Darko Milosevic, Dr.rer.nat./Dr.oec.

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The Discourse on Patent Value

2.2.3 Economic Value 
The economic value of patents is not determined solely by the characteristics of a single patent, but by various factors of a technology, firms, competitors, and markets. Thus, the economic or commercial value of individual patents can hardly be derived from information contained in a single patent document. Furthermore, the economic benefits of a technological product can hardly be assigned to one single patent, as this product is usually the result of several technologies – also often protected by several patents – implemented in one device, machine etc. For example, the debate in Japan on employee-inventor compensation centers on this problem of how to assess the contribution of a single patent to the overall economic value of a complex product, with the case of the blue LED as the most famous case (with the final settlement paying millions of dollars to the employee-inventor). However, it is also well established in the empirical literature that some patent indicators predict the economic and social values of patents. Private economic gains from an individual patent are measured in various ways, including whether the patent is licensed or not (Gambardella et al. 2007; Sampat, Ziedonis 2004), by licensing revenues (Sampat, Ziedonis 2004), by renewal history (Bessen 2008; Harhoff et al. 1999; Schankerman, Pakes 1986; Schankerman 1998), by opposition and litigation history (Harhoff, Reitzig 2004), and by expected sales values of patents (Gambardella et al. 2008; Harhoff et al. 1999; Harhoff et al. 2003). Among these measures, the renewal and opposition history can be acquired directly from patent databases. Other patent indicators that predict these economic values differ across studies. However, the following patent indicators are usually examined in the literature: forward citation counts, backward citations (either to patent documents or non-patent references), the breadth of patents (either as measured by the number of different technology classes or the number of claims), or the size of the patent family. Several other studies take the stock market value of firms as an aggregated measure of economic value (Hall et al. 2005; Lanjouw, Schankermann 2004; Nagaoka, Kwon 2006) or other financial performance indicators at the firm level (Hagedoorn, Cloodt 2003; Narin, Noma 1987). They examine how these value measures are predicted by various patent indicators including the number of patents, forward citations and others. A straightforward approach is a survey as described in chapter 2.2 further below. These surveys also confirm the assumption of a skewed distribution of the economic value. However, it is worth it to look at these findings in more detail. In this context, Figure 2-3 shows the value distribution as investigated by Giuri et al. (2007) where the very skewed distribution of values at the area of high values is obvious. However, the observed distribution approximately has the shape of a log normal function, and not of a power law function. The special feature of the log normal function is that the distribution on the side of high value is skewed, whereas the share of patents with very low or no value is rather limited. The majority of patents is situated in the area of low and medium values. In the case of a power function, the share of patents with very low or no value would be quite high. Of course, the distribution is still extremely skewed in terms of concentration on very high values; about 10% of the applications represent about 90% of the value. Nevertheless, the area of low and medium values with the majority of applications refers to the value area from € 300 thousand to € 10 million, thus a level which is not negligible at all. Linking the values to type of inventions and applicants, most of the low and medium level applications reflect incremental inventions and patents and/or patents of small and mediumsized enterprises (SMEs) with limited markets. In contrast, the patents with very high values are primarily linked to radical inventions of very large enterprises with large markets and some breakthrough inventions of start-up enterprises. Thus a limitation of the analysis to patents with very high value would imply the concentration on some patents of very large enterprises and successful start-ups, and the incremental inventions of all types of enterprises and those of SMEs would be disregarded; thus major parts of economic activity would not be reflected.

