BPP Innovation

• This page is included under the section BPP Field Exam
• This page is associated with BPP Field Exam Papers

Definitions

Nelson (1959):

• Invention is defined as the human activity directed toward the creation of new and improved practical products and processes.
• Scientific research is the human (sic) activity directed towards the advancement of knowledge. Knowledge is either:
  • Facts or data observed in reproduceable experiments
  • Theories or relationships between facts (usually equations).

Cohen and Levinthal (1990):

• Absorbative capacity is defined as the ability to evaluate and utilize outside knowledge This includes recognizing and assimilating new knowledge and applying it to commercial ends.

Gompers, P., J. Lerner, and D. Sharfstein (2003):

• Fairchild View: Employees are trained and conditioned to be entrepreneurs by working in a VC backed firm (exposure to networks etc)
• Xerox View: Large firms are incapable of responding to radical changes that upset their business; thus the invention of a disruptive technology leads the inventor to leave

Henderson and Clark (1990):

• Incremental innovation introduces relatively minor changes to an existing product
• Radical innovation, by constrast, is based on a different set of scientific or engineering pricipals (to the established paradigm) and it opens up new markets and potential applications
• Modular innovation replaces a core component, but leaves the architecture untouched
• Architectural innovation leaves the existing components, and the core design concepts, essentially untouched, but changes the ways in which the components are linked
• A component is a physically distinct portion of a product that embodies a a core design concept and performs a well defined function.
• A channel is a formal or informal communication channel within a firm
• A filter allows a firm to ignore information that is not relevant (or not compatible with its capabilities), and to immediately identify what is crucial in its information stream.
• A problem solving strategy is employed by engineers and designers inside of the firm. These strategies become limited (or specialized) over time to match the channels and filters of the organization and are a part of the firm's organizational capabilities.
• Dominant design: Technological evolution is characterized by periods of experimentation, followed by the emergence of a dominant design.
• Organizational capabilities are loosely the skills and problem solving abilities of a firm, including it's communication channels, filters and strategies

Lamoreaux and Sokoloff (2005):

• Innovation is defined by Schumpeter as distinct from invention - it is "making new combinations". When entrepreneurs innovate, they take a new idea and make it work. Thus innovation is synonomous with commercialization: embody the idea in a productive enterprise and generate profits. Entrepreneurs innovate and then managers run (once profits to the innovation have been dissapated).
• Patents: Are the grants of exclusive property rights to a new technological idea

Mowery and Ziedonis, (2001):

• AUTM is the Association of University Technology Managers
• Bayh-Dole is the Bayl-Dole act of 1980 (see the paper and also )
• TTO is a Technology Transfer Office

Murray and Stern (2005):

• Anti-Commons Hypothesis: IPR may inhibit the free flow and diffusion of scientific knowledge and the ability of researchers to build cummulatively on each other's discoveries.
• Papers are scientific articles designed to share new knowledge
• Patents share knowledge and impose a property right over it simultaneousl
• The Stokes Model: uses axes "Consideration of Use" and "Quest for Fundamental Understanding" to categorize "Pure Applied", "Pure Basic" and "Use Inspired" research.
• The open science institution uses rewards for conducting basic research that favor cummulative knowledge production over the long term
• The private property regime ignores the impact on follow on research, and instead attempts to exclude others in order to appropriate value through commercialization

Teece (1986):

• The Appropriability Regime is made up of two components: The nature of the technology (tacit/codified knowledge) and the efficacy of legal mechnisms of protection. It can be strong (favoring property rights) or weak (alllowing expropriation)
• Patents do not confer perfect appropriability: They can be invented around, often at modest costs; They are especially ineffective at protecting process innovations; Legal requirements for upholding their validity or proving their infringement are high
• Trade secrets may be a viable alternative if the product does not reveal the technology (or it can not be reverse engineered). This is likely to be true when knowledge is tacit, rather than codified.
• Preparadigmatic - there is no single generally accepted conceptual treatment of a branch of knowledge
• Paradigmatic - a body of theory appears to have passed the canons of acceptability.
• A dominant design signals normal "standards" upon which research proceeds
• Complementary Assets: The successful commericialization of an innovation requires that the know-how be used in conjunction with other assets or capabilities for production and distribution
• Cospecialized assets need relational specific investments from one or both side

Thursby, Fuller and Thursby (2007):

• The Professor's privilege in Europe allowed faculty ownership of their IP - this is referenced in this paper

Ziedonis (2004):

• A patent is a right to exclude - it does not guarantee the owner the right to use if use infringes on the rights of others.
• The anti-commons therory is that a large number of exclusionary rights leads to underinvestment
• Concentrated rights are rights held by only one or a small number of holders
• Fragmented rights are when rights are dispersed

Mowery (2009):

• Open Innovