13 A Study on Strategic Use of the Patent System andIts Effects on R&D (*)
Research Fellow: Takamasa SUZUKI
The purpose of the patent system is to encourage invention by promoting the protection and utilization of
inventions, thereby contributing to the development of industry as a whole. Consequently, when designing apatent system, it is vital to avoid negative impacts that could arise due to strategic use of the system bycompanies seeking to maximize profits (for example, impeding incentives for competing companies to undertake
research and development, rather than increasing its own incentives to undertake research and development).
The objective of this study is to analyze decision-making mechanisms in companies’ strategic intellectual
property protection activities (such as decisions on whether to patent or conceal an invention) and conduct atheoretical analysis of the relationship between such strategic activities by companies and the innovation
performance generated in the market as a result, in order to identify issues concerning approaches to a patent
system that will contribute to industrial development.

Ϩ Introduction
Article 1 of the Patent Act clearly states thatthe purpose of the patent system “is, throughpromoting the protection and the utilization of
inventions, to encourage inventions, and thereby
to contribute to the development of industry.”Thanks to the development of various databasesin recent years, Japan is among those achieving
remarkable progress in investigating innovation
processes related to such issues by using patentdata. However, patent data merely shows one
aspect of companies’ innovation activities, as only
some of the inventions obtained as a result ofresearch and development (R&D) are actuallypatented. For example, according to Yamauchi etal. (2012), who analyzed the Survey on Research
Activities of Private Corporations conductedannually by the National Institute of Science andTechnology Policy (NISTEP), around 20% of theinventions that emerged from each company’s
main business areas that were judged to bepatentable were concealed, without any patentapplication being filed. Moreover, Yamauchi et al.
(2014) pointed out the importance of trade
secrets to small and medium-sized enterprises(SMEs) in particular as a means of ensuring
appropriability. The purpose of the patent system
is not only to protect inventions, but also to
publish technology through patent applications
and promote R&D via the use of this technology.
Consequently, in considering a good patent

system, it is necessary to think about incentives
for companies to publish the results of their R&D.
The aforementioned single sentence ofArticle 1 of the Patent Act concisely expresses
the fact that the patent system is a system thatshould simultaneously realize two concepts that
could be described as polar opposites: theprotection of inventions and the promotion ofcompetition. If the protection of the inventor’srights is too powerful, distortions such as
monopolistic markets could emerge, due to theimpeding of competition between those who havethe invention and those who do not; conversely, if
the rights of inventors are disregarded and theonly means of encouraging market competition isgovernment policy, companies will become
impoverished and are unlikely to become
motivated to invest in innovation. Accordingly, forthe patent system to achieve its purpose, it would
appear to be vital to use this system to skillfully
control the balance between protection andcompetition in industry.
As such, focusing on the multifaceted natureof the patent system, this study conducts atheoretical analysis of whether policies that affectprotection and/or competition promote R&D
through the use of the patent system by inventors.
Particular attention is paid to the decision-making
mechanism in companies’ strategic intellectual
property protection activities (whether to publish
an invention and acquire exclusive rights bymeans of a patent application or to conceal that(*) This is an English translation of the summary of the report published under the Industrial Property Research
Promotion Project FY2014 entrusted by the Japan Patent Office. IIP is entirely responsible for any errors in
expression or description of the translation. When any ambiguity is found in the English translation, the original
Japanese text shall be prevailing.
IIP Bulletin 2015 Vol.24● 86 ●

invention). In other words, as well as clarifying
the mechanism via which the company thatoriginally obtained an invention decides whether
or not to apply for a patent, this study conducts atheoretical analysis of the effect on innovation
performance throughout the market as a whole if
the company did actually apply for a patent.
Through this, it examines approaches to a patent
system that will contribute to industrial
development.

