Fact of the Week: Firms With Reduced Patent Protections Conduct 37 Percent Less Follow-on Research

Source:  Arora, et al., “(When) Does Patent Protection Spur Cumulative Research Within Firms?,” NBER Working Paper Series, June 2021.

Commentary: Intellectual property rights serve a vital purpose by protecting profits of firms’ expensive research and by incentivizing further research investments within firms. In the absence of IP rights, competing firms may more easily enter markets using findings already pioneered by firms that have invested in research. This would allow following firms to yield all the benefits of research while leading firms bear the costs. Markets that depend on scientific research would risk failure because of the disincentive to conduct leading research that would exist if not for IP rights.

To measure the effects that IP rights have on continuous research investment conducted by firms, a team of four researchers at the National Bureau for Economic Research modeled the relationship between the level of protection provided by a firm’s patents and the amount of follow-on research they conducted. The researchers’ methodology approximates patent protection by measuring textual similarity and associated dates of patents between 4,323 firms. The strength of a patent’s protection falls as more closely related patents with earlier priority dates are disclosed. Quantitative analysis found that firms facing a reduction in their patent protections conducted 19 percent less follow-on research than a control group of firms with unchanged patent protections. This effect was even more profound in technology markets, where tech firms with reduced patent protections also reduced follow-on research by 37 percent compared to unaffected counterparts. As patents become increasingly crowded, the level of IP protection they provide falls alongside the likelihood that firms can recoup investments in research, which reduces incentives for further scientific research.