nep-ino New Economics Papers
on Innovation
Issue of 2009‒02‒28
seventeen papers chosen by
Steffen Lippert
Massey University Department of Commerce

  1. Electricity Sector Liberalisation and Innovation: An Analysis of the UK Patenting Activities By Jamasb, T.; Pollitt, M.G.
  2. Complementary Patents and Market Structure By Schmidt, Klaus M.
  3. On the price elasticity of demand for patents By de Rassenfosse, Gaétan; van Pottelsberghe, Bruno
  4. To Be Financed or Not… - The Role of Patents for Venture Capital Financing By Haeussler, Carolin; Harhoff, Dietmar; Mueller, Elisabeth
  5. Geographic and Technological R&D Spillovers within the Triad: Micro Evidence from US Patents By Aldieri, Luigi; Cincera, Michele
  6. Venture Capital and Innovation: Which is First? By Hirukawa, Masayuki; Ueda, Masako
  7. Venture Capital and Industrial ''Innovation'' By Hirukawa, Masayuki; Ueda, Masako
  8. The London Agreement and the Cost of Patenting in Europe By Mejer, Malwina; van Pottelsberghe, Bruno
  9. Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes By Galasso, Alberto; Schankerman, Mark
  10. Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes By Bhattacharya, Sudipto; Guriev, Sergei
  11. How Much Does Immigration Boost Innovation? By Gauthier-Loiselle, Marjolaine; Hunt, Jennifer
  12. 'Essential' Patents, FRAND Royalties and Technological Standards By Dewatripont, Mathias; Legros, Patrick
  13. Motivation and Sorting in Open Source Software Innovation By Belenzon, Sharon; Schankerman, Mark
  14. Acquisitions, Divestitures and Innovation Performance in the Netherlands By Van Beers, Cees; Dekker, Ronald
  15. Labor Laws and Innovation By Acharya, Viral V; Baghai-Wadji, Ramin; Subramanian, Krishnamurthy
  16. Inducement Prizes and Innovation By Brunt, Liam; Lerner, Josh; Nicholas, Tom
  17. Innovation and Change in the Process of Alliance Formation in the Japanese Electronics Industry By James R. Lincoln

  1. By: Jamasb, T.; Pollitt, M.G.
    Abstract: Liberalisation has had a marked effect on innovative activities in the electricity industry. R&D and patenting activities are generally regarded respectively as innovative inputs to and outputs from technological progress. Electricity reforms have resulted in a reduction in R&D spending in the sector. This paper examines the effect of reforms on patenting activity in the UK electricity sector. The results indicate that electricity related patents in non-nuclear and renewable technologies have increased in the post-liberalisation period. We attribute this trend to increased commercialisation of the sector. While this development is positive, we argue that a lasting decline in R&D will in the longer run reduce technological progress in the sector. In order to maintain the pace of innovation, we discuss the need for a framework for innovation systems that is commensurate with the incentive mechanisms of a liberalised sector.
    Keywords: Electricity, patent, innovation, technology, liberalisation
    JEL: L94 O31 Q32 Q38
    Date: 2009–01
  2. By: Schmidt, Klaus M.
    Abstract: Many high technology goods are based on standards that require access to several patents that are owned by different IP holders. We investigate the royalties chosen by IP holders under different market structures. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders (or a patent pool) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always encourages entry and innovation.
    Keywords: complementary patents; IP rights; licensing; patent pool; standards; vertical integration
    JEL: K11 L15 L24 O31 O32
    Date: 2008–10
  3. By: de Rassenfosse, Gaétan; van Pottelsberghe, Bruno
    Abstract: This paper investigates whether patent fee policies are a potential factor underlying the boom in patent applications observed in major patent offices. We provide the first panel-based evidence suggesting that fees affect the demand for patents in three major patent offices (EPO, USPTO and JPO), with a price elasticity of about -0.4 (similar to that of the residential demand for oil or water). The laxity of fee policies adopted by patent offices over the past 25 years therefore contributed, to a significant extent, to the rising propensity to patent observed since the mid-nineties. This is especially true at the European Patent Office, which has dramatically decreased its fees since the mid-1990s.
