21 Use of Patents by Firms on Competition Strategies– Empirical Analysis Using Patent-Related Statistics – (*)
Research Fellow: Masayo Kani
This research verified the factors that have an influence on the determination of a strategy totechnically exclude other firms, out of firms’ patent utilization strategies. Firstly, firms wereclassified into those that can implement a strategy to technically exclude other firms (discrete
technology product firms) and those that cannot do so (complex technology product firms),
according to the technical characteristics of the products dealt with by the firm. The research
empirically proved that the structure of patent utilization strategies differs between discrete
technology product firms and complex technology product firms. On that basis, analysis was
conducted on the patent utilization strategies of the former firms. These firms can implement a
strategy to technically exclude other firms using patents in order to gain excess profits in the
product market, since they lack a technically complementary relationship with other firms. On
this occasion, the technology environment matters. Under circumstances where there are many
firms in the technology environment a firm faces and other firms’ products using substitutetechnologies grab the market share, the advantage of exclusive in-house use of patents in the
product market is small. However, even in such an environment, firms can technically exclude
other firms and maintain their market share by establishing patent blocking and preventing otherfirms from patenting substitute technologies. This research shows that the technology
environment has an influence as one of the determining factors for a strategy to technically
exclude other firms using patents.

I

Introduction

According to the “2006 Survey of
Research and Development,” Japan’s R&D
expenditure in fiscal 2005 stood at a record
high, amounting to 17,845.2 billion yen.
Firms’ research expenditures make up 71.4%
thereof (12,741.5 billion yen). Seeing thatfirms spend such a great amount on R&D
expenditures, they probably wish to secure
the profits generated therefrom. One of themeans of securing such profits is throughutilization of the patent system.
How, then, do firms exploit the patents
they have obtained? In the “Survey ofIntellectual
Property-Related
Activities”
conducted by the Japan Patent Office (JPO),
the status of patent exploitation by survey
targets (mainly firms) has been studied aspart of efforts to understand the actual(*)

conditions of intellectual property-related
activities in Japan. The survey covers a wide
variety of items, including the number ofpatents held, the number of used patents,
the number of patents exploited in-house,
and the number of patents exploited by otherfirms. The survey thus provides important
information regarding the status of patent
exploitation in Japan.
Looking at patents exploited in-houseusing this data, 25% of all survey targets
have some patents that are exploited bothin-house and by other firms, meaning that
75% of them have not licensed the patents
used in-house to other firms. However, thenumber of patents used only in-houseincludes those that are used only in-house
because no licensee can be found, despite theintention to license to other firms (licensable
rights). It is thus possible to calculate theThis is an English translation of the Japanese summary of the report published under the Industrial Property
Research Promotion Project FY2007 entrusted by the Japan Patent Office. IIP is entirely responsible for any errors
in expressions or descriptions of the translation.
●

IIP Bulletin 2008188 ●number of patents used only in-house on
purpose – in other words, the number ofpatents exclusively used in-house – bysubtracting the number of licensable patentsfrom the number of patents used only
in-house. As a result, 39% of the survey
targets have patents that are exploited bothin-house and by other firms, or licensable
patents that have been exploited in-house.
However, this indicates that 60% of thesurvey targets still do not intend to license
patented technologies that they use in-houseto other firms. In recent years, firms’ acts ofprofiting from patent licensing haveattracted attention. Yet the statistics show
firms’ intention to eliminate other firms withregard to technologies they use in-house.
It is often pointed out that such a
difference in patent utilization strategies
arises from differences between types ofbusiness. From what, then, do differences
between types of business arise? Moreover,what factors affect patent utilization
strategies? Out of firms’ patent utilization
strategies, this research focuses on thestrategy to technically eliminate other firms,
and discusses determining factors for patentutilization strategies after considering theintentions on which strategies to technicallyeliminate other firms are implemented.

