Outline:
• Introduction
• Is the IP system working?
– patents
– copyright
• Incentives for R&D
• Other innovation policies
There is substantial material in addition to that in Ch. 11 that can be added to this topic and some suggestions are given below

• Most important issue is to convey clearly to students why policy has potential to increase innovation
– Chapter 1 had theoretical section on market failures involved in innovation – this lecture should show how this links to policies
• Across the OECD countries and beyond there is wide agreement that governments have a vital role to play in promoting innovation
• The exact nature of this role and specific policies are still subject of debate
– In fact, as has been discussed in previous Chapters, there is often a weak evidence base for many of the policies
– This not surprising. In many areas of economic policy there is much uncertainty (e.g. monetary/finance policy – witness 2008 financial crisis)
– Innovation policy is at least as complex as other areas, and one could argue that it is not sufficiently studied

First consider the ‘patent explosion’
• Patents granted in the US were 52,000 in 1979 but rose to 182,000 in 2008
• The US patent explosion is an interesting way to motivate this discussion but …
• Patents in the EU have also risen rapidly, tripling between 1985 and 2005
• Most recent data for US is at http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm

• US Supreme Court extended patent protection to new areas: biotechnology, computer software, business method patents, scientific research methods
• Universities have increased opportunity to patent scientific discoveries (Bayh-Dole Act, 1980)
• Since 1982 a dedicated court handles patent cases
(Court of Appeal of the Federal Circuit) and this is considered a ‘friendly court’ for patentees
• A 1984 Act permits drug companies to extend patents by five years where they had spent time gaining approval for patented drug
• These factors extended the range and offered better incentives to potential patentees

• Strategic use of patents can reduce competition: Patents may create barriers to entry and raise production costs of incumbent or new firms (see Ch. 6, 6.4 and 6.6)
• Patents can hinder sequential innovation: Patents held by one firm can increase costs of other firms’ R&D, affecting the next generation of innovators
• The patent system adversely affects smaller and start-up
firms: Both the above can create problems for smaller and start-up firms. Plus high cost of monitoring, obtaining and defending patents create problems (see Ch. 6, 6.5)
• Patent races are inefficient: Competition to be the first to patent can lead to excessive and inefficient R&D spending
(see Ch. 6, 6.2)

Low patent quality
• Too many patents are granted, especially in the US, for obvious inventions - clogs up the patent system and devalues novel patents
High uncertainty.
• Related to the above, but also to:
• Litigation system - has made some very large awards
• Strategic use of patents by firms
High costs.
• Problem both for US Patent and Trademark Office and for users of the patent system - overall cost of the patent system is now several billion dollars per year
• There is an ‘arms race’ effect where all companies struggle to keep up

• See: http://www.bitlaw.com/source/cases/patent/index.html
• Students may have heard of Blackberry (Research in Motion) patent dispute (settled in 2006 for $612 million)
• There are many other cases/examples that can be found by searching Google, etc

Examples of IP policies – see Table 11.1 for detailed examples
IPR Policy
Patent insurance
Dispute resolution
Comments
Government can organise/subsidise insurance against litigation
IP offices can offer independent advice/mediation services
Lengthening protection To encourage more use of IPRs and increase innovation.
Enforcement Action to detect and stop infringement (including counterfeiting).
Scope and/or breadth Legislative or legal rulings can alter the scope or breadth of IPRs.
Non-obviousness or
‘inventive step’
Opposition or reexamination system
‘Non-obviousness’ (US) or ‘inventive step’ (Europe) means that the patented invention should not be obvious to a person skilled in the relevant art. Altering this can make it harder to gain IP rights..
EPO has opposition system for patents; US PTO has re-examination system but
EU system much more widely used.
Cost of obtaining and maintaining IPRs
Utility models
Application and renewal fees for patents and trademarks affect numbers of applications and the stock of IPRs.
TRIPs allows countries the option of having a ‘utility model’, best described as a cross between a patent and a design (see Chapter 2, section 2.5).
Education and outreach Inform firms, especially SMEs, of possible benefits of IPRs.

