State of Innovation

Patents and Innovation Economics

Déjà vu All Over Again: Undoing the Reagan Revolution

The situation in Egypt is reminding me of the Iranian situation in 1979.  The reason the situation in Egypt is occurring is because the world economy has fallen apart and the people of Egypt are facing declining economic prospects.  Egypt is a socialist country, so the economic prospects have been mediocre at best, but with the decline in the world economy the prospects for the average person in Egypt have plummeted.  Already there is a Google executive missing in Egypt and I see the situation evolving along the lines of Iran in 1979.  Is this just random coincidence or is something more going on.  In 1979 we had a progressive (they should be called regressives, socialists, communists, Marxists, statists or just plain freedom haters) president who ruined our economy and apologized for America around the world.  Today we have a freedom hating president (progressive) who has spent the first two years apologizing for the U.S.  During the 1970s progressives (yes Nixon was a progressive – see wage and price controls) had spent the decade destroying the U.S. and world economy.  During the last decade progressives (yes Bush was a progressive – see Medicare Prescription Drug Program the biggest entitlement since Medicare) have spent the decade destroying the U.S. and world economy.  Luckily for the U.S., the Reagan revolution occurred and the U.S. had two decades of strong economic progress, won the Cold War, and pushed back socialism (freedom hating) around the world.  Unfortunately, it now appears that all the progress of the Reagan Revolution has been undone.  Here are the analogies between the U.S. before Reagan and presently.

Weak Patent System

It is a little known fact that a major part of Reagan’s economic plan included strengthening our patent system.  He started a process where our patent system was strengthened by a number of initiatives over the next 17 years.  Another little known fact is that we have consistently weakened out patent system since 2000.  We broke the social contract with inventors in 2000 when we agreed to publish patent applications at 18 months from filing even if the patent had not issued.  The social contract for patents is that in return for telling the public how to practice the invention the inventor receives a limited term property right.  By publishing how to practice the invention without having granted a patent, the public is receiving the benefit without fulfilling it side of the bargain.  Before 2000 patent applications were secret until they were allowed.  If an inventor felt he was not receiving adequate protection for his invention, he could withdraw the application and keep his invention a trade secret.  There have been a number of other changes to our patent laws that have weakened inventor’s property rights in their inventions.  This is exactly the situation the U.S. was in before Reagan became president.

Taxes

Reagan significantly lowered our marginal tax rates, unlike the very minor changes made by President Bush.  In exchange for lowering the marginal tax rates the tax code was simplified and most deductions were eliminated.  Now we have a very complicated tax code, where the alternative minimum tax (AMT) now hits many middle class families.  Our marginal tax rates appear low, but the phasing out of deductions makes it much more onerous than it first appears.  Finally, the complexity of the tax code has grown to being even more burdensome than in the 1970s.

The ads on TV for “tax fixing” firms remind us that our government is at war against its own citizens.  In a truly free country, there would be no market for these firms.

Lawyer Ads

Much like the 1970s we now are being bombarded by tort lawyers looking to get rich off of other people’s misery.  In the 70s it was plane crashes, diving boards, ambulance chasers, and perceived environmental concerns.  Today it is “bad drugs”, ambulance chasers (some things never change), and asbestos.  In the 70s these lawyers killed off diving boards, killed off the nuclear (not nucular President Bush) power, and almost killed off the private aviation business.

Unions

Before Reagan unions were draining the life out of our corporations.  They received oversized pay checks and imposed productivity killing rules.  Today public sector unions have pay packages that are much larger than their private sector workers who are paying them.  The retirement packages are outrageous paying retirees six figure pensions to people who have committed felonies and are in prison.

 

The Reagan Revolution has completely undone.  Are we better off today now that Reagan’s agenda has been completely subverted?  Will regressives (freedom haters) admit the damage they have done to the world, freedom, and the US?

 

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February 8, 2011 Posted by | -Economics, Innovation, Patents | , , , | 7 Comments

Obama: Make Regulation Efficient

President Obama in a Wall Street Journal op-ed piece said that he has directed federal agencies to eliminate job killing regulations.  According to Obama the Executive order requires “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.”  As an example he points out:

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month.