II

Prior Research on Patent Use

How is the patent system seen in
economics? Since technical knowledge, whichis the result of research and development, isinformation, it has a special character as
economic property, as argued by Arrow(1962). That is, there is the issue ofappropriability, i.e. the relevant actor cannot
enjoy all profits obtainable from technicalknowledge due to non-competitiveness andnon-exclusiveness. If appropriability is low,others may enjoy a free ride on information.
This causes a decline in incentives forinvention. Therefore, there is a patent
system that prevents such decline inincentives by protecting inventions though
the granting of exclusive rights forinventions for a certain period of time. In●

addition, the mechanism that makes
invention information available for use has asignificant influence on the economy, and,
under the patent system, exclusive rights are
granted on the premise of publication.
Therefore, the system also functions topromote the transmission of information.
Ordover (1991) mentions the patent systemfrom two viewpoints – specifically, protection
and transmission of inventions.
However, firms do not always consider
protection by patents as the most effectivemeans of achieving appropriability. For
example, looking at the effectiveness ofappropriability in Cohen et al. (2000),“confidentiality of technical information”
exceeds “protection by patents” with respectto
product
innovations
andprocess
innovations. In addition, for process
innovations, “prior marketing of products”
ranks highly.
Although it is difficult to achievecomplete appropriability through patents,
the patent system still brings about
considerable benefits. What purposes, then,do firms have when they aim at obtaining apatent for technology? Cohen et al. (2000)
tabulates the purposes of firms’ obtaining
patents in two categories – productinnovations and process innovations – basedon the following seven items: the “preventionof copying,” the “prevention of other firms’
attempts to patent a related invention,‘patent blocking,’” the “earning of licensing
revenue,” “use to strengthen the firm’s
position in negotiations with other firms,”
the “prevention of infringement,” “use as ameasure of internal performance of a firm’s
technologists” and the “enhancement of thefirm’s reputation.” Looking at the results, forboth product and process technologies, the“prevention of copying” and “patent blocking”
are the prevalent purposes of patenting. This
indicates that a patent strategy, which
increases the degree of freedom of a firm’s
own business activities and ensures its
position in the product market, thereby
enabling it to gain a competitive advantage,is the important purpose of patent use byfirms.
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Thus, patent utilization strategies areorganized here, taking into consideration the
purposes of use. First of all, the patents heldby firms can be divided into two categories,
namely used and unused patents. It is said
that about half of the patents in Japanremain unused, though the percentage
differs depending on the type of business andthe attributes of the firm. Used patents arefurther divided into two categories based on
the user (patentee (in-house) or other firms).
Firstly, patents used in-house include thosethat are used only in-house and those thatare also used by other firms throughlicensing. Furthermore, patents used only
in-house include those exclusively usedin-house and those used only in-house
because there is currently no licensee, notbecause there is an intention to use themexclusively. Exclusive in-house use is aimed
at gaining greater profits in the productmarket through the prevention of copying byother firms and differentiation from otherfirms in terms of technology. Secondly,
patents used by other firms can be classified
based on the forms of licensing, including
paid licensing, cross-licensing and patentpooling. In the case of paid licensing, thepurpose is licensing revenue. Cross-licensing
and patent pooling are forms of technicalcooperation with other firms, in whichpatents also play a role as bargaining chips.
On the other hand, unused patents are
not unnecessary patents. According toMotohashi (2007), they can be classified into
three types: patents for the “prevention ofpatentingofrelatedtechnology(circumventing inventions) by other firms(establishment of patent blocking),” those forthe “possibility of future commercialization”
and those “preserved for later use with aview to future licensing activities.” Firstly,
patent blocking can be considered as a
strategy for a firm to gain greater profits by
preventing inventions that circumvent its
patented technology, which serves as its core,
and thus protecting the market for its own
products. Next, the possibility of futurecommercialization is an aspect of the
postponement option for patents. A patent is●

