Tag: empirical study

Categories
Economic Study Patents

Empirical Study Confirms Positive Relationship Among Patents, Technological Progress, and Societal Benefit

dictionary entry for the word "innovate"We “stand on the shoulder of giants,” goes the famous adage. In a groundbreaking new law review article, Does Patented Information Promote the Progress of Technology?, Cardozo Law’s Jonathan H. Ashtor examines the relationship among patents, information theory, and their corresponding benefits to society and technology. His study applies economic theory to empirical patent data, concluding that a patent’s disclosure, and hence its informational content, has a positive technological impact on society beyond any limited private monopoly bestowed on the inventor. The paper was supported with a research grant from CPIP’s Leonardo da Vinci Fellowship Research Program.

Today’s populist, conventional wisdom is that patents are monopolies that block public benefits and restrict innovative behavior. Ashtor’s research reveals the opposite. He explains that “this study finds that the greater the information content of a patent’s disclosure, the higher the probability it will be held valid, and in turn, the larger its expected positive impact on the development of future technologies.” Combining an in-depth review of the underlying economic theories around the role of the patent system’s information dissemination function with a rigorous empirical study methodology, Ashtor confirms that valid patents have a greater positive impact on future technologies.

Economic Theory Validates Patent System’s Ultimate Societal Benefits

Academics often cite a variety of theories underlying the fundamental benefits of the patent system. But, at its core, the patent system is a quid pro quo between the private benefit of the grant of a limited monopoly in exchange for the public dissemination of the knowledge of a discovery, in turn, allowing others to build upon this information. While the U.S. Constitution enshrines this concept for promoting the “useful Arts,” (Art. 1, sec. 8, cl. 8), the theory around this bargain dates back thousands of years.

Modern economic patent theories are rooted in classics such as Aristotle’s Politics, in which the ancient Greeks advocated for recognition, awards, and honors for the achievements of discoverers. The “storehouse of knowledge” theory states that patent activity contributes to expanding public storehouse of knowledge. Relatedly, the “prospect theory” advances an understanding that the opportunity to obtain a patent monopoly creates the incentive for investment in research for new inventions. Finally, the “innovation theory” infers that patents are necessary to induce people to put existing inventions to practical use. Together, these theories speak to how patents on discoveries ultimately contribute to the public’s benefit.

Moving beyond these traditional concepts, Ashtor’s paper explores the economic “tradeoff theory” of patents. First appearing in Nobel Laureate William Nordhaus’ famous 1969 article regarding the technological development process, tradeoff theory states that when the patent disclosure function works properly, patents tend to promote technological progress notwithstanding the exclusive monopoly rights. Ashtor explains that tradeoff theory supports the idea that more robust patents have the greatest positive impact on technological development. He observes that “[p]atent law provides a convenient lens through which to observe the impact of a patent on future technology.” Conversely, invalid patents, such as those lacking novelty, are found to have the weakest impact on future technologies. (Ashtor notes that even an invalidated patent is useful; it is prior art and can also guide future technological development.) While this causal relationship may be intuitive for some, Ashtor uses empirical evidence to back it up.

Empirical Analysis Verifies Positive Impact of Patents

Employing a solid empirical research methodology, the study examines patents and data obtained from federal court patent litigation records, along with input from the USPTO’s Office of Economic Analysis. In essence, the study charts the impact of future patented technological progress as a product of the resulting new patents filed (noted through the use of forward citations). Forward citations are widely used as a measure of innovation, particularly when comparing patented technology in a broad range of fields. Ashtor’s study relies on a dataset of approximately 1,000 U.S. patents. A multitude of variables are considered in determining whether the patents are demonstrating this positive effect, including the number patent claims, the length of the respective patent claims, the size of the patent family, the number of inventors, the written description’s length, the vintage of the patents, and the adjudicated validity or invalidity.

The study incorporates data modeling and log-linear regression analysis. It then measures future technological innovation through indicia such as future additional patents or other cumulative innovation. For example, by counting the number of additional citations each patent generates, one can assess the impact, including the follow-on technological advancement regardless whether they are subsequently validated or invalidated patents. Ashtor’s models are designed to consider, and overcome, various systemic challenges, such as biases in the dataset or other idiosyncrasies.

