2004-06 Patent rights and innovation

This paper provides an empirical analysis of the effects of patent protection on innovative activity. It provides evidence from both an output perspective of innovation (namely patent applications) and an input perspective (namely research and development). In order to implement the empirical analyses, the paper updates an index of patent rights to year 2000 and provides an index of enforcement effectiveness (in practice). Using both firm-level and national level panel data, the paper finds that the relationship between patent protection and innovation typically is U-shaped (or inverse U-shaped), holding other factors constant. The idea is that patent protection can both stimulate as well as deter innovation, depending on circumstances. For poorer economies dependent on imitative and adaptive research, patent protection tends to raise the cost of innovation and thereby reduce the rate of innovation. For richer economies, where patent strength is already fairly high, a further strengthening of patent rights may enhance market power to the extent that incentives to introduce new technologies are reduced. For other situations, stronger patent regimes can encourage domestic innovation and attract foreign innovation.