G-SEC WORKING PAPER No.9
Patent breadth and cumulative innovation:a natural experiment in the mid 1980s
Shinya Kinukawa *June, 2006

Abstract
The economic theory of the optimal patent design argues that patent protection only
from imitations is not sufficient to stimulate cumulative innovation. This paper explores theeffects of broadening patent breadth on cumulative innovation based on a natural experimentin 1986-87, in which Texas Instruments' lawsuits succeeded in broadening the protection ofits basic patents of Dynamic Random Access Memory by out-of-court settlements. I examinechanges in the quantity and quality of patents of firms involved in the lawsuits by using
patent citations as a measure of the quality of patents. Both high and low quality patents
increased after the lawsuits, but the increase in low quality patents was much more intensethan the increase in high quality patents. Broad patent protection for basic or earlier
innovation may stimulate firms' research efforts, but it may also produce a large amount of
low quality inventions as by-products, which could reduce social welfare.
JEL classification: O3
Keywords: Patent breadth; Cumulative innovation; Citations*

Economic Research Center, Fujitsu Research Institute and Global Security Research Institute, Keio
Universty. E-mail: shinya.kinukawa@jp.fujitsu.com

Patent breadth and cumulative innovation: anatural experiment in the mid 1980s
Shinya Kinukawa
June 12, 2006

Abstract
The economic theory of the optimal patent design argues that patent
protection only from imitations is not su¢ cient to stimulate cumulative
innovation. This paper explores the e¤ects of broadening patent breadthon cumulative innovation based on a natural experiment in 1986-87, in
which Texas Instruments’lawsuits succeeded in broadening the protectionof its basic patents of Dynamic Random Access Memory by out-of-court
settlements. I examine changes in the quantity and quality of patentsof …rms involved in the lawsuits by using patent citations as a measureof the quality of patents. Both high and low quality patents increased
after the lawsuits, but the increase in low quality patents was much more
intense than the increase in high quality patents. Broad patent protection
for basic or earlier innovation may stimulate …rms’research e¤orts, but it
may also produce a large amount of low quality inventions as by-products,
which could reduce social welfare.
JEL classi…cation: O3
Keywords: Patent breadth; Cumulative innovation; Citations
Economic Research Center, Fujitsu Research Institute and Global Security Research Institute, Keio University. E-mail: shinya.kinukawa@jp.fujitsu.com

1

1

Introduction

The main policy instruments of patent systems are length and breadth (or scope)of patents. However, since the length is …xed unless the patent law is changed,
in practice, breadth is the only available patent policy tool. The Japanese government is currently pursuing “pro-patent”policies, while the U.S. government,
which had been strengthening patent protection since the early 1980s, is revising its current patent system. These policy reforms a¤ect technological areasthat infringe relevant patents, i.e. the breadth of patents. Thus, exploring
the relationship between patent breadth and innovation has important policy
implications.
Theoretical studies suggest that breadth of patents is a key stimulus forinnovation. For example, Denicolò (1996) shows that in the case of a single invention, narrowing patent breadth results in reducing the incentive to innovate.
When the innovation process is a long sequence of improvements (cumulative
innovation), O’Donoghue, Scotchmer, and Thisse (1998) shows that …rms underinvest in R&D without "leading breadth", which protects a patented invention
from improved products (protection from imitations or inferior products is called"lagging breadth").1
Empirical studies, however, have been inconclusive on the above theoretical results. Lerner (1994) examined biotechnology …rms and showed that …rms
whose patents have more International Patent classes (IPCs) are valued more
highly by venture capitalists, which can increase pro…ts and innovation incentives. On the other hand, Merges and Nelson (1990) examined the historicaldevelopment of electrical lighting, automobiles, airplanes and radio in the U.S.,
and argued that strong patent rights by early inventors inhibited the broaddevelopment of the technologies. Sakakibara and Branstetter (2001) examinedthe e¤ects of the 1988 Japanese patent reform that extended patent breadth.
1 A patent with large leading breadth can be issued by validating broad claims. An example
is a patent granted to the Harvard Medical School oncomouse (Harvard mouse) in 1984 (USPatent 4736866), whose seven claims are for a transgenic non-human mammal. Thus, applying
the oncomouse technology to non-human mammals other than mouse can infringe that patent.
Small leading breadth can be validated under the “doctrine of equivalence.”2