IIP Bulletin 2008

an exclusive right available for a certain
period of time. For example, if there is great
uncertainty about current commercializationof a patented technology, it is possible topostpone its commercialization to the future.
In this case, if a firm obtains a patent for thetechnology as of this moment, the technology
will never be used by any other firms. Thismeans that the firm holds the patent while
keeping it unused, in anticipation of profits
obtainable from the future product market.
Patents preserved for later use with a view
to future licensing activities are unused
patents which firms intend to license toother firms. Firms assume that they will
earn licensing revenue through paid
licensing or use patents as bargaining chips
in cross-licensing or patent pooling in the
future.
These three types of unused patents are
divided into two categories based on therelationships with other firms. For the“establishment of patent blocking” and the“possibility of future commercialization,” thepurpose is to prevent other firms from
exploiting a patent, though the patent is
kept unused. These two have meaning as
exclusion strategies using patents (non-use
as an exclusion strategy). On the other hand,patents “preserved for later use in future
R&D or licensing activities” are regarded as
licensable
to
other
firms
(licensable
non-use).
Do all firms face the same problems inusing patents in such ways, then? In thisresearch, out of the technical characteristics
of products, patent utilization strategy is
discussed by dividing products into “discrete
technology
products”
and“complextechnology products,” from the viewpoint of
the number of patented technologies
required for manufacturing products.
A complex technology product means a
product where many patented technologies
are required in product manufacturing, andthe technologies that constitute a productare highly likely to complement each other.
In this case, there will be no problem if a
firm holds all the necessary patents.
However, it is not unusual that patent
190 ●holders belong to several firms, and a patent
thicket arises. On this occasion, technicalcooperation with other firms throughcross-licensing and patent pooling becomes
an effective means. This is observed in themachine-related industries, including theelectric machinery industry.
On the other hand, a discrete technology
product means a product where holding acertain patent leads directly to the product.
It can be manufactured using relatively few
patents. For example, in the pharmaceuticalindustry and the chemical industry, corepatented technology is important, andobtaining a patent for such technology leads
to the product.
However, the situation is not always thesame even among the industries for discrete
technology products, and a distinctive patent
use may arise depending on whether
substitute technology is easily generated.
Reitzig (2004) indicates the number ofpatents necessary for protecting one
innovation(patentbulk),
basedonquestionnaire survey results. Comparing thechemical,
pharmaceutical,
machinery,electric and transport equipment industries,
the greatest number of patents is necessary
in the chemical industry. This is because,
among the industries for discrete technology
products, it is an industry in which
substitute technology is easily generated,
and thus firms take action to hold down
peripheral patents (establishment of patent
blocking) in order to prevent other firms
from patenting substitute technology. In
other words, for the industries for discrete
technology products, a large patent bulk
means difficulty in technically eliminatingother firms by the core patented technology
alone.
As just described, the problems that afirm faces when conducting production
activities using its patented technology differ
based on the technical characteristics of its
products. Therefore, there arise differences
between firms’ patent utilization strategies.

A firm producing complex technology
products develops a patent strategy inconsideration of technical cooperation withother firms. On the other hand, a firm
producing discrete technology products is notconstrained by technical cooperation withother firms and, on the contrary, can adopt a
strategy that technically excludes otherfirms.
The purpose of this research is to clarify
the strategy for achieving competitive
advantage in the product market byexcluding other firms, with regard to firms’
patent utilization activities. Therefore, inwhat follows, verification will be conductedwith a focus on corporate activities regarding
discrete technology products.

III

Determining Factors for Patent
Utilization Strategies: In the Caseof Discrete Technology Products

Discretetechnology
products
arecharacterized by the situation where there isacorepatented
technology
andmanufacturing
productsusing
said
technology lacks complementarity with othertechnologies. Consequently, in contrast to
the case of complex technology products,
technical cooperation with other firms is
unlikely to become a constraint on patent
strategies. That is, patented technology islikely to affect competitive advantage in the
product market. Going to extremes, a firm
may monopolize the product market by its
patent if there is no competitive productusing other patented technology in the same
product market. On the other hand, there isa threat that competitive products will be
introduced in the same product market if
another firm obtains a patent for technology
related to the core patented technology.
First, out of the methods of patent use,patentstrategies
regardingexclusive
in-house use and paid licensing areverified.(*1) The model of Arora and Fosfuri(2003) is used, in which the patent holder(*1) To focus attention on discrete technology products, this research does not consider cross licensing and patent pooling,which are forms of technical cooperation.
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191 ●IIP Bulletin 2008