ϩ ModelThis section sets out a model of a patent racein a market consisting of two companies, taking
into account the cumulative nature of theinventions. From the perspective of the R&D
promotion effect, it considers decision-making interms of the situations in which intermediate
inventions are published through patentapplications.
With regard to the basic competitive
background, the two companies are competing todevelop a certain end product and two inventions
are required to develop it (the first-stage
invention and the second-stage invention). The
inventions have a cumulative nature, so thefirst-stage invention is needed in order to create
the second-stage invention, and the product using
the second-stage invention is the end product, but
it is assumed that an intermediate product using
the first-stage invention could also be brought tomarket. Here, it is assumed that a patentapplication is required to bring the product tomarket, irrespective of the stage. In other words,
it is assumed that reverse engineering, etc. would
lead to the emergence of imitations if theinvention was commercialized without acquiring
rights via a patent application.
The series of events that could occur in thismodel begins with both companies starting towork on the first-stage invention. As time
progresses, one of the two companies succeeds indeveloping the invention first and becomes theleading firm, so it faces a choice as to whether toapply for a patent for the first-stage invention orwhether to conceal it.
Once a patent application is filed, a productusing this invention will be brought to market, so
the R&D competition focused on the first-stage
invention will end and the R&D competition
aimed at creating the second-stage invention will
start. Success in creating the second-stage
invention is the ultimate goal of both companies,
so the company that is first to succeed indeveloping it following the R&D competition will
file a patent application for the second-stage
invention; the end product will then be brought tomarket and the patent race will end.
If, upon succeeding in creating the first-stage
invention, the leading firm chooses to conceal
this invention, the leading firm will move on to
R&D focused on the second-stage invention,
while the other company – that is to say, thefollowing firm – will still be working on first-stage
R&D. If, in this situation, the leading firm
succeeds in developing the second-stage
invention, that company will file a patentapplication for the second-stage invention and theend product will be brought to market, ending thepatent race. However, if the following firm
succeeds in creating the first-stage invention
before that success, it is assumed that thefollowing firm will be able to choose whether tofile a patent for the first-stage invention orwhether to conceal it. The patent application
results in a product of intermediate quality thatuses the first-stage invention being brought tomarket and the two companies compete todevelop the second-stage invention; the company
that wins this competition files a patentapplication for this invention and brings it tomarket, ending the patent race.
The diagram below illustrates the series of
events that could occur in this model from thetime that the competition between the twocompanies to create the first-stage invention
begins until one of those companies succeeds increating the second-stage invention. Here, wheneach company has itself succeeded in developing
the first-stage invention, it cannot tell which of
the two events inside the dotted line in the
diagram has actually occurred. In other words, it
is assumed that neither company knows whether
it has succeeded in creating the invention as thefollowing firm (that is to say, whether the rival
company has already succeeded in creating thefirst-stage invention and is concealing it) or
whether its own R&D has been successful before
its rival’s.

● 87 ●IIP Bulletin 2015 Vol.24

Start
1st-stage R&D
competition
between two
firms

Leading firm
files for 1ststage invention

Following firm
files for 1ststage invention

2nd-stage R&D
competition
between two
firms

One (becomesleading firm)
succeeds in 1ststage development

Following firm
succeeds in
1st-stagedevelopment

Following firm
conceals 1st-stage
invention

One succeeds
in 2nd-stage
development

Goal

Leading firm
conceals 1ststage invention

Leading firm
succeeds in 2ndstage
development

Following firm at
1st stage, leading
firm at 2nd

Not known which when 1st-stage
invention succeeds

Goal

Figure 1
In each phase, each company continues to
pay a certain sum in investment costs and if it
succeeds in its R&D of an invention at either
stage (and if the invention at that stage has notbeen patented by the other party), it can earn
profits from the market by filing a patentapplication for that invention. The period during
which profits are earned from the patenting of thefirst-stage invention runs until one of thecompany succeeds in creating the second-stage
invention; profits from the second-stage invention
can only continue to be earned for the duration of
the patent protection term.
In the case of the first-stage invention, thedecision on whether to file a patent application orconceal the invention is based on consideration
not only of the profits to be secured from theinvention, but also the ramifications of theinformation for competing companies (spillover)or the effect of imposing constraints on the R&D
activities of the rival company by patenting theinvention (blocking by such means as depriving
them of freedom of operation). In this model, theripple effect of the technology in the patentapplication is considered to depend on the state of
the rival company’s progress with its R&D. If, at
the time of filing a patent application for the
first-stage invention, the rival company has not
succeeded in creating that invention, the ripple
effect of the technology resulting from thepublication of the information will enable the rival

IIP Bulletin 2015 Vol.24

Series of Events that Could Occur
company to participate in the second-stage R&D
competition without having succeeded in creating
the first-stage invention; in other words, aspillover will occur. On the other hand, if, at thetime of filing a patent application for the
first-stage invention, the rival company isconcealing the fact that it already has thatinvention, the information about the technologythat the rival company has already succeeded indeveloping will be published and protected byanother party, so the blocking effect will actually
be greater than the spillover effect. Policymakers
can control the efficiency of these effects. In thecase of the efficiency of spillover, policies such as
making patent examination more rigorous by, forexample, adding new description requirements orrevising the examination guidelines make the useof information published via a patent application
more effective. On the other hand, policies
affecting the efficiency of blocking focus on theextent of the scope of protection offered by apatent application.
The decisions made by companies
concerning patent application versus concealment
in this situation are examined. The focus here is
the situation in which a patent application will be
filed in a form that will result in the first-stage
invention causing a spillover.