Formerly, Japanese patent law allowed only one claim on a patent. In 1988, thelaw was changed, allowing multiple and independently valid claims on a patent.2
They conducted an econometric analysis of 307 Japanese manufacturing …rms,
and found that those Japanese …rms’ R&D expenditures and patenting were
unresponsive to the change in patent breadth.
This paper presents new empirical evidence of the relationship between
patent breadth and innovation using Texas Instruments’ successful lawsuits
against eight Japanese electronics …rms in 1986-87 as a natural experiment.
Texas Instruments (TI) sued eight Japanese (and one Korean) …rms alleging
that they were infringing its patents of basic technologies of Dynamic Random
Access Memory (DRAM). The suits covered not only current but also future
generations of DRAM, and thus it can be interpreted that TI was claiming
broader leading breadth. TI and the Japanese …rms reached out-of-court settlements in favor of TI, and thus the leading breadth of TI’s DRAM patents was
virtually broadened. After this event, other large patent holders such as IBM
and Motorola also began asserting patent rights to increase revenue from patent
licenses (Hall and Ziedonis (2001)).
As O’Donoghue, Scotchmer, and Thisse (1998) and other theoretical studiesof two-stage innovation such as Green and Scotchmer (1995) suggest, it is notlagging but leading breadth that stimulates cumulative innovation. Therefore,
to examine the relationship between patent breadth and innovation, the types ofbreadth (lagging or leading) and the types of innovation (single or cumulative)
should be matched. Sakakibara and Branstetter (2001) conjecture that, basedon a number of interviews, the gap between theoretical and their empiricalresults can be due to poor communication between the intellectual property
department and the R&D department. Yet another explanation could be amismatch between the types of breadth and innovation to be studied. The
Japanese patent reform in 1988 was not necessarily intended to broaden patent
2 A 1976 amendment to the Japnese patent law allowed multiple dependent claims, but
the amendment did not substantially change the single claim system. See Sakakibara andBranstetter (2001).

3

protection beyond imitations. Since cumulative innovation industries such as
electronics have been the highest R&D intensity industries in Japan, Japanese…rms’unresponsiveness to the 1988 reform might be interpreted as being not aparadoxical but rather a natural result.
An advantage of this paper’s empirical approach is that the combination of
the types of breadth and innovation is appropriate. The e¤ects of TI’s lawsuits on innovation are examined by comparing the quantity and quality ofelectronics-related patents of the eight Japanese …rms sued by TI and three major U.S. electronics …rms (TI, IBM, and Motorola) before and after the lawsuits.
The quality of a patent is measured by using citations to that patent. Examining changes not only in the quantity of patents but also in the quality of patentis especially important because patents are quite heterogenous in their quality
and thus the number of patents does not necessarily represent the amount ofinnovation. However, there are several problems in using citations to a patent
as a patent quality measure, primarily due to truncation. These problems canbe mitigated by using the "quasi-structural" approach proposed by Hall, Ja¤e,
and Trajtenberg (2002).
The results of empirical analysis show that the average quality per patent
for the eight Japanese …rms has decreased after the TI lawsuits. However, thedecrease in the average quality was due to a large increase in low quality patents.
An increase in high quality patents is also observed, although the increase wasmuch smaller compared to the low quality patents. Thus, the empirical results
do not contradict theoretical results of the e¤ects of broad patent protection
when innovation is cumulative. At the same time, however, it is shown thatbroad patent protection may have also stimulated low quality inventions as byproducts, which could reduce social welfare.
The paper is organized as follows. Section 2 describes the natural experiment of TI’s suits in 1986-87. Section 3 explains the framework of the empiricalanalysis, data, and results. To supplement the empirical analysis, I also interviewed intellectual property managers of two Japanese …rms sued by TI in 1986,4

whose results are summarized in Section 4. Finally, Section 5 discusses the policy implications of the empirical analysis and interview results. The details of
measuring patent quality using the quasi-structural approach are described inAppendix.