    Keywords: patent cost; patent systems; patenting fees; price elasticity; propensity to patent
    JEL: O30 O31 O34 O38
    Date: 2008–11
  4. By: Haeussler, Carolin; Harhoff, Dietmar; Mueller, Elisabeth
    Abstract: This paper investigates how patent applications and grants held by new ventures improve their ability to attract venture capital (VC) financing. We argue that investors are faced with considerable uncertainty and therefore rely on patents as signals when trying to assess the prospects of potential portfolio companies. For a sample of VC-seeking German and British biotechnology companies we have identified all patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find that in the presence of patent applications, VC financing occurs earlier. Our results also show that VCs pay attention to patent quality, financing those ventures faster which later turn out to have high-quality patents. Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do not spur VC financing, presumably because they are anticipated. Our empirical results and interviews with VCs suggest that the process of patenting generates signals which help to overcome the liabilities of newness faced by new ventures.
    Keywords: biotechnology; intellectual property rights; patents; R&D; venture capital
    JEL: G24 L20 L26 O30 O34
    Date: 2009–01
  5. By: Aldieri, Luigi; Cincera, Michele
    Abstract: This paper aims at assessing the magnitude of R&D spillover effects on large international R&D companies’ productivity growth. In particular, we investigate the extent to which R&D spillover effects are intensified by both geographic and technological proximities between spillover generating and receiving firms. We also control for the firm’s ability to identify, assimilate and absorb the external knowledge stock. The results estimated by means of panel data econometric methods (system GMM) indicate a positive and significant impact of both types of R&D spillovers and of absorptive capacity on productivity performance.
    Keywords: absorptive capacity; firms’ productivity growth; Geographic and technological R&D spillovers
    JEL: O33 O47
    Date: 2009–01
  6. By: Hirukawa, Masayuki; Ueda, Masako
    Abstract: Policy makers typically interpret positive relations between venture capital investments and innovations as an evidence that venture capital investments stimulate innovation ('VC-first hypothesis'). This interpretation is, however, one-sided because there may be a reverse causality that innovations induce venture capital investments ('innovation-first hypothesis'): an arrival of new technology increases demands for venture capital by driving new firm startups. We analyze this causality issue of venture capital investments and innovation in the US manufacturing industry using both total factor productivity (TFP) growth and patent counts as measures of innovation. Using a panel AR regression as well as industry-by-industry AR regressions, we find that TFP growth is often positively and significantly related with future VC investment, which is consistent with the innovation-first hypothesis. We find little evidence that supports the VC-first hypothesis. More surprisingly, one-year lagged VC investments are often negatively and significantly related with both TFP growth and patent counts.
    Keywords: Innovation; Venture Capital
    JEL: D24 G24 O31 O32
    Date: 2008–12
  7. By: Hirukawa, Masayuki; Ueda, Masako
    Abstract: For the sample period of 1965-1992, Kortum and Lerner (2000) find that venture capital (VC) investments have a positive impact on patent count at industry level, and this impact is larger than that of R&D expenditures. We confirm that this positive impact continued to be present and became even stronger in late 90s during which VC industry experienced an unprecedented growth. We then proceed to study if this positive impact of VC is also present on productivity growth, which is a measure of innovation alternative to patent count. Unlike the impact on patent count, we do not find that VC investment affects total factor productivity growth. We do find that VC investment is positively associated with labor productivity but this positive impact is originated from the technology substitution from labor to other productive inputs such as energy and material. Therefore, our finding suggests that, at industry level, VC investment increases the patent propensity but may not necessarily improve the productive efficiency. Various interpretations are offered why this may be the case.
    Keywords: Factor Substitution; Innovation; Patent; Productivity; Venture Capital
    JEL: D24 G24 O31 O32
    Date: 2008–12
  8. By: Mejer, Malwina; van Pottelsberghe, Bruno
    Abstract: This paper analyses the consequences for the European Patent System (EPS) of the recently ratified London Agreement (LA), which aims to reduce the translation requirements for patent validation procedures in 15 out of 34 national patent offices. The simulations suggest that the cost of patenting has been reduced by 20 to 30 percent since the enforcement of the LA. With an average translation cost saving of €3,600 per patent, the total savings for the business sector amount to about €220 millions. The fee elasticity of patents being about -0.4, one may expect an increase in patent filings of eight to 12 percent. Despite the translation cost savings, the relative cost of a European patent validated in six (thirteen) counties is still at least five (seven) times higher than in the United States.
    Keywords: European patent system; fee elasticity; London Agreement; patent fees; translation costs
    JEL: O34 P14 P51
    Date: 2008–11
  9. By: Galasso, Alberto; Schankerman, Mark
    Abstract: We study how fragmentation of patent rights (‘patent thickets’) and the formation of the Court of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement agreements when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the ‘pro-patent shift’ of CAFC. The model also predicts that the impact of fragmentation on settlement duration should be smaller under CAFC. We confirm these predictions empirically using a dataset that covers nearly all patent suits in U.S. federal district courts during the period 1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking into account both reduction in duration per dispute and the increase in the number of required patent negotiations associated with patent thickets.