● 88 ●

Ϫ Solution to the Model and Effect on Policy

III. Solution to the Model and Effect on Policy
Figure 2
The diagram above regards the model
described in Section II as an extensive-form gamewith ‫ܫ‬ଵ and ‫ܫ‬ଶ as players, and expresses it in theform of a game tree1. In this model, the optimal
action pairs for both companies in relation to four
variables (R&D costs in each phase, the average
speed at which invention takes place, theefficiency of spillover (should it occur), and theefficiency of blocking (should it occur)) are
explored. R&D costs and the speed at which theinvention takes place are exogenous variables
that cannot be controlled by policymakers anddiffer according to the market in which thecompanies are competing. Figure 3 shows thedecisions made by the companies as to whether tofile a patent application for or conceal thefirst-stage invention in each combination of these
two exogenous variables, taking the efficiency of
spillover and the efficiency of blocking undercurrent policy as a given. In the area above thedotted line in this diagram, filing a patentapplication is the action at the equilibrium point
for both companies, but the company whose rival
has filed a patent application will withdraw fromthe R&D competition for the second-stage
invention. In the top left area of the diagram,
R&D costs are high and the speed of invention islow. In this kind of market, filing a patentapplication for the first-stage invention makes it
possible to reduce the profits that can be earned
by the rival company from the second-stage
invention, thereby diminishing its motivation toinvest; in addition, it will take time for the next

Two-Stage R&D Game Treeinvention to be created, so it becomes more
important to secure profits from the first-stage
invention. Even in the shaded area adjacent to thedotted line, filing a patent application as soon thecompany succeeds in creating the first-stage
invention is the optimal action for both companies,
but here, the patent application will not cause therival company to withdraw from the market andthe consequent spillover will promote R&D
competition focused on the second-stage
invention. Conversely, in the bottom right area,
the speed of invention is rapid and R&D costs are
low, so the profits that can be gained from being
the first to succeed in creating the second-stage
invention are substantially greater than earnings
from the market resulting from the patenting of
the first-stage invention and concealment of theinvention will therefore be the optimal action pairfor both companies. In the portion between these
two areas, the optimal action pair will be for one
company to choose to file a patent application andfor the other to choose to conceal it. It is notknown before the R&D competition begins which
company will become the leading firm, so if eachcompany takes the action seen at the equilibrium
point in this area and if the company choosing tofile the application happens to be the leading firm,a technological ripple effect would occur, whereas
if the following firm succeeds in creating thefirst-stage invention and files the application, thiswould have the effect of blocking the technology
concealed by the leading firm.

● 89 ●IIP Bulletin 2015 Vol.24

Figure 3
In this model, if the action at equilibrium is(file, file) and the rival in the competition will notwithdraw from the market, socially desirable
R&D competition will occur at the point where
the end product will be brought to market in the
shortest period of time and where eachcompany’s total investment costs are lowest.
Accordingly, this model examines how thisdesirable case (the shaded area in the diagram)

Figure 4

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can be increased by controlling the efficiency of
spillover and the efficiency of blocking, which arebeing treated as policy variables.
The diagrams below illustrate the changes in
the optimal actions for the companies brought
about by a policy that increases spillover
efficiency, a policy that increases blocking
efficiency, and a policy that increases both ofthese simultaneously.

The Effect of Increasing Spillover Efficiency

If spillover efficiency alone increases, thenumber of inventions concealed due to fears
about spillover to competitors will grow, while thenumber of inventions that encourage withdrawal
from the market due to the filing of patentapplications will fall. To determine whether or notthere will be an increase in patent applications
that promote R&D focused on the second-stage
invention, it is necessary to examine the

Figure 5

Optimal Action Pairs

difference in size between the decline in thenumber of patent applications that encouragerivals to withdraw from the market and theincrease in the number of inventions concealed.
Consequently, a rise in spillover efficiency has theeffect of shifting the area in which patentapplications that encourage R&D occur further
toward the top left of the diagram.