2

The TI lawsuits in the mid 1980s

On January 24, 1986, Texas Instruments (TI) …led patent infringement lawsuits in Federal District Court in Dallas against eight Japanese electronics …rms
(and one Korean …rm, Samsung) that were producing and selling DRAMs inthe United States. The lawsuits by TI were brought after the patent policychanges in the early 1980s, and TI’s con…dence in …ling the suits was boosted
by “pro-inventor”rulings by the Court of Appeal for the Federal Circuit, which
was established in 1982.3 The suits covered not only current but also future
generations of DRAM chips that would be used in all types of computer systems to store data.4 The Japanese …rms were sued not necessarily for imitating
existing technologies but rather for producing and selling improved technologies.
In fact, Japanese …rms had developed proprietary technology of their own andsome of them responded by countersuing TI for infringing their patents.5 TI
also …led a complaint with the International Trade Commission (ITC) regarding
the importation into the U.S. of DRAMs as infringing TI’s patents, and ITC
initiated an investigation on March 11, 1986. TI reached settlement agreementswith the eight Japanese …rms in 1987 and received signi…cant royalty paymentsfrom them.
The patents that TI defended were basic technologies to produce DRAM,
and the Japanese …rms had developed improved DRAMs using TI’s technologies.
Thus, TI was claiming larger leading breadth in the suits. Although TI’s victory
was brought by out-of-court settlements rather than court decisions, it implies
3 Financial Times, January 28, 1986, “TI reconsiders policy on patents.”
4 Ibid.
5 Business Week, April 28, 1986, “TI’s battle plan against the Japanese.”5that larger leading patent breadth became virtually e¤ective. In fact, after
the TI lawsuits, coupled with Polaroid’s success in an infringement suit against
Kodak in 1986, other large patent holders such as IBM and Motorola beganasserting their patent rights more aggressively, and the patenting strategies ofmany high-tech …rms have changed since then (Hall and Ziedonis(2002)). Thus,
the lawsuits in 1986-87 could be interpreted as a natural experiment whereleading breadth of patents was virtually broadened. In theory, innovation insemiconductor and other cumulative high technologies such as computers andcommunications equipment could have been stimulated after the suits.
On the other hand, there is also a theory that broad patent protection candeter innovation if an invention consists of complementary components. Shapiro(2001) argues that strong patent protection for multiple complementary technologies can create a "patent thicket," an overlapping set of patent rights requiring licenses from multiple patentees, and can have the perverse e¤ects ofsti‡ing innovation since each patentee has strong monopoly power. Semiconductor and other electronics products are not only cumulative but also complementary innovations comprised of many components. The complementary
nature of semiconductors is well shown in the fact that cross-licenses amongmajor semiconductor manufacturers were necessary even before the TI lawsuits.6 Thus, broader leading breadth of patents can have two opposite e¤ects
on innovation.

3

Empirical analysis

3.1

Framework

To answer the question whether or not broader patent breadth after the TI
lawsuits stimulated innovation, I examine changes in the quantity and quality ofpatents of the eight Japanese …rms sued by TI and three major U.S. electronics…rms: IBM, Motorola, and TI. The quality of patents is measured using the
6 Ibid.

6

number of citations that a patent receives from other patents (forward citations).
Using forward citations as a proxy of the quality of patents can be validated
by empirical …ndings that the quality of patented inventions is closely related to
the number of citations that the patents receive from other patents. Albert etal. (1991) examined 77 patents granted to Eastman Kodak in 1982-83 and foundthat ratings of the technological impact of patents evaluated by researchers at
Eastman Kodak are highly correlated with the counts of citations that thosepatents received. In economic literature, Trajtenberg (1990) studied the correlation between the change in social welfare due to innovation and the numberof patent citations for Computed Tomography (CT). Using two measures of thechange in social surplus due to innovation of CT, he showed that correlations
between those welfare measures and the counts of CT manufacturing …rms’
patents weighted by forward citations were around 0.7 and statistically significant. On the other hand, there were no statistically signi…cant correlations
between the welfare measures and simple patent counts. Moreover, Hall, Ja¤e,
and Trajtenberg (2005) found that …rms’stock of patents weighted by forward
citations is correlated with …rms’market value.
However, several problems exist in using forward citations as a measure of
the quality of patents. One problem is truncation in observed citations: we
can observe citations only by the last date in the data set. This truncation
makes it di¢ cult to compare citations to patents applied for in di¤erent years
because it takes a long time to measure the citations that a patent receives. For
example, it took over 10 years for patents that were granted in 1975 to receive
50% of forward citations by 1999 (Hall, Ja¤e, and Tranjtenberg (2002)). Thus,
patents that were applied for in the later period in the sample would receive
fewer citations regardless of their quality when compared with patents that wereapplied for in the earlier period.
In addition to the truncation problem, di¤erences in the Patent O¢ ce’s
practices across time make it di¢ cult to compare citations in di¤erent years.
Since whether citations should be made to a patent or not is determined by7