The fact that it has taken a severe economic recession and the lagging poll numbers of a president to make this changes shows how heavy handed our government has become and how Bzyantine our regulatory environment is.  I have suggested that the US needs a Regulatory Bill of Rights to provide citizens protections from excessive and contradictory regulations.  The Bill of Rights (first ten amendments) do not protect citizens from regulatory rules.  With just a few exceptions, if the governmental designates something a regulatory law or civil penalty then it can completely ignore the Bill of Rights.  I doubt that this is what the Founding Fathers intended when they passed the Bill of Rights.

 

If President Obama really wants to get rid of job killing regulations here is a list in order of importance:

1) Repeal Sarbanes Oxley

Sarbanes Oxley has effectively killed the IPO market and the better part of the equity market in the US.  See Sarbane Oxley Obstructing Innovation

2) Fully Fund the US Patent Office

Congress has stolen about $2B in user fees from the US Patent Office over the last two decades.  This has hurt innovation, job growth, and the economy.  See Restore Patent Funding to Create Jobs.

3) Repeal all Securities Laws

Every econometric study of our securities laws shows that they provide no benefit for investors.  See Liu, Tung, Santoni, Gary J., Stone, Courtenay C.,   Federal Securities Regulations and Stock Market Returns. This paper surveys several papers that have studied the effects of securities laws all of which show no meaningful change in investor outcomes.

4) Pass a Regulatory Bill of Rights

This would provide ordinary citizens the tools necessary to require the federal government to only implement regulations that achieve their purpose in a cost efficient manner.  See Regulatory Bill of Rights.

 

5) Eliminate the Income Tax

The income tax is not designed to generate revenue for the federal government.  It is designed to punish certain people who have committed no crime (violation of the due process clause of the 5th Amendment) and to allow Senators, Congressmen and the President to sell tax favors to the wealthy.  The income tax system should be replaced with a system with the sole goal of providing the federal government the revenue it needs.  A flat tax or a national sale tax would both work.

 

6) Repeal ObamaCare

This is a job killing piece of legislation that we cannot afford.

 

7) Reform Social Security and Medicare

The best reform is to make them defined contribution programs instead of defined benefit programs.

 

If President Obama were to implement these five simple changes, the U.S. would see above 7% growth for the next two decades.

 

January 19, 2011 Posted by | -Economics, Innovation, Patents | , , , , , | Leave a comment

George Will: US Suffering From Innovation Dearth

In a January 2, 2011 column (Needed: A science stimulus) in the Washington Post, George Will points out that the US is suffering from a lack of innovation.  He makes a token node to the patent system in the article and then he focuses on government spending on science and engineering and does not mention the patent office is underfunded.  George reflects Washingtons and the elitists attitude that government spending is what drives the economy.  He just believes government spending should be directed to science.  In addition, he repeats the elitist comment that most of the science is done by the elite and us peasants don’t really contribute much.

The late Nobel laureate Julius Axelrod said, “Ninety-nine percent of the discoveries are made by 1 percent of the scientists.”

This elitist attitude contradicts all the available evidence.  As the book, The Most Powerful Idea in the World, discussed in Georges’ article points out, sustained economic growth does not happen until property rights for ideas (patents) are enacted.  This releases a flood of inventions, not by the elite, but by ordinary citizens.  It was the democratization of the inventing process that lifted the masses out of the Malthusian Trap.

 

January 14, 2011 Posted by | Uncategorized | , , , , , , | 5 Comments

The Value of Charity

From President Bush’s 1000 points of light to President Obama’s biblical argument “aren’t we our brother’s keeper?” for government charity programs it appears everyone agrees that charity is good for our country and may even strengthen our economy.  We are bombarded with the message that “we must give back to our community.”  This discussion even spilled over to Bill O’Reilly and Stephen Colbert where they both agreed that charity was good but disagreed on the extent and implementation of charity.

First, let’s  examine the logic of the “give back” mantra.  In order to give something back you must have taken something.  If you live in a free and just society the only people who can “give back” are those people who are thieves.  The statement is complete nonsense, meant to associate anyone who is successful financially with thieves morally.

Yes, but we don’t want to see our fellow human beings dying in the street for lack of food do we?  About 200 years ago humans in the Western world first escaped the Malthusian Trap.  The Malthusian Trap is when humans are like every other animal, their population expands until they are on the edge of starvation.  This means that until 200 years ago some people did starve to death and it was a real threat for all but the wealthiest people.  This could not have been solved by using charity to redistribute food to those people starving.  There just was not enough food for all the people on Earth.  Even today there are parts of the World where people starve to death.  This problem will never be solved by charity.  While there may be enough food to feed all the people on Earth today, the problem is purposeful manipulation of food supplies in countries for political purposes.

