Intellectual Property Rights and Patents
We examine the economic impact of a new technology as cloud computing. This will allow firms to rent
computing power and storage from service providers, and to pay on demand, which will have a profound
impact on the cost structure of all the industries and, through this, on: 1) business creation and
macroeconomic performance; 2) job creation in all industries and job reallocation in the ICT sector; 3) public
finance accounts, through the direct impact on the public sector spending and the indirect one on the tax
revenues. In this study we try to disentangle these three aspects of the impact of cloud computing with
reference to the European economy.
Privacy Issues with Cloud Applications by V. Ranganathan (2010, IS Channel).
This privacy review analyses the relevant laws, technological problems and
literature on Software as a Service (SaaS). The dvent of web applications
within powerful web browsers has meant the consumer-oriented segment
of the IT industry is evolving away from the server environment to an open
field client environment. The article will debate the legal implications of the
cloud on the privacy of the user and whether it is possible that technology
will have to provide some of the solutions that the legal law cannot provide.
At the end, the article concludes whether cloud computing is expected to
deliver the benefits that it states it will provide in accordance with adequate
regulation, security and privacy features required for its user.
Financial Aspects of Cloud Computing Business Models by J. Jäätmaa (2010).
The purpose of the study was to explore financial aspects of cloud computing business models
from information technology (IT) services provider’s perspective. The financial aspects
were divided into revenue model and related pricing mechanisms and cost structure and related
cost accounting mechanisms according to business model ontology.
Cloud computing is a new computing paradigm and the latest megatrend in IT industry developed
as a result of the convergence of numerous new and existing technologies. It is characterized
by provision of rapidly scalable and measurable IT capabilities as a service on ondemand
and self-service basis over the network from common resource pool.
The study was carried out as a single case study in a global company offering IT services for
large enterprises and public organizations and currently preparing to introduce its own cloud
services. Ten semi-structured interviews were conducted with managers of the case company
for exploring the financial aspects of cloud services. Qualitative data analysis was employed
for processing and summarizing the findings.
Findings of the study suggested that each cloud service should have a distinct business model.
The business model is a mediating construct that translates the new technology to the service’s
value proposition. The business model also defines appropriate pricing and cost accounting
mechanism for a service. The business models are based on services provider’s position in
cloud computing value chain. A cloud computing business logic framework was created to
illustrate the interaction between the value chain, business models and its elements.
The key cost types of services do not necessarily change much with cloud computing. Cloud
computing has still potential to significantly reduce services provider’s costs through reengineering
of production architecture. A cloud computing cost accounting model was created to
illustrate how production costs should be aggregated and distributed.
Pricing of services changes with cloud computing and pay per use and subscription-based
pricing mechanisms are most typical for cloud services. The pricing should be based on customer’s
perceived value instead of production costs of services. A generic cloud computing
pricing mechanism that combines pay per use and subscription mechanisms was created to
better balance risk sharing between services provider and customer.
Security Risks of Cloud Computing and Its Emergence as 5th Utility Service by M. Ahmad (2010, Information Security and Assurance).
Cloud Computing is being projected by the major cloud services provider IT companies such as IBM, Google, Yahoo, Amazon and others as fifth utility where clients will have access for processing those applications and or software projects which need very high processing speed for compute intensive and huge data capacity for scientific, engineering research problems and also e- business and data content network applications. These services for different types of clients are provided under DASM-Direct Access Service Management based on virtualization of hardware, software and very high bandwidth Internet (Web 2.0) communication. The paper reviews these developments for Cloud Computing and Hardware/Software configuration of the cloud paradigm. The paper also examines the vital aspects of security risks projected by IT Industry experts, cloud clients. The paper also highlights the cloud provider’s response to cloud security risks.