Information Theory Supports the Value of Patents

At the heart of Ashtor’s paper is a discussion about how the information contained in a patent disclosure has real value not only for the inventor, but also for the public at large. The debate around intellectual property often conjures fear that it “locks up” public knowledge or somehow “holds up” progress. But Professor Nordhaus’ tradeoff theory demonstrates that “patents do not provide permanent or very powerful exclusive rights over information.” In fact, the very dissemination of information arising from the patent system leads to real public benefits. It’s critical to understand that a patent protects the disclosed inventions, not the underlying ideas. Ashtor demonstrates that the patent system is critical to the dissemination of knowledge.

Ashtor’s study validates the tradeoff theory of patents. Namely, the tradeoff arising from the societal benefit of a valid patent’s information disclosure is generally greater than the restrictions from the private right of exclusivity due to any patent monopoly. Hence, valid patents promote more technological progress than invalid patents. The way in which patents are invalidated corresponds to varying impacts on technology, and Ashtor’s empirical data demonstrates a direct relationship between a patent’s technological impact and certain intrinsic characteristics of its disclosure. Generally, valid patents tend to have greater information content than invalid ones.

Human Genome Project Provides Perspective

The importance of Ashtor’s research is highlighted through the additional context of a case study. He considers how patent activity impacts cutting-edge fields like health care and molecular biology. While prior studies have looked at gene patenting activity surrounding the Human Genome Project (HGP), they’ve largely been limited to examinations of follow-on activity arising from both the publicly available patented information and the gene patenting activity by private firms. Ashtor is quick to note that past studies around the Human Genome Project do not “directly address cumulative innovation of patented technologies,” the focus of his exploration. Ashtor argues that all of the gene-related patents flowing from the HGP illustrate the positive impact of future patented technological progress. He concludes that his case study hence shows that the resulting gene patenting activity from the HGP supports the tradeoff theory of patents.

Ashtor’s study is groundbreaking, empirically rigorous, and provides much for future researchers to consider. As skeptics of intellectual property continue to voice their doubts, it’s critical to understand the societal benefits that patents confer. Ashtor’s work takes a step in the right direction, and we can expect other researchers will stand on his shoulders as they build upon his work.

Ashtor’s article was recently published in the Northwestern University Law Review, and the full text can be downloaded here: https://scholarlycommons.law.northwestern.edu/nulr/vol113/iss5/2/

Categories
Economic Study Innovation Inventors Legislation Patent Law Uncategorized

How Patents Help Startups Grow, Innovate, and Succeed

Many academic studies of the patent system focus on the negative, extrapolating from anecdotes about a few bad actors to make the case that our patent system is broken and to bolster cries for legislation weakening patent rights. Precious few studies focus on the countless honest and hardworking patent owners whose inventive labors benefit us all. But understanding how patents support inventive enterprises is a crucial part of the equation, especially at a time when Congress is considering legislation that would make it extremely difficult for startups and individual inventors to enforce their patent rights.

In a newly-published working paper, The Bright Side of Patents, CPIP Edison Fellow Deepak Hegde, along with co-authors Joan Farre-Mensa and Alexander Ljungqvist, take a look how patents help startups grow. They show that, contrary to the claims made by several academics and activists, startups are not victims of the patent system. On the contrary, patents help startups become more successful and innovative.

The study finds that “patent approvals help startups create jobs, grow their sales, innovate, and eventually succeed.” When a startup’s first patent application is approved, its employment growth increases by 36% and its sales growth increases by 51% on average over the next five years. First-patent approval also has a strong causal effect on a startup’s continued ability to innovate, increasing the number of subsequent patent grants by 49% and increasing the quality of those patents by 27%. In fact, a startup with first-patent approval is twice as likely to end up listed on a stock exchange—a common indication of success for a startup.

Negatively affecting startups are delays in the patent application process and ultimate application rejections. For every year an ultimately-approved patent application is delayed, the startup’s employment growth decreases by 21% and its sales growth decreases by 28% on average over the following five years. Furthermore, each year a patent application is delayed, the average number of subsequent patents granted decreases by 14% while the quality of those patents decreases by 7%. And for each year of delay, the probability that a startup will go public is cut in half.

