14 A Quantitative Analysis of the Economic Effects of Patents
on Industry: The Case of Japanese Automobile Industry(*)
Research Fellow: Miyuki TANIGUCHI
This study represents an economic analysis of an argument that Japanese firms’ patents are failing tocontribute to their profits. Particularly, this study focused on patents for eco-friendly technologies used for hybrid
vehicles to verify the economic effects of patents on the automobile industry. Automobiles cover so many
elemental technologies that it is unlikely that any single firm will own all of the patents covering one vehicle.
Because the patent royalties are spread out across many different patent owners, profitability for patents ofautomobile technologies is assumed to be low. However, almost all eco-friendly technology patents aremonopolized by a few Japanese firms, so this subcategory of patents might make more of a contribution to the
profits of Japanese firms than patents generally. This study found that international applications for patents onelectric motor technologies can hold down vehicle production costs, but that they do not contribute to the profits of
the automobile industry due to the insufficient diffusion of vehicles powered by electric motors. It also found thatpatents on hybrid vehicle control technologies have failed to contribute to boosting car manufactures’ newpassenger car sales. This lack of an effect may be due to hybrid vehicles’ limited market share even in countries
with strict vehicle emissions standards, such as Japan and Germany.

I

Introduction

According to Watanabe (2012), one of recent
patent-related arguments in the intellectual
property management field says, “Japaneseenterprises’ patents may be failing to contributeto their earnings.” Given the fact that European
firms and American firms with fewer patents are
earning more than Japanese firms with more
patents, some Japanese firms question whether ahigh investment in patents will yield sufficient
returns.
This study examines whether patents
contribute to profits for firms by employing an
economic approach to verify whether patents are
apt to lead to profits. Specifically, the study has
had two purposes. One purpose is to verify the
impacts of patent systems and patent acquisitions
on the productivity of the entire industry and on
individual patent acquirers with econometricmodels. Another purpose is to drive policy
implications for patent systems that would
provide incentives for the research anddevelopment (R&D) operations of enterprises andmake greater contributions to invigorating theindustry. Particularly, the study proposed a patent
system that will boost incentives for firms’
investment in research and development ofsocially significant eco-friendly technologies in anenvironment where it is very uncertain whether

patented technologies could increase profits.
Only the automobile industry is analyzed.
The reason for narrowing down the target to one
industry is that patents’ links to earnings widelydiffer from industry to industry. For example,
Watanabe (2012) compared the pharmaceuticaland electronics industries based on aquestionnaire survey by Watanabe et al. (2008)
and reaffirmed that patents’ contributions toearnings differ from industry to industry. The
reason for choosing the automobile industry fromamong a number of industrial industries is thatboth the situations of less and more monopolized
patents can be analyzed in this industry. In
general, it can be assumed that less monopolized
are associated with lower profits attributable tothe patents, while more monopolized patents canlead to higher profits attributable to the patents.
Given that automobiles cover a large number of
elemental technologies including electronics, it
may be difficult for any single automobile
manufacture to possess all patents on its products.
Therefore, patents’ profitability can be generally
assumed to be low in the automobile industry.
However, patents on hybrid and othereco-friendly technologies are a special case.
Because patents covering these technologies are
more monopolized, with many held by the same
Japanese firms, these patents may contribute
more to profits than patents covering other(*) This is an English translation of the summary of the report published under the Industrial Property Research
Promotion Project FY2013 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.

