allows firms to maintain a higher research intensity and increase their probability of success. We characterize the equilibrium coalition structure when the innovation is drastic as well as non-drastic and examine its variation with respect to input spillovers and imperfect appropriability of benefits. We also compare equilibrium and efficient coalition structures.

R&D Cooperation and Spillovers: Some Empirical Evidence from Belgium

Successful innovation depends on the development and integration of new knowledge in the innovation process. Part of this knowledge will reach the firm from external sources. Several authors have documented the existence of these external information flows and have commented on their importance for decisions at the firm level (Adam B. Jaffe, 1986; Jeffrey I. Bernstein and M. Ishaq Nadiri, 1988) and ultimately for economic growth (Paul M. Romer, 1990; Gene M. Grossman and Elhanan Helpman, 1991; Zvi Griliches, 1992). One challenge facing this literature has been the measurement of these information flows or “spillovers” between firms and gauging their effect on different innovation management decisions by the firm. While assessing spillovers, it is important to distinguish between incoming spillovers, which affect the rate of innovation of the firm, and appropriability, which affects the ability of the firm to appropriate the returns from innovation. The information sources for incoming spillovers are usually situated in the public domain, and their usefulness to the firm depend on the firm’s ability to create information flows from this public pool of knowledge. But firms also attempt to appropriate the benefits of their innovations by controlling the information flows out of the company into the pool of publicly available information. The relevance of distinguishing between incoming spillovers and appropriability is revealed when we use these measures to analyze their impact on the decision of firms to engage in cooperative RD Morton I. Kamien et al., 1992; Raymond De Bondt, 1997). On the other hand, imperfect appropriability increases the incentive of firms to free ride on each other’s RD Katrien Kesteloot and Veugelers, 1995) and encourages free-riding on the RD Veugelers: Katholieke Universiteit Leuven and CEPR, Naamsestraat 69, 3000 Leuven, Belgium (e-mail: Reinhilde.Veugelers@econ.kuleuven.ac.be). The authors would especially like to thank an anonymous referee, as well as Raymond De Bondt, Paul Geroski, Mort Kamien, Steve Martin, Marno Verbeek, Gary Charness, James Costain, and Harry Bowen, for very helpful comments. We also thank the seminar participants at the London Business School, IESE Business School, Universidad Carlos III, Universitat Autonoma de Barcelona, Universidad de Zaragoza, Universidad Publica de Navarra, the Universite Libre de Bruxelles, and Paris I and Paris XII, and the participants in ASSET (Bologna), LASEM (Cancun), and EARIE (Turin). The DWTC and IWT generously provided the data for this research. Cassiman acknowledges support from BEC2000-1026 and CIRIT 1997SGR00138, and Veugelers from CNRS, Enjeux Economiques de l’Innovation, and NFWO (G.0131.98). The paper was to a large extent written while Cassiman was assistant professor at the Universitat Pompeu Fabra in Barcelona and Veugelers was visiting the Universitat Autonoma de Barcelona and MIT [Sloan School (ICRMOT)].

Spillovers, Appropriability, and R&D

I distinguish the impacts of input spillovers and imperfect appropriability of the revenue generated by cost-saving innovation in a racing model. Comparativestatic relationships with respect to the level of spillovers depend on the levels of post-innovation payoffs; comparative-static relationships with respect to the degree of appropriability depend on changes in the levels of post-innovation payoffs. Simulations illustrate conditions under which private payoffs and net social welfare are maximized for positive spillover levels and incomplete appropriability. The main qualitative results of the basic model hold if it is extended to include endogenous absorptive capacity.

Price-cap regulation and uncertain technical change

The paper studies the effect of price-cap regulation on the research behaviour of a regulated firm and an external developer who are pursuing an uncertain innovation. Contributions of this work include incorporating innovation uncertainty and imperfect appropriability of innovation rewards into the analysis. In contrast to existing literature, it is found that a tighter price-cap diminishes the incentives for cost-reduction.

Industrial innovation and governmental policy: A review and proposal based on observation of the U.S. electronic sector

The U.S. electronics sector has been particularly successful at technological innovation since the 1940s. This paper addresses governmental policies that influence the process of technological innovation, drawing on aspects of the history of the electronics sector. Three topics receive particular attention—(1) uncertainties, ideas, and imperfect appropriability, (2) returns to R&D and associated investments, and (3) competition and selection environments. As a foundation for this discussion, several conceptual frameworks are briefly described and some classifications for innovation are explored, i.e., by importance (basic/improvement), by locus of change (process/product), by area of application (peaceful/dangerous), by locus of choice (private/public), and by value (worthwhile/not worthwhile). The discussion is underscored by the observation that better links between conceptual understanding and policy formulation are needed in order to derive practical insights into useful actions. One specific policy recommendation is tendered: an income tax credit on earnings of all employees (including salaried staff and managers) of R&D intensive firms. Such a policy would be appropriate from the standpoint of the topics outlined above (i.e., uncertainties, returns to R&D, and competition); the policy would also delegate responsibility for effective use of the subsidy to the employees and firms affected and would directly acknowledge and reward the contributions of individuals—whether in R&D, production, marketing, or support areas—to the innovative capabilities of their firms and the society at large.