People did not escape the Malthusian Trap because of charity.  The only reason people escaped the Malthusian Trap is because we increased our level of technology.  The only way to increase our level of technology is by inventing and then disseminating these invention.  This occurs when we have strong property rights, particularly for inventions (patents), and free markets.  Why don’t we celebrate people and companies that create and disseminating new technologies instead of charity?  If you truly want to help the “poor,” then you should support free markets and strong property rights, particularly for inventions.  For more information see Source of Economic Growth.

Charity takes (gives) money from a productive person and gives it to someone who has not produced anything.  Since everyone has to consume to live, charity results in a decrease in total wealth.  In addition, the money given to charity is not given (spent) on someone who is productive.  If you really wanted to maximize the “pay it forward” value of your charity, you would give it to the person who was most likely to do the most good with it.  This means you would give it to a person who is productive, which is what generally happens in a free market.

When people donate their time to charities it also destroys wealth.  When engineers, lawyers, architects, doctors, etc spend time preparing meals or hammering nails, they are trading time worth $100-$1000 per hour for labor worth $10 per hour.  This does not help the poor, it just reduces the total wealth created.

Does charity have any value?  I have been both the recipient of charity and have given charity over the years.  I am appreciative of the charity I have received and have no regrets about the charity I have given.  Charity is like manners.  It makes civil society more pleasant, when it is private charity.  Government charity is not charity it is theft.  Even when there is too much private charity it is destructive.  How much is too much charity?  When more than 10% of the people in a country receive charity it is too much.  I remember a United Way pitch I was forced to sit through where they said 40% of the people in our area benefited from the charities the United Way supported.  If that was the case, why didn’t we just pay for these things directly rather than paying United Way to take a cut and redistribute our money?

Here is what Ayn Rand had to say about charity.

My views on charity are very simple. I do not consider it a major virtue and, above all, I do not consider it a moral duty. There is nothing wrong in helping other people, if and when they are worthy of the help and you can afford to help them. I regard charity as a marginal issue. What I am fighting is the idea that charity is a moral duty and a primary virtue. (emphasis added)

“Playboy’s Interview with Ayn Rand,” March 1964.

Note that Ayn Rand believes that charity requires judgment, specifically the judgment of whether the recipient is worth of help and the giver can afford the expense.

People who push charity as a moral issue are immoral and are not helping the “poor.”

 

December 21, 2010 Posted by | -Economics, Innovation, Patents | , , , , , , , | Leave a comment

Long Term Economic Predictions

Background

It has been a year since I published my book The Decline and Fall of the American Entrepreneur: How Little Know Laws and Regulations are Killing Innovation.   The book explains that the only way to increase real per capita income is by increasing our level of technology.  This can be accomplished by capital equipment purchases, which upgrade plant and equipment with newer technologies or by creation of inventions.  Since the United States is a leader in technology, we do not have the choice of just upgrading to new technologies produced in another country.  So we must create new technologies if we want our economy to grow.  There are two ways to encourage the creation of new technologies; government funding or private investment in inventions.  Government spending on research and development is not nearly as effective as private spending for all the same reasons that government spending is always wasteful.  A study by the Small Business Administration shows that most emerging technologies are invented by small entrepreneurial start-ups.  Unfortunately, since 2000 the U.S. has undermined the three foundations on which technology start-ups are based.  Those three foundations are intellectual capital, financial capital, and human capital.  We weakened the intellectual capital foundation by weakening our patent system, we weakened the financial capital foundation with the passage of Sarbanes Oxley, and the human capital foundation was weakened by the accounting rules that required the expensing of stock options.

Since my book was published the financial capital foundation has been further undermined by the passage of the financial reform bill.  There has been no change on the human capital front.  There is mixed news on the intellectual capital front.  The good news is that David Kappos replaced the incompetent and traitorous Jon Dudas as the head of the Patent Office.  The bad news is that Supreme Court again illustrated their utter incompetence in the Bilski decision.  For more information, see The US Economy and the State of Innovation.