Dominance and Innovation by
C. Velu and S. Iyer (2010, University of Cambridge).
Do dominant or less dominant firms innovate more? Theoretically it has been shown that within
an asymmetric mixed strategy game of a patent race, the less dominant firm invests more than
the dominant firm. But the empirical data on patent races is divided. This paper argues that
the decisions that concern strategic choice in innovation may be influenced by expected relative
returns. The new approach, called the returns-based beliefs approach, is based upon subjective probabilities. It combines a decision analytic solution concept and Luce’s (1959)
probabilistic choice model. In particular, the authors show how the use of the returns-based beliefs
approach provides support for the thesis that dominant firms invest more in R&D within an
asymmetric mixed strategy game. Consequently, they argue that the returns-based beliefs
approach is more in line with recent empirical studies of innovation. The paper also provides empirical
evidence using UK R&D data across a range of industries from 2001-2006 that shows that firms’
spending on R&D is related more to their own profitability than that of their competitors, which
is consistent with the returns-based beliefs approach, and discusses the managerial implications of
the new theoretical approach and the empirical findings.
The role of Intellectual Property Rights, Innovation and Competition Law in the European Software Industry. If there is no promise of monopoly would there be any incentives to innovate? by F. R. Lewell (2009).
The thesis analyses and identifies the relationship between the management of innovation, intellectual property rights and competition law in the European software industry. Furthermore it points out important factors which are necessary to create a healthy market for the industry, in particular by 1) balancing IP law and competition law and 2) promoting choice and technological neutrality, in form of standards and interoperability.
There is an ongoing debate regarding the use of intellectual property rights to foster innovation in the software industry. With emphasis on innovation and software patents, the thesis is questioning the intellectual property rights in the software industry and the monopoly situations they provide, will there be any incentives to innovate without them?, are they necessary for innovation in the software industry? And one should ask one self – if they do no good what harm may they cause?
The thesis is using a 'law and economics' approach, with both a positive and a normative inquiry. The software industry has been researched by looking at competition law and intellectual property law separately and combined to observe the effect on innovation. Case law has been provided to give another perspective and a better understanding of the theory presented.
The thesis concludes by discussing the consequences of strong intellectual property regimes and shows that innovation happens without patents, they are not directly needed to encourage innovation. Where the intellectual property system creates market failures, society has found alternative ways to secure knowledge and technological innovation by encouraging open standards and open innovation
Product market regulation, Innovation and
Distance to Frontier by B. Amable, L. Demmouy and I. Ledezmaz (2009, Industrial and Corporate Change.
This paper tests the relation between product market regulation and inno
vation conditional to the closeness to the technological frontier on a panel
of 15 industries for 17 OECD countries over the period 1979-2003. A recent
literature has focused on a negative impact of regulation growing in intensity
with the proximity to the frontier. A simple model of innovation and growth
shows that one should not necessarily expect this result. Empirical tests on a
variety of speci…cations show that the schedule linking the impact of product
market regulation to the closeness to the technological frontier has a positive
slope and that the impact of regulation can be positive when industries are
close to the frontier.
The Effect of Entry on R&D Investment of Leaders by D. Czarnitzki, F. Etro and K. Kraft (2008).
There is a long debate on the role of market leaders in investing in R&D.
Following Arrow (1962), a popular view regards competitive pressure as being
supportive for innovative activity and that incumbents tend to be less
innovative than outsiders. This paper reconsiders this view both from
a theoretical and an empirical perspective. A theoretical model provides
hypotheses on the incentives to invest in R&D for incumbent leaders and
outsiders. It establishes the crucial role of entry pressure on the behavior of
leaders and followers. In markets with free entry each firm tends to invest
less, but when the incumbents have a leadership position in the competition
for the market, they tend to invest more than the average firm. Hence, the paper
obtains the exact opposite of the commonly held view associated with Arrow.
We also show that these theoretical results are robust to different model
specifications.
The theoretically derived hypotheses are tested with a sample of German
manufacturing firms. The authors study R&D intensity at the firm level, and the
novel aspect of our empirical approach is given by the fact that the companies
provided a subjective view on their key determinants: entry pressure and
the identification of market leaders. Control variables include employment,
capital intensity, a measure of the firms’ patent stock, the Herfindahl index
of concentration and sector dummies. The independence of the entry variable
from the dependent variable, R&D intensity, is supported through an
instrumental variable analysis and a number of exogeneity tests.
The authors find strong empirical evidence for their main predictions: entry pressure
reduces the average investment per firm, but incumbent leaders invest more
than other firms when they are pressured by a strong threat of entry. This
implies that we may have to change our way of looking at persistent market
dominance: this may be the result of strong competitive pressure rather than
of market power. Moreover, the size of the firms and their patent stocks, proxy for the protection of IPRs, are positively related to R&D intensity. These results hold after a number of robustness tests with instrumental variables.
