There’s a basic economic trade-off underlying any patent system and where the costs and benefits lie depends on the perspective that is taken: that of the patent owner or that of society.
On the benefit side for the patent owner is the temporary right to exclude others from using the invention. This right is valuable because it keeps out competitors, creating a competitive advantage in the market for the owner.
On the cost side there is the investment in research and development needed to obtain a patent and the obligation to publicly disclose the invention in full technical detail, which means giving up secrecy and any associated competitive advantages.
For society, the costs and benefits are essentially reversed. The temporary market power which is created by patents is a social cost because it distorts competition during the effective lifetime of the patent. Two social benefits offset this cost. The first is the creation of incentives to invest in innovation and generate new products and processes. New products create more choice for consumers. New processes have lower costs for firms and eventually lead to lower prices for consumers.
The second social benefit is the disclosure of technical information, which informs the quest for further innovation.
Economic value of patents and other intellectual property rights
A recent study the European Patent Office (EPO) carried out with the Office for Harmonisation in the Internal Market, measured the importance of intellectual property rights to the EU economy. It’s difficult enough to calculate the value of individual patents, let alone the combined value of intellectual property rights for a whole economy. For this reason we took a different approach. Instead of looking directly at intellectual property rights, we identified sectors that make intensive use of intellectual property rights. Next, we calculated how much these IPR-intensive industries contributed to the EU economy, in terms of employment, gross domestic product, wages and international trade.
Our key findings:
- Over one-third of all jobs (35%) in the EU are either directly (26%) or indirectly (9%) generated in IPR-intensive industries. This constitutes about 77 million jobs.
- IPR-intensive industries contribute 39% of the total GDP in the EU. This is about €4.7 trillion.
- Wages in IPR-intensive industries are 41% higher than in non-IPR-intensive industries. In absolute terms this equates to €715 per month.
Under-use of patents
One of the patent-related topics currently receiving special attention in Brussels is the under-use of patents. It’s important to be clear about what is meant by under-use. One possible definition is the extent to which the owners are not using their patents, whilst at the same time being willing but not able to license them out.
This definition, however, leaves room for misunderstandings.
First, if the owner does not exploit the patent in the sense of producing the patented product or using the patented process, this should not necessarily be counted as non-use. Patents can also be used in strategic ways, for example to prevent lawsuits, to block others from patenting and ensure freedom to operate, or as barter in cross-licensing agreements. These uses can serve to create a better position for the inventor and encourage innovative efforts.
The second caveat relates to being willing, but not able, to license out a patent. This inability could mean that transaction costs stand in the way of granting a license, or that the licensee could not secure finance to commercially use the invention. These are genuine problems that need attention.
However, what if parties cannot agree on the license fees? Or if licensing does not occur because the invention is commercially too risky? Surely, such issues should not fall under any definition of under-use.
Further research into the under-use of patents is advisable before any policy measures are considered.
Realising more value for Europe
Two immediate measures come to mind that will help generate more value from patents for Europe.
The first is the unitary patent, currently being implemented, which will make patent protection in Europe cheaper, providing the same level of protection at a lower price. The benefits are present for all users of the patent system in Europe, wherever in the world they are based. However, given that just over half of the patents granted by EPO are European, the benefits will mostly flow to Europe. Moreover, if more innovations are available in more European countries, this implies an increase in consumer surplus, irrespective of the origin of these innovations.
The second measure is to make better use of intangible assets, including patents. The importance of intangible assets in modern companies tends to be highly underestimated, according to a recent study by the UK’s Intellectual Property Office. At the end of the 1970s approximately 80 per cent of the corporate value of companies was due to tangible assets, with 20 per cent accounted for by intangible assets. At the end of the 1990s these proportions were completely reversed.
Even though intangible assets are of great importance to many businesses, they play only a limited role in the financing of companies. It seems that this enormous untapped potential to create growth in Europe is worth greater consideration by policy makers in Brussels.
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