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Do patents promote innovation?

IDEAS AND OWNERSHIP: The concept of protecting ideas and innovation by legal means dates back to antiquity. But in the age of the internet and multinational business models, many of the existing laws are…

Having a patent may increase financial returns by between 40% and 50%. Xurxo Martínez

IDEAS AND OWNERSHIP: The concept of protecting ideas and innovation by legal means dates back to antiquity. But in the age of the internet and multinational business models, many of the existing laws are under strain, their suitability and ultimate purpose called into question.

Here, Dianne Nicol and John Liddicoat delve into the issue of whether the patent system, as it stands, really promotes ideas and innovation, as is regularly claimed.

The oft-used mantra in support of the patent system is that it encourages innovation, and innovation is good for society. This seems to make sense in theory: a patent provides an inventor, and any other individuals and organisations that have claims to the patent through the inventor, with broad rights over the subject matter of the invention.

That’s important, because only those people who have patent rights can exploit the subject matter that’s claimed in the patent. Essentially, the patent provides a temporary monopoly, usually for a 20-year period, over the technology.

If a patent is granted for an invention claiming the use of steam to power an engine, then the only people who can actually use steam to power an engine are those with patent rights. But once the patent expires, anyone else can use the invention.

This freedom from competition supposedly provides an incentive to commercially develop the invention claimed in the patent, and also encourages further inventive activity. Such activity is said to be good for society because it encourages technological advancement.

So would we have had developments in biotechnology, information technology, nanotechnology and the like without patents? That’s not clear-cut.

The extent to which patents actually encourage innovation is difficult to empirically measure. Anecdotally, the CEO of any company operating in a field of high technology will probably argue their patents are crucial to the success of their business. On the other hand, economists who have been modelling such questions for many years tend to provide much more equivocal answers.

Recent work by economists at the Intellectual Property Research Institute of Australia (IPRIA), based at the University of Melbourne, suggests patents provide some incentive to commercially develop an invention. The researchers found that, if a patent application is not granted for whatever reason, the chance of the invention making it to market decreases by 13%.

A separate paper analysing the same dataset focused on the commercial returns from patents. Controlling for the value of the invention itself, it was found that having a patent increased the financial returns by between 40% and 50%.

So the IPRIA analyses suggest you don’t necessarily need a patent to develop an invention but, if you have one, the financial returns are likely to be much higher. Of course this work only measures private value to individuals who have patent rights.

Quite how the social value of patents might be measured is even more perplexing. Measuring the role of patents in signalling to potential collaborators that a technology has been developed is likewise tricky to measure empirically.

Does it matter? Almost all countries have a patent system, and there is no current policy either nationally or internationally to dismantle them.

Where the issue becomes contentious is at the boundary between invention and discovery, between invention and abstract thought. Current debates about the role of patents in encouraging innovation tend to focus on subject matter such as genes, software, computer-implementation and business methods.

One concern is that broad foundational patents in new areas of technology could block off whole areas of research and development, deterring innovation. For instance, breast cancer gene patents have delayed additional research on these genes.

Even if no single patent has a blocking effect, if the patent landscape is too complex and if too many negotiations have to be undertaken to provide freedom to operate, the impact on innovation could be negative.

Yet despite concerns that such outcomes are “inevitable” in fields such as biomedicine, concrete evidence that they are eventuating has been hard to find. Rather, what we do see is “work-arounds”, including such strategies as:

  • ignoring patents that are too broad and are susceptible to challenge for invalidity
  • engaging in licensing
  • aggregating technologies, and
  • redirecting research efforts.

The licensing of patents for Gardasil from CSL Ltd. to Merck is an example of successful licensing.

Inevitably there are costs associated with each of these strategies, such as risk of litigation or expensive licensing fees. But whether they are outweighed by the benefits of allowing such patents is yet another question that’s difficult to answer.

Perhaps the situation can be best summed using the words of two famous economists, Fritz Machlup and Edith Penrose, who stated:

“If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.”

If we accept that the patent system is here to stay, we should begin to concentrate on mechanisms that adjust the patent system to clearly enhance innovation. Clarifying the distinction between what is patentable, and what is not, is one option.

Improving patent quality and patent transparency, as well as adjusting the role of competition law, may also help achieve this.

This is the second part of Ideas and Ownership. To read the other instalments, click on the links below:

Part One: IP, patents, copyright, you

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2 Comments sorted by

  1. Darren Jones

    Biotechnology Manager

    Patents are not the be-all and end-all of innovation. However, especially in an area like biotech (my profession) where lead times, costs, and failure rates are so high, patents and IP are the only tangible asset that investors can risk their capital on- especially in the critical start-up phase. In biotech, having patent applications filed is critical to getting early funding. Without investors having some cartainty that they can 'own' what they are investing in, no investment would ever occur.

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  2. Stephen Prowse

    logged in via LinkedIn

    I think the article asks the wrong question. While the patent system may impact innovation, the major impact is on investment leading to product development so a better question could be; how does the patent system affect investment and product development? As Darren has indicated, in a sector where product development takes an average of around 14 yrs and costs several hundred $million, a patent is essential to give investors some confidence.

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