Innovation, Patents and Economic Growth

Readers Question: What economic factors should I consider if I want to know the relationship between innovation and the presence of patents/copyrights? Do copyright/patents (generally Intellectual Property Rights) stifle innovation? Does it slow down economic growth?

There is some debate. But, one argument is that patents are necessary to encourage innovation. If firms were unable to patent new machines, they would have less incentive to spend the necessary money on research and Development. Research and Development is risky and expensive; a firm may have to spend millions of pounds on developing new technology. If the technology was then freely available to all firms the market would be competitive and therefore, they would not make sufficient profit to justify the investment. Also it is argued that investment for innovation is paid for out of retained profit. So current patents on drugs are in effect financing future innovation. (This is certainly what the drug companies will say)

The Problem with Patents

The problem with patents and intellectual property rights is that they effectively give monopoly power to firms. Because no one else can produce the good they can set high prices and exploit the consumer. Monopoly power is generally considered harmful to consumer welfare leading to deadweight welfare loss. However, the impact on economic growth is limited. Also firms may argue consumers are not worse off because they are enjoying goods that wouldn’t have been developed without patent protection.

This is why some patents are given for a certain number of years. For example, patents on drugs last for about 7 years.

Will There Be Innovation without Patents?

You could argue innovation would still occur without patents. For example, it takes time for other companies to catch up with developments in technology. By that time the first firm may already have generated brand loyalty. For example, Apple has helped create new technologies which have proved popular. Similar products have been sold by other companies, but, Apple still makes good profits because they are seen as the ‘original’ innovator of the ipod.

By on July 6th, 2008

2 thoughts on “Innovation, Patents and Economic Growth

  1. Look at the success of an innovation in terms of ROI (return on investment). You really think any company would invest in trying to come up with something new even though they can blatantly copy their competitor’s product. Without patents, you cannot have a successful innovation. It sort of provides the safeguard for an invention to become a great innovation.

  2. In the study of Modern Innovation Economics, innovation is defined as the rate of change of knowledge with respect to time. Knowledge is defined as the rate of change of information with respect to time. Information is defined as facts and data. They are derivatives.

    The innovation economy as discovered by newer research requires that human knowledge becomes tangible outside the organizational construct of the corporation.

    There could be challenges to what we now know to be patentable. Why should a company patent if they can no longer guarantee monopoly status where knowledge assets cannot be contained. Business method patents may go so far as to patent algorithms for the allocation of a secret sauce of knowledge assets that produces a given probability of success for a business plan. Cool huh.

    See USPTO application: 20070226163. Very interesting ideas coming down the road.

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