R&D Collaboration with Uncertain Intellectual Property Rights

Research and development (R&D) collaborations allow firms to combine their resources, exploit complementary know-how and internalize R&D externalities. Hence, R&D collaborations may spur innovation activities in the private sector. Firms can, however, be reluctant to engage in R&D collaboration if they fear unwanted knowledge spillovers to partners. Losing highly valuable knowledge to potential competitors through collaborations poses a direct threat of a firm’s market position. A means to control outgoing spillovers are formal intellectual property rights, such as patents. This paper focuses on the interplay between intellectual property rights and R&D collaboration. We investigate the impact of uncertain intellectual property rights on firms’ collaborative R&D activities. Our study is motivated by recent trends in the European patent system. While the patent examination process at the European Patent Office (EPO) takes relatively longer than at the United States Patent and Trade Mark Office, the duration of the patent examination at the EPO further increased significantly after a surge in patent applications in the mid 1990s. In response, firms face higher uncertainty about their certified intellectual property rights in Europe, in general, and especially since the 1990s. In this study, we argue that patent pendencies create uncertainty and shape the relative return of R&D collaboration agreements. We show that, depending on the type of partner, uncertain intellectual property rights reduce R&D collaboration which may hinder the production of knowledge in the economy. Empirical results from a sample of almost 3,000 firms engaged in product and/or process innovations in German manufacturing indicate that collaboration between competitors is most sensitive to uncertain intellectual property rights as compared to collaborations with universities, suppliers or customers. Our findings have important implications for technology policy. Governments have long understood the virtues of R&D collaboration by exempting R&D partnerships from anti-trust legislation and implementing several policies to encourage R&D collaborations. Our results show that a functional intellectual property rights system is needed for successful utilization of this policy: patent examination should be of high quality, but should also be performed in a timely manner.

Czarnitzki, Dirk, Katrin Hussinger and Cédric Schneider (2011), R&D Collaboration with Uncertain Intellectual Property Rights, ZEW Discussion Paper No. 11-010, Mannheim, published in: Review of Industrial Organization.