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Do Patents Encourage or Discourage Innovation?

There is any conclusive answer, but tendencies. Those tendencies relates with: (i) The patent´s quality; (ii) Type of innovation; (iii) State of development of a country; and (iv) Size of the enterprise. Based on those trends, I propose the following model:

Patents Encourage-Discourage Innovation

Patents Encourage-Discourage Innovation

This model explains how patent’s quality, type of innovation, state of development of a country, and size of the enterprise may discourage innovation. The model is a circle divided if for slices, with the logic that its center is a discouraging area for innovation (therefore, the negative signs on it), and that the outlying is an encouraging area for innovation (thus, the positive marks on it).

Despite that, the “+” and “-” symbols not only indicate the areas that encourage and discourage innovation, respectively. They also show how to interpret every slice. For instance, the patent’s quality slice is read like: The more (+) patent’s quality, the more patents encourage innovation; the less (-) patent’s quality, the less patents encourage innovation.

Speaking clearly, it is a matter of how centered we are. The more in the center we are located in the four slices, the more patents may discourage innovation for us and vice versa.

The Findings (Tendencies)

First, it seems that the less patent quality is, the more patents may discourage innovation. When the patent lack quality it means that it was granted for obvious and no novel inventions, blocking the real innovator and adding licensing fees. Furthermore, such poverty in quality increase the risk of demands coming from trolls. So, patents increment the cost and risk of introducing a product in the market. Conversely, a higher quality in patents leads to make true the utilitarian argument and the spillover effect limiting the negative effects of the monopoly.

Secondly, it seems that the less radical the innovation is, the more patents may discourage innovation. Less radical means more incremental, and incremental innovation builds on previous innovations. Thus, patents impede new attempts and approaches coming from others innovators. Also, complex industries get affected because they have to pay several licensing fees for the different technologies they need to build on, that discourage innovation. In addition, patents promote the trolling behavior on first innovators, discouraging innovation efforts because of licensing fees efforts. The other way around, the monopolist protection that patents provide seems to be effective when the innovation requires a high investment; secrecy does not work, and it is easy to imitate, in other words when it is more radical.

In Third place, it seems that the less developed a country is, the more patents may discourage innovation. The technological improvement of developing countries through imitation and adaptation is hampered by patents because they prevent precisely that imitation. Likewise, import-based developing countries can even have problems importing different technologies because of property rights of foreign companies. Moreover, the whole process of technology transfer for developing countries can be seriously damaged or stopped for patents protection. However, scientifically advanced developing countries seem to be benefited on their leading industries as whichever other multinational company, indicating that patents are more beneficial when the country is more developed.

Lastly, It seems that the less the size of the enterprise is, the more patents may discourage innovation. Patenting activities and monitoring its compliance requires resources the SMEs lack, for them to focus on those activities works on detriment of innovation because of the relocation of resources. As well, patents have high direct and indirect costs and truly expensive consequences if infringing one. So, patents reduce the spectrum of possibilities to innovate. Notwithstanding, for high-tech SMEs the usefulness of patents relies on attracting venture capital, what is related with the radical innovation traits. Beyond that, for large SMEs the patents reduce the risk of reverse engineering based on their products, thus from copy. All these draw the idea that patents may encourage innovation as the size of the enterprise increase.

Assembling the puzzle, those four pieces form the Patents Encourage-Discourage Innovation Model (PEDIN). This model is a visual abstraction of the four previous observations; it makes easy to understand and present when patents may discourage or encourage innovation. It is my wish that the innovation community finds it useful and provocative.

Note: This post is based on the essay “Do Patents Encourage or Discourage Innovation” of the same author. The essay is currently being adapted looking for publication in a Journal.

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