Giving Away the Game? The Impact of the Disclosure Effect on the Patenting Decision

Patenting is widely acknowledged as a major tool to reward innovative firms for their efforts in research and development (R&D). However, many firms decide to keep their inventions secret. Understanding a patent according to the original sense of patent law, it basically has two functions: The first is to mitigate the problem of unintended spillover of R&D outcomes by providing an effective tool of temporary knowledge protection. This protective effect of a patent enables the inventor to appropriate the returns from his research efforts. The second function of a patent is to contribute to the diffusion of (new) knowledge by requiring the disclosure of the invention to society.

Most of the economic literature implicitly assumes that the disclosure requirement has no impact on the protective effect of a patent and consequently on the propensity to patent. Or more precisely it is assumed that the disclosure requirement is only effective after a patent's expiry. This implies that the use of the disclosed invention for subsequent innovation is strongly limited during the patent term. But this approach neglects the possibility of inventing around the precedent invention and entering the market with an improved - and oftentimes even non-infringing - product.

In this paper we take a closer look at the disclosure effect and analyze whether firms take it into account when deciding between patenting and keeping secret. Assuming that competitors may benefit from the disclosed information in different ways we want to answer the question how the extent of the disclosure effect influences an innovator's propensity to patent. To this end, we present a theoretical model and test its predictions empirically. The main theoretical and empirical result of this paper is that the disclosure effect of patenting plays a substantial role in firms' patenting decision in that a higher impact of the disclosure effect decreases the firms' propensity to patent. This topic also has a policy dimension. If policymakers decide to implement some changes to patent law which would result in strengthening the disclosure effect of patenting, e.g. by implementing or extending a research use exemption, such actions should take into account that this could cause an increasing reluctance of firms to patent. Hence, more newly created knowledge would be kept secret. This may have further detrimental effects on the economy's overall innovativeness and future productivity.

Heger, Diana and Alexandra Zaby (2012), Giving Away the Game? The Impact of the Disclosure Effect on the Patenting Decision, ZEW Discussion Paper No. 12-010, Mannheim, published in: Oxford Economic Papers.