Invention and Discovery
In Science-Based Firms by J. D. Adams and J. R. Clemmons (2008).
To what extent does new invention depend on knowledge from past inventions? How important for invention is knowledge outside the firm compared to inside knowledge? Do knowledge flows from science play an additional role in invention? How do production functions for invention compare with those for scientific discoveries? This paper seeks to provide tentative answers to these questions. Its approach builds on two literatures. The first is the search approach to technological change pioneered by Evenson and Kislev (1975, 1976), and applied to R&D by Nelson (1982) and growth by Kortum (1997). The second is the quality ladders approach to growth, in which higher quality products supersede lower quality ones. Grossman and Helpman (1991) and Barro and Sala-i-Martin (2004) contain expositions. Etro (2004) implicitly builds on this approach in his discussion of patent racing under different assumptions about industry organization.
Using a sample of large R&D-performing firms in the U.S., which are observed during 1981-1999, the empirical work quantifies inventions and scientific discoveries as well as knowledge flows to both. The evidence builds on patents and citations in the NBER Patent Citations Database and papers and citations to papers from the NBER Scientific Papers Database. In addition the authors draw on Compustat for firm R&D stocks and on the CASPAR database of the National Science Foundation for university R&D1.
Main findings are as follows. Simple patent counts depend on knowledge flows from inventions but much less on science. When we replace patent counts with patents weighted by citations received, a measure of invention weighted by impact, the authors find that knowledge flows from patents continue to dominate, but that knowledge flows from science now have a much greater impact. When they compare flows from inside and outside the firm, they find that outside flows have a larger effect on patents produced. When they compare industry-based with university-based they find that the effects of knowledge flows from industry outweigh those from universities by a wide margin.
For comparison with patents the paper estimates production functions for scientific papers. It finds that firm’s papers depend even more that its patents on knowledge flows from outside the firm. In addition, unlike patents, flows from universities have a larger effect on scientific papers than industry flows. These comparative findings on patents and papers suggest that innovation is a sequential process in which the scope of the firm’s research progressively narrows as it proceeds from early to late stages. In the early going the firm’s scientific effort depends mostly on outside knowledge, most of that coming from universities. Later on, the firm’s inventions depend mostly on the firms’ past inventions and on inventions elsewhere in industry, with science strictly secondary. Nevertheless, the authors observe that science plays an important role in patents, especially highly cited patents.
National Policies
as Platforms for
Innovation.
Reconciling a Flat World with Creative Cities by B. Cox and S. Del Bianco (2007).
License Expenditures of Incumbents and Potential Entrants:
An Empirical Analysis of Firm Behavior by D. Czarnitzki and K. Kraft (2007).
Empirical literature on innovation produced a broad knowledge about determinants
of R&D (intensity) and patenting behavior at the firm level. Sales realized by newly
developed products and innovation counts are also considered, but less frequently.
There are, however, further aspects of innovative activity. Many innovations are not
exclusively used by one firm (the inventor), but are licensed for use by others. This is
also reflected in numerous theoretical articles on technology licensing. Nevertheless,
empirical studies on this subject are very rare. This paper discusses theoretical
results on the incentives to purchase licenses, and it aims at deriving empirically
testable hypotheses based on economic theory. It subsequently reports the results of
an econometric study on the determinants of licensing expenditures.
Much has been written about the discussion concerning the incentives of a
monopolist compared to a potential entrant to invest in innovation since the seminal
contributions of Schumpeter and Arrow. More recent papers use
game-theoretic approaches to analyze this question. Basically there are two rivaling
models: the patent race model and the auction model of Gilbert and Newbery.
The patent race model highlights uncertainty and time during the innovative process.
Firms compete in R&D projects and the successful innovator obtains a patent, which
in turn is connected with a given profit (the price). In this scenario the incumbents
invest less in R&D than a potential entrant (the challenger), as a successful
innovation would replace the current monopoly and the profits from it would be
dissipated. In contrast, the challenger currently has no profits (in that market) and
hence this R&D-reducing effect does not exist for it.
