Innovation Strategies of German Firms: The Effect of Competition and Intellectual Property Protection

According to the Schumpeterian view, intellectual property (IP) protection policy and antitrust policy might affect firms' incentives to innovate in opposite directions. The former policy gives monopoly rights to innovators, thus, increasing incremental profits from innovation. The latter policy suppresses firms' market power decreasing incremental profits from innovation. This article contributes to understanding the interaction of IP protection policy and antitrust policy for stimulating firms' innovation. It takes into account that firms' innovation strategies can differ. Concretely, firms can choose whether to engage into imitative innovation improving already existing products or more radical innovation introducing market novelties.

Using a sample of 1253 German firms from manufacturing and services sectors. I analyze the impact of both the effectiveness of IP protection and competitive pressure on firms' innovation strategy choices. Three innovation strategies are considered: to abstain from innovation, to introduce products that are known in the market but new to the firm (imitation) or to introduce market novelties (innovation). I find that the effectiveness of patent protection perceived by firms positively affects firms' innovativeness, i.e. propensity of imitation and innovation. Having a small and a medium number of competitors also positively affects firms' innovativeness. However, this effect depends on the perceived effectiveness of patent protection. If the perceived effectiveness of patent protection is low or medium, both innovation and imitation are enhanced, whereas if it is high, only innovation is enhanced.

The results suggest that the two policies, IP protection policy and antitrust policy, can reinforce each other in promoting innovation. For instance, in markets with few competitors an increase in patent protection effectiveness perceived by firms might rather increase firms' incentives to introduce market novelties. By contrast, in markets where firms have almost monopoly power an increase in patent protection effectiveness might rather promote the introduction of improved products. Despite the common patent system in all industries the perceived effectiveness of IP protection by firms can be affected, for instance, through the courts' interpretation of novelty and non-obviousness.

Slivkó, Olga (2012), Innovation Strategies of German Firms: The Effect of Competition and Intellectual Property Protection, ZEW Discussion Paper No. 12-089, Mannheim.