patent examiners in the Patent O¢ ce, the number of skilled examiners or computerization of the patent …les might have a¤ected the number of citations toa patent. Even for patents applied for in the same year, comparing citations
would be complicated if di¤erent technologies have di¤erent tendencies to becited and/or the Patent O¢ ce has di¤erent practices across technological …elds.
Finally, there may have been “in‡ation” of citations after the patent policy
shift in the 1980s, which means that later citations are less signi…cant thanearlier citations. Hall and Ziedonis (2001) argue that, based on an econometricanalysis on the U.S. semiconductor industry, many large manufacturing …rms
engaged in “patent portfolio races”after the mid 1980s, which means that …rms
apply for as many patents as possible in order to avoid getting involved inpatent suits. If …rms increased disclosure of many low quality inventions throughpatents for strategic reasons to avoid costly lawsuits, then citations made by
those strategic patents might have increased accordingly, which is the in‡ationof citations.
To solve these problems in using citations as a measure of patent quality, I
use the “quasi-structural” approach suggested by Hall, Ja¤e, and Tranjtenberg(2002). In this approach, the average number of forward citations is decomposed
into the following three parts: (i) year e¤ects, (ii) lag distribution independent ofyears, and (iii) stochastic term. The year e¤ects are further decomposed into (i)the year e¤ects for patents cited by other patents (cited year e¤ects, hereafter)and (ii) the year e¤ects for patents citing other patents (citing year e¤ects,
hereafter). The cited year e¤ects can be interpreted as changes in the qualityof innovation. On the other hand, the citing year e¤ects can be interpreted asnominal changes or noises in the number of citations.
The number of citations to a patent in which the above problems are controlled is calculated in the following way. First, noise factors in observed citations are removed using the estimated citing year e¤ects. Then, …xing the lengthof lags to 24 years for all patents, unobserved citations is added to observed citations for each patent by using the estimated lag distribution. To adjust for8the di¤erence between the average citations and citations to each patent during the unobserved years, average citations are multiplied by the ratio of eachpatent’s citations to average citations during the observed years. See Appendix
for details.

3.2

Data

The eight Japanese electronics …rms that were sued by TI are Fujitsu, Hitachi,
Matsushita Electronics (a subsidiary of Matsushita Electric Industrial), Mitsubishi Electric, NEC, Oki Electric Industry, Toshiba, and Sharp.7 For theseeight Japanese and three U.S. …rms (IBM, Motorola, and TI), I examine U.S.
patents in electronics as research outputs of cumulative innovation. The dataon the U.S. patents is taken from the NBER Patent-Citation Data File, which
includes all the utility patents granted from 1963 to 1999 and all citations madeby patents granted from 1975 to 1999. In the following analysis, application
years are used as years of creation of patents because there are lags between
application and grant years due to examination processes at the Patent O¢ ce.
Moreover, because of application and grant lags, many patents applied for in
the later years in the data …le had not yet been granted at the time that thedata …le was completed, which is implied by the data showing that the numberof patent applications suddenly drops a few years before the end year of thedata …le. Thus, I use patents applied for between 1975 and 1996.
The technological classi…cation system used in the NBER data …le aggregates
400 main (3-digit) patent classes of the U.S. Patent and Trademark O¢ ce into
6 main categories (Chemicals, Computers & Communications, Drugs & Medical, Electrical & Electronic, Mechanical, Others) and 36 sub-categories. As
electronics patents, I use all the subcategories in the Computers & Communications (Communications, Computer Hardware & Software, Computer Peripherals, and Information Storage), and Semiconductor Devices from the Electrical
7 In the following analysis, patents of Matsushita Electronics are coupled with the patentsof its parent company, Matsushita Electric Industrial.

9

& Electronic.

3.3

Results

Figure 1 is the average number of electronics patents per …rm for the eight
Japanese and three U.S. …rms. Both the Japanese and U.S. …rms’ averages
increased, and the increases for the U.S. …rms seem to have accelerated in thelate 1980s.
Figure 2 shows the average quality of patents measured by citations, which
is hereafter called “real citations” because noise factors are removed and unobserved citations due to truncation are added. Contrary to the increase inpatents, the real citations decreased on average for both the Japanese and US…rms.
To test whether the decrease in the real citations after the mid 1980s is
statistically signi…cant, I divide the sample into the periods before and after the
TI suits, 1975-85 and 1986-96, and test the di¤erences in the means of the two
samples using the Mann-Whitney test, a non-parametric rank test.8 The resultsof the tests are shown in Table 1. The null hypothesis that the means of the two
samples are equal is rejected at signi…cance level 5% for both the Japanese andUS …rms, and thus the decreases in the real citations are statistically signi…cant.
The decrease in the average real citations, however, does not necessarilymean that the level of innovative activities of those …rms decreased and only
strategic patents increased. Figures 3 and 4 are histograms of the number ofpatents in di¤erent levels of real citations for the eight Japanese and three U.S.
…rms respectively. The histograms reveal that the decrease in the average realcitations is due to a large increase in low quality patents. The number of patents
with real citations of less than 10 increased by about 5 times for the Japanese…rms and by about 4 times for the U.S. …rms. At the same time, however, thenumber of patents also increased for all other levels of citations. The numberof patents with real citations of more than 50, the highest quality patents,
8 See Conover (1999) Chapter 5 for details.

