Patent Thickets, Licensing and Innovative Performance

In recent years, the view of patents as a policy tool to stimulate R&D has increasingly come under criticism. The theoretical literature has shown that when research is sequential and builds upon previous innovations, stronger patents may discourage follow-on inventions and a debate has emerged over the extent to which patent "thickets" may stifle innovation. Patent thickets can be defined as "a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology". While some progress has been made in empirically characterizing thickets in terms of fragmented ownership of patent rights, there is very little evidence about how effectively the market for technology can mitigate their effects, and the extent to which this affects innovative performance. In this paper, we investigate these questions using survey data on licensing activity and innovation by German manufacturing firms. We use indexes of fragmentation of patent rights based on the patent portfolios of firms operating in the respective technologies of the German companies. We find evidence that firms facing patent thickets have a higher propensity to engage in inlicensing. Therefore markets for technology may provide an effective mitigating mechanism for the defragmentation of rights. We then analyze the relationship between fragmentation and innovative performance, considering separately firms requiring access to patented technology (in-licensors) and firms that do not require this access (non-licensors). For firms that report positive expenditures on inlicensing, we find a negative relationship between fragmentation of IP rights and innovative performance as measured by share of sales with products new to the firm. This is consistent with the hypothesis that, for firms that require licenses to commercialize new technology, the fragmentation of upstream property rights hampers innovation. The negative effect on product innovation is particularly strong for in-licensing firms with few patents, which suggests an important strategic role for building up a large patent portfolio in the context of fragmented property rights.

Cockburn, Iain M., Megan MacGarvie and Elisabeth Müller (2008), Patent Thickets, Licensing and Innovative Performance, ZEW Discussion Paper No. 08-101, Mannheim, published in: Industrial and Corporate Change.