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aspects of the vehicle. The study thus focused on
patents on eco-friendly technologies that arehighly monopolized. Given the Japanese
automobile industry’s strong international
competitiveness, their patents could be found to
be a source for their competitiveness.
Here,
eco-friendly
technologies
inautomobile industry must be defined specifically.
The study defines as eco-friendly technologies forengine technologies for hybrid electric andelectric vehicles that are almost monopolized bysome Japanese automobile manufactures. In
general, electricity-fueled vehicles emit lessnitrogen oxide, carbon dioxide and particle
matters than gasoline-fueled ones and are viewed
as eco-friendly cars that impose fewer loads onthe environment.
In analyzing economic effects of patents theon automobile industry, the channels throughwhich patents work to the advantage of patent
holders are considered. There are three main
ways that patent owners in the automobile
industry may profit from their patents: 1) Bycollecting license fees from other firms that wish
to use the patented technology; 2) By applying
the patented technologies to increase production
efficiency and lower production costs, thereby
enhancing the firm’s price competitiveness; and3) By using the presence of the patented
technology as a marketing point to attract
customers. In an approach designed to cover allthese channels, an econometric approach was
adopted to verify the following three points:(A) Whether getting patents increases profits inthe automobile industry(B) Whether patents reduce vehicle production
costs(C) Whether patents increase the demand for
new cars
The procedures and results of theeconometric analysis in this study aresummarized the following: First, production
functions are estimated to verify (A) whether theacquisition of patents leads to boosting profits inthe automobile industry. The verification covered
the three channels comprehensively. The
verification found that getting the patents
concerning the electric motor technologies
reduced earnings in the automobile industry eventhoughthesetechnologies
werehighlymonopolized by some firms. As earlier assumed,
it also found that the acquisition of patents onother major technologies has little impact onearnings in the automobile industry. Next, it wasverified whether production costs or sales aspects

are responsible for leading to the acquisition ofpatents on electric motor technologies to lower
earnings. A production function was estimated toverify (B) whether patents reduce vehicle
production costs. The analysis found thatpatented electric motor technologies that are partof eco-friendly technologies can reduce labor andcapital input per vehicle to lower overall
production costs. It also found that the acquisitionof patents on hybrid engine technology canincrease production costs instead of lowering
them. As for sales, a demand function was
estimated to verify (C) whether patents increase
the demand for new cars. The analysis found thatpatents do not increase new car sales. It also
found that patents on hybrid vehicle control
technologies as part of eco-friendly technologies
fail to lead to expanding demand for new cars.
This may be because the market penetration rate
for hybrid vehicles is still low.

Ⅱ An analysis of some impacts ofpatents on productivity of theJapanese automobile industry
Chapter II first verified whether theacquisition of patents leads to boosting earnings
in the automobile industry. As it is difficult for any
single automobile manufacture to possess all
patents on a car consisting of a large number of
elemental technologies, it is expected that it
would be difficult for patents to lead to boostingearnings.
As someJapanese enterprise
exclusively possesses patents on eco-friendly
technologies for hybrid and electric vehicles andalmost monopolizes the hybrid and electricvehicle market, there is a possibility that theacquisition of patents on these technologies could
contribute to earnings in the Japanese automobile
industry.
Production functions are employed for theverification. First, a stochastic frontier production
function was estimated. In the stochastic frontier
production function, the inefficiency terms added
to a usual translog production function to control
differences in country-by-country automobile
industry production efficiencies. Next, ordinal
least square models are employed to check
impacts that patents exert on the value of
inefficiency determined through the estimatedstochastic frontier production function.
Data on 14 of the 15 major vehicle-producing
countries between 1990 and 2010, excluding
Sweden whose data were unavailable, were used
for estimation. The 14 are Japan, the United

