Patents increase innovation. Specifically, patents provide profit-driven incentives and enable biotech advancements.

Economists have repeatedly demonstrated that inventors are driven primarily by the expectation of profiting from owning the rights to their inventions. Zorina Khan of , whose 2005 classic The Democratization of Invention: Patents and Copyrights in American Economic Development was awarded the prestigious Alice Hanson Jones Prize for outstanding work in economic history, observed that “Ordinary people [are] stimulated by higher perceived returns or demand-side incentives to make long-term commitments to inventive activity.” She also found that “their patterns of patenting were procyclical [and] responded to expected profit opportunities.”

Along with her colleague the late Kenneth Sokoloff of UCLA, Professor Khan then  in helping U.S. startup businesses grow the economy from an agrarian backwater into the most powerful industrial economy on the face of the earth: Then, as now, the American formula for success was simple: Startups + patents = jobs and economic growth!

Over the last 50 years, economists have found that patents continue to foster ex ante innovation — meaning, they induce people to invent because of the prospect of profiting from those inventions. The work of economists such as Arrow (1962), Griliches (1963), Schmookler (1966), Kitch (1977), Reinganum (1981), Klemperer (1990), Romer (1990), Giulbert and Shapiro (1990), Grossman and Helpman (1991), Scotchmer (1999), and Gallini (2002) on this issue is mostly available for free online at the  Research Network.

One especially interesting 2007 study by Arora, Ceccagnoli, and Cowen entitled found that "the patent premium for innovations that were patented is substantial. Firms earn on average a 50% premium over the no patenting case, ranging from 60% in the health related industries to about 40% in electronics.” Sure, one should be cautious about academic research, especially given the old joke about how an economist opens a can of soup. (Answer: assume a can opener.) But real-world economics clearly confirms the research findings.

Consider, for example, that the biggest job-creating new industries of the last 60 years — semiconductors (consumer electronics), PCs, software, biotech, mobile telephony, and Internet e-commerce — were all launched and grew strong on the basis of patented inventions created by startup businesses. As the CEO of Juno Therapeutics, Hans Bishop, and ARCH Venture Partners co-founder Bob Nelson : “Let us be clear: investments in the biotech industry are based entirely on patents. Without strong patents, we cannot raise money to find cures for disease.”

Moreover, the evidence that patents foster innovation is not confined to the U.S., nor is it limited only to developed countries. In 2008, by the Organization for Economic Co-operation and Development (OECD) found that “stronger levels of patent protection are positively and significantly associated with inflows of high-tech product [and] expenditures on R&D.” And in that attracted wide attention, Shih-Tse Lo of Concordia University in Montreal found that the 1986 reforms strengthening the Taiwanese patent system “stimulated additional inventive activity, especially in industries where patent protection is generally regarded as an effective strategy for extracting returns, and in industries which are more R&D intensive. The reforms also seemed to induce additional foreign direct investment in Taiwan.” Interestingly, the evidence also shows that rather than hindering knowledge sharing, as the Economist claims, patents actually promote it. observed that “patents improve the allocation of resources by encouraging rapid experimentation and efficient ex-post transfer of knowledge across firms.”

Indeed, it turns out that the patent system is one of the most effective tools for knowledge-sharing and technology transfer ever devised.  by French economists Francois Leveque and Yann Meniere found that 88 percent of U.S., European, and Japanese businesses said they actually rely upon the information disclosed in patents to keep up with technology advances and direct their own R&D efforts.

This is hardly a new phenomenon. The 19th century inventor Elias E. Reis that when he read about an 1886 patent issued to Elihu Thomson for a new method of electric welding, “there immediately opened up to my mind a field of new applications to which I saw I could apply my system of producing heat in large quantities.” Thomas Edison was known to frequent the patent office in order to study other inventors’ patents and hopefully spark ideas of his own. As for Edison himself, found that rather than blocking further invention, his seminal 1880 incandescent lamp patent (No. 223,898) actually “stimulated downstream development work” that resulted in “new technologies of commercial significance [including] the Tesla coil, hermetically sealed connectors, chemical vapor deposition process, tungsten lamp filaments and phosphorescent lighting that led to today’s fluorescent lamps.”

A simple thought experiment suggests why this is so. As UCLA’s Sokoloff and Yale’s Naomi Lamoreaux  “The very act of establishing exclusive property rights in invention not only protected patentees but also promoted the diffusion of information about technology. To see why, imagine a world in which there was no patent system to guarantee inventors property rights to their discoveries. In such a world, inventors would have every incentive to be secretive and guard jealously their discoveries from competitors [because those discoveries] could, of course, be copied with impunity. This is the world of trade secrets.

“By contrast,” the authors noted, “in a world where property rights in invention were protected, the situation would be very different. Inventors would now feel free to promote their discoveries as widely as possible so as to maximize returns either from commercializing their ideas themselves or from [licensing] rights to the idea to others. The protections offered by the patent system would thus be an important stimulus to the exchange of technological information in and of themselves. Moreover, it is likely that the cross-fertilization that resulted from these information flows would be a potent stimulus to technological change.”