Uncertainty over eligibility substantially reduces innovation – newest research

The key contribution of the current paper is that it considers the effect of patenting uncertainty on innovations.2 This is important because patenting uncertainty may have detrimental effects on innovation and turn the actual purpose of the patenting system—protecting and stimulating innovation—into its opposite. If it turns out that patenting uncertainty diminishes inventive activity, that would undermine the intent of the patent system in fostering innovation over time. Yet, due diligence in the patent award process is important to reward true inventors and to adequately determine the scope of a patent (Goel, 2002).

Not all patent applications are ultimately granted patents, with reasons for denials varying from a lack of originality, technical issues with filing paperwork (or the transaction cost of patenting), multiple, simultaneous filers of the same invention, etc. Consequently, some new inventors (nascent entrepreneurs or first-time inventors) might be dissuaded from filing patents or inventing by looking at the low success rate in patent grants (Goel & GöktepeHultén, 2013). This possible effect has the potential to undermine the success of the patent process—whereas the intent of the patent process is to reward and encourage innovation by protecting the property rights of the inventors, the very process of due diligence to identify the true inventors and identify original contributions might have the opposite effect of dissuading innovation by some due to the uncertainty associated with patent grants.

A historical look at the USPTO data from 2001 shows the patent grant rate to be about 70 percent (https://patentlyo.com/patent/2021/04/uspto-grant-rate.html). Obviously, there would be significant variation in patent grant rates across innovation types, and types of patents applied for. We control for this somewhat in the analysis below by considering utility patents separately.

A significant institutional development during the time period under consideration was the Leahy-Smith America Invents Act (AIA) of 2011 (https://www.congress.gov/bill/ 112th-congress/house-bill/1249; https://en.wikipedia.org/wiki/Leahy%E2%80%93Smith_ America_Invents_Act) that, among other changes, switched the patenting criterion from the “first-to-invent” to the “first-to-file”. This change could have impacted patent applications and we test for this effect in Sect. 5.4.

To operationalize the analysis, we use time series data on patent applications and patent grants from the United States. The focus on the United States is due to the availability of a relatively long time period of data and the relatively good comparability of the data (although foreign inventors could be some of those applying for patents in the United States). We will also determine if the effect of uncertainty on utility patents is different than that on overall patents. Finally, we are able to compare the short-run and long-run effects of patenting uncertainty on innovation.

To quantify the presence of uncertainty in patenting, we assess the variation in the difference between patent applications and patent grants. This helps us gauge the extent to which patent applications fail to materialize into actual patents. Subsequently, we compute the 5 year moving standard deviation of this difference. The results, based on this measure of patenting uncertainty, show that our main hypothesis of greater patenting uncertainty leading to lower innovation rates is supported. Furthermore, we find some differences between the short-run and long-run effects and between overall patents and utility patents. Besides adding to the literature, these insights have useful implications for technology policy. Are the efforts to reward true inventive activity having adverse outcomes on innovation? Are the effects of patenting uncertainty alike in the short term and the long term?