decides the number of firms to whom it will
license the patent by comparing two factors:
the license revenue effect and the rent
dissipation effect. The latter effect reduces
the profit because of heightened competition
from the licensees’ entry into the same
product market. This is a model by which thepatent-holding firm determines how manylicensees it will have. It is not a model useddirectly for exclusive in-house use; however,by inducing conditions under which the ideal
number of licensees is 0, this model can
express exclusive in-house use as well. From
those conditions, hypotheses are formulatedwith regard to the incentive for exclusive
in-house use and for paid licensing. Only the
major hypotheses are presented below.
Regarding factors in the product market,
firstly, the number of products using
different patented technologies in the same
product market becomes an issue. This isbecause the production quantity of products
other than product i has an influence in the
inverse demand function, unless product i isacompletely
differentiatedproduct.
Therefore, the more products in the same
market, the smaller the excess profits andrent dissipation effect due to licensing. Thisis because the market is shared by those
products.
If there are now several kinds ofproducts in the product market, it meansthat there are several patent-holding firms
in the product market, since a product and apatented technology correspond one-on-one
in the model. Patented technologies in thesame product market fall under the same ora similar class of technology classification.
Therefore, for firms, low concentration of thetechnology market (the technology market iscongested) indicates the possibility of thepresence of many products that can becompetitive in the product market.
<Hypothesis 2>
If the technology market for a patent

held is congested (low concentration of thetechnology market), the incentive for
exclusive in-house use will be lower while
the incentive for paid licensing will behigher.
The second factor in the product market
is the degree of differentiation of a product.
If a product is completely differentiated fromother products in the same product market,
it is possible to completely ignore theinfluence of other products in the inverse
demandfunction.
Therefore,apatent-holding firm may gain monopoly
profits in the product market unless it
licenses the patent. Licensing under suchcircumstances has a large rent dissipation
effect.
<Hypothesis 3>
The stronger a product is differentiated,the higher the incentive for exclusive
in-house use and the lower the incentive forpaid licensing. (*2)
Hypothesis 2 and 3 imply that the otherproducts are important factors affecting thedecision whether to license a patent or not.
The larger the effect of the other products is– that is, increasing the kinds of products(Hypothesis 2) or difficulty in productdifferentiation (Hypothesis 3) – the lower the
incentive for exclusive in-house use and thehigher the incentive for paid licensing.
Moreover, it is shown that the total profit ofa patent holder is decreasing in the numberof product varieties. (*3)
One way of reducing the effect of otherproducts is a product differentiation strategy.
The degree of differentiation of a productwill be lower if another product using
substitute technology exists in the same
market. Said product will be treated as thesame product as said other product in the
inverse demand function if said otherproduct is a complete substitute for said(*2) This hypothesis is not subject to empirical analysis because it is difficult to measure the degree of differentiation of a
product in empirical analysis. However, it is closely linked to Hypothesis 4, mentioned later.
i(*3) See Appendix Ｃ in Arora and Fosturi (2003) for V N < 0 .
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192 ●

product – that is, there is absolutely no
difference between these products. On thecontrary, if a product is independent, it iscompletely differentiated, and other products
do not have any influence on the inverse
demand function.
On the other hand, patenting related
inventions is an effective way of clearing thethreat of substitute products. As mentioned
in Section II, patent bulk is large in thechemical industry according to Reitzig (2004).
This is because firms in the chemicalindustry intend to establish patent blocking
to prevent substitute technology to their own
core patented technologies from being
patented by other firms. That is, it can besaid that establishing patent blocking is a
strategyofexcluding
rival
firms
technologically.
The strategy of patent blocking prevents
the production of substitute products by rival
firms, since another firm can not use thepatented technology in its production. It is
important that no firm uses it. However, in
Arora and Fosfuri (2003), the presence ofunused patents is not recognized in theirmodel. The preemptive patenting theory ofGilbert and Newbery (1982) constitutes
research that theoretically indicated thepresence of unused patents. From theimplication of an exclusion strategy in themodel, patents unused due to suchpreemptive patenting are considered to fallunder those for the “establishment of patent
blocking” and the “possibility of futurecommercialization” (non-use as an exclusion
strategy).
When, then, does the incentive forincreasing the degree of differentiation
increase? It has been said above that thedecrease in excess profits due to licensing
will be small if there are many products thatare based on other technologies in the same
product market. Based on this, the degree ofconcentration of the technology market andincentive for exclusive in-house use in
Hypothesis 2 were derived. However, if
complete differentiation of a product can beaimed at by the inverse demand function, afirm can ignore the presence of other firms.
Therefore, the firm can monopolize theproduct market unless it grants licenses.
<Hypothesis 4>
If a large number of entrants exist in the(patent) technology market, and the degreeof competition is high, incentives for non-use
as an exclusion strategy will be high. (*4)