These problems are being exacerbated by the budgetary issues associated with aging baby boomers.  The Obama and Bush administrations compounded these problems by expanding Medicare to prescription drugs and the passage of Obama Care.  Presently, Medicare/Medicaid and the Children’s Health Insurance Program (CHIP) represent 21 percent of the federal budget.  Social Security represents about 20 percent of the federal budget and interest payments represent about 8 percent of the federal budget.  It is estimated that about 10,000 baby boomers will go on Medicare per day for the next twenty years.  However, about 5000 seniors are dying per day.  Each Medicare recipient costs about $10,500, so Medicare costs will expand by $185 billion dollars (today’s dollars) or another 5% of the federal budget.  Roughly, the same calculation applies to social security.  So Medicare and Social Security will consume approximately 50% of the U.S. federal budget by 2020.  In addition, the interest payments are likely to consume around 30% of the U.S. federal budget.  This means that 80% of the federal budget will be spoken for.  This does not include any additional costs for Obama Care.  It is unlikely that the federal budget as a percentage of the economy can grow, since the U.S. had to borrow one third of the federal budget in 2010.

Here are my predictions for the next decade based on this background.  I provide an optimistic, most likely, and pessimistic scenarios.  Note these scenarios are based on what I believe is most likely to occur, not what I believe is the best that could be done or the worst that could be done to the U.S. economy.

Predictions Common to all Scenarios

Properties rights of all kinds will continue to be weakened.  It appears that you can get a PhD. in economics (or even win the Nobel Prize) without understanding even the most basic ideas of property rights and how they affect a free economy.  Even so called free market economists forget that Reagan not only cut tax rates, he strengthened property rights.  Particularly he strengthened patent rights – for more information click here.  He also strengthened property rights by weakening regulations and weakening the power of unions.  A number of so-called free market economists do not understand that property rights are based on productive activity.  As a result, they have joined in an all attack on property rights for inventions – patents.  For more information see Scarcity Does it Prove Intellectual Property is Unjustified.

There does not appear to be any meaningful ground swell against Sarbanes Oxley[1] and the Financial Reform Bill.  As a result, entrepreneurial companies will be starved for financial capital.  Because it appears very unlikely we will strengthen property rights for inventions or property rights generally or strengthen our capital markets so they work for start-up companies, the most optimist scenario is limited to subpar growth.

The growth of the Internet will result in a continued decline in commercial real estate values under all scenarios.  Commodity prices are likely to increase, inflation adjusted, under all circumstance.  Growth in China and inflation will drive this increase in commodity prices.

Optimistic Scenario

This scenario assumes that the U.S. faces up to its budgetary problems, repeals Obama Care, and rationalizes it tax structure.  This scenario assumes that Obama is not elected for a second term.  Government spending will grow slightly as a percentage of GDP.  Supply Side economists would probably consider this enough to create vigorous economic growth.  However, it does nothing to really encourage investment in new technologies.  As a result, real inflation adjusted GDP growth over the decade will probably be around 2%.  Median household family income after taxes will be stagnant.  This will be two decades during which median household income has not grown in the U.S.  I believe that will be the first time in the history of the U.S. this has occurred.

The housing market is likely to be stagnant since family incomes will be stagnant.  Inflation is likely to run 4-6%, but this will not be enough to cause appreciation in housing prices.  In fact, inflation adjusted housing prices will likely decline.

The best economic opportunities will be in government related jobs or businesses.  Commodity based business will also prosper.  Technology entrepreneurs will be few and far between.  Unemployment numbers will hover between 7-9% throughout the whole decade – this will be the new normal.  The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. may fall below the top ten in the world.  The U.S. will also be one among many equals in technological and scientific leadership.  All social ills will increase slowly including crime, number of welfare dependents, and black market transactions.

Most Likely Scenario

This scenario assumes that the U.S. will not face up to its budgetary problems and Obama Care will not be repealed completely.  Under this scenario, the U.S. will go from financial crisis to financial crisis.  Each financial crisis will be meet with a short term band-aid solutions.  Federal government spending will grow to at least 30% of GDP and total government spending will be 50-60% of GDP.  Inflation will grow to 10-14% by the end of the decade.  Despite this, housing prices will not keep up with inflation.  Median household family income after taxes will decline by 2-7%.  Official GDP numbers will show slightly negative growth, but this will over state the actual growth rate.

