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P. Moser

The American Economic Review, Vol. 95, No.4 (Sept., 2005)

A Summary

Principal Research Question Is the direction of innovation determined by patent laws?
Theory A patent offers the inventor exclusive rights to benefits from their invention for a limited period of time. This essentially creates a monopoly for the purpose of encouraging innovation. In the absence of such patents it is unlikely that individuals would invest much in R&D. The longer the patent, the more gains accrue to the inventor, but the larger is the deadweight loss.

Monopolies decide simultaneously on price and output whereas the competitive firm has no control over price. Thus, whilst the competitive industry produces at MR = MC, the monopolist operates where price if greater than marginal cost with a lower level of output. Consumers are typically worse off in such a situation, and we could have a Pareto improvement if the monopolist would supply at competitive prices and quantities. This means there is deadweight loss. This is the price paid for encouraging innovation.

Motivation If innovative activity is motivated by expected profits and if the effectiveness of patent protection varies across industries then countries with no patent protection should specialize in industries which exhibit strong alternative means of protection. Patents may therefore determine the direction of innovation, and this means that the introduction of patents in a country that does not currently have them could incite a change in comparative advantage, as patent protection expands the set of industries in which individuals which to innovate. Any changes in innovative industry could be relevant for determining economic growth.

The relevant alternative means of protection would be secrecy, beating competitors to market, or keeping strict control over assets complimentary to the production/marketing process. Secrecy is probably the most effective.

Data Data from world fair exhibitions. Exhibition data measure innovation whether they are patented or not whereas as patent data only counts those innovation that the inventor decided to patent. Thus exhibition data should be superior.
Method Focuses on data from exhibitors from Northern Europe as there should be small differences only in unobserved characteristics. Denmark and Switzerland did not have patents, and the Netherlands had abolished them when on a free trade drive.
  • Comparisons of US/UK patenting rates are very reveal similar patenting behaviour despite the fact that there were big differences in the laws, and in the cost (much more expensive in UK). Innovators chose to patent in the same broad industry categories, especially machinery. There was a much smaller rate of patenting for scientific instruments, food processing, chemicals etc.
  • Differences in the distribution of innovations across industries varies with length of patent, with increase in the length of short patents being much more significant.
  • Patentless countries show a strong focus on a narrow set of industries particularly scientific instruments.
  • Patentless countries focused on scientific instruments and food processing and less on machinery. Swiss innovators focus on industries where patents are not generally applied for in countries that have strong patent protection.
  • Mining deposits seem to have a strong effect on the level of innovation in mining equipment.
  • Patent laws have strong effect on choice of industry even when GDP, country, education are controlled for, and Switzerland is dropped from the specification.
  • Education has an effect on the level of high tech industry in the country.
  • Size of population seems to have an effect as large economies allow for large scale industry to be profitable.
Interpretation Potential innovators choose simultaneously between industries and their choice may seems to be influenced by patent laws as well as other characteristics of their work environment (e.g. availability of inputs etc.).

Innovators in countries without patent laws innovated where process secrecy was possible. Patent laws thus help to determine how innovators respond to demand from various sectors for innovations and so they also help to determine the supply of knowledge in an economy.

The introduction of patent laws in LDCs may slow rather than aide growth is they are led to compete more directly with innovations from the developed world. Strong patent laws only assist when they encourage new technologies different from those in the developed world.

Robustness Patent laws could be endogenous to the level of innovation. Tries to solve this by constructing a synthetic Switzerland using matching techniques.

The Netherlands abandoned its patent laws. There are not sufficient data points to do country fixed effects, but this change in NL is like a natural experiment. The proportion of Dutch innovations in food processing went from 11 to 37% surpassing textiles as the most prominent sector.

Problems Countries attending the fairs would often compete to demonstrate their technical supremacy in certain industries, so the data may not be an accurate reflection of innovation in any given country. 

Space restrictions, transport costs, and inventions that were easy to copy could mean that certain inventions were underrepresented. However, these problem are somewhat mitigated by the organizers being flexible on space, and the display of blueprints and models to deal with transport and secrecy issues.