10increased by about 10 times for the Japanese …rms and by about 3 times for the
U.S. …rms. Thus, broader leading patent breadth after the TI suits could have
had e¤ects on stimulating innovations. The increase in low quality patents, on
the other hand, is a possible side e¤ect of broadening patent protection, and it
supports the patent portfolio race hypothesis raised by Hall and Ziedonis (2001).

4

Field Interview

To supplement the above empirical analysis and explore policy implicationsof broad patent protection, I conducted interviews with intellectual property
managers (IP managers, hereafter) of two of the above eight Japanese electronics…rms.9 To both IP managers, I asked the following two questions:(1) What were the e¤ects of TI’s 1986-87 lawsuits on your company’s R&D?
(2) Should the government broaden patent protection to stimulate innovation?
For the …rst question, both IP managers admitted the same e¤ect as the
U.S. …rms that is suggested by Hall and Ziedonis (2001): aggressive patent applications to avoid litigation and to exploit license revenue. However, one IPmanager also noted that the incentive to develop basic invention with broad
patent claims increased after the TI suits. The other IP manager pointed outthat the TI suits had di¤erent e¤ects on di¤erent types of technologies. For
highly complimentary technologies, the company tried to invent high quality
technologies within the existing system to gain bargaining power in license negotiation. On the other hand, for relatively independent technologies that do
not require many components, the company tried to “invent around”those technologies. These are consistent with the results of the empirical analysis in theprevious section.
For the second question, both IP managers agreed that broad patent protection is important for innovation. There are at least two ways to broaden
9 Both interviews were conducted in July 2005. One was in person and the other was bytelephone.

11

patent protection: issuing patents with broad claims, and extending claims of
issued patents using the “doctrine of equivalents.” One IP manager suggested
that the Japanese government should increase issuing patents with broad claims
for basic inventions.
The other IP manager noted that obtaining patents with broad claims forbasic inventions is possible under the current Japanese patent system and is
only a matter of “claim drafting.” However, he suggested that the Japanese
government should give broader patent protection not only to basic inventions
but also to applied inventions. The Japan Patent O¢ ce tends to narrow thescope of patent claims of applied inventions. Although applied inventions can
induce further applied or improved products, those original applied inventions
have not been adequately protected because their patent claims are too narrow.
This story …ts the in…nite sequential innovation model, showing that broad
patent protection to each stage’s invention could enhance …rms’R&D incentive.
Both IP managers strongly objected to extending the use of the “doctrineof equivalents.” The Supreme Court of Japan has shown …ve conditions underwhich two inventions are interpreted to be legally equivalent. One IP manager noted that allowing arbitrary judgment by courts to broaden the range of“equivalents” beyond the …ve conditions would increase the uncertainty about
infringement and thus hurt …rms’R&D incentive. This point is exactly the sameas the amicus curiae brief of IBM, Kodak, and Ford in supporting the defendantin the Festo v. Shoketsu case in the Supreme Court of the United States.105Discussion

This study empirically examined the e¤ects of broadening leading breadth on cumulative innovation based on a natural experiment in 1986-87, namely TI’s successful lawsuits claiming broad patent protections including from future prod1 0 Brief of International Business Machines Corporation, Eastman Kodak Company, andFord Motor Company as Amici Curiae in support of respondents, United States Supreme
Court, May 9, 2001, No. 00-1543.

12

ucts. The results show that the average quality of patents of eight Japaneseand three U.S. electronics …rms, which is measured by citations, had decreased
after the TI suits. The decrease of average quality, however, was caused notby a decrease in …rms’innovative activities but rather by the explosion of low
quality patents. High quality patents also increased after the TI suits, although
the amount of high quality patents is much smaller compared with that of low
quality patents. The empirical results imply that …rms increased R&D e¤orts
and as a result, both low and high quality inventions were produced. The interviews with IP managers of two Japanese …rms, both of which were among
the eight Japanese …rms sued by TI, support the implication of the empiricalresults. The interviewees noted that their …rms increased research e¤orts bothin developing basic technologies and in “inventing around” after the 1985 TI
suits.
The empirical and interview results are consistent with theoretical resultsthat leading breadth stimulates cumulative innovation. However, the results
also suggest that leading breadth may also stimulate the production of low
quality patents. The increase in low quality patents can be socially wastefulin the following two ways: …rst, if they are substitutes to other inventions,
there is the ine¢ ciency due to overlapping investment in developing the same
technology; second, if they are complements to other inventions, the “patent
thicket” problem, which is the ine¢ ciency due to an overlapping set of rights,
will increase.
The …rst ine¢ ciency would decrease as the breadth of patents increases because "inventing around" would be more di¢ cult if the protected area of an
invention becomes larger. For the second ine¢ ciency, however, further policy tuning would be required. When inventions are complements, broad patentclaims cannot prevent an increase in low quality patents because complementary
inventions do not fall in each other’s infringement area. Thus, broad patents
may intensify the patent thicket problem. To alleviate the problem, broadening
patent claims should be packaged with patent pools, an agreement among patent13

owners to license a set of their patents to one another or to third parties.11 Otherwise, high transaction costs in licensing contracts could hurt …rms’ research
incentive and raise product prices, resulting in reduced consumer surplus.