The best economic opportunities will be in government related jobs or businesses.  Commodity based business will also prosper.  The financial differences between those who are in the government’s favor and those who are not will be huge.  Technology entrepreneurs will be almost nonexistent.  The brain drain from the U.S. will be apparent and a cause for anxiety.  Unemployment numbers will hover between 9-15% throughout the whole decade.  The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. will fall well below the top ten in the world.  The U.S. will also be a declining power in technology and science.  All social ills will increase moderately including crime, number of welfare dependents, and black market transactions.  The chance of a major war in the world will be moderate.

Pessimistic Scenario

The U.S. will not face up to its budgetary issues even to get through a crisis.  The U.S. will either literally default on its debt or inflation will be over 20% or both.  Multiple states will go bankrupt and be bailed out by the federal government.  Tax burdens will skyrocket as will the black market.  Housing prices will decrease significantly except in extremely exclusively neighborhoods.  Social order will collapse.  The pretense that the U.S. is a nation of laws or that the Constitution has any meaning will be completely destroyed.  There is a possibility (15%) that there will be a military coup.  Alternatively or in combination there is a possibility that the U.S. will break up into a number of separate countries.  Many parts of the U.S. will decide that it no longer makes sense to support Washington, Wall Street and parts of California that have become use to crony capitalism and government handouts.  The brain drain from the U.S. will be well known and huge.  This may be the driver for politicians and voters to demand real reform.  China and India will dominate the world economy.  Unfortunately, neither will likely fill the U.S.’s shoes and become a technological and scientific leader.  Singapore will likely be the richest country in the world on a per capita basis by a large margin.  They will be the major center of technological and scientific research.  The chance of a major war in the world will be probably.

Caveats

The best reason to be more optimistic is that the U.S. has never had two bad decades in a row.  In the late 1930s and late 1970s there was no reason to suppose that the U.S. would right itself economically.  We pulled out the 1930s because Roosevelt realized that he had to adopt pro-business policies if the U.S. was to have any chance of winning World War II and so did the voters.  In the 70s, there was little hope that the U.S., let alone England, would pull out of the inflationary spiral, increase unionization, increased regulation, increasing government spending and entitlements.  However, there was the glimmer of Ronald Reagan and a surge of free market economists such as Milton Friedman, who still understood property rights.  Unfortunately, I do not see a Ronald Reagan on the horizon and many of today’s free market economists are overly focused on the detrimental effects of Federal Reserve and high marginal tax rates.  Very few seem to understand the importance of strengthening property rights, particularly for inventions or the need to free up our capital markets from regulation.  I hope I am wrong and there is a politician who understands property rights, particularly for inventions, and the need to free up our capital markets, while having the strength to stand up to government unions and special interests.

I cannot decide if we are seeing the collapse of Western Civilization under the weight of the welfare state (socialism) or if we are seeing the last hurrah of the welfare state.


[1] Ron Paul and Newt Gingrich have advocated eliminating SOX.

December 10, 2010 Posted by | -Economics, Innovation, Patents | , , , , , , | 1 Comment

Failing of Free Market Theory

I went to an excellent talk by Professor Gary Wolfram, of Hillsdale College, at the Pikes Peak Economic Club last night.  He explained that free market capitalism is associated with the wealthiest nations in the world and centrally planned economies are associated with the poorest nations of the world.  Free markets are based on property rights and the rule of law, not the rule of man.  The freest nations economically have the longest life spans.  The poorest ten percent of the population in the freest countries have a greater share of the total wealth than in non-free countries.  A poor person in the wealthiest/freest countries is likely to live in a house they own, the house is generally a three bedroom house, and most likely has air conditioning.

Professor Wolfram explained that the way you get rich in a free society is to provide goods and services that large numbers of people want.  He stated that we should celebrate people and companies that make large profits, because they have made a large number of people happy.  A big reason why free market countries are so wealth is because they provide an incentive to innovate.  He pointed out how many products that we use today did not exist 30 or 50 years ago.

In the question period of the talk, I pointed out to Professor Wolfram that there is a strong relationship between economically free countries and those that have strong property rights for inventions or patents.  The most innovative countries in the world are those with the strongest patent systems.  Those countries that first escaped the Malthusian Trap were those with strong patent systems.  Vice versa those countries with weak patent systems or non-existent patent systems are poor, not innovative, and are often still mired in the Malthusian Trap.  I then asked why so many “free market” proponents want to weaken or eliminate property rights for inventions (patents).

