Innovative Output, Productivity and Profitability. A Test Comparing USPTO and EPO Data

Abstract

The aim of this paper is to test whether patent‐based indicators are still reliable measures of innovativeness in light of organizational changes in the field of Intellectual Property Rights (IPR) protection and the regulatory reforms already occurred and under way, respectively, at the US Patent and Trademark Office (USPTO) and the European Patent Office (EPO). For most high‐tech industries, patents represent an outcome of the production process and their number can be taken as a proxy for a firm's ability to improve its productivity growth and profitability. The case study reported here concerns the biotechnology industry in Italy, whose firms, by definition, have Intellectual Property (IP) activities in their portfolios. For this purpose, we use a unique dataset which collects balance sheet items and patent information from EPO and USPTO. After linking firms' financial and production data with the patent information, we estimate a modified knowledge production function in which the dependent variable is alternatively (labor) productivity growth and profitability. Although based on a quite small sample, our findings provide some indication of a statistically significant relationship between patents with the EPO and both productivity growth and, in particular, profitability. This suggests that firms might pursue different strategies when patenting with the USPTO and the EPO.

Keywords:

• Patents
• IP protection
• productivity
• profitability
• biotechnology industry
• Italy

Acknowledgements

Financial support from MiUR (PRIN 2006, “Innovation, Entrepreneurship, and Competitiveness of Italian Firms in High‐tech Industries”; protocol #2006132439; project leader: E. Santarelli) is gratefully acknowledged. Previous versions of this paper have been presented at the Cespri‐Keins DIME Conference (Milan, 5–6 June 2007) and the 34th Annual EARIE Conference (Valencia, 6–9 September 2007). Thanks are due to two anonymous referees for useful comments and suggestions. The opinions expressed by Francesca Lotti do not necessarily reflect those of the Bank of Italy.

Notes

1. Not all the authors who have examined the evolution of US patenting agree on the “low quality” explanation of the US patent boom. Kortum and Lerner (1999) suggest that the growth of US patents is not explained by what they call the “friendly court” hypothesis, but by changes in US companies’ research strategy, which has become more and more oriented to applied and short‐term objectives. Hall and Ziedonis (2001) suggest that US firms may now apply for menial patents, to be used as bargaining chips when sued for infringement; however, this applies only to companies dealing with complex technologies (such as semiconductors) and not “one‐patent‐one‐product” technologies such as biotech and pharma.

2. The harmonization of standards consequent upon the TRIPS agreement has been particularly problematic for developing countries, which have been forced to undertake major reform of their legislation on intellectual property in such crucial fields as pharmaceuticals and food (McCalman, 2001).

3. Although the conventional wisdom that strengthening IPRs will increase innovation is not uncontroversially supported by economic theory, at least since when Nordhaus (1969) showed the existence of a trade‐off between incentives and monopoly distortions in the case of non‐rival goods (for a critical survey, cf. Denicolò, 2007). This cautious view is consistent with the empirical evidence (Hölzl, 2007).

4. The creation of EPO represented a true change of regime in Europe. Deng (2007) has found that the average quality and the private value of the EPO patents during the early 1980s were substantially higher than those obtained through the national offices in Germany, France and the UK.

5. That is, since when Jacob Schmookler (1966) started to make systematic use of the information contained in the patent records collected at the PTO—compiling a number of time series of patent totals by industry, going back more than a century—to identify a positive and significant correlation between the dynamics of the overall process of innovation and economic growth.

6. Conversely, firms use only moderately patent databases when they design their innovation strategies (Arundel, 2000).

7. According to Trajtenberg et al. (1997), “basicness” refers to originality, closeness to science and breadth of innovations, whereas “appropriability” to the ability of inventors to reap the benefits from their own innovations.

8. The IPC codes selected by the OECD are the following: A01H 1/00 + A01H 4/00 + A61K 38/00 + A61K 39/00 + A61K 48/00 + C02F 3/34 + C07G 11/00 + C07G 13/00 + C07G 15/00 + C07K 4/00 + C07K 14/00 + C07K 16/00 + C07K 17/00 + C07K 19/00 + C12M + C12N + C12P + C12Q + C12S + G01N 27/327 + G01N 33/53 + G01N 33/54 + G01N 33/55 + G01N 33/57 + G01N 33/68 + G01N 33/74 + G01N 33/76 + G01N 33/78 + G01N 33/88 + G01N 33/92.

9. To be noted is that, according to OECD (2006), Italy is a country non‐specialized in biotechnology patents, given that its share of biotechnology (EPO) patents divided by its share of patents in all technology areas is less than 1.

10. Centrale dei Bilanci is a large panel of non‐financial institutions which contains balance sheet information. Unfortunately, balance sheets do not report data on R&D expenditures and it is not possible to distinguish them from the intangible assets. For this reason, we preferred not to rely on that measure.

11. Since opposition leads to revocation in about 40 percent of the cases, and to a restriction of the patent right in another 30 percent of the cases, we do not use this piece of information for the purposes of the present paper. Accordingly, the empirical analysis deals only with patents filed either with the EPO or the USPTO alone. No control is therefore made for “family size” and the hypothesis that the number of jurisdictions in which the same invention is patented is highly correlated with patent value (Putnam, 1996).

12. That is the date of first filing. This means that, for example, if a patent is applied for first at the USPTO and then at the EPO, it is given the date of the USPTO filing.

13. On the one hand, the small number of observations prevents us carrying on more sophisticated, and perhaps more suitable econometric techniques, but on the other, we can interpret our OLS results as preliminary indications.

14. As a further control, to account for a possible delay for the impact of the patent activity to manifest, we included in the regression also more lags of the patent count, both bio and non‐bio. Lags greater than one were not significant, so we decided not to include them in the main regression.