REPORT ON PATENTS,

INNOVATION, AND
GROWTH
An Assignment for Industrial Organization Course

Allysha Tifany (2609031) | Karla Estrella (2609014)

03 March 2017 | Vrije Universiteit Amsterdam

 Empirical Correlations

According to the endogenous growth theory, the investment in human capital, innovation, and
knowledge are significant contributor to economic growth. All these innovative activity are then
used in the production of final goods and leads to permanent increases in the growth rate of
output. We would like to find out whether there is a correlation between innovative activity and
economic growth, specifically in Southern Europe (Greece, Italy, Portugal and Spain) and the result
is reflected on the findings below.

We use data from year 2003-2012 of GDP growth as a measure of economic growth, while RnD
expenditure, Patents Filings, Gross Fixed Investments, and Exports of Manufacturing Goods as
innovative activity variables. In theory, human capital should also be included as a measure of
innovative activity but as theres no sufficient data available, we choose to omit this.

Based on the scatterplot constructed above, we can see that there are no heteroscedasticity, so it
fulfilled one of Gauss-Markov assumption. Theres no transformation applied because there is no
heteroscedasticity detected. We presented the data as above because we believe that innovative
activities (RnD expenditure and patents filings) affects the GDP growth. There is also no visible
correlation, nor any outlier.

According to the random effects GLS regression result that we run, we found that RnD expenditure
and total patents filings are not significance in respect to GDP growth. However, we found that
theres a significance between gross fixed investment and exports of manufacturing goods in
respect to GDP growth. But we believe this is because investment and exports are already proven
as factors that affects GDP growth (GDP= C+I+G+NX), while theres still no prove that patents and
innovative activities can.

For the second test we conducted the log GLS regression to compare the results, however theres
no difference between the first and second regression so we take the same conclusion that
innovative activity has no significancy to GDP growth.
 Arguments For Weakening Or Abolishing Patents

In the last years there has been an enormous increase in the number of patents and in the
strength of their legal protection, but there is no evidence that shows patents increase innovation,
productivity, technical progress, research or development.

Property rights were first used in 1474 at the Venetian Republic, but they had problems from the
beginning because they were subject to exploitation, monarchs could use the monopolies on
inventions to extract rents and use that money to finance wars.

About two centuries ago, patents were restricted in some areas and limited in number, depth and
duration. But in the last years, the number of patents have been increasing, in 2012 Greece issued
125 patents, Italy issued 4636, Portugal 134 and Spain 1706 but if we look at their GDP growth we
can see that there hasnt been an upward but on the contrary, some of those countries even had
negative growth with -7.3% in Greece, -2.8% in Italy, -4% for Portugal and -2.9% in Spain in the
same year, so we can see that patents are not encouraging growth.

Studies have shown that competition and first mover advantage are the main drivers of
productivity, not the monopoly power of patents. The average annual growth of productivity in
sectors with high competition is bigger tan the sectors with low competition, that means that
theres a positive correlation between competition and productivity and patents reduce
competition by concentrating monopoly power on individuals or firms.

The existence of monopolies created by patents reduce the incentives for innovation, which is the
driver of improvements in human welfare and economic growth, because new innovators are
subject to legal action and demands from earlier patent holders that generate hundreds of
millions in legal costs with no social benefits, patents discourage innovations when they reduce
the payoffs to later innovators who rely on previous inventions as an input for their work. There
are alternative factors that explain the stimulation of innovations in a country, for example, a
culture of entrepreneurship, the free exchange of knowledge and investments in science.

The patent systems normally benefit those who own the patents but disadvantage future
innovators as well as consumers. They are widely used to prevent entry and encourage exit from
markets. It is very common that big companies sue the newcomers, and the future start-ups with
no patents are forced to pay enormous amounts of money to the already established big
companies.

Studies show that firms are more likely to use secrecy if innovations are important, patents reduce
collaboration and exchange of ideas because a person that makes a discovery will try to keep it
secret until he or she can lock it down with a patent.

Data indicates that, historically, the great majority of innovations have been created outside of the
patent systems and countries without patent laws contribute as many exhibits and prize winners
as countries with patent law.

In conclusion, patents have a bad impact in society in general, they might help inventors feel more
comfortable with sharing their discoveries, but the creation of monopolies affects individual
interests by limiting the incentives to create, to make progress and to do research. One of the
main objectives of patents is to impulse innovation but research has shown that they do the
opposite, they also reduce competition and in consequence, they reduce productivity. The
solution would be to abolish patents but its a difficult process since many groups like the patent
attorneys benefit from them so the short-term solution would be to at least reduce the number of
patents, their duration and to rethink all the government policies that bear on incentives for
invention.