Innovation, Growth and Innovation, Growth and Patents on CIIs in the EUPatents on CIIs in the EU

Federico EtroFederico Etro

June 2005June 2005

The Common position adopted by the The Common position adopted by the European Council in March 2005, European Council in March 2005, establishes the patentability of CIIs establishes the patentability of CIIs when they provide a technical when they provide a technical contribution to a field of technology:contribution to a field of technology:• excluding pure software, business excluding pure software, business

methods and consulting practices methods and consulting practices (difference from US)(difference from US)

• confirming current EU rulesconfirming current EU rules

Part of the European Parliament has Part of the European Parliament has proposed amendments which would proposed amendments which would exclude many innovations in the ICT exclude many innovations in the ICT from patentability:from patentability:• amendments which establish vague amendments which establish vague

definitions of “technical” contribution or definitions of “technical” contribution or “field of technology” are going to add “field of technology” are going to add significant restrictions on what can be significant restrictions on what can be patented patented

• others explicitly excluding innovations in others explicitly excluding innovations in data processing are going to exclude data processing are going to exclude most inventions in the digital technologymost inventions in the digital technology

The economic point of view:The economic point of view:• what matters is the consequence for what matters is the consequence for

investment in innovation!investment in innovation!

and patents on CIIs promote investment and patents on CIIs promote investment in innovation with benefits for in innovation with benefits for everybodyeverybody

Traditional economic theory:Traditional economic theory: Market power and patents promote Market power and patents promote

incentives to innovate and create growth incentives to innovate and create growth ((Schumpeter, 1934Schumpeter, 1934))

Patents should exist in any field of Patents should exist in any field of technology trading-off (technology trading-off (Nordhaus, 1969Nordhaus, 1969) ) social benefits (promote innovation) and social benefits (promote innovation) and costs (temporary market power), but for costs (temporary market power), but for CII:CII:• the social benefits are larger (ICT drives most the social benefits are larger (ICT drives most

technological progress nowadays), technological progress nowadays), • the social costs are smaller (average life of the social costs are smaller (average life of

innovations is short)innovations is short)

Patents and R&D subsidies are Patents and R&D subsidies are essential in high-tech sectors to essential in high-tech sectors to enhance endogenous growth (enhance endogenous growth (RomerRomer, , BarroBarro, 1990s), 1990s)

Recent developments:Recent developments:• Market leaders have a beneficial role in Market leaders have a beneficial role in

general R&D, under free entry general R&D, under free entry (Etro, (Etro, 2004, Innovation by Leaders, Econ. Journ.)2004, Innovation by Leaders, Econ. Journ.)

• small firms make pathbreaking small firms make pathbreaking innovationsinnovations

Antitrust Implications Antitrust Implications for the New Economy:for the New Economy:

Priorities for industrial policy:Priorities for industrial policy:• Protect IPRsProtect IPRs• Promote free entry Promote free entry

not fight against market leadersnot fight against market leaders this is also for competition policy (Etro, this is also for competition policy (Etro,

2005, Aggressive Leaders, Rand Journ. 2005, Aggressive Leaders, Rand Journ. Econ.)Econ.)

Do patents stifle innovation?Do patents stifle innovation?

Opponents of patents on CII say that Opponents of patents on CII say that patents stifle innovation based on patents stifle innovation based on economic research for instance by economic research for instance by Bessen and Maskin (2002). But:Bessen and Maskin (2002). But:• The theory by Bessen-Maskin does not The theory by Bessen-Maskin does not

justify this!justify this!• Evidence on the US experience by Evidence on the US experience by

Bessen-Maskin does not confirm this!Bessen-Maskin does not confirm this!