He rejected my premise that many free market proponents were anti-patent.  He went on to explain that some inventions deserve patent protection that had shorter periods of time and that other inventions deserved longer periods of protection according to a perfect theoretical model of economics.  For instance, inventions that would have been discovered by someone else shortly thereafter should receive shorter terms than “truly novel” inventions.  He also suggested that patents inhibit the diffusion of new technologies.  Finally, he implied that the way we increase our wealth is by driving down the profits associated with products and services.  Reducing the profit margin in goods and services increases the availability of these goods and services.  It is common for free market proponents to see the market process of reducing the profit and cost of goods and services as the major way free markets increase wealth.

Several people pointed out that his proposal for different lengths of patent protection seemed to contradict his idea that capitalism is based on the rule of law, not the rule of man.  The implication was that someone would have to decide which inventions would receive which term length.  As a result, this would be an arbitrary rule of man decision.  In fairness, Professor Wolfram pointed out that this was not true as long as the standard was objective.  While I disagree that we should have different terms for different inventions, Professor Wolfram is clearly correct that this is not necessarily subjective.

The empirical evidence does not support the suggestion by the Professor that patents inhibit the diffusion of inventions and technology.  Those countries with the strongest patent rights also have the greatest technology diffusion.  A major goal of modern patent systems is to spread the information associated with inventions, so that other inventors can build on the work of previous inventors.  There is also no empirical evidence for the idea that inventions would occur without property rights for inventions.  Those countries without strong patent systems do not produce inventions.  The suggestion that, in a free market system, inventions will just occur is at best speculation and the evidence we have shows the opposite.  When the US has weakened its patent system, our innovation has suffered as well as our economy.  For instance, in the 1970s we weakened our patent system and the US started to technologically fall behind Japan.  For more information see Foreigners Receive More Patents Than US!

The most troubling part of Professor Wolfram’s response was the implication that wealth is created in a free market economy by driving down profits.  Professor Wolfram seemed to imply that there was a “correct” or “optimal” amount of return an inventor should receive for a patent.  Shouldn’t we celebrate inventors who create something that everyone wants?  If an inventor creates something very few people want, how does that hurt technological diffusion?  More importantly, is it really true that wealth is created in a free market by driving down the profit margins of manufacturers (or inventors)?

The idea that the real power of the free market to create wealth is in its ability to foster competition (for the same product) and therefore drive down profit margins is incorrect.  If we were able to obtain every product available in 1900 at its cost or even free, we would not be nearly as wealthy as we are today.  Wealth is mainly created, not by cost or profit reduction, but by the creation of new inventions, i.e., technology.  We do not want people/companies competing to produce me-too products, but competing based on inventions.  Shortening the length of patents will encourage competition on me-too products instead of creating new products.  While the optimal length for patents may be difficult to determine, shorter terms will discourage innovation.  There is no evidence that the present length of patents are inhibiting innovation or the economy.

The idea by free market economists that the power of free markets is there ability to reduce the cost of existing products also leads to fallacies about antitrust law (now rebranded as competition law).  This cost reduction theory suggests that we should aggressively apply antitrust law to create competition.  However, the empirical evidence shows that periods of aggressive antitrust enforcement result is low levels of invention and weak economic growth.  For more information see Foreigners Receive More Patents Than US!

Wealth in a free market is mainly created by the invention of new technologies.  It is a failing of economists to suggest that the power of a free market is its cost reduction of existing products.  This fallacy results in an anti-property right policy towards inventions and an aggressive application of antitrust laws.  The empirical evidence shows these policies do not create wealth.

November 12, 2010 Posted by | Innovation, Patents | , , , , , , , | 19 Comments

Patents Critical Indicator of Success

Another study shows that start-up company success is tied to patenting success.  The authors of the study are a pair of professors of  finance, Jerry Cao of Singapore Management University and Po-Hsuan Hsu of University of Connecticut.  Perhaps the key finding is:

Start-up firms that successfully file patents before receiving any VC investment and more likely to complete IPOs and less likely to fail or be acquired.

The study shows that

67.39% of patenting VC investees successfully completed the IPO process, whereas only 14.81% of VC investees without patents did do.

This is a huge difference.  Patents are also a good indicator of whether a firm will end up in bankruptcy.

On the other hand, only 3.47% or patent-filing VC investees filed bankruptcy, in sharp contrast to the 10.12% of VC investees without patents who did so.

This study clearly shows that patents are critical to the success of start-up companies.

September 29, 2010 Posted by | -Economics, Innovation, Patents | , , , , , | Leave a comment