• Copyright term has been lengthening in most countries and is now equal to the life of the author plus 70 years (WTO and TRIPS)
• Tracing this rise in the US over 200+ years (maximum copyright terms, including renewals):
1790: 28 years, 1831: 42 years, 1909: 56 years, 1962:
75 years, 1976: life plus 50 years, and 1998: life plus
70 years
• In comparison with patents (20 years) this protection looks overly long
• Note that copyright protection can be narrower than patents (e.g. in literary works)

• Piracy has long been a problem for literary and musical works
• Problem has exploded with advent of new technologies for copying (photocopiers, computers, Internet, filesharing software)
• But if too many elements of societal knowledge are held as IPRs this can stifle creativity
• Lack of empirical evidence about the role of copyright in stimulation or stifling of creativity means we cannot adjudicate
• Lack of formal registration of copyright means that legal aspects of infringement are muddied – hard to find out if infringing or infringed, and hard to sue

• Lengthy historical debate about whether firms need these incentives for innovation
• Counter argument is that being first to market is a sufficient incentive for many
• Also firms can/do use trade secrecy protection in many fields of enterprise
• Surveys of firms show that they rate trade secrecy more highly than patents as a means to appropriate rewards from innovation (Ch.6)
• But in some key fields secrecy is very hard to maintain (e.g. pharmaceuticals) and then the patent system is vital to maintaining ownership

• Trademarks signal the origin and quality of products
• So they give firms incentives to maintain that quality
(e.g. present Toyota problems)
• Allow flexibility in production as franchising is possible leading to arms-length quality control
• Here the franchise owner specialises in marketing and innovation, while franchisee produces to a known and trusted recipe/formula
• But do successful brands in fact restrain market competition?
• If incumbents saturate markets with varieties backed by advertising then new entrants face higher costs of entry

• R&D Tax Incentives: (see Hall and Van Reenen 2000)
- Common in OECD countries
- Two main types “level” and “incremental”
- Level scheme offers tax relief on all R&D so has some deadweight loss as not all the R&D is new
- Incremental scheme offers tax relief on increases in R&D over a given period but is more complex in practice
• Direct R&D Grants and Other Schemes: (see OECD 2006)
- These are now a declining share of business R&D expenditure
- Problems are ‘selectivity’ and ‘crowding out’
• Prizes, Awards, and Patent Buyouts: (see Kremer 1998)
- Alternative incentive systems can be used

• Policy toward Universities (Chap 4 has some discussion but could extend here)
- Establishment of Technology Transfer Offices (TTOs)
- Increased interface between university research and private business
- Rise in licensing revenues to universities
• SMEs, High-tech Start-ups, and Entrepreneurship
(See Lerner 1999, OECD 2008)
- Enterprise culture
- Knowledge and skills
- Access to finance
- Regulation

• Competition Policy (less material on this, but has been an area of interest in recent years)
• Industry Standard Setting (if students have not heard of
QWERTY issues then cover here - see Chap 7)
• Government procurement policy
- large purchasing power can target innovation (e.g. development of zero carbon buildings)
- as early users of new products government can support development by giving feedback
- pitfalls if fail to assess full costs of products over their lifecycle in use
- problems when commissioning departments lack expertise to choose wisely

1.
Why has patenting increased so much in recent years? Will this trend continue?
2.
What policies might improve the working of the a) patent, b) copyright and c) trademark systems?
3.
Should patents be replaced by a system of rewards and prizes?
4.
Why are ‘markets for technology’ important?
5.
How would you evaluate the effectiveness of an R&D tax incentive scheme?
6.
Are direct R&D grants a better policy than either R&D tax incentives or patents?
7.
Would the money spent on R&D tax credits be better spent on educating scientists?

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