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The economic importance of patents
Rich in intellectual property
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Introduction
Experts across Europe are in no doubt: Today's economy is becoming increasingly knowledge-based and intellectual property in the form of patents plays a vital role in this growth. Between 1992 and 2002, the number of patent applications filed in Europe, Japan and the United States grew by more than 40 percent. The number of patents filed with the European Patent Office reflects that trend, going from approximately 100,000 applications in 1997 to nearly 193,000 in 2005. This is due, in part, to individual inventors, SMEs, large companies and research institutions realising the importance and economic impact of patenting their innovations.The key observation here: Patents can encourage innovation and economic growth under certain conditions and hamper it under others. The impact of patents on innovation and economic performance is so complex that a fine-tuned patent system is crucial to ensure maximum benefit for a country's firms and its overall economy.
Impact on macro-economy
In an ideal world, the more patents filed, the higher the level of innovation in a country. This in turn leads to economic growth and more money invested in research and development - a virtuous circle which can only exist when there is a sufficiently high entry level for patents.
Because large firms can easily absorb the costs connected with the patent process, their application strategy has significantly changed in recent years. Trying to protect small improvements, they are filing several applications for any given invention.
This strategic patenting - observed by the Organisation for Economic Co-operation and Development (OECD) in areas such as the U.S. semi-conductor industry and the European mobile phone sector - has resulted in an inflation of applications and created a significant backlog in patent offices around the world.
Impact on the different economic players
Impact on the individual:
For an independent inventor or applicant, filing a patent means high costs. In fact, a single inventor is often only able to finance a patent application by obtaining public or corporate sponsorship or by licensing or selling his invention to a larger company.
As for the individual within a company, filing a patent often means added clout within the scientific and corporate world - he or she has joined the rank of "inventor". If an individual publishes a patent, his or her standing within the company usually rises, with all the benefits that may bring.
In Germany, inventors employed by companies enjoy special legal rights, with an employee-inventor law ensuring a fair compensation system. The law requires firms - if they decide to commercialise the invention of an employee - to compensate the inventor accordingly. If the company decides not to use the invention, the inventor can hold onto the rights.
Impact on SMEs:
A patent or patent family can be the launching pad for a start-up firm. Using their patents, small firms may be able to attract venture capital and assert their rights in front of larger companies.
Dominic Guellec, a senior economic expert at the OECD, said patents are vital in securing market share for small companies that want to grow independently and avoid simply "being gulped by larger firms with more money."
This is especially true for firms in intellectual property-based fields such as the biotechnology or information technology sectors. The ability to license intellectual property further enables a firm's participation in the innovation networks of other companies.
Common sense suggests that if a company can't protect its own inventions, it will be less likely to invest in them. But because of patent protection, companies now have the time to further develop and perfect their inventions - resulting in better products. And an excellent product or innovation may give the SME the all-important opportunity to grow into a large company.
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Impact on large companies:
Today, the number of high-quality patents - from the point of view of substance - held by a company increasingly defines its overall value. The stronger a company's patent portfolio, the more it is worth on the stock market, and the higher the price a competitor must pay in the case of a takeover.
According to the OECD, a growing number of large firms report significant revenues from outward licensing of technologies they have developed but do not intend to commercialise. IBM alone has reported revenues of more than USD 1.5 billion in recent years from technology licences, mostly on a non-exclusive basis.
Impact on research institutions:
More and more public research institutions and universities have started patenting their inventions, enhancing technology diffusion and the transfer of knowledge from universities to the public. (It's not uncommon for start-ups in sectors such as bio-technology to have their roots in public research institutions.)
The patenting trend within public research institutions (which has been popular in U.S. universities since the late 1980s) has taken hold in Europe over the past decade. But even if the research institution doesn't start a company to commercialise their patent, it is still eligible to enter the public domain if a business licenses it. This in turn funds the universities' research and opens up new possibilities for innovation.
Challenges for the EPO
While defensive patenting may hamper innovation, some of the key challenges lie in the nature of the patent system itself: While it protects innovation, it also creates de facto monopolies. In a development especially true for emerging technologies, patents can hinder innovation when essential knowledge and foundational inventions are overly protected: This may discourage follow-on inventors if the holder of a patent for an essential technology refuses access to others under reasonable conditions. The EPO aims to ensure there is always a clear "inventive step" when publishing patents in order to minimise the impact of strategic patenting.
In developing countries, there is still a lack of awareness that intellectual property can be a driving force for economic growth. Often, this positive development is pushed from abroad and observers say the EPO should continue its cooperation with developing countries to help them improve their intellectual property systems, in turn sparking economic growth.
Outlook
The EPO is convinced that patents could have "an even stronger impact on economic growth" once the patent system is better known in Europe and a patent culture develops similar to that of the United States.
In terms of patent quality and overall numbers, however, the EPO will continue to try to avoid an inflation of low-quality patent applications that have caused a significant backlog at the United States Patent and Trademark Office. To avert such a trend, the EPO has introduced a quality policy to bring certainty to the market for the applicant and the public. The EPO's approach is "quality instead of quantity."