State of Innovation

Patents and Innovation Economics

Accounting Inhibits R&D

Accounting rules for R&D result in companies and nations under investing in research and development.   Since increases in real per capita income are the result of increases in our level of technology, this accounting error actually results in all of us being poorer.  The point of R&D is to create inventions, whether products or processes, that are useful.  R&D that does not result in inventions may be interesting intellectually, but does not increase our wealth- so the rest of the post will discuss investments in inventions as opposed to the more nebulous concept of R&D. 

 Creating an invention without obtaining legal title to the invention is like building an office building without obtaining title to the land and building.  Without legal title to the office building, you cannot finance the building, sell the building, or lease the building.  In other words, without legal title to the office building its economic value is significantly reduced.  The same is true of inventions.  Inventing something without obtaining legal title to the invention means that you cannot license (lease) the invention, cannot sell the invention, and cannot finance the invention. 

There are couple of ways to obtain title to an invention.  You can either obtain a patent on the invention or you can keep the invention a trade secret.  Many inventions are not amenable to trade secret protection.  As a society, it is better if people obtain patents instead of keeping their inventions a trade secret, since a patent allows other people access to the knowledge associated with the patent, allowing them to use this knowledge to build other inventions.

 The present accounting rules for the costs in creating an invention and obtaining title to the invention result in an immediate expensing of these costs.  While this may be helpful from a tax point of view, it causes these costs to appear superfluous.  Note that the rest of this post is concerned with accounting as an accurate measurement tool for the operations of a business and is not concerned with tax law, which has caused so many perversions to accounting and business generally.  Our present accounting systems never show  internally funded inventions produce any value. 

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March 14, 2010 Posted by | Innovation | , , , , , , , | 7 Comments

A Modest Proposal for Academic Economists

In one of my earlier posts, Patent Quality Non-Sense , I pointed out that the R&D (Research and Development) per patent ratio, GDP per patent ratio, and number of citations per patent have all increased over the last fifty years.  These were all statistically significant changes.  Based on this evidence I concluded that the quality of patents (or threshold for obtaining a patent) has increased over the last fifty years.

I was fortunate enough to have an academic economist send me a message pointing out that there were several papers by academic economists that have been debating why the R&D per patent and GDP per patent ratio have been increasing.  One of these papers suggested the reason for this phenomena was that as technologies are explored they become mined out – the cost of obtaining a new invention keep increasing.  Of course this issue had been explored in the 1950s by the famous economist, Jacob Schmookler, in his book “Inventions and Economic Growth.”  Professor Schmookler showed that across multiple industries the amount of R&D per patent was essentially the same.  See figure 2, page 46, figure 22, page 138, figure 23, page 139. 


Since these industries included both new industries and mature Continue reading

January 13, 2010 Posted by | Innovation, Patents, Uncategorized | , , , , , , | Leave a comment