    Keywords: anti-commons; litigation; patent thickets; patents; settlement
    JEL: K41 L24 O31 O34
    Date: 2008–08
  10. By: Bhattacharya, Sudipto; Guriev, Sergei
    Abstract: We develop a theory of control rights in the context of licensing interim innovative knowledge for further development, which is consistent with the inalienability of initial innovator’s intellectual property rights. Control rights of a downstream development unit, a buyer of the interim innovation, arise from its ability to prevent the upstream research unit from forming financial coalitions at the ex interim stage of bargaining, over the amount and structure of licensing fees as well as the mode of licensing, based either on trade secrets or on patents. We model explicitly the equilibrium choice of the temporal structure of licensing fees, and show that the innovator’s ex interim financial constraint is more likely to bind when the value of her innovation is low. By constraining the financial flexibility of the upstream unit vis-a-vis her choice over the mode of licensing of her interim knowledge, the controlling development unit is able to reduce the research unit’s payoff selectively in such contingencies. This serves to incentivise the research unit to expend more effort ex ante, to generate more promising interim innovations. We further show that such interim-inefficient control rights can nevertheless be renegotiation-proof.
    Keywords: control rights; corporate venturing; patents; trade secrets
    JEL: D23 K12 O32
    Date: 2008–08
  11. By: Gauthier-Loiselle, Marjolaine; Hunt, Jennifer
    Abstract: We measure the extent to which skilled immigrants increase innovation in the United States by exploring individual patenting behavior as well as state-level determinants of patenting. The 2003 National Survey of College Graduates shows that immigrants patent at double the native rate, and that this is entirely accounted for by their disproportionately holding degrees in science and engineering. These data imply that a one percentage point rise in the share of immigrant college graduates in the population increases patents per capita by 6%. This could be an overestimate of immigration's benefit if immigrant inventors crowd out native inventors, or an underestimate if immigrants have positive spill-overs on inventors. Using a 1940-2000 state panel, we show that immigrants do have positive spill-overs, resulting in an increase in patents per capita of 9-18% in response to a one percentage point increase in immigrant college graduates. We isolate the causal effect by instrumenting the change in the share of skilled immigrants in a state with the state's predicted increase in the share of skilled immigrants. We base the latter on the 1940 distribution across states of immigrants from various source regions and the subsequent national increase in skilled immigrants from these regions.
    Keywords: Immigration; Innovation
    JEL: D24 J61 O32
    Date: 2009–01
  12. By: Dewatripont, Mathias; Legros, Patrick
    Abstract: In this paper we abandon the usual assumption that patents bring known benefits to the industry or that their benefits are known to all parties. When royalty payments are increasing in one’s patent portfolio, private information about the quality of patents leads to a variety of distortions, in particular the incentives of firms to 'pad' by contributing weak patents. Three main results that emerge from the analysis are that: (i) the threat of court disputes reduces incentives to pad but at the cost of lower production of strong patents; (ii) mitigating this undesirable side-effect calls for a simultaneous increase in the cost of padding, that is, a better filtering of patent applications; (iii) upstream firms have more incentives to pad than vertically-integrated firms which internalize the fact that patent proliferation raises the share of profits going to the upstream segment of the industry but at the expense of its downstream segment. This seems consistent with recent evidence concerning padding.
    Keywords: Frand; padding; royalty; Standard setting organization; weak patent
    JEL: L24 L40 O31 O34
    Date: 2008–08
  13. By: Belenzon, Sharon; Schankerman, Mark
    Abstract: This paper studies the role of intrinsic motivation, reputation and reciprocity in driving open source software innovation. We exploit the observed pattern of contributions - the 'revealed preference' of developers - to infer the underlying incentives. Using detailed information on code contributions and project membership, we classify developers into distinct groups and study how contributions from each developer type vary by license (contract) type and other project characteristics. The central empirical finding is that developers strongly sort by license type, project size and corporate sponsorship. This evidence confirms the importance of heterogeneous motivations, specifically a key role for motivated agents and reputation, but less for reciprocity.