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States, Canada, Germany, the United Kingdom,France, Italy, Spain, Australia, South Korea, Brazil,
Russia, India and China. The number of samples
stood at 196 (14 countries over 14 years). Data on
country-by-country automobile industry was
drawn
from
GMID
Passport
Academic(Euromonitor International) and patent data -PCT (Patent Cooperation Treaty) applications bymajor technology category in the automobile
industry -- from the OECD iLibrary. Value addedin the automobile industry was defined as output
and capital and labor as input.
The verification found that patents fail tolead to boosting earnings in the automobile
industry.
Evenpatentsoneco-friendly
technologies that are highly monopolized by someenterprise were found to make little contribution
to earnings. The finding is identical to the earlier
study conclusion that Japanese enterprises'
patents have failed to contribute to theirearnings.
Next, Chapter II confirmed whether
production side is responsible for the failure ofpatents on highly monopolized eco-friendly
technologies to contribute to earnings. Because
the frontier model was rejected as an estimation
result of stochastic frontier production function
estimation, patents were added as an independent
variable for the trans-log production function
without the inefficiency term to examine theimpacts of patents on productivity.
Data on 14 of the 15 major vehicle-producing
countries between 1990 and 2010, excluding
Sweden whose data were unavailable, was used.
The 14 are Japan, the United States, Canada,
Germany, the United Kingdom, France, Italy,
Spain, Australia, South Korea, Brazil, Russia,
India and China. The number of samples stood at
196 (14 countries over 14 years). Data on
country-by-country automobile industry was
drawn
from
GMID
Passport
Academic(Euromonitor International) and patent data -PCT (Patent Cooperation Treaty) applications bymajor technology category in the automobile
industry -- from the OECD iLibrary. Output was
defined as the number of vehicles produced andinputs were defined as capital and labor.
In this section, supply sides measurements
were investigated to verify whether theacquisition of patents leads to lowering
automobile production costs. The verification
found that patents on electric motor technologies
among eco-friendly technologies can reduce
production costs while patents on hybrid
technologies can increase automobile production

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costs. Japan monopolizes patents on both electricmotor and hybrid technologies. Therefore, thetwo categories of patented technologies are
assumed to have offset each other’s impacts on
production costs. Therefore, demand side rather
than production side is assumed to be responsible
for the failure of patents on highly monopolizedeco-friendly technologies to contribute to.

Ⅲ An analysis of some impacts ofpatents on the sales of Japanesepassenger cars in the Japaneseand foreign markets
Chapter III confirmed whether demand side
is responsible for the failure of patents on highly
monopolizedeco-friendly
technologies
tocontribute to earnings. The explanatory variableassumed to be responsible demand factors areincome from licensing of patented technologies
and income from sales of products using patented
technologies. However, licensing income was
excluded from my analysis, because the licensingof patented technologies in the automobile
industry takes place mainly between automakers
and their subsidiaries.
The analysis in Chapter III examines theJapanese and German automobile markets. This
study examines both a foreign market and thedomestic market because Japanese automobile
manufactures’ economic activities cannot be
differentiated from those of their foreigncounterparts in the Japanese automobile market,
given that imported vehicles are primarily thoseof foreign automobile manufactures in Japan. The
reason for choosing the German market as aforeign market subject to the analysis is that both
Japanese and German automobile manufacturers
are apt to file more patent applications.
Comparison of patents acquired by Japanese andGerman automobile manufactures indicates that
bothJapaneseandGermanautomobile
manufacturers are apt to acquire patents in theirrespective home countries. But there is adifference between them. German automobile
manufacturers have acquired fewer patents thanJapanese automobile manufactures in Japan, while
Japanese automobile manufacturers have acquired
as many patents as German automobile
manufactures in Germany. A breakdown ofpatents on hybrid vehicle control technologies
among eco-friendly technologies found that
Toyota Motor Corp. has acquired a remarkably
large number of such patents both in Japan andGermany, indicating Toyota’s monopolistic