The auction model of Gilbert and Newbery assumes that a process innovation
has already been invented and now the license for its use is offered to a monopolist
and a potential entrant. As time plays no role and the profit to be gained from its
application is known, the uncertainty factor is absent. If the innovation is non-drastic,
the monopolist will offer more than the potential entrant, and if the innovation is
drastic, both will pay the same.
Thus, the predictions of these two models differ. The auction model may have its
relevance for innovation projects that are not as risky as R&D activities. If licenses
are bought or a new technology (from outside) is introduced, the risk involved is
presumably much smaller than that of an R&D process. There have been no tests to
date as to whether the Gilbert and Newbery model applies to such investments in
innovation. This empirical study aims at the analysis of licensing expenditures of companies.
Empirical research concerning licensing is very rare. This important paper is the first to perform an econometric test on the relationship between the
position of the firm in the market and its licensing expenditures. The study uses data on German
companies in order to analyze expenditures for technology licenses.
Aside of standard control variables the motives for innovation
expenditures are also taken into account. The authors differentiate between firms
which intend to secure their present position in the market (incumbents)
and those intending to enter a new market (challengers). In line with the
prediction of the auction model, it turns out that incumbents show higher
expenditures for technology licenses than potential entrants.
Innovation, Firm Efficiency, and Market Structure by
D. Hughes (2007).
Of long standing interest has been the relationship between a firm’s innovative
efforts, efficiency and market structure. Research on these themes have typically either
evaluated Schumpeter’s (1942) notion of market power encouraging firm innovation or
Demsetz’s (1973) hypothesis that dominant firms owe efficiency and not market power
for their position. While numerous, and often controversial, empirical studies have
produced mixed results in these areas, there are few theoretical models that account for
the patterns observed in the data.
Seeking to explain both questions of why dominant firms perform relatively more
research and the persistence of monopoly, Etro (2004) develops a theoretical model of
patent races under Stackleberg competition. Under the assumption of free entry, Etro
finds that dominant firms must aggressively innovate to avoid market decline. Further,
markets characterized by the continuous leapfrogging of new patent holders must possess
some barriers to entry, suggesting that persistence of monopoly actually indicates
competitive markets. While this result appears counter- intuitive, it is actually in line with
Demsetz’s (1973) idea that dominant firms are far from basking in the quiet life, but earn
their dominance through superior performance, which we append are maintained by
continual innovation. Empirically testing whether dominant firms have greater
incentives to innovate, Blundell et. al. (1999) find that dominant firms who innovate
actually receive higher stock market valuations than those who do not, which could
account for their high rate of innovation despite decreasing returns per dollar of R&D.
This paper develops a theoretical model of endogenous firm growth that
conforms to empirical regularities found in the literature and explicitly defines firm
efficiency as the principal driver of firm growth and market structure. Estimating a
stochastic frontier model with U.S. manufacturing firm data from the COMPUSTAT
database, the authos finds results consistent with the theoretical model: (i) R&D expenditures rise proportionally with firm size and with R&D
intensities independent of firm size
(ii) The number of patents and innovations per dollar of R&D tends to
decrease with firm size
(iii) Persistent differences in firm sizes
(iv) Smaller firms tend to grow faster than larger firms, although among larger
firms growth rates are unrelated to past growth or firm size.
The last stylized fact requires a few words. This is a refinement of Gibrat’s law
which held that firm growth and size are uncorrelated. However, recent empirical work
rejects this hypothesis for very small firms. This is important because Gibrat’s law is
often imposed on theoretical models of firm growth.
Since firm growth is determined by firm efficiency in the model, it is desirable that this is consistent with the analogous observation that smaller firms grow faster and are more efficient than large firms. The model reconciles this
observation with Demsetz’s hypothesis of large, efficient firms by considering separate
measures of technical efficiency and allocative efficiency that firms may trade-off, with
smaller firms likely to minimize their static, allocative inefficiency and larger firms likely
to minimize their dynamic, technical inefficiency.
Do Patents Facilitate Financing in the Software Industry? by R. Mann (2005, Texas Law Review).
This outstanding paper studies the role of intellectual property in the software industry. Unlike previous papers, which focus primarily on software patents – which generally are held by firms that are not software firms – this paper provides a thorough and contextually grounded description of the role that patents actually play in the software industry itself.
