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Patent Incentives

Returns to Patenting and the Inducement for Research & Development (R&D)*

Executive Summary

The UK has one of the oldest and best regarded intellectual property rights (IPR) regimes in the world. Yet there is little evidence on private returns to patenting for firms operating in the UK, and on the incentive effects of patenting in encouraging R&D investment in patenting firms. Using available data from the UK innovation survey (known as the Community Innovation Survey or CIS) and linked business performance data the report assesses both the additional returns firms achieve by patenting, and the effects on R&D spending.

This report tests an economic model built upon the following intuition. The monopoly power conferred by a patent provides a firm a price premium in new product revenue, thus increasing profitability. At the same time this increased profitability also acts as an inducement to increase R&D spending by the firm. Using this idea we try to jointly estimate the extent of the premium and the inducement to R&D. In this way the research builds and extends work in two literature streams, viz. the economic literature on the value of patents and the literature on effect of patents on R&D expenditures.

The analysis uses two approaches derived from Arora et al. (2008) for estimating the patent premium. The first approach relates innovation survey data on new product revenues to R&D investments and measures of patent effectiveness (self assessed by businesses). It then measures the incremental revenue (from new products) earned by a firm that can be attributed to patent protection. We term this the revenue patent premium. The second approach estimates what we call the profit premium (the additional profitability on account of patent protection) and the inducement to invest in R&D due to patent protection by building a model of profits generated by innovative products that are patented.

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