One big reason why patents help startups is that they make it easier to access capital from external investors. The authors find that patents serve to mitigate frictions in information between potential investors and startups. Patents play an important role by alleviating startups’ concerns about having their inventions misappropriated by investors and by alleviating investors’ concerns about the credibility, quality, and monetary future of the startups. Having access to capital in turn sets startups on a path of growth where they can turn ideas into products and services, generate jobs, increase revenue, and undertake further innovation.

What makes this study unique is its unprecedented access to the USPTO’s internal databases, which allowed the authors to evaluate detailed review histories of both approved and rejected patent applications. Prior studies only focused on approved applications, thus making it impossible to accurately separate out the economic and innovative effects. The authors here are able to demonstrate the direct benefits of patent protection with causal evidence from a large-sized sample—45,819 first-time patent applications filed by startups.

There is a surprising amount of criticism of the patent system today. Some claim that patents are a waste of time and resources for startups, useful only for defensive purposes. Others claim that patents actually harm startups. The authors here show that startups that secure patent protection are in fact more likely to succeed. As Congress considers yet another round of large-scale patent legislation, lawmakers need to understand the role that enforceable patent rights play in enabling startups to grow and succeed. This study is a great step in adding some much needed clarity to the ongoing patent policy debates.

Categories
Copyright Copyright Theory History of Intellectual Property Innovation Intellectual Property Theory Law and Economics Patent Law Patent Litigation Patent Theory Statistics Uncategorized

Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong

By Mark Schultz & Adam Mossoff

A handful of increasingly noisy critics of intellectual property (IP) have emerged within free market organizations. Both the emergence and vehemence of this group has surprised most observers, since free market advocates generally support property rights. It’s true that there has long been a strain of IP skepticism among some libertarian intellectuals. However, the surprised observer would be correct to think that the latest critique is something new. In our experience, most free market advocates see the benefit and importance of protecting the property rights of all who perform productive labor – whether the results are tangible or intangible.

How do the claims of this emerging critique stand up? We have had occasion to examine the arguments of free market IP skeptics before. (For example, see here, here, here.) So far, we have largely found their claims wanting.

We have yet another occasion to examine their arguments, and once again we are underwhelmed and disappointed. We recently posted an essay at AEI’s Tech Policy Daily prompted by an odd report recently released by the Mercatus Center, a free-market think tank. The Mercatus report attacks recent research that supposedly asserts, in the words of the authors of the Mercatus report, that “the existence of intellectual property in an industry creates the jobs in that industry.” They contend that this research “provide[s] no theoretical or empirical evidence to support” its claims of the importance of intellectual property to the U.S. economy.

Our AEI essay responds to these claims by explaining how these IP skeptics both mischaracterize the studies that they are attacking and fail to acknowledge the actual historical and economic evidence on the connections between IP, innovation, and economic prosperity. We recommend that anyone who may be confused by the assertions of any IP skeptics waving the banner of property rights and the free market read our essay at AEI, as well as our previous essays in which we have called out similarly odd statements from Mercatus about IP rights.

The Mercatus report, though, exemplifies many of the concerns we raise about these IP skeptics, and so it deserves to be considered at greater length.

For instance, something we touched on briefly in our AEI essay is the fact that the authors of this Mercatus report offer no empirical evidence of their own within their lengthy critique of several empirical studies, and at best they invoke thin theoretical support for their contentions.

This is odd if only because they are critiquing several empirical studies that develop careful, balanced and rigorous models for testing one of the biggest economic questions in innovation policy: What is the relationship between intellectual property and jobs and economic growth?

Apparently, the authors of the Mercatus report presume that the burden of proof is entirely on the proponents of IP, and that a bit of hand waving using abstract economic concepts and generalized theory is enough to defeat arguments supported by empirical data and plausible methodology.

This move raises a foundational question that frames all debates about IP rights today: On whom should the burden rest? On those who claim that IP has beneficial economic effects? Or on those who claim otherwise, such as the authors of the Mercatus report?

The burden of proof here is an important issue. Too often, recent debates about IP rights have started from an assumption that the entire burden of proof rests on those investigating or defending IP rights. Quite often, IP skeptics appear to believe that their criticism of IP rights needs little empirical or theoretical validation, beyond talismanic invocations of “monopoly” and anachronistic assertions that the Framers of the US Constitution were utilitarians.

