Patents, knowledge spillovers, and entrepreneurship

Small Business Economics, Mar 2011

We develop an endogenous-growth model in which we distinguish between inventors and innovators. This distinction implies that stronger protection of intellectual property rights has an inverted U-shaped effect on economic growth. Intellectual property rights protection attributes part of the rents of commercial exploitation to the inventor that would otherwise accrue to the entrepreneur. Stronger patent protection will therefore increase the incentive to do research and development (R&D) and generate new knowledge. This new knowledge has a positive effect on entrepreneurship, innovation, and growth. However, after some point, further strengthening of patent protection will reduce the returns to entrepreneurship sufficiently to reduce the overall growth rate.

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Patents, knowledge spillovers, and entrepreneurship

Zoltan J. Acs 0 1 2 Mark Sanders 0 1 2 JEL Classifications 0 1 2 0 M. Sanders (&) Utrecht School of Economics , Utrecht, The Netherlands 1 Z. J. Acs M. Sanders Max Planck Institute of Economics , Jena, Germany 2 Z. J. Acs George Mason University , Fairfax, VA, USA We develop an endogenous-growth model in which we distinguish between inventors and innovators. This distinction implies that stronger protection of intellectual property rights has an inverted U-shaped effect on economic growth. Intellectual property rights protection attributes part of the rents of commercial exploitation to the inventor that would otherwise accrue to the entrepreneur. Stronger patent protection will therefore increase the incentive to do research and development (R&D) and generate new knowledge. This new knowledge has a positive effect on entrepreneurship, innovation, and growth. However, after some point, further strengthening of patent protection will reduce the returns to entrepreneurship sufficiently to reduce the overall growth rate. 1 Introduction Reforms in the US patent system over the past few decades have caused an explosion in patent applications and grants (Gallini 2002; Jaffe and Lerner 2004). These reforms were aimed at strengthening the position of patent holders, and they were successful in increasing the productivity of research measured in patents. However, it has also been argued that the quality and importance of these patents have decreased and that the patent boom has not generated the economic growth that might have been expected (Jaffe and Lerner 2004). This has provoked a debate on the theoretical and empirical justifications for strengthening patent protection among policy-makers and academics. The debate on patents is not new. In fact, for as long as patents have existed, scholars have debated the optimal length, strength, and breadth of protection. A strong rationale for more protection has been formalized in endogenous, innovation-driven growth models such as those put forth by Romer (1990), Aghion and Howitt (1992), Segerstrom et al. (1990), Grossman and Helpman (1991), Stokey (1995), and Young (1993). In these models knowledge creation drives economic growth in the long run. Consequently, intellectual property rights (IPR) protection is considered a key institution that allows inventors to market their inventions and thereby recover their costs. The logic in these models implies that stronger IPR protection stimulates investment in knowledge creation and consequently causes higher growth. The empirical growth literature indeed strongly supports the notion that institutions in general (Barro 1996; Sala-I-Martin 1996; Acemoglu et al. 2001) and IPR protection in particular (Varsakelis 2001; Branstetter et al. 2006; Kanwar 2006; Allred and Park 2007) contribute to growth performance. However, this same literature does not support the premise that more and stronger protection is always better. Instead, evidence of an inverted-U-shaped relationship is growing (Gould and Gruben 1996), and some theoretical arguments for such a relationship have already been proposed; for example, Nordhaus (1969) pointed out that static efficiency losses need to be traded off against dynamic innovation gains, and several other mechanisms have been suggested in what one might label the patent literature.1 This literature, however, relies largely on partial equilibrium modeling techniques. This makes it difficult to evaluate the importance of these mechanisms for overall economic growth and innovation. Analyzing the trade-offs in the context of general equilibrium, endogenous innovation-driven growth models is a recent research trajectory aimed at connecting these two literatures, and the area of focus in this paper. Nordhauss arguments, for example, have been formalized in general equilibrium innovation-driven growth models by Kwan and Lai (2003) and Iwaisako and Futagami (2003). Both papers show that static losses can be weighed against dynamic gains, and thus, an optimum level of protection exists. Horii and Iwaisako (2007) and Furukawa (2007) focus on the reduced growth potential in an economy with more monopolized sectors. However, as ODonoghue and Zweilmueller (2004) observe, little further analysis of 1 There exists, for example, a literature in contract theory (e.g., Grossman and Hart 1986; Aghion and Tirole 1994) as well as a large industrial organization literature on the strategic use of patents (e.g., Teece 1986, 2006) and the implications for optimal patent policy design. In particular, issues such as disclosure in sequential innovation processes, fragmented innovation processes, and cumulative or cooperative research projects have been addressed. Examples of papers in this literature include Gilbert and Shapiro (1990), Gallini (1992), Scotchmer (1991), Green and Scotchmer (1995), Chang (1995), Matutes et al. (1996), Scotchmer (1996), Van Dijk (1996), ODonoghue (1998), ODonoghue et al. (1998), Hunt (19 (...truncated)


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Zoltan J. Acs, Mark Sanders. Patents, knowledge spillovers, and entrepreneurship, Small Business Economics, 2011, pp. 801-817, Volume 39, Issue 4, DOI: 10.1007/s11187-011-9322-y