2.2.4 The Social Value of Patents – Spilling Over 

The social economic value of patents has been hardly measured and, hence, hardly studied. One investigation by Trajtenberg (1990) measures the benefits accruing to the users of a medical device and show that citation-weighted patent counts well predict them. Studies at the regional or national level examining the relationship between regional or national financial performance and patenting performance will be further reviewed in the course of this project, with regard to the social value of patents. Schumpeter (1908) defined social value as the value set by a society or a community instead of any simple individual, which is thus characterized by collectivity and altruism. As a patent is a legal intellectual right granted by an authorized government entity (patent office) to exclusively protect its holder's commercial benefits from unauthorized use for a certain period of time, the patent system offers the temporary monopoly to inventors in exchange for their early disclosure of new technologies. The implications of the patent system are twofold. One is to encourage investments and efforts in inventive activities, but it is less important, given that there are many means to achieve the same goal. The more important implication, from a social point of view, is to force inventors to disclose their newly developed technologies, based on the assumption that the spill-over effects, or externalities, of public knowledge are beneficial for the whole of society. The crucial role of "knowledge", "technology", or "innovation" in shaping and enhancing economic development has been recognized by many economists and policy-makers (Edquist, McKelvey 2000; Lundvall, Foray 1996; Malecki 1991; Nelson, Romer 1996). Therefore, enlarging the stock of public knowledge is assumed to be critical for both technological and economic development. In sum, the social value of patents, or how society benefits from inventions, is technological advancement and ultimately economic growth. If a new technology contained in a patent is significant, it cannot only advance the field to which it belongs, but also provides new concepts, tools, and ways of production that facilitate innovations in other fields, and gradually update the level of technological capabilities in the whole society.  Patents (and R&D leading to developing the patented inventions) have spill-over benefits. Geographic spill-overs of R&D are well known phenomena (Griliches 1992; Jaffe 1986). Likewise, many studies provide empirical evidences of spill-overs from patented technologies to the technological capacities of companies (Jaffe et al. 1993; Jaffe et al. 1998; Jaffe et al. 2000). A key measure of knowledge spill-overs from patents is the distribution of patent citations, across either regional or technological boundaries. Spill-overs between technologies or technological classes, thereby providing new developments for example by "new combinations" (Schumpeter 1908) has been analyzed by Grupp (1996). In their seminal paper, Jaffe, Trajtenberg, and Henderson (1993) argued that patent citations indicate knowledge flows because citations codify the passage of ideas. From then on, while many studies have employed this indicator to investigate spill-overs (Acs et al. 1994; Almeida 1996; Audretsch, Feldman 1996; Breschi, Lissoni 2004; Maurseth, Verspagen 2002; Thompson, Fox-Kean 2005), a good number of studies have been undertaken to examine the validity of the indicator (Alcacer, Gittelmann 2004; Jaffe et al. 2000; Lemley, Tangri 2003; Meyer 2000; Michel, Bettels 2001; Nelson 2009). A primary concern with patent citations or measures constructed by citations centers on whether all subsequent innovations are built directly upon knowledge contained in a cited patent as assumed. While patent citations are generated by attorneys and/or examiners in addition to inventors, it has been demonstrated that they are, albeit pertinent, a noisy indication of knowledge flows from cited innovations to citing inventors (Alcacer, Gittelmann 2004; Jaffe et al. 2000). Another issue associated with patent citations, due to the scheme of different patent systems, is a redundant or incomplete list of prior arts. Michel and Bettels (2001) found that remotely related work is also cited for fear of running the risk of filing an incomplete list of references, while Lemley and Tangri (2003) discovered applicants are possibly incompletely citing prior arts to reduce the damage from "wilful infringement." Moreover, Nelson (2009) points out patent citations may both under-represent and over-represent spill-overs by neglecting scientific article authors and licensees as downstream users. Next to the stock of patents and count of citations, several further patent indicators are reported to predict the technological value. They include the numbers of claims, backward citations, and the number of different patent authorities where the patent is filed (see Lanjouw, Schankermann 2004). However, these indicators are shown to be important predictors of technological value in many other studies. The number of licenses could