The bulk of the paper considers the pros and cons of patents in the software industry. On the positive side, the paper starts by emphasizing the difficulties that pre-revenue startups face in obtaining any value from patents. Litigation to enforce patents is impractical for those firms. Efforts to obtain patents divert the firm’s focus from the central task of designing and deploying a product, and the benefits of excluding competitors are limited for firms that cannot themselves exploit the relevant technology. Once the firm is larger, a number of potential benefits appear. First, despite concerns that patents are not effective to appropriate innovation in the software industry, a substantial number of software startups do have patents of sufficient strength to exclude competitors.
Because the principal targets of those patents are much larger firms, that finding is important because it suggests that patents are more beneficial to small firms than to large firms. The paper then considers indirect effects related to the use of patents in cross-licensing transactions and in providing information about the firm. The first benefit may be substantial to firms that obtain patents, but the paper dismisses use in cross licensing as a net benefit to the industry: absent some other benefit, all firms would be better off saving the costs of obtaining patents. The information benefits, in contrast, seem to be net improvements in the system of innovation. The question, however, is whether those benefits are sufficiently substantial to justify the costs of obtaining the patents.
The paper then turns to the prominent claims advanced by Bessen and others that the enforcement of software patents has hindered innovation in the software industry through creation of a patent “thicket.” The paper rejects those claims for two broad reasons. First, notwithstanding the empirical analysis of R&D spending in papers by Bessen, Maskin, and Hunt, it is argued that direct evidence of high R&D spending in the software industry undermines claims that software patents cause firms to reduce R&D spending. Second, it is shown that the actual structure and practices of the industry belie any claim of a patent thicket. Relying on interviews that the author conducted and publicly available information, it is shown that young firms in the software industry are not in any significant way constrained in their development activities by the existence of large patent portfolios in the hands of incumbent firms.
The paper also contextualizes the role of patents by examining the relatively weak protections that copyright and trade secret can afford. At bottom, neither of those systems can provide a useful mechanism that would allow small firms to appropriate the values of their inventions. If such protection is a significant positive benefit of the patent system, it is equally true that neither copyrights nor trade secrets are (or can) contribute significantly in that respect, however useful they might be in other roles (such as preventing piracy).
The paper closes by considering critically the possibility of middle-ground responses
that would limit patent rights in the industry but not abolish them
entirely. First, it criticizes a possible registration system that might provide
information benefits without the costs of excluding competitors. The study argues that such an approach would be impractical both because
it would be difficult to disentangle the information benefits from the right to
control technology, and because software firms would have an
inadequate incentive to participate in such a system. Finally, the paper considers the
possibility of special limits on the rights of “trolls,” small non-operating firms
formed solely to litigate patents, arguing that trolls serve a useful function
as specialized intermediaries and that in fact they may have a positive role in
promoting innovation in the industry.
The Patent Paradox Revisited: An Empirical Study of Patenting in the US Semiconductor Industry, 1979-95 by B. Hall and R. Ziedonis (2001, The RAND Journal of Economics)
This paper examines the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation. Recent survey evidence suggests that semiconductor firms do not rely heavily on patents to appropriate returns to R&D. Yet the propensity of semiconductor firms to patent has risen dramatically since the mid-1980s. The authors explore this apparent paradox by conducting interviews with industry representatives and analyzing the patenting behavior of 95 US semiconductor firms during 1979-95. The results suggest that the 1980s strengthening of US patent rights spawned "patent portfolio races" among capital-intensive firms, but also facilitated entry by specialized design firms.
Innovation and Patents for the Software Industry: an Empirical Analysis of the EU and US Cases by F. Etro (2006, in Software Patents, Edited by A. V. Narsimha Rao, ICFAI University Press, Hyderabad, India, forthcoming)
During the last months, the European Union tried to complete a process of harmonization of the patent system for computer-implemented inventions (CIIs) with the aim to provide proper incentives to invest and innovate in the New Economy. After a long procedure, the Common Position adopted by the European Council in March 2005 proposed the patentability of CIIs when they provide a technical contribution to a field of technology. While this positive proposal simply reaffirmed the requirements already adopted in Europe for the last two decades and it excluded from patentability any pure software, business methods and consulting practices, part of the European Parliament proposed a number of amendments aimed at radically change the current situation excluding most of the innovations in the Information and Communication Technology from patentability (for instance, amendments which established vague definitions of “technical” contribution or “field of technology” were going to add significant restrictions on what could be patented). As a consequence of such a confusing situation, the European Parliament ended up rejecting the all Directive in July 2005. While this avoided the introduction of those dangerous restrictions on patentability, there is still a need for a deeper harmonization of the European patent systems (not just for CIIs) and the debate is likely to continue in the near future.
