THE USE OF INTELLECTUAL PROPERTY RIGHTS AND INNOVATION BY MANUFACTURING FIRMS IN CANADA

Abstract

The objective of the paper is to determine how the utilisation of intellectual property rights (IPRs) by Canadian manufacturing firms is related to their characteristics, activities, competitive strategies and industry sector in which they operate. The principal source of information used in this endeavour is the Statistics Canada Survey of Innovation 1999.

The paper starts with an overview of other studies that looked at the use of intellectual property rights in Canada. Follows a conceptual framework presenting variables likely to explain the use specific IPRs by Canadian manufacturing firms.

The use of IPRs is to a great extent correlated with basic economic characteristics of firms, their activities and industry environment. A series of estimated logit regressions predict the probability that a firm will use a specific IPR instrument. Also estimated is the contribution of the use of IPRs to the probability that a firm innovates.

The decision of a firm to use IPRs is often not independent of the decision to innovate. To eliminate the potential endogeneity bias I estimate a two-stage logit model. A comparison of the single- and two-stage logit models shows that the nexus from the protection of intellectual property (patents) to innovation may be weaker than indicated by the single equation model.

Keywords:

• Intellectual property rights
• Innovation and invention
• Manufacturing
• Canada

Acknowledgements

Sincere thanks for access to and help with the data and their interpretation are due to: F. Gault, F. Anderson, S. Schaan and B. Nemes from Statistics Canada and P. Therrien from Industry Canada. My students M. St-Pierre, A. Bourezak and C. Trudeau helped me with the computer work. i also acknowledge receiving helpful comments from J. Putnam and the editor and two anonymous referees of this review. Financial support from Industry Canada is gratefully acknowledged. I am alone responsible for the opinions and remaining errors.

Notes

¹Oslo manual (OECD, 1989). For a review of a series of 12 European studies of innovation policy and practice see European Commission (2001).

²The trend of declining patenting was reversed only in the early 1980s, after publication of this study.

³These responses have to be considered today in a proper perspective. Amendments to the Copyright Act introduced in June 1988 extended copyright protection to computer programs, strengthened the right of artists to control who uses their work and improved systems to collect copyrights. The new act also increased penalties for infringement of copyright up to a maximum of $1 million, with prison terms ranging from 6 months to 5 years. The Canadian Patent Act also underwent significant changes in 1989.Thus the dissatisfaction and criticism that the Canadian IPRs did not provide sufficient protection and had not kept pace with technological developments may no longer be valid today.

⁴Baldwin's study is based on the Statistics Canada Survey of Innovation and Advanced Technology conducted in 1993, which surveyed both small and large manufacturing firms. One of the particularities of the survey was that in case of larger firms, different sections of the questionnaire were addressed to those persons in the firm most likely to be intimately involved with the subject at hand. Thus questions relative to IPRs were answered by the person in charge of intellectual property protection in the firm. These and other methodological differences make it difficult to compare results of this survey with the most recent Statistics Canada Survey of innovation in 1999.

⁵Not all legal scholars would agree that secrecy are an IPR. It may depend, among other things, on whether non disclosure agreements were signed with other parties. Since we do not have further information than an answer yes or no the question whether the firm used trade secrets, we consider for practical purposes of this study the response ‘yes’ as a form of IPR.

⁶See the classification of industries in Core, Secondary and ‘Other’ technology sector in Appendix I.

⁷According to the neoclassical theory of innovation, patents provide the incentive for firm to innovate.

⁸Introduction of an innovation involves various activities including often, but not always, R&D. These activities may account for a larger share of innovation cost than R&D. Therefore the variable of interest here is the return on investment in innovation activity rather than the return on investment in R&D.

⁹The recent research as reviewed by (Cohen and Levinthal, 1989) tends to regard the failure of the empirical literature to obtain robust results on how innovation is related to size of firm and to market structure as an indication that these relationships are more complex than previously believed. More complex modelling of technological change (Levin and Reiss, 1984; 1988), suggests that innovation, size of firm and market structure are mutually dependent variables.

¹⁰Agree or strongly agree with the statement: Q1b = My clients can easily substitute my products (goods and services) for the products of my competitors. Q1d = The arrival of new competitors is a constant threat. Q1e = The arrival of competing products (goods and services) is a constant threat. Q1i = My products (goods and services) quickly become obsolete

¹¹We first tried to reduce the scores on eleven competitive environment related questions to a smaller number of factors by a principal component analysis. Since the results of this more complex approach are less transparent and statistically not better than the ones reported above, we abandoned the principal component approach.

¹²Respondents rated the importance of the Q2a=‘Seeking new markets ’ and Q2c=‘Developing niche or specialized markets’.

¹³The concept of technological opportunity goes back at least to (Scherer, 1965). Levin et al. (1987) measure the extent to which an industry relies on science-based research. (Baldwin et al., 2003) measure technological opportunity of an industry by the percentage of R&D performers within an industry that have collaborative agreement with universities, colleges or external R&D institutions. The variable proved to be a statistically significant determinant of innovation.

¹⁴See e.g., Lundvall (1992); Nelson (1993); Niosi (2000) et de la Mothe and Paquet (1998).

¹⁵I gratefully acknowledge the help of my assistants M. M. St.Pierre and A. Bourezak, who wrote this IML program in the course of their thesis work and helped me to use it for this paper.

¹⁶Variables indicated ‘left out’ in Table II.

¹⁷Thus for example in the case of introduction of the world-first innovation I _w−first=1 and all other outcomes that include: the less original innovations (Canada-first and firm- first), unsuccessful innovation and being not involved in innovation, obtain I _w−first=0.

¹⁸The question on the use of IPRs is quite general. It reads: ‘….which of the following methods have been used by your firm to protect its intellectual property (Patents, Trademarks, Copyrights, Confidentiality agreements, Trade secrets and Other) during the past three years (1997–1999).’ The second question related to IPRs inquired about the number of patent applications the firm applied for In Canada and in the United States.

Thus the question did not specifically ask respondents to report the IPRs used to protect the innovations introduced in the 1997–1999 period, nor did it ask questions regarding the IPRs used to protect their most important innovation.

¹⁹An attempt to estimate a more complex model involving three or more equations with three or more interdependent endogenous variables did not work out.

²⁰The asymptotically correct variance–covariance matrix was programmed in SAS/IML according to Murphy and Topel (1985) method. Most of the asymptotically correct standard errors of regression coefficients are generally larger than the uncorrected ones ( not presented here). The statistical significance of estimated coefficients deteriorates notably more in the patent equation than in the innovation equation.

²¹The test z shows that the positive relationship between the use of IPRs and increased profitability is significant well beyond the 1% level. The values of statistics phi range between 4% and 9% ( Phi can be interpreted as a correlation coefficient (phi=0-no relationship, phi=1-perfect correlation).

²²Note that since the innovation survey asked questions relative the 1997–1999 period only, the patent application counts may not include applications that were applied for later than 1999.

²³However, the finding that more original innovators tend to use more frequently IPRs does not necessarily mean that IPRs acts as an innovation incentive. The survey does not include any information on a firm's motives behind the decision to use IPRs.

Additional information

Notes on contributors

Petr Hanel

E-mail: [email protected]