IV Data Used
The data used in this research is takenfrom the IIP Patent Database, in which
individual patent data is recorded, and thequestionnaire of the JPO’s “Survey ofIntellectual Property-Related Activities” in2003 and 2004 concerning firms’ intellectual
property-related activities. (*5) The data fromthese sources is linked on a firm level, and adata set is thereby prepared with respect toeach firm, consisting of the status of use ofpatents, technical factors and firm factors of
the firm. (*6) For details of the data, see themain body.

V

Estimation

This research empirically indicatesfactors that have an influence on three typesof strategies out of firms’ methods of patent
use: exclusive in-house use, paid licensing
and non-use as an exclusion strategy. That is,
the rate of exclusive in-house use (calculated
by subtracting the number of patents(*4) Although Arora and Fosfuri (2003) assume the innovation market, technology market and product market,
preemptive patenting corresponds to the innovation market. firms(*5) However, the 2003 survey data is used for only one item. Therefore, in what follows, the 2004 survey data is
described.
(*6) From the individual data of the “Survey of Intellectual Property-Related Activities,” an applicant code subject to thesurvey can bespecified. In the IIP Patent Database, an applicant code is attached to each patent for which an
application was filed. Therefore, bothpieces of data can be linked with each other by using the applicant code.
Consequently, it is possible to know what patents a surveytarget holds. Incidentally, although the “Survey ofIntellectual Property-Related Activities” contains 5,247 samples (total number of patents held: 766,733.1), 2,924
samples (total number of patents held: 716,355.4) were used through matching with the IIP Patent Database.
●

193 ●IIP Bulletin 2008

exploited by other firms from the total
number of patents exploited and thendividing this by the number of patents held),the rate of paid licensing (calculated by
dividing the number of patents licensed forvalue by the number of patents held) and therate of non-use as an exclusion strategy(calculated by dividing the number of unused
patents for defense purposes by the numberof patents held) are used as explained
variables, and the following factors areverified as explanatory variables: (i)technical
factorsreflecting
thecharacteristics
andenvironmentoftechnology (patent-based appropriability,
technology cycle and the degree ofconcentration of the technology market), (ii)technical factors of a firm itself (the numberof patents held, the number of classes oftechnology classification and the degree oftechnological diversification) and (iii) firm
factors (the number of employees, R&D
intensity and the profit rate for the previous
fiscal year).
As is obvious in the prior researchmentioned in Section II, the products dealt
with by firms do not have the same technicalcharacteristics. Given this factor, it is first
confirmed by statistical means whether
there is a structural difference between
discrete technology product firms andcomplex technology product firms in thedetermination of patent utilization strategies.
In this research, firms that belong to themachinery industry, electric machinery andapparatus industry, or communications/electronics/electric measuring instrument
industry are deemed ad hoc to be complex
technology
product
firms.
The
null
hypothesis that determining equations forthe three types of strategies fulfill thezero-coefficient restriction at the same time
is significantly rejected, and a structuraldifference between discrete technology
product firms and complex technology
product firms in the mechanism for patentutilization strategies is recognized.
This research pays attention to patent
use by discrete technology product firms.
Therefore, estimations are conducted on●

IIP Bulletin 2008

samples excluding complex technology
product firms.
With regard to the main estimation results,
the rate of exclusive in-house use tends toincrease where the technology market ishighly concentrated (supporting Hypothesis
2). In a highly concentrated technology
market, it is considered very advantageous
to technically exclude other firms without
licensing and adopt a strategy forcompetitive advantage in the product market.
On the other hand, when the technology
market surrounding a patent held iscongested(low
concentrationofthetechnology market), there will be a highpossibility that many other products exist in
the same product market. In this case, therent dissipation effect due to licensing will
be smaller, and thus the incentive for
exclusive in-house use will be lower.
However,regardingtherelationships
between the degree of concentration of thetechnology market and the rate of non-use as
an exclusion strategy, it is possible toconfirm that the rate of non-use as an
exclusion strategy is higher when thetechnology market is congested, as indicatedin Hypothesis 4. This indicates that where
the incentive for exclusive in-house use is
low due to the situation of the technology
market, non-use as an exclusion strategy isused as patent blocking – that is, as a
strategy for differentiation in exclusive
in-house use.

