Innovation-Specific Patent Protection and Growth

In this thesis, I am undertaking the analysis of the effects of increasing intellectual property rights on the reallocation of different kinds of research and development within an endogenous growth framework. This thesis’ approach considers the innovation process as sequential and cumulative in nature and studies the effects of different property rights regimes on a country’s innovative performance. In particular, by explicitly modelling basic and applied research and development (R&D) within a general equilibrium framework, I try to overtake the existing growth theory, which usually aggregates all sources of R&D and innovation, neglecting intermediate inventive steps. My approach is certainly inspired by the current Schumpeterian growth theory (see Aghion and Howitt, 1998 and 2009), which envisages new products and processes arising from Poisson processes, whose arrival rates depend on private and public R&D. However, unlike the previous Schumpeterian models, in most of the chapters of this thesis, creative destruction itself is modelled as a two-stage processes, or more precisely, as a sequence of investment decisions in R&D, whose result is a probability to invent (basic research) or to innovate (applied research). Hence, the first step, "basic research", creates a research tool which is by itself not profitable, but has the potential to become the basis for the second step innovation. The second step is a marketable product which increases consumers' utility and, through the grant of a patent, generates the monopolistic rent for the second step innovator, i.e. the manufacturer of the new product. This is a natural and simple way to explicitly model basic and applied research, yet it entails non-trivial technical complications in the models along with strong policy implications. Chapter 2 tries to answer the following research question: in order to foster innovation and growth should basic research be publicly or privately funded? This chapter studies the impact of the shift in the U.S. patent system towards the patentability and commercialization of the basic R&D undertaken by universities. Such a shift rendered the U.S. universities more responsive to "market" forces. Prior to 1980, universities undertook research employing researchers motivated by "curiosity. " After 1980, universities patent their research and behave as private firms. This move, in a context of two-stage inventions (basic and applied research) has an a priori ambiguous effect on innovation and welfare. Chapter 2 builds a Schumpeterian model and matches it to the data to evaluate this important turning point. iii Chapter 3 extends the model presented by Chapter 2 by introducing Kremer’s (1998) mechanism for inducing innovation by means of auctions for new patents. Such patent buy-outs are run by the public sector in order to reward innovators and freely disseminate most of the new basic research findings. My work is the first attempt to use Kremer’s idea to address the issue of the patentability of basic research and the financing of early innovation. The same Chapter 3 also quantitatively analyses the impact of the so called “research exemption” of patented basic knowledge. Under the research exemption doctrine, if the second innovator is successful in developing a saleable product or process, then he or she can patent it and yet infringe another patent. The key question that modern economies' innovation systems have been facing in the past few decades is: how should basic research be funded in view of maximizing the efficiency of the innovation system as a whole? In other words, is it possible to conceive the privatization of a country's basic knowledge and an efficient system of incentives to basic research? The study presented by Chapter 4 provides a quantitative assessment on the effects of the US patent reforms that, at the beginning of the Eighties, brought to the patentability of research tools, often invented by the university-led research activity. In particular, Chapter 4 re-examines the policy scenarios and the comparisons presented throughout Chapter 2 and Chapter 3 in order to try to provide these two with a robust empirical support. In the first scenario, only the public sector institutions undertake basic research, rendering all results publicly available for firms, racing to find patentable applications. In the second scenario, important for assessing the post-1980 reforms in the US system of innovation, basic research itself is privatized, and hence patented by private firms. The most important question for the political economy of basic research is which system is most conducive to innovation and growth. The public system permits more idea dissemination, but may not give basic researchers enough incentives to focus their research on the directions most needed by the private developers downstream. The private system optimally channels basic research, but, by allowing the patentability of ideas upstream, precludes free entry into applied R&D. This generates conflicting effects, and the policy conclusions depend on the value of all the relevant parameters in the economy. In Chapter 4, I estimated the most important of these parameters with the US data immediately preceding the major reorganization of university and basic research in the 80s, and I simulated the two scenarios. The resulting simulations show that public R&D system, prevailing at that time, was indeed outperforming every privatized alternative scenario. iv Since the incentives to conduct basic or applied research play a central role for economic growth, Chapter 5 tries to answer the following research question: how does increasing early innovation appropriability affect basic research, applied research, education, and wage inequality? Chapter 5 analyses the macroeconomic effects of patent protection by incorporating a two-stage cumulative innovation structure into a quality-ladder growth model with skill acquisition. It focuses on two issues (a) the over-protection vs. the under-protection of intellectual property rights in basic research; (b) the evolution of jurisprudence shaping the bargaining power of the upstream innovators. It shows that the dynamic general equilibrium interactions may seriously mislead the empirical assessment of the growth effects of IPR policy: stronger protection of upstream innovation always looks bad in the short- and possibly medium-run. In a common law system an explicit dynamic macroeconomic analysis is appropriate; hence I have incorporated the mathematical modelling of the evolution of the common law into the rational expectations of the agents. This major modification allows me to schematically replicate the evolution of the skill premium, education, and strengthening of intellectual property rights (IPR) happened in the US during the Eighties and Nineties of the XX century. Chapter 5 also provides a simple "rule of thumb" indicator of the basic researcher bargaining power and 5 shows that IPR evolution can be introduced into a fully rational expectation framework. This helps explaining the well-known dynamics of the skill premium and education in the US, that motivated well-known theories of skill biased technical change and directed technical change (see Acemoglu 2008). Chapter 6, finally, draws inspiration from an important recent empirical literature on competition and productivity in the service sectors (see Nicoletti and Scarpetta, 2003; Alesina et al., 2005; Griffith et al., 2006; Aghion et al., 2006) to build a theoretical framework to predict whether innovation is hampered by the lack of completion in the non-manufacturing sectors. In this final chapter, I have built a simple model of process innovation where the provision of essential services (intermediate inputs, for example financial services or transports) for the production of the final good is subject to sectorial regulation, which shapes the market structure of the intermediate sector as a non-competitive one. The structure adopted in this chapter allows examining the effects on the economy of the presence of two different monopolized tasks: the intermediate service provision and the use of the innovation. The ultimate purpose is to show how the lack of competition in an intermediate essential sector, like the service sector, is actually able to depress productivity growth in the final sector.