The Effect of Increasing Blocking Efficiency● 90 ●

If blocking efficiency alone increases, patentapplications will begin to be filed for inventions
that had previously been concealed. Rather thanincreasing patent applications filed in the hope ofachieving a blocking effect, this increases the
incentive to file due to fears of blocking by a rival.
At the same time, this policy will not affect the

Figure 6

The Effect of Increasing Both Spillover Efficiency and Blocking Efficiency

If
both
efficiencies
areincreased
simultaneously, the increased incentive forconcealment caused by greater spillover
efficiency can be offset by the simultaneous risein blocking efficiency. A policy that achieves abalance in the rise in the two efficiencies brings
about a strict increase in the number of patentapplications that promote R&D, while causing astrict decrease in the number of inventions

Figure 7

situation in which the filing of a patent applicationby the leading firm causes the following firm towithdraw from the market. Consequently, a rise inblocking efficiency has the effect of extending thearea in which patent applications that encourage
R&D occur toward the bottom right of the
diagram.

concealed and the number of patent applications
that cause rivals to withdraw from the market.
Finally, this paper analyzes the impact thatknowing whether or not the rival has an invention(in this model, a situation in which there is whatis described in game theory as “complete
information”) has when considering whether tofile a patent application for that invention orconceal it.

Changes in Actions if Both Efficiencies Increase Where There is Complete Information

The change in the diagrams above from left
to right shows the change in actions by thecompanies if the policy in the original modelchanges from that illustrated in Figure 3 to that
illustrated in Figure 6. Although the same policy
has been enacted, in Figure 6, it had the effect ofincreasing the number of applications for patents
in the bottom right portion of the diagram,whereas this effect is weakened where there iscomplete information. Accordingly, the existenceof uncertainty concerning the fact that the rival
might be concealing the invention can be said toincrease the policy’s effect. By increasing theblocking effect of patents, this policy offsets the
incentive to choose to conceal an invention
brought about by its promotion of the spillover
effect arising from patent applications. This isbecause the increased blocking effect of patents
increases incentives for the following firm to file apatent application due to direct motivation in theform of the ability to block its rival, whereas theleading firm will file patent applications despite
the spillover risk due to an indirect factor, namely
its fear that there will be a more powerfulblocking effect than before the change in policy. In
the situation in which a company did not know
● 91 ●IIP Bulletin 2015 Vol.24

whether it was the leading or following firm, theincentive to file a patent application was increased
by both direct and indirect factors, so thecompanies reacted more sensitively to control ofthese variables.

ϫ Conclusion
This study considered approaches to a patent
system that will encourage R&D. It focused on
examining the mechanism by which companies
purposely conceal inventions from which they can
expect to generate profits via the acquisition ofrights, and undertook a theoretical considerationof policies for reducing concealment in thissituation and increasing patent applications that
promote R&D. Accordingly, it firstly set out amodel for actions by companies in a situation
involving inventions with a cumulative nature andthen analyzed the decisions they madeconcerning whether to disclose or conceal thoseinventions. From the perspective of a patent
system that promotes R&D – in other words, thecreation of a further invention through theutilization of a patent for which an application has
been filed –this model explicitly took into
consideration the intrinsically cumulative natureof inventions. As a result, it was ascertained that,
due to the cumulative nature of the inventions,
there was an incentive to deliberately conceal aninvention for which rights could be acquired, even
if there was no cost involved in filing a patentapplication and maintaining the patent. If R&D
costs are not that high and the invention of theultimate product will generate substantial profits,
there is only a weak incentive to publish thatintermediate invention in exchange for patentrights. This is because publishing it will place thecompany at a greater disadvantage because therival company will learn the company’s current
position in the R&D competition and the directionthat further development will take based on thatinvention. Consequently, the company is likely towant to minimize the amount of information
disclosed when filing the patent application. The
trade-off between the spillover effects for suchrival companies and the blocking effect on therival’s R&D achieved by securing exclusive rights
plays a crucial role in decisions concerning thefiling of patent applications.
In the model considered in this study, boththe spillover and blocking effects brought about
by a patent application were explicitly examined.
In particular, this model considered the effects ofpolicies based on the assumption that the