VI

Discussion: Influence of Patent
Use on the Profit Rate

Discussions on firms’ patent strategies
have been conducted theoretically andempirically thus far. What influence, then,do differences in firms’ patent portfolios haveon corporate profits? In this section,
empirical analysis is conducted on theinfluence of exclusive in-house use, paid
licensing and non-use as an exclusion
strategy (patent utilization strategies dealt
with in this research) on the profit rate.
Factors that have influence on the profit
rate can probably be divided into market

194 ●actors and firm factors. Market factors arethose that have influence on the market
structure, and firms are making efforts toincrease their profit rate by combining theestablishment of barriers to entry anddifferentiation strategies. Patent strategies
comprise part of such efforts. Patent
strategies examined in this research take
into account the rent in the market.
Therefore, the profit rate is used as an
explained variable, and three types of patent
strategies (the rate of exclusive in-house use,
the rate of paid licensing and the rate of
non-use as an exclusion strategy), thenumber of employees and R&D intensity are
set as factors. 2 Stage Least Square (2SLS)
estimation is then conducted.
In the first stage of 2SLS, estimation of
the three types of patent utilization
strategies, which are endogenous variables,
is conducted using the instrumental variable.
This is not different from the estimation ofdetermining factors for patent utilization
strategies, as mentioned in the previous
section. In the second stage, the influence on
the profit rate is estimated. This process has
something in common with the firm’s
decision-making process. That is, a firm
decideson
its
patentstrategyinconsideration of technical factors and firm
factors, and its profit rate is determinedbased on its patent strategy and various
other management efforts.
From the estimation results, it ispossible to understand that the rate of
exclusive in-house use has a positive effecton the profit rate. That is, the result showsthat the higher a firm’s rate of exclusive
in-house use is, the higher its profit rate is.
In addition, R&D intensity is also positiveand significant, and the profit rate tends tobe higher for firms that actively carry out
R&D. However, the result shown here wasobtained by only taking patent strategies
and just two firm factors into account as
determining factors for the profit rate. It isthus necessary to pay attention to the pointthat various other factors are mutuallyrelated to the corporate profit rate.

●

VII ConclusionOutoffirms’
patentutilization
strategies, this research verified factors thathave an influence on the determination of astrategy to technically exclude other firms.
In doing so, it was indicated that there arefirms that can implement a strategy totechnically exclude other firms (discrete
technology product firms) and those thatcannot do so (complex technology productfirms),
accordingtothetechnical
characteristics of the products that they deal
with. In addition, it was empiricallyindicated that the structure of patentutilization
strategies
differs
betweendiscrete technology product firms andcomplex technology product firms.
Firms that deal with complex technology
products require many patented technologies
to produce their products, meaning that they
are constrained by technical cooperation
with other firms. On the other hand, firms
dealing with discrete technology products
lackatechnicallycomplementary
relationship with other firms, and rather
aim at excluding other firms technologically.
Therefore, they carry out exclusive in-house
use and non-use as an exclusion strategy. In
that regard, the condition of the technology
market has great relevance as a determining
factor. Specifically, there is little advantage
in exclusive in-house use in a productmarket where there are many substitutetechnologies in the technology market,
enabling substitute products to be put on themarket. However, hypothetically speaking,firms in such an market will adopt a
strategy to prevent substitute technologies
from being patented by other firms, throughthe establishment of patent blocking.
Empirical analysis proved that exclusive
in-house use and non-use as an exclusion
strategy are determined under the influenceof the technology market.
In this manner, strategies are mutuallyrelated in a patent portfolio. Although thisresearch also mentioned this point in
empirical
analysis,theanalysisofdetermining factors for each strategy did not

195 ●IIP Bulletin 2008

go beyond estimated calculation of individual
equations.
Empirical
analysisinconsideration of the relevancy between
patent strategies is left as a future task.

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