The Functions of Patents in Our Societies: Innovation, Markets, and New Firms

Abstract

This article discusses the role and functions of patents in society using data and evidence from the economic and management literature. It targets competent managers and policy-makers who are not, however, scholars on this topic or the economics of innovation. The article highlights the trade-off that while patents provide private protection to appropriate the returns from inventions, they also encourage the diffusion of innovation – in particular, they provide signals about the value of new firms, disclose information about the invention, and encourage the exchange of innovations and ideas in markets for technology. It then concludes that in order to better understand the role of patents in society, Patent Agencies and stakeholders should invest to a greater extent in data collections or field experiments that nail down causal effects and mechanisms. So far most of the available data are not collected with these identification strategies in mind. Scholars then have to device solutions from the available data, and in so doing they can only answer some questions that can be addressed with these data. Patents have many complex effects. Therefore, the question whether their overall net contribution to society is positive or negative is hard to answer and probably not testable. However, many studies that rigorously identify specific effects will provide the basis for rigorous evidence-based management and policy that optimizes this trade-off.

Keywords: patents, innovation, markets for technology, new firms

JEL Classification: L21, L24, L26