US R&D/Sells in ICT US R&D/Sells in ICT

Solid line: Solid line: R&D/Sells for US firms R&D/Sells for US firms innovating on innovating on computer, computer, telecommunications and electronic telecommunications and electronic componentscomponents (Source: NBER) (Source: NBER)

Dotted line: top firmsDotted line: top firms Policy shock: 1981: case Policy shock: 1981: case Diamond vs Diamond vs

Diehr Diehr (450 US 175)(450 US 175)• the Supreme Court ordered the USPTO the Supreme Court ordered the USPTO

to grant a patent on a CIIto grant a patent on a CII• Since then CII were patentable in USSince then CII were patentable in US

Bessen-Maskin: Bessen-Maskin: • use 1986-87 as the reference year. But use 1986-87 as the reference year. But

it should be 1980-81it should be 1980-81• do not control for any other factor do not control for any other factor

(business cycle,..)(business cycle,..)• do not compare R&D for CII with R&D for do not compare R&D for CII with R&D for

other inventionsother inventions

What about ICT and CIIs in EU?What about ICT and CIIs in EU?

There is a gap between US and Japan There is a gap between US and Japan on one side and EU on the other side on one side and EU on the other side in ICTin ICT

North European countries have a North European countries have a larger ICT sector compared to larger ICT sector compared to Mediterranean countries (more Mediterranean countries (more patents, higher fraction of high-tech patents, higher fraction of high-tech patents)patents)

Value added of ICT sectorValue added of ICT sector

Export of ICT goodsExport of ICT goods

ICT patent application with EPOICT patent application with EPO

ICT patent application with EPOICT patent application with EPO

Europe needs:Europe needs:

Promote high-tech sectors to Promote high-tech sectors to compete globallycompete globally

Larger investment in R&D to enhance Larger investment in R&D to enhance growthgrowth

Larger incentives to invest in R&D in Larger incentives to invest in R&D in the New Economythe New Economy

>> IPRs protection and R&D subsidies!>> IPRs protection and R&D subsidies!

ConclusionsConclusions

1.1. additional additional restrictions to the restrictions to the patentability of CII would jeopardize patentability of CII would jeopardize investmentinvestment in innovation and in innovation and technological progress in the technological progress in the leading high-tech sectors of the leading high-tech sectors of the European economy with negative European economy with negative consequences on growth and consequences on growth and competition in the global economycompetition in the global economy

ConclusionsConclusions

2.2. explicit explicit exclusion of entire fields of exclusion of entire fields of technology, as data processing, technology, as data processing, from patentability would shift from patentability would shift investmentsinvestments toward US and other toward US and other countries, where IPRs are better countries, where IPRs are better protected, in a large and rapidly protected, in a large and rapidly increasing number of fieldsincreasing number of fields

ConclusionsConclusions3.3. additional additional restrictions to the restrictions to the

enforcement of the current patent enforcement of the current patent system would open doors to foreign low system would open doors to foreign low cost productions (think of China)cost productions (think of China) which, which, without patent protection, would be free without patent protection, would be free to imitate European products even in to imitate European products even in high-tech sectors, with negative high-tech sectors, with negative consequences on European employment consequences on European employment and on innovative (and also non and on innovative (and also non innovative) SMEsinnovative) SMEs

ConclusionsConclusions

4. improvements should promote 4. improvements should promote access to patents especially for access to patents especially for SMEs (SMEs (monitoring and Fund for monitoring and Fund for SMEsSMEs) to consolidate the European ) to consolidate the European comparative advantage in high-tech comparative advantage in high-tech sectors where innovation and sectors where innovation and human capital play a crucial role human capital play a crucial role and to help achieving the goals of and to help achieving the goals of the EU Lisbon strategythe EU Lisbon strategy

ConclusionsConclusions

5.5. enhancement of the spillovers created enhancement of the spillovers created by the patent system on the diffusion by the patent system on the diffusion of knowledge could be obtained of knowledge could be obtained through further requirements on the through further requirements on the disclosure of the patented CII: some disclosure of the patented CII: some useful amendments have proposed useful amendments have proposed that that the disclosure of the invention the disclosure of the invention must be sufficiently clear and must be sufficiently clear and complete to be carried out by a person complete to be carried out by a person skilled in the artskilled in the art

ICT patent application with EPOICT patent application with EPO

High-tech patents in 2001High-tech patents in 2001

% of ICT Patents% of ICT Patents