be considered as an appealing measure of knowledge spillovers. Given that a licensee has typically to pay 1) an upfront fee and/or 2) an annual fee and/or 3) a percentage of annual revenues on related products, licensing indicators, compared to patent citations, should be able to reflect a more explicit relationship between the licensee and his licensed patent and a stronger impact of the latter on the former. However, it is difficult to collect the licensing data, especially from private firms. Most studies targeting the relationship between licensing and spill-overs were based on licensing data from university technology transfer offices (Nelson 2009; Thursby et al. 2001; Thursby, Thursby 2002), leaving unexamined the patents licensed in industry and other public research institutes. The distinction between two kinds of licensed patents also merits attention, patents containing embryonic and non-embryonic inventions, because the latter ones that are "ready to use" have nothing to do with technology transfer (Colyvas et al. 2002). Citations of patents in publications have been suggested as a candidate for measuring spillovers (Nelson 2009). The observed convergence between academia and industry (Hong, Walsh 2009; Powell, Owen-Smith 1998; Slaughter, Leslie 1997; Slaughter, Rhodes 1996) usually refers more to the proximity of academia to industry than the other way around, owing possibly to the commercial emphasis and an ingrained thinking of "linearity" between scientific research and innovation, research on spill-overs predominantly focuses on the diffusion of scientific research results in academia to industry and usually investigates such diffusion by using survey data (e.g. Agrawal, Henderson 2002; Cohen et al. 2002a). However, the relationship between scientific research and innovation is reciprocal and complicated instead of "linear" (Etzkowitz, Leydesdorff 2000; Gibbons et al. 1994; Stocks 1997), publication citations to a patent offer another indication of spill-over effect of a patent, and should reflect a more complete picture of how a patent benefits the whole of society together with patent citation and licensing data. In addition, the co-patent measure indicating the involvement of different organizations in an innovative project reflects the spill-over effects. As Feldman and Kelley (2006) argued, when different organizations have a project-oriented collaboration, the benefits would spill-over to influence the involved organizations' innovative processes and activities rather than be confined to the collaborative project. Moreover, the social welfare can be enhanced by allowing for more efficient use of expertise and assets (Winter 1987), shortening the innovation cycle and decreasing risks and costs of generating innovations, as well as reducing unnecessary duplicated work, resource waste, and patent races (Reinganum 1989). Although the co-patent measure has become a prevalent variable measuring collaboration (e.g. Guellec, van Pottelsberghe de la Potterie 2001; Hagedoorn et al. 2003; Hicks, Narin 2000), it is seldom treated as an indicator of spill-over effects. One reason is that many enterprises attribute a patent application to one assignee - even in the case of a collaborative invention – and close a license contract, as then the rights of both partners can be defined in a more precise way. In this case, the collaboration is not reflected by multiple applicants.

2.2.5 Strategic value 
Besides economic and technological values, patents may create strategic benefits, which is an increasing phenomenon in the era of patent explosion, where it is argued that patent strategies of innovative companies became broader and more complex, thus resulting in an expansion of patent applications. The patent system, whose original purpose was to provide a temporally limited protection for technological knowledge, is more intensively used by companies for various other so-called strategic motives (Blind et al. 2009). The strategic value of patents includes blocking competitors, easier access to financial markets, preventing key technologies from being invented around and the generation of licensing revenues. This strategic value has frequently been studied in recent years. Several large-scale surveys of inventors or R&D managers clearly provide evidence that a strategic value of patents exists, having several sub-dimensions (Blind et al. 2006; Cohen et al. 2002b; Harabi 1995; Sheehan et al. 2003). Also, more detailed case studies were published recently. They attempt to characterize and examine factors affecting strategic values (Grindley, Teece 1997; Hall, Ziedonis 2001; Reitzig 2004; Reitzig et al. 2007; Ziedonis 2004). It could clearly be shown that the existence of the patent system offers possibilities to exploit patents for strategic purposes (Blind et al. 2006; Blind et al. 2009). Generally, according to Arundel and Patel (2003), all motives that go beyond the protection of one's own inventions to appropriate benefits in relevant markets based on this inventions are defined as "strategic". The consequence is that the decision to patent has partly uncoupled the