Intellectual Property Strategies and the Returns to R&D

Although the prospect of obtaining patent protection is believed to encourage R&D investments and thus the rate of inventive activity, there is little by way of direct evidence to support this belief. We use original data from the 1994 Carnegie Mellon survey on the appropriation of R&D in the US manufacturing sector to empirically estimate a structural model linking a firm’s choice of the optimal level of R&D efforts with its intellectual property protection strategy. We explicitly model the use and effectiveness of different technological strategies, including patenting, secrecy and the exploitation of first mover advantages, as conditioning the effect of firms and industry characteristics such as firm size and competitive pressure on the returns to firms’ inventive activity. The analysis also incorporates the role of information spillovers and other organizational factors influencing the productivity of R&D investments. A key result is that the effectiveness of a firm’s patenting strategy is one of the main determinants of R&D efforts and thus the production of inventions in only selected industries. In particular, in industries such as biotechnology, drugs and chemicals patent protection significantly induce R&D and innovation. In other industries such as machinery, electronics and instruments the results are mixed, with other strategies such as secrecy and the exploitation of lead times having a significantly larger impact on the returns to R&D. By looking at the structural differences between the two types of industries, we conjecture that the critical factor conditioning the effect of patenting on R&D and innovation is the degree to which a firm controls the complementary technologies needed to commercialize an innovation.