    Keywords: incentives; innovation; intrinsic motivation; motivated agents; open source software; reciprocity; reputation
    JEL: L14 L17 L41 O31 O32
    Date: 2008–10
  14. By: Van Beers, Cees; Dekker, Ronald
    Abstract: This aim of this paper is twofold. First it examines the determinants of acquisitions and divestitures of Dutch firms in the period 1996-2004. Second, it investigates the impact of acquisitions and divestitures on the firm’s innovative output performance. An econometric model is specified and estimated with Community Innovation Survey data for the Netherlands in the period 1996-2004. The main findings of this study are as follows. First, innovating firms are significantly more involved in acquisition activities than non-innovating firms, which suggests that acquisitions are a strategy to gain access to new technologies or knowledge. Second, lack of knowledge as a barrier to innovate increases the chance of acquiring assets of other firms although not significantly. Lack of finance as a barrier to innovate increases significantly the chance of divesting assets. Third, acquisitions motivated by knowledge barriers in the innovation process affect the probability of positive innovative sales positively while acquisitions motivated by other reasons than innovation barriers affect this probability negatively. No effect of knowledge barriers induced acquisitions on the level of the innovative sales could be found.
    Keywords: Innovation; performance; mergers; acquisitions; divestitures; strategy.
    JEL: L10 D40
    Date: 2009–02–02
  15. By: Acharya, Viral V; Baghai-Wadji, Ramin; Subramanian, Krishnamurthy
    Abstract: Can stringent labor laws be efficient? Possibly, if they provide firms with a commitment device to not punish short-run failures and thereby incentivize the pursuit of value-maximizing innovative activities. In this paper, we provide empirical evidence that strong labor laws indeed appear to have an ex ante positive incentive effect by encouraging the innovative pursuits of firms and their employees. Using patents and citations as proxies for innovation and a time-varying index of labor laws, we find that innovation is fostered by stringent labor laws, especially by laws governing dismissal of employees. We provide this evidence using levels-on-levels, changes-on-changes, and finally difference-in-difference regressions that exploit staggered country-level law changes. We also find that stringent labor laws disproportionately influence innovation in those sectors of the economy that are more innovation intensive. Finally, we find that while the overall effect of stringent labor laws is to dampen economic growth, laws that govern dismissal of employees are an exception: dismissal laws promote economic growth, consistent with the evidence that they encourage firm-level innovation.
    Keywords: Entrepreneurship; Growth; Labor laws; Law and finance; R&D; Technological change
    JEL: F30 G31 J5 J8 K31
    Date: 2009–02
  16. By: Brunt, Liam; Lerner, Josh; Nicholas, Tom
    Abstract: We examine prizes as an inducement for innovation using a novel dataset of awards for inventiveness offered by the Royal Agricultural Society of England from 1839 to 1939. At annual shows the RASE held competitive trials and awarded medals and monetary prizes (exceeding one million pounds in current prices) to spur technological development. We find large effects of the prizes on contest entries, especially for the Society’s gold medal. Matching award and patent data, we also detect large effects of the prizes on the quality of contemporaneous inventions. These results hold even during the period when prize categories were determined by a strict rotation scheme, thus overcoming the potential confounding effect that awards may have targeted "hot" technology sectors. Our evidence suggests that prize awards can be a powerful mechanism for encouraging competition and that prestigious non-pecuniary prizes can be a particularly effective inducement for innovation.
    Keywords: awards; contests; patents
    JEL: N40 O30 O31
    Date: 2008–07
  17. By: James R. Lincoln
    Abstract: This paper examines the changing process of strategic alliance formation in the Japanese electronics industry between 1985 and 1998. With data on 128 Japanese electronics/electrical machinery makers, we use a dyad panel regression methodology to address a series of hypotheses drawn from embeddedness and strong/weak tie theory on how keiretsu and prior alliance networks have constrained partner choice in new R&D and nonR&D alliances. We argue and find that the keiretsu effect is smaller on R&D than nonR&D alliances, and that this is truer of the “weaker-tie” horizontal keiretsu than the “stronger-tie” vertical keiretsu. Dividing our time series into four periods (1984-88, 89-90, 91-94, 95-98), however, reveals some important variations in the keiretsu role over time. The horizontal and vertical keiretsu effects on R&D alliances had vanished by 1991-94 (the post-bubble recession era), but they continued in the nonR&D case, in part, we believe, because these provided a means of reducing costs and capacity in a stringent macroeconomic environment. Following previous strategic alliance research, we further examine how the prior alliance network conditioned strategic alliance formation in Japanese electronics and how those patterns varied over time. The data suggest that, as the strategic alliance founding process became “disembedded” from Japan’s legacy keiretsu networks, it was driven increasingly by prior direct and indirect alliance ties.
    Date: 2009–02

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