Appendix: Constructing the citation-based measure of patent quality
This appendix explains in detail the procedure for estimating the quality ofpatents using citation data. As explained in the text, observed citations could
contain noises due to di¤erences in technological characteristics, changes in thepractices of the Patent O¢ ce, or an increase in the pool of patents that possiblycite other patents. Hall, Ja¤e, and Trajtenberg (2002) (hereafter, HJT) propose
two approaches to remove those noises: the …xed-e¤ects approach and the quasistructural approach. The …xed-e¤ects approach removes the noises by removing
all of the time di¤erences, even if they include real technological changes. On
the other hand, the quasi-structural approach assumes some time di¤erences
are real and removes only noise factors. This paper applies the latter approachsince a comparison of the patent quality between two di¤erent periods is themain objective of this paper. The model in the following is a slight modi…cationof the one suggested by HJT.
To implement the quasi-structural approach, some structure should be imposed on the movement of citations to distinguish noises and real changes. The
quasi-structural approach developed by HJT imposes the following two assumptions: proportionality and stationarity. Proportionality assumes that the shapeof the lag distribution over time, which is the fraction of the lifetime citations
in di¤erent lags from the time when a patent is applied for, is independent of
the total number of citations received. Stationarity assumes that the lag distri1 1 See Shapiro (2001) and Lerner and Tirole (2004) for how patent pools can improve social
welfare. Yet another way to deal with low quality patent is suggested by Hopenhayn and
Mitchell (2001). They suggest providing "menus" of patents, that is, di¤erent combinationsof length and breadth.

14

bution does not change over time. See Hall, Ja¤e, and Trajtenberg (2002) for a
discussion of the validity of these two assumptions.
Let Psk be the number of the technological …eld k patents applied for in yearks, and Cst
be the number of citations to the technological …eld k patents appliedkfor in year s made by all patents applied for in year t, where t > s. Cst=Psk , theaverage number of citations that the …eld k patents in year s receive from allpatents in year t, can be decomposed into the following three factors:
k
Cst
=
Psk

where

k (s; t) fk (l) exp

k
st

;

(1)

k (s; t) is the e¤ects of application years, fk (l) is the lag distribution of

the average citations that only depends on the lag l = t s, and kst is a stochastic
term. Each component is speci…c to the technological …eld k. The speci…cation
with di¤erent year e¤ects for di¤erent technological …elds is a modi…cation of
HJT’s model, which speci…es that they are equal among all the technological…elds.
Using the econometric speci…cation in HJT, (1) is further speci…ed as following:
k
Cst
=
Psk

where

k
0;

k
s;

k k k
0 s t exp

k

l

1

k

exp

l

exp

k
st

;

(2)

k
t are the …eld k patents’parameters for constant term, the yeare¤ect of cited patents, and the year e¤ect of citing patents, respectively. In
the speci…cation (2),k (s; t) is modeled as the product of the constant, citedyear e¤ects, and citing year e¤ects, and fk (l) is modeled as the product of
two exponential functions. The parameters

k

and

k

in the lag distributionfunction can be interpreted as the speed of obsolescence and di¤usion of patented
inventions, respectively.
The parameters of (2) can be estimated by the nonlinear least square method,
taking the log of (2) and regressing the log of the average citations on lags andyear dummies for cited and citing e¤ects. Following the estimation strategy

15

of HJT, citing-year e¤ects are estimated for each year, while cited-year e¤ects
are estimated for …ve-year intervals based on the premise that cited-year e¤ects
are real changes in innovation and thus change slowly. The patent data in
the following two technological …elds in the NBER patent data …le is used:
Computers & Communications, and Electrical & Electronics (for Semiconductor
Devices). The data …le includes all the utility patents granted in 1963-99, andits citation …le includes all citations made by patents granted in 1975-99. Thus,
application years of cited patents are 1963-98, and application years of citing
patents are 1975-99, yielding 600 observations for each technological …led. The
estimated parameters of (2) and their standard errors are shown in Table A1.12
The estimated lag distributions are shown in Figure A1.
Citing-year e¤ects can be interpreted as noises in the citation counts, whichshould be removed from the count of citations in order to evaluate the quality ofpatents, while cited-year e¤ects can be interpreted as real changes in innovation.
Thus, to calculate the citation-based measure of patent quality (“real citations,”
hereafter), the count of observed citations for a patent is de‡ated by ^ kt .
The duration for which a patent receives citations is …xed to be 24 years
for all patents by supplementing unobserved citations.13 For example, for thepatents applied for in 1976, one year (year 2000) is supplemented, and for thepatents applied for in 1977, two years (year 2000 and 2001) are supplemented.
Unobserved citations can be estimated in the following way. First, the …tted lag
distribution in lag l is de…ned as

