No innovation internal link—patents aren’t key to investment

Filippo, Northwestern University Kellogg School of Management; Timothy, Boston University Questrom School of Business and NBER. “Patent policy and American innovation after eBay: An empirical examination.” Volume 48, Issue 5, June 2019, Pages 1271-1281. LJS

Although R&D investment remains highly concentrated among large¶ firms, there is other evidence that innovation is becoming more distributed (Foster, Grim and Zolas 2016; Ozcan and Greenstein 2013).¶ Perhaps our previous analyses have missed the impact of patent-policy¶ changes on smaller innovators. To rule out this hypothesis, we gathered data on venture capital spending from the Price Waterhouse MoneyTree¶ survey. These data allow us to look at aggregate VC spending by sector¶ and deal-type, but not individual investments.28¶ Fig. 5 shows that Venture Capital Investment followed an upward¶ trend from 2002 through 2012, at which point there was a dramatic¶ increase in total VC funding, coming mainly in later rounds. There is no¶ apparent change in either early or later stage VC funding in the years¶ immediately after the eBay decision, although there is a drop in later¶ round funding in 2009 and 2010, coinciding with the recession.¶ To provide additional insight into possible links from patent policy¶ to VC investment, we can examine investments for the computing and¶ life science sectors. Fig. 6 plots Total VC investments and Seed stage¶ investments for both sectors. The graph clearly illustrates that the large¶ surge in investment around 2012 is associated with later rounds in the¶ computing industries. Late stage life science investments also increase¶ around this period, but not by the same amount. There is also an increase in early-stage computer-related VC investing (relative to early stage life science investing) starting around 2009. While computer-related investment is higher than life sciences investment throughout this¶ time period, it is notable that there is no sharp decline in Life Sciences¶ VC investing following the AMP and Myriad decisions.¶ Overall, we take the main message of Figs. 5 and 6 to be a shift in VC¶ investment towards industries most influenced by the post-eBay changes in¶ patent policy. It is important to highlight that we cannot say whether VC¶ investments might not have been higher absent the changes. However, to¶ the extent that the observed changes reflect other factors that were more¶ significant than patent-policy, this result is consistent with the idea that¶ intellectual property is less important for driving investments in innovation¶ than those other factors. Moreover, as we emphasized above, economic¶ theory also provides reasons to suspect that a more flexible patent remedies¶ regime could lead to more innovation – particularly in settings like the IT¶ sector where rights are fragmented and innovation is highly cumulative.