technological needs of protection from competitors in the traditional sense or at least the strategic behavior of other market participants is anticipated, and patents serve as new sources of revenue (Blind et al. 2006). The strategic values do not only cover monetary aspects like access to financial markets, licensing revenues and the like, but also more indirect ones like the motivation of employees. In general, companies' patent portfolios can be seen as a hurdle to deter new potential competitors from entering the market or to establish themselves in a certain sector. The most common strategic motive is blocking competitors, which can be differentiated in two versions (Blind et al. 2006; Blind et al. 2009). The first is the so-called defensive blockade, where firms use patents to avoid their own technological room to manoeuvre being diminished by patents of others. The second version is the offensive blockade, that exists when firms only patent to prevent competitors using technological inventions in the same or adjacent areas of application that are close to one's own inventions, but not identical. So-called patent thickets (cf. Cockburn, MacGarvie 2009; Shapiro 2000) are built up and firms patent "more broadly" than necessary to directly protect an invention. In addition, there is a large bandwidth of further strategic motives (Blind et al. 2006; Blind et al. 2009; Cohen et al. 2000). For example, firms may choose to generate licensing revenues or trade with other firms (cross-licensing), or use patents as bargaining chips in negotiations with other companies to gain access to new technologies, which is especially prominent in sectors like ICT (Hall, Ziedonis 2001). Furthermore, patents can be used for international market extension, standardization or to increase the firm's reputation or technological image. Another motive can be seen in the use of patents as a measure of internal performance of a firm's R&D personnel that can also be used for motivational purposes, as the innovative output can easily be assigned to single organizational units. Especially for SMEs (small and medium-sized enterprises), easier access to the capital market can also be regarded as a strategic motive for patenting. Innovative results are made visible by the use of patents. This can serve as a signal of lower risk for potential investors, which increases their willingness to invest. From this point of view, technological start-ups are largely dependent on patenting.  However, most of the strategic motives are potentially more beneficial for large enterprises (Blind et al. 2006; Neuhäusler 2009). Blocking competitors, for example, is not possible until a firm has some patents at its disposal and has the (financial) capabilities to patent broadly (Blind et al. 2006). The use of patents for cross-licensing negotiations or trade with other firms also tends to be more beneficial for larger companies, as a larger patent portfolio accompanies such "player-strategies" (Cohen et al. 2000; Hall, Ziedonis 2001). Additionally, using patents as an internal performance indicator can also be seen as being far more beneficial with increasing firm size, mainly because larger firms are assumed to have more R&D personnel and more often possess a special in-house patent department that can be evaluated. Additionally, complex product industries, e.g. the electro-technical and automotive industry, where the number of patents per innovation is large, are assumed to show increased strategic use of patents, than discrete product industries, like the chemical sector, where the number of patents per market-exploitable innovation is considerably smaller (Cohen et al. 2000; Cohen et al. 2002b). Another kind of strategic value of patents lies in their representation of codified knowledge (Grupp 1998). One basic assumption of patent indicators used in the context of national competitive analysis is that they reflect the knowledge capabilities or the knowledge stock of a company and – in a wider perspective – of nations (Frietsch, Schmoch 2006). A patent may have no direct value for the firm or the innovation system, but it is part of a technological trajectory where others will have a high economic, strategic or social value, and these valuable patents build on the (economically) less valuable patents.  Although it is hard to measure the strategic value of patents, the analyses of withdrawal information could serve as a rough estimate. The argument is that, for example, blocking patents which have no direct technological value, are only used as long as they do not create any costs. Payment of maintenance fees at the European Patent Office is not required until three years after filing a patent (European Patent Office 2009). As innovation cycles in many technological fields are rather short and are becoming even shorter, the three-year period suffices to deter market entrants and competitors from patenting in the same field. So patents that are withdrawn shortly before the three-year period ends could at least roughly be seen as an indicator for strategic patenting.

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