Does Fragmented or Heterogeneous IP Ownership Stifle Investments in Innovation?

The effectiveness of patents to stimulate R&D is often limited. If innovation is sequential and complementary, patent protection may even stifle technical advance (Bessen and Maskin, 2006). The surge of patenting in complex technologies suggests that firms accumulate large patent portfolios rather to secure freedom to operate (Grindley and Teece, 1997). This raises concerns that the increasing costs for securing IPR might "tax" innovation (Jaffe and Lerner, 2004; Bessen and Meurer, 2008).

Patents provide a right to exclude but not necessarily a right to use. Surging patent filings has resulted in thickets of overlapping patents (Hall et al., 2012). These mutual blocking relationships among multiple firms are difficult to resolve. IP ownership is fragmented which raises coordination costs and royalty stacks (von Graevenitz et al., 2011).

The uncertain scope of patent protection may furthermore result in inadvertent patent infringement (Reitzig et al., 2007, 2010). For capital-intensive innovators, this poses the risk of their high commitment level being exploited. Inadvertently infringed patent owners may capture part of their fruits from investment if infringed patent owners have invested less relationship-specifically (Farrell et al., 2007).

This study asks whether firms are less likely to invest in innovation if IP ownership is fragmented or if owners of overlapping patents are less capital intensive, respectively. Citations among German owners of European patents are used to identify owners of overlapping patents. It is usually difficult to identify relationship-specific investments directly. Fixed tangible assets appear, however, as feasible proxy (Antràs, 2003).

Using data from the Mannheim Innovation Panel, I find that fragmented IP reduces the investment propensity of firms with small patent portfolios. This suggests that market entry is difficult for firms lacking large patent portfolios as bargaining chips for licenses. Firms with large patent portfolios are less likely to invest in innovation if they cite owners of overlapping patents with smaller stocks of fixed capital. This suggests that large innovators incorporate the risk of held up application-specific capital in their investment decisions. Hence, the effects of patent thickets on innovation appear not uniform among firms.

Schwiebacher, Franz (2013), Does Fragmented or Heterogeneous IP Ownership Stifle Investments in Innovation?, ZEW Discussion Paper No. 13-096, Mannheim.