Biotech patents have no effect on investment – prefer our evidence, it’s based on the only study that establishes causality

//DH

C. The Holy Grail: Causality

Of the quantitative studies exploring the relationship between patents and finance, only one can claim to truly isolate the causal effect of a patent grant on investment. Professors Joan Farre‐Mensa, Deepak Hegde, and Alexander Ljungqvist leverage the fact that PTO examiners, who are (or used to be) randomly assigned to review applications, vary dramatically in their propensity to grant patents.85 This introduces some external variation—in other words, variation that is unrelated to the applicant or the invention— into the application outcomes. (Intuitively, if you draw a lenient examiner, you’re more likely to receive a patent than an applicant with an otherwise identical invention who is assigned to a much tougher one.)86 The authors track subsequent funding outcomes and find that a patent grant causes a 50% increase in the likelihood of attracting early-stage investment over the five years following the first PTO action, as well as an increase in the likelihood of a subsequent IPO.87 More striking still, the authors explore the variation across industries and find that the impact of a patent grant is stronger in information technology (IT) than other industries.88 (Though for present purposes, it’s important to note that the authors do not count businessmethods software as part of their “IT” category, instead combining it with “other industries.”) For IT patents, the first patent grant doubles the likelihood of receiving investment whereas for biochemistry, the effect is not significantly different from zero.89 This last result is quite surprising in light of both the findings in the survey literature and the conventional wisdom amongst many commentators that biotechnology is a particularly important site of patent protection.90