Unfortunately, the recent debate has been characterized by a certain confusion on the role of patents in general and in particular on CIIs, largely created by the pressure of lobbies willing to extend the possibility of free imitation to new fields of technology. However, policymakers should always keep in mind that what matters is not the interest of this group rather than the one of the innovative firms driving technological progress, but the interest of the society as a whole, and in particular of current and future consumers who benefit from a higher rate of innovation.
Mainstream economic theory (at least since the work of Joseph Schumpeter in the 30s until the most recent research on the determinants of growth) is quite clear about the fundamental role of the protection of intellectual property rights through patents in promoting innovation, technological progress and growth, especially in high-tech sectors, which create general purpose technologies and hence are able to increase overall productivity in the economy. While the main social gain from all patents on CIIs is to promote innovation in the most dynamic sectors, the social cost, traditionally associated with market power of patentholders, is smaller than for other patents since in these sectors competition mainly works through frequent price-reducing and quality-improving innovations. Hence, the rationale for patents on CIIs is even stronger than for other inventions.
Neglecting these traditional economic insights, opponents of the patent system have often claimed that patents stifle innovation. Unfortunately, even the evidence on the US experience provided by few works against these patents does not support such a view in a convincing way. The extension of patent protection to software related inventions started in 1980 (the first patent for a CII was granted by the US Patent and Trademark Office in 1981) and it was associated with a clear increase in R&D investment during the eighties. The R&D/sales ratio for US firms innovating on computer, telecommunications and electronic components (the relevant field for CIIs) increased from 5.5% to above 8% in 1989. Moreover, the works against patentability of CIIs did not compare investment in CIIs with investment in other technologies and did not take into account other (macroeconomic or sector-specific) factors, hence there is no any rigorous econometric evidence against patents which could be drawn from the American experience. Nevertheless a misleading interpretation of this research has created a lot of confusion in the debate.
Adopting a more balanced view in line with the theoretical and empirical findings of economic research, we can summarize the following suggestions for the future debate on rules for patents on CIIs:
- additional restrictions to the patentability of CIIs would jeopardize investment in innovation and technological progress in the leading high-tech sectors of the European economy with negative consequences on growth and competition in the global economy and would shift investments toward US and other countries where IPR are better protected in a large and rapidly increasing number of sectors;
- new limitations to the enforcement of the current patent system would open doors to foreign low cost productions (think of China) which, without patent protection, would be free to imitate European products even in high-tech sectors, with negative consequences on European employment and on innovative (and also non innovative) SMEs;
- improvements of the effectiveness of the current patent system for CIIs should rather promote access to patents especially for SMEs, traditionally less able to exploit this opportunity, to consolidate the European comparative advantage in high-tech sectors where innovation and human capital play a crucial role and to help achieving the goals of the EU Lisbon strategy. In this sense, it would helpful to establish institutional ways to provide financial, technical and administrative support to SMEs dealing with patents in the EU;
- enhancement of the spillovers created by the patent system on the diffusion of knowledge could be obtained through further requirements on a disclosure of the patented inventions which should be sufficiently clear and complete to be carried out by a person skilled in the art.
POWERPOINT PRESENTATION ON INNOVATION, GROWTH AND PATENTS ON CII IN THE EU
Intellectual Property Frontiers. Expanding the Borders of Discussion Edited by A. Jensen and M. Pugatch (2006)
For more on this subject see the December 2005 Stockholm Network Monthly Bulletin on IPRS.
Two Sources of Persisting Patent Controversy by B. Pretnar (2005)
What is the Value of Your Patent? Theory, Myth and Reality by
M. Pugatch (2005, IPR Bulletin)
