Name :John P. Walsh
Organization (at the time of the grant): University of Tokyo
Title of Research:“Is a pro-patent policy justified: empirical evidence from Japan and the U.S.”
Purpose :There is substantial concern among policymakers in Japan and the US about therelation between patent policy and innovation. Recently, we have seen a tendency toendorse a “pro-patent” policy as a means for increasing innovation. Many believe
patent rights are essential for protecting returns to innovation (what economists broadly
call “appropriability”) and therefore key to promoting R&D, productivity and economicgrowth. In both the law and economics, it has long been recognized thatcommercializing an invention or disclosing its details may elicit imitation, thereby
dissipating the value to the inventor and dampening incentives to invent. In theory,
patents solve this appropriability problem: in exchange for disclosure of the details of
the invention, society grants the right to restrict an invention's use, thereby enhancing
the incentive to invent. The effect of patents on innovation is complicated by the dualrole of patent-mediated information disclosure in affecting the incentives to innovate:
On the one hand, the information disclosed by own patents tends to diminish
appropriability, decrease the patent premium, and thus a firm’s propensity to patent andits R&D incentives (cf. Horstmann et al. 1985; Arora, Ceccagnoli, Cohen, 2003,
henceforth labeled ACC). On the other hand, patents held by other firms may stimulate
R&D productivity via their impact on R&D information flows and thus increase, throughthis channel, the incentives to innovate. Since the Japanese patent system compels thedisclosure of more information sooner in the innovation process relative to the U.S., aninternational comparison between the U.S. and Japan should reveal the differential
effects on R&D incentives of greater information flows due to patents (cf. Ordover, 1991,
Cohen et al., 2002). Furthermore, it is Japan’s disclosure-based system that is
associated with relatively greater R&D effort). This suggests that there may be
important social welfare gains from a patent system that is balanced more toward
disclosure and less toward exclusivity.
In fact, despite the policy trends, there is very little empirical support for thispro-patent policy, and some reason for skepticism (cf. Mazzolini and Nelson 1998).
Because firms can capture much of the benefit from their innovations through firstmover advantages, secrecy and complementary sales or manufacturing capabilities,
the additional benefit from patenting the invention is uncertain, particularly because
patents are costly to get and to defend, disclose information, and can be invented
around (Cohen, et al. 2002). In addition, the benefits that patents provide one firm canbe impediments to another firm trying to develop new technology (Scotchmer, 1991).
On the other hand, prior work suggests that in some industries, particularly drugs,
patents are effective in protecting returns to innovation and provide important
incentives for substantial R&D (Levin, et al. 1987, Cohen, et al. 2002). Thus, the net
effect of patents on R&D incentives and on technical advance is not certain.
Content/Methodology:
To address the issues raised above, we developed and estimated a firm-level
model of patenting and R&D effort in Japan and the U.S. using the matched surveys

from NISTEP and Carnegie Mellon University. Responses, provided by the R&Dmanagers, were matched to each R&D unit’s focus industry that represented the bulkof its R&D effort. Our U.S. and Japanese samples allow us to construct industry-levelmeasures for over 60 distinct manufacturing industries and has firm-level data fromover 1400 respondents. We supplemented the survey data with additional archival
data on public R&D spending, by state/prefecture and by field (allowing us to estimate
local public R&D spending for each respondent). We also added data on whether thecompany was public and whether it was foreign-owned, using published sources. Noprior study has this extensive a set of measures from such a broad sample of firms andindustries. The combination of comparable sample from both the U.S. and Japan
makes this dataset unmatched as a tool for studying patents and innovative activity.
We build on prior work examining the impact of patenting on innovation in the US
manufacturing sector (ACC, 2003) and compare the effects of patent protection on
R&D incentives between the U.S. and JapanWe estimated a firm-level model of the patent premium (the incremental return toan innovation from patenting) and its effects on R&D spending. Our unique dataset
allows us to measure R&D, patenting, the strength of patents, and information flows
separately, which enables us to estimate the patent premium for each industry and foreach country. We estimate a system of structural equations where patent propensity,
patent applications, and R&D investments are mutually determined. Exogenous
variables in the model include measures of patent effectiveness, firm characteristics(such as size, IT use, globalization and ownership), inter-firm competition, andinformation flows (from rivals and from public sources).
Further research will expand this line of activity to include an industry-levelcross-national model. We will estimate a system of equations at the industry level inwhich industry R&D is partly determined by industry-level R&D spillovers, non-patentappropriability (secrecy, first mover advantages, sales and manufacturing capability)
and the strength of patent protection; and, at the same time, industry R&D and patents
contribute to R&D spillovers. Preliminary analyses of the US data suggest that patentshave a positive effect on R&D, but that spillovers also have an independent, positiveeffect. By extending the analyses to include the case of Japan, we can leverage thedifferences in the patent systems to probe the effects of patent policies and market
structures on these relationships. Since the Japanese patent system discloses more
information sooner in the innovation process (Ordover, 1991), estimating such a modelfor the US and Japan should reveal the differential effects on R&D incentives of greater
information flows due to patents. After controlling for the other factors that condition
R&D, a finding that greater R&D information flows due to patents strongly encourage
R&D would imply that more disclosure due to patents may not, on balance, discourage
innovative effort. Such a conclusion could offer important implications for patent policyin each country. We also hope to take advantage of new survey data in Japan to do an
over-time comparison.
Conclusions/Observations:
Initial findings suggest that contrary to the U.S. (cf. ACC, 2003), in Japan it isprofitable to patent the typical innovation and firms show substantially higher patent
propensities across all manufacturing industries. However, conditioned on having
applied for a patent on the innovation, the premium on a patented innovation is higher
in the U.S. than in Japan. Preliminary results also show that larger firm size andstrategic offensive and defensive uses of patents (for example, for prevention of suits,
cross-licensing or blocking) that go beyond the licensing and commercialization ofinnovations (cf. Cohen, Nelson and Walsh (2000), tend to stimulate the returns topatenting relative to other appropriability strategies to a greater extent in Japan than inthe U.S.

We also find that the disclosures due to patents held by competitors stimulate afirm’s R&D productivity in both countries, although this complementarity effect is muchgreater in Japan then in the U.S. The results thus suggest that patent protection
stimulates R&D incentives and innovative performance in both countries, but thechannels that mediate such positive effect are substantially different, with important
implications for both business and public policy.
We are still in the process of analyzing the data and confirming the results. The
model is econometrically complex and we are still working on refining measures andspecifications. Thus, these initial results should be viewed with some caution.
However, the model looks promising and we believe that the key results will be robust
to changing specifications.
Thus, our results suggest that the impact of patenting varies significantly between theU.S. and Japan. While our results are consistent with a pro-patent policy shift, given
the large cross-industry variance in the impact of patenting on innovation, we should becautious about inferring that stronger patents would have an overall positive effect oninnovation.