IIP Bulletin 2015 Vol.24

spillover effect is strengthened when an invention
that nobody has previously succeeded in creating
is published, whereas the blocking effect isstronger than the spillover effect if a company
files a patent application for an invention that acompetitor has already succeeded in developing
but has been concealing, because that competitor
will no longer be able to freely use the invention
at hand. More specifically, if policymakers were,for example, to increase the quality of information
published when patent applications for inventions
were filed by imposing more stringent
requirements for the description provided on theapplication documents, it is likely that this would
increase the blocking effect of patents throughcontrols that would make spillover occur more
efficiently or by accepting a broader scope of
patent protection in the claim. Accordingly, thisstudy analyzed approaches to patent policy byusing these tools in tandem, with the aim ofpromoting further R&D through the publication oftechnical information, which is the intended
purpose of the patent system. As a result, it was
ascertained that, rather than canceling out theeffects of the policies, these two tools actuallycomplement each other, so it is preferable toimplement policies that achieve an appropriatebalance between the amount of information
disclosed when filing a patent application and thescope of protection provided by patent rights,
according to the amount of information disclosed.
Among the various intellectual property
policies that have been implemented by the Japan
Patent Office, one example of more rigorous
description requirements is the 2003 change inthe system concerning support requirements.
This change in the system took the form of the
stipulation of a new type of violation of the
support requirements: “When the content
disclosed in the detailed explanation of theinvention can neither be expanded nor
generalized to the scope of the claimed invention
even in light of the common general knowledge asof the filing.” Accordingly, to obtain protection forthe same scope as before, it became necessary toprovide more detailed evidence and experimental
data. If the results of the model are applied, thiskind of change in the system would increase thenumber of inventions concealed, while reducing
the number of following firms withdrawing fromthe market due to a patent application by a leading
firm, so the balance between the two would
determine whether R&D competition in thesecond stage would be promoted. The author
would like to conduct an empirical evaluation of● 92 ●

such effects in the future.
Moreover, this study dealt with R&D
competition between companies with the same
capabilities, but in the case of competingcompanies with differing levels of ability to utilize
patents (for example, SMEs or large corporations),
even if their R&D capabilities are the same, thespillover effect of a patent application on rivals isgreater for SMEs, while the blocking effect isweaker. Consequently, the incentive to file apatent application is lower than for a large
corporation. The reverse could be said withregard to a large corporation, so this is likely togive rise to asymmetry between companies ofdifferent scales in terms of the importance of thepatent system in securing profits from inventions.
One more distinctive feature of this study isthe fact that it examined the effects of incomplete
information and policy effects. Where companies
are under pressure from competitors and their
R&D capabilities, they do not know whether they
are ahead of or behind their rivals in the R&D
competition. In patent applications in thissituation, there is uncertainty because theapplicant does not know at the time of filingwhether the application will trigger a spillover to
its rivals or give rise to a blocking effect that willslow down rivals who are leading the race. This
study examined the effects of policy changes in asituation where the patenting firm knows that it isin the leading position, as well as a situation
where the patenting firm does not know its
position in the competition. As a result, it was
found that the policy effect is greater when there
is uncertainty with regard to information. This isdue to the fact that firms react to each of thepolicies because they are not sure of the effect at
the time of application. Consequently, suchcomposite policies can be expected to have agreater effect in emerging industries, where thepace of invention is swift and leapfrogging occurs
frequently, with the position of leading andfollowing firm changing rapidly, rather than inheavy industry, where the more and less leading
firms are already common knowledge. Thismeans that it is worthwhile for a company toknow that it is the first-mover and that its rivals
are behind in the competition. This also suggests
the potential for a strategy of filing a patent thathas nothing more than a signaling effect, with thesole intention of informing rivals that thecompany is ahead of them in the R&D
competition, thereby bringing about thewithdrawal of those rivals from the market
without triggering a spillover effect. Models that

include such options and R&D races consisting of
inventions at additional stages could be topics for
future consideration.
References
Yamauchi, I. et al. (2012). “Know-how
Management and Innovation Performance“,
NISTEP Discussion Paper, No.84 (in Japanese).
Watanabe, T. (2008). “Seminar: Introduction toGame Theory”, Nikkei Publishing (in Japanese).
Yamauchi, I. et al. (2014). “Effects of strategic IP
management and early patent protection on the
SME’s innovation performance”, ERIA Research
Report [forthcoming].

1● 93 ●For more on game theory, see Watanabe (2008), forexample. What is referred to as the information set isrepresented by the dotted line.

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