Dl

exp

k

l

1

exp

k

l

; l = 0; : : : ; 24:

If a patent receives at least one citation during observed years (1975-99),
1 2 Table A1 shows results using the Newton-Raphson method. However, the estimation results using the Newton-Raphson method are quite di¤erent from the results using the GaussNewton method, implying that residuals in the …tted (2) are not small and thus the speci…cation (2) might not be a good approximation of the observed average citations. See Davidson
and Mackinon (1994). Finding a better speci…cation for the average citations would be an
important topic in future works.
1 3 HJT used 30 years of lags. I use shorter lags because the …t of model (2) is not satisfactory
enough as noted in the previous footnote. Shortening lags could mitigate the bias due to using
estimated citations.

16then the amount of citations that the patent will receive in year s + L >1999,
Cs;L , where L represents all lags in which citations are not observed, is predictedin the following way:

PM
Cs;lCs;L = DL Pl=0M
l=0 Dl(3)

where M =1999-s is the maximum lag in which citations are observed. Predicting unobserved real citations based on DL is valid under the stationarity
assumption, and adjusting the average citations in lag L ( DL ) for an individual
patent’s unobserved citations using the ratio between individual and averageobserved citations is valid under the proportionality assumption.
On the other hand, there are many patents not receiving any citations duringobserved years, though those patents may receive some citations in unobserved
years. For example, some patents that were applied for in 1975 received the …rst
citations in 1999, 24 years after their applications. The equation (3) cannot
be used if a patent did not receive any citations during observed years sincePM
l=0 Cs;l = 0: Unobserved citations for patents that were applied for in years >1975 (all 24 lags are observed for 1975 patents) but received no citations
during observed years are estimated using the conditional expected number ofcitations to patents applied for in 1975 given that they did not receive any
citations for the …rst M <24 years:

E

X24

l=0

Cs;l jXM

l=0

Cs;l = 0

E

X24

l=0

C1975;l

s
1975

j

XM

l=0

C1975;l = 0 :For example, for patents applied for in 1976 without any citations by 1999, theexpectation of real citations in 2000 (24-th lag for 1976 patents) is estimatedusing the average real citations to patents applied for in 1975 that received
citations only in 1999 (24-th lag for 1975 patents), adjusting for di¤erent citedyear e¤ects ( 1976 = 1975 ).

17

References[1] Albert, M.B., D. Avery, F. Narin, and P. McAllister (1991) “Direct Validation of Citation Counts as Indicators of Industrially Important Patents”,
Research Policy, Vol. 20, pp. 251-259.
[2] Conover, W.J. (1999) Practical Nonparametric Statistics Third Edition,
New York, NY: John Wiley & Sons.
[3] Davidson, R. and J.G. Mackinon (1994) Estimation and Inference in Econometrics, New York, NY: Oxford University Press.
[4] Denicolò, V. (1996) "Patent Races and Optimal Patent Breadth andLength", Journal of Industrial Economics, Vol. 44, No. 3, pp. 249-265.
[5] Green, J. R. and S. Scotchmer (1995) "On the Division of Pro…t in Sequential Innovation", RAND Journal of Economics, Vol. 26, No. 1, pp.
20-33.
[6] Hall, B.H., A.B. Ja¤e, and M. Tratjenberg (2002) “The NBER Patent
Citation Data File: Lessons, Insights and Methodological Tools”, In A.B.
Ja¤e and M. Trajtenberg, ed., Patents, Citations & Innovations: a Window
on the Knowledge Economy, Cambridge, MA: MIT press.
[7] -, -, and - (2005) “Market Value and Patent Citations”, RAND Journal of
Economics, Vol. 36, No. 1, pp. 16-38.
[8] Hall, B.H. and R.H. Ziedonis (2001) “The Patent Paradox Revisited: An
Empirical Study of Patenting in the U.S. Semiconductor Industry, 19751995”, RAND Journal of Economics, Vol. 32, No. 1, pp. 101-128.
[9] Hopenhayn, H.A. and M.F. Mitchell (2001) "Innovation Variety and Patent
Breadth", RAND Journal of Economics, Vol. 32, No. 1, pp. 152-166.
[10] Lerner, J. (1994) "The Importance of Patent Scope: An Empirical Analysis", RAND Journal of Economics, Vol. 25, No. 2, pp. 319-333.