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possession of hybrid vehicle control technology
patents.
The verification was implemented throughthe estimation of a demand function for new
vehicles. In line with Berry et al (1995, 1999),
Goldberg and Verboven (2001), Pertin (2002), andOhashi and Toyama (2012), I used vehicle prices,income and vehicle performances as independent
variables influencing vehicle demand in theanalysis. Then, the number of patents owned byautomakers was added as one of variables
representing vehicle performances to verify the
impacts of patents on demand. The reason fortreating the number of patents as a variable
representing vehicle performances is that major
patented automobile technologies are expected to
improve overall vehicle performances by
increasing fuel efficiency and reducing emissions.
To estimate a demand function for new
passenger cars in the Japanese market, this study
used data on model-by-model sales for Japanesepassenger cars between 2003 and 2010. Data areunbalanced and data for the period are notnecessarily available for all models. Informationon the number of effective patents for eachautomobile manufacture was taken from data
provided by the Japan Patent Office. When
analyzing the impacts of hybrid vehicle control
technology patents on car demand, however,model-by-model data between 2006 and 2010 wasused. This is because data in and before 2005 areunavailable, given that no one is allowed to accesspatents on hybrid vehicle control technologies inand before 2005 through the IPC (International
Patent Classification). For estimating a newvehicle demand function in the German market, I
used model-by-model sales data for passenger
cars between 2009 and 2011. Data are unbalanced
and data for the period are not necessarily
available for all models.
This section analyzed demand side andexamined whether patents contributed toincreasing demand for new cars. The verification
found that patents are not associated with anincrease in car sales in either the Japanese or
German market. Patents on eco-friendly
technologies were also not associated with anincrease in sales. This means that hybrid vehicle
control technology patents failed to boost demandfor cars even though the Japanese government
has provided tax cuts and subsidies to expand
demand for eco-friendly cars since fiscal year
2009. Hybrid and electric vehicles accounted forabout 20% of the Japanese new vehicle market in
fiscal year 2012. In Germany, the market

penetration rate for hybrid and electric vehicles
was limited to less than 1%. Production anddemand aspect analyses apparently indicate thateven patents on highly monopolized eco-friendly
technologies failed to contribute to earnings
because hybrid vehicles and electric vehicles
using eco-friendly technologies have yet tosufficiently spread in the market.

Ⅳ Conclusion
This study used an econometric approach to
examine whether patents lead to an increase ofprofits in the automobile industry. The
verification found that neither less monopolized
general patents nor highly monopolizedeco-friendly technology patents have increased
profits in the automobile industry. Next, thisstudy examined whether supply side or demandside are responsible for the failure of patents onhighly monopolized eco-friendly technologies tocontribute to earnings. Analyses on production
and demand side found that a small market sharefor vehicles using eco-friendly technology patents
is mainly responsible for the failure of patents onhighly monopolized eco-friendly technologies tocontribute to profits.
In the Japanese market, hybrid vehicle
control technology patents failed to boost demandfor cars even though the Japanese government
provided tax cuts and subsidies to expand demandfor eco-friendly cars starting in 2009. This meansthat even if an enterprise monopolizes
technologies that are recognized as socially useful,patents on these technologies fail to lead toearnings
unlessproducts
using
these
technologies sufficiently spread in the market.
This indicates uncertainties of profits. In theautomobile industry, an automobile manufacturethat monopolizes patents on hybrid vehicles may
expirebeforepatent-owning
automobile
manufactures can profit from these patents. In
this way, an automobile manufacture that hasdeveloped a technology could be defeated byrivals in a price-cutting race after the expirationof a patent on the technology, thus failing tosufficiently recover research and development
investment. Unless patents on new technologies
are expected to lead to earnings, enterprises may
choose to keep new technologies secret or may
lose incentives for research and development.
Eco-friendly technologies can reduce load on
the environment, thus making great social
contributions. If priority is given to promoting
research and development (R&D) of eco-friendly

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technologies, the government should design thepatent system to allow the term for patents on
eco-friendly vehicles to be extended in line with
eco-friendly vehicles’ penetration into the market.
This measure is intended to reduce uncertainties
of earnings from patenting of eco-friendly
technologies and keep incentives for enterprises
to research and develop these technologies.

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Goldberg, P. K., and Verboven, F. (2001). “Theevolution of price dispersion in the European car
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Ohashi, H., and Toyama, Y. (2012). “A quantitive
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Petrin, A. (2002). “Quantifying the Benefits of
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