State of Innovation

Patents and Innovation Economics

Patents & Innovation

Tech Dirt has a post on Nathan Myhrvold recent article in the Harvard Business Review (http://hbr.org/2010/03/the-big-idea-funding-eureka/ar/pr), entitled Patent Attorney Highlights How Intellectual Ventures Syphons (Siphons) Money Away From Innovation.  The level of misunderstanding in this article is incredible.  First patents are legal title to inventions.  Stocks are legal title to a part of a company.  It is not surprising that patents have some of the characteristics of stocks.  If a secondary market is created for patents, this means that inventors who are not successful in commercializing their inventions will be able to obtain some return for their efforts.  Without a secondary market for stocks any purchase of a company’s shares would be locked up forever.  This would discourage investment in companies.  Similarly, a lack of a secondary market in patents reduces the investment in technology.

The evidence that patents encourage innovation is overwhelming if you open your eyes.  Those countries with the strongest patent laws have the fastest rates of innovation and diffusion of innovation.  Those countries with weak or non-existent patent laws have the least innovation and technology diffusion.  Before patent laws became widespread in the western world, the rate of innovation was slow enough that the per capita income of the west had not changed in centuries.  Note that many of the other conditions of a free market, such as low taxes, property rights, etc existed for centuries before per capita income started to increase in Europe.  If you believe this is just correlation, the burden is on you to prove it since all the evidence is against you.

Clearly, our patent system has problems.  The average time it takes to obtain a patent is over three years.  If it took three years to obtain title to your house or shares in a company you would assume you were living in a third world country.  Patents need the equivalent of title insurance for real property.  Before title insurance you had to pay an attorney a lot of money to do a title search to make sure you were going to obtain clear title to your house or land. In addition, you had to pay a surveyor to determine the boundaries of your land.  The boundaries were not obvious at all and our ancestors were very litigious over the boundaries of their property.

Despite these problems, the US has strong economic growth when we have strong patent laws and systems and weak economic growth when we have weak patent laws.  Antitrust laws were used to weaken our patent laws in the 1930s and 1970s and we had extended economic downturns.  Our patent laws were strengthen in the 1980s and strong in the 1990s and we had strong economic growth.  The only way to increase real per capita income is by increasing our level of technology.  Patents clearly encourage advances in technology, which results in real economic growth.

February 24, 2010 Posted by dbhalling | Innovation, Patents | , , , , , | 2 Comments

The Next Big Thing

According to Nathan Myhrvold, invention is set to become the next software.  Nathan Myhrvold is the head of Intellectual Ventures, an invention capital firm.  Myhrvold states:

I believe that invention is set to become the next software: a high-value asset that will serve as the foundation for new business models, liquid markets, and investment strategies. The surprising success Intellectual Ventures has had over the past 10 years convinces me that, like software, the business of invention would function better if it were separated from manufacturing and developed on its own by a strong capital market that funded and monetized inventions.

He believes that we significantly under invest in inventions.  Inventions are generally funded under a charity model according to Myhrvold.

Rather than relying on the charity model and its overdependence on government-sponsored research, we should be looking for ways to harness the tremendous financial power of the private sector to fund invention. Consider this: Inflation-adjusted federal spending on academic research rose by 60% from 1983 to 2007. Meanwhile, investments in the business sector by the U.S. venture capital and private equity industries soared by 1,140% and 1,940%, respectively. The total $1.6 trillion (in 2008 dollars) invested by venture capital and private equity firms in this period is three times the $537 billion that the U.S. government spent on academic research.

In his article in the Harvard Business Review, he states that patents are not given the respect they deserve.  For instance,

In affluent nations, product companies too often see inventors and other patent holders as adversaries, and vice versa. But product companies should see inventors as wellsprings of innovation and should trust them—and invention capitalists—enough to tell them what new technology the companies actually need. Inventors, for their part, should see manufacturers and invention capitalists as customers and should trust them to pay fair prices for the ideas they use. We aspire to be a trustworthy matchmaker that helps make this happen.

Interestingly, Intellectual Ventures obtains a significant number of patents from individual inventors.

One significant source of patents is the archetypal solo inventor. Many such inventors have no interest in writing a business plan or building a company; they prefer to just hand off their invention to a licensee and move on to the next great idea. Investment firms like ours spare them the work of tracking down and negotiating with lots of potential licensees separately, and we can almost always give them a fairer deal. We’ve paid about $315 million so far to individual inventors, making us one of their largest sources of new capital.

This is additional evidence that Congress needs to make sure that our patent laws are friendly to individual inventors.  Congress is considering changing our patent laws so that they are less friendly to individual inventors, by converting our patent system from a first to invent system to a first to file system, weakening the penalties associated with stealing other people’s patented technology, and requiring all patent applications to be published at 18 months.

As the US moves from a manufacturing economy to a knowledge economy more people will be involved in the business of inventing.  We need strong patent laws and an efficient Patent Office to facilitate this transition.  We also need entrepreneurs, like Mr. Myhrvold, to create an efficient market in patents.  Many people do not remember that before title companies, buying real property required expensive title searches and determining the boundaries of your land was expensive and uncertain.  In the 1800s lawsuits over title and land boundaries were extremely common.  No one suggested that we should not have real property rights in the 1800s because of these problems.  The same evolution will occur with respect to patents, if we allow the market to work and maintain strong patent laws.

February 19, 2010 Posted by dbhalling | Business Models, Patents | , , , , | No Comments Yet

In Defense of Patent Trolls

The term patent trolls is usually applied to companies that enforce patents that they are not practicing.  These Non-Practicing Entities (NPEs) include companies specifically organized for this purpose such as Intellectual Ventures.  However, it also includes Universities and divisions of most large corporations such as IBM.  Many of these corporations complain about NPEs.  However, any consistent definition of a NPE (troll) would include these hypocrites. Read more »

September 18, 2009 Posted by dbhalling | Uncategorized | , , , , , , , | No Comments Yet