18

[11] Merges, R.P. and R.R. Nelson (1990) "On the Complex Economics ofPatent Scope", Columbia Law Review, Vol. 90, No. 4, pp.839-916.
[12] O’Donoghue, T., S. Scotchmer, and J.-F. Thisse (1998) “Patent Breadth,
Patent Life, and the Pace of Technological Progress,”Journal of Economics& Management Strategy, Vol. 7, No. 1, pp. 1-32.
[13] Sakakibara, M and L. Branstetter (2001) “Do Stronger Patents Induce
More Innovations? Evidence from the 1988 Japanese Patent Law Reforms”,
RAND Journal of Economics, Vol. 32, No. 1, pp. 77-100.
[14] Shapiro, C. (2001) “Navigating the Patent Thicket: Cross Licenses, Patent
Pools, and Standard Setting”, In A.B. Ja¤e, J. Lerner, and S. Stern, ed.,Innovation Policy and the Economy Number 1, Cambridge MA: MIT press.
[15] Trajtenberg, M. (1990) “A Penny for Your Quotes: Patent Citations andthe Value of Innovations”, RAND Journal of Economics, Vol. 20, No. 1,
pp. 172-187.

19

Table 1: Test results for the di¤erences in the means

Mean
Mann-Whitney test statistic
P-value

Eight Japanese firms
1975-85
1986-96
6.954
5.130
38.0000.000

20Three U.S. firms
1975-85
1986-96
9.426
6.403
35.089
0.000

19
7
19 5
7
19 6
7
19 7
7
19 8
7
19 9
8
19 0
8
19 1
8
19 2
8
19 3
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
96

Estimated citations

19
7
19 5
7
19 6
7
19 7
7
19 8
7
19 9
8
19 0
8
19 1
8
19 2
8
19 3
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
96

Number of patents

1600

1400

1200

1000

800

600

400
8 JP firms

200
3 US firms

0Figure 1: Average number of electronics patents per …rm

12
8 JP firms

10
3 US firms

8

6

4

2

0

Figure 2: Average estimated (real) citations per patent

21

50-

212
21

40-50

20
14

30-40

73
39

20-30

398
211

1986-96

Estimated citations

1975-85

2515
1226

10-20
0-10

27999

5357
0

5000

10000

15000

20000

25000

30000

Number of patents (8 JP firms)

Estimated citations

Figure 3: Histogram for the eight Japanese …rms’patents

50-

160
48

40-50

41
40

30-40

145
111

20-30

498
367

1986-96
1975-85

2180
1211

10-20
0-10

15491

3616
0

5000

10000

15000

Number of patents (3 US firms)

Figure 4: Histogram for the three U.S. …rms’patents

22

20000

Table A1: Estimated parameters

Computers & Communications
coefficient
s.e.
Alpha
0.75610.0148
Beta (cited effect)
1965-69
0.99890.000031970-74
1.22770.01241975-79
1.33020.0251
1980-841.28650.0292
1985-89
1.16850.0207
1990-94
0.93770.0081
1995-99
0.46350.0662Gamma (citing effect)
1976
0.96500.00181977
0.94660.00261978
1.02890.00141979
1.10380.00571980
1.16490.00841981
1.19070.01071982
1.26790.01541983
1.20630.01251984
1.31040.02141985
1.42070.0323
1986
1.55420.04631987
1.70030.06121988
1.82220.07811989
2.11540.11991990
2.09980.12291991
2.18720.1405
1992
2.35240.17511993
2.69680.24431994
3.41650.4007
1995
4.60230.69451996
3.89930.54861997
3.06440.3662
1998
0.56770.0377
1999
0.02260.0112Lag Distribution
Delta
0.11460.0046Phi
0.50810.025523

Electrical & Electroniccoefficients.e.
0.48360.01620.99111.15111.2126
1.1534
1.1574
1.12400.73810.00020.00520.01090.01010.01350.01230.02810.92640.89811.00341.0324
1.0661
1.05781.1146
1.0611
1.16951.30851.3925
1.5382
1.67831.7674
1.78871.8076
1.95822.10012.39082.85832.63062.27200.62320.02830.00270.00390.00010.00130.00250.00210.00460.00250.00770.01580.02210.03190.04420.05430.05720.06260.08050.10130.14110.21480.18280.13840.02380.00950.08500.68160.00320.0282

Citations (lag distribution function)

0.8

Computers and Communications

0.7

Electrical and Electronics

0.6
0.5
0.4
0.3
0.2
0.1
0
0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 32 34
Lag

Figure A1: Estimated lag distributions

24