Tuesday, January 18, 2005
Patents and Innovation
I thought about adding this as a comment to Reuben's post below but feared it might reduce the importance of the following finding by Petra Moser, now an assitant professor at MIT's Sloan school. Summarizing her dissertation, NYT (in 2003) says that developing countries like India, which is scheduled to come into full compliance with an international patent treaty in 2005, may be better off without strong patent laws.... Professor Moser concludes what was good for America and Britain in the 19th century is not necessarily good for emerging, largely rural economies in countries like Denmark, the Netherlands and Switzerland....
This paper introduces a new internationally comparable data set that permits an empirical investigation of the effects of patent law on innovation. The data have been constructed from the catalogues of two 19th century world fairs: the Crystal Palace Exhibition in London, 1851, and the Centennial Exhibition in Philadelphia, 1876. They include innovations that were not patented, as well as those that were, and innovations from countries both with and without patent laws. I find no evidence that patent laws increased levels of innovative activity but strong evidence that patent systems influenced the distribution of innovative activity across industries. Inventors in countries without patent laws concentrated in industries where secrecy was effective relative to patents, e.g., food processing and scientific instruments. These results suggest that introducing strong and effective patent laws in countries without patents may have stronger effects on changing the direction of innovative activity than on raising the number of innovations.
Read the whole paper here. To summarize, there are two kinds of innovations: those that are most profitably patented (you can't keep them secret forever) and those most profitable as trade secrets (think Coca-Cola). So if your country doesn't have patents laws, pretty obviously you are going to focus your innovation efforts on the latter. And you may produce a lot of innovation that way. Note however, that this does not mean that you will have *more* innovation than a country that offers both patent *and* trade secret protection. That would depend on how much time one spends in simply try to figure out if a patent is violated in the process of innovation and the amount of enforcement costs. Clearly as the number of existing patents increase this will be a problem. Even innovators might end up spending too much on needless litigation to avoid lawsuits or suing potential innovators.
Finally, with regards to drugs, a basic question remains, is the increase in price (and the potential social welfare losses) less than the gains of innovation. In India, this is unlikely to be the case, especially if you consider the number of people affected (and beneficiaries of indian drugs are wordwide, as Reuben notes in his post) and if you consider the fact that innovation in the industry was not stunted before the patent laws!
This paper introduces a new internationally comparable data set that permits an empirical investigation of the effects of patent law on innovation. The data have been constructed from the catalogues of two 19th century world fairs: the Crystal Palace Exhibition in London, 1851, and the Centennial Exhibition in Philadelphia, 1876. They include innovations that were not patented, as well as those that were, and innovations from countries both with and without patent laws. I find no evidence that patent laws increased levels of innovative activity but strong evidence that patent systems influenced the distribution of innovative activity across industries. Inventors in countries without patent laws concentrated in industries where secrecy was effective relative to patents, e.g., food processing and scientific instruments. These results suggest that introducing strong and effective patent laws in countries without patents may have stronger effects on changing the direction of innovative activity than on raising the number of innovations.
Read the whole paper here. To summarize, there are two kinds of innovations: those that are most profitably patented (you can't keep them secret forever) and those most profitable as trade secrets (think Coca-Cola). So if your country doesn't have patents laws, pretty obviously you are going to focus your innovation efforts on the latter. And you may produce a lot of innovation that way. Note however, that this does not mean that you will have *more* innovation than a country that offers both patent *and* trade secret protection. That would depend on how much time one spends in simply try to figure out if a patent is violated in the process of innovation and the amount of enforcement costs. Clearly as the number of existing patents increase this will be a problem. Even innovators might end up spending too much on needless litigation to avoid lawsuits or suing potential innovators.
Finally, with regards to drugs, a basic question remains, is the increase in price (and the potential social welfare losses) less than the gains of innovation. In India, this is unlikely to be the case, especially if you consider the number of people affected (and beneficiaries of indian drugs are wordwide, as Reuben notes in his post) and if you consider the fact that innovation in the industry was not stunted before the patent laws!