As we detail in our AEI essay, though, the problem with arguments like those made in the Mercatus report is that they contradict history and empirics. For the evidence that supports this claim, including citations to the many studies that are ignored by the IP skeptics at Mercatus and elsewhere, check out the essay.

Despite these historical and economic facts, one may still believe that the US would enjoy even greater prosperity without IP. But IP skeptics who believe in this counterfactual world face a challenge. As a preliminary matter, they ought to acknowledge that they are the ones swimming against the tide of history and prevailing belief. More important, the burden of proof is on them – the IP skeptics – to explain why the U.S. has long prospered under an IP system they find so odious and destructive of property rights and economic progress, while countries that largely eschew IP have languished. This obligation is especially heavy for one who seeks to undermine empirical work such as the USPTO Report and other studies.

In sum, you can’t beat something with nothing. For IP skeptics to contest this evidence, they should offer more than polemical and theoretical broadsides. They ought to stop making faux originalist arguments that misstate basic legal facts about property and IP, and instead offer their own empirical evidence. The Mercatus report, however, is content to confine its empirics to critiques of others’ methodology – including claims their targets did not make.

For example, in addition to the several strawman attacks identified in our AEI essay, the Mercatus report constructs another strawman in its discussion of studies of copyright piracy done by Stephen Siwek for the Institute for Policy Innovation (IPI). Mercatus inaccurately and unfairly implies that Siwek’s studies on the impact of piracy in film and music assumed that every copy pirated was a sale lost – this is known as “the substitution rate problem.” In fact, Siwek’s methodology tackled that exact problem.

IPI and Siwek never seem to get credit for this, but Siwek was careful to avoid the one-to-one substitution rate estimate that Mercatus and others foist on him and then critique as empirically unsound. If one actually reads his report, it is clear that Siwek assumes that bootleg physical copies resulted in a 65.7% substitution rate, while illegal downloads resulted in a 20% substitution rate. Siwek’s methodology anticipates and renders moot the critique that Mercatus makes anyway.

After mischaracterizing these studies and their claims, the Mercatus report goes further in attacking them as supporting advocacy on behalf of IP rights. Yes, the empirical results have been used by think tanks, trade associations and others to support advocacy on behalf of IP rights. But does that advocacy make the questions asked and resulting research invalid? IP skeptics would have trumpeted results showing that IP-intensive industries had a minimal economic impact, just as Mercatus policy analysts have done with alleged empirical claims about IP in other contexts. In fact, IP skeptics at free-market institutions repeatedly invoke studies in policy advocacy that allegedly show harm from patent litigation, despite these studies suffering from far worse problems than anything alleged in their critiques of the USPTO and other studies.

Finally, we noted in our AEI essay how it was odd to hear a well-known libertarian think tank like Mercatus advocate for more government-funded programs, such as direct grants or prizes, as viable alternatives to individual property rights secured to inventors and creators. There is even more economic work being done beyond the empirical studies we cited in our AEI essay on the critical role that property rights in innovation serve in a flourishing free market, as well as work on the economic benefits of IP rights over other governmental programs like prizes.

Today, we are in the midst of a full-blown moral panic about the alleged evils of IP. It’s alarming that libertarians – the very people who should be defending all property rights – have jumped on this populist bandwagon. Imagine if free market advocates at the turn of the Twentieth Century had asserted that there was no evidence that property rights had contributed to the Industrial Revolution. Imagine them joining in common cause with the populist Progressives to suppress the enforcement of private rights and the enjoyment of economic liberty. It’s a bizarre image, but we are seeing its modern-day equivalent, as these libertarians join the chorus of voices arguing against property and private ordering in markets for innovation and creativity.

It’s also disconcerting that Mercatus appears to abandon its exceptionally high standards for scholarly work-product when it comes to IP rights. Its economic analyses and policy briefs on such subjects as telecommunications regulation, financial and healthcare markets, and the regulatory state have rightly made Mercatus a respected free-market institution. It’s unfortunate that it has lent this justly earned prestige and legitimacy to stale and derivative arguments against property and private ordering in the innovation and creative industries. It’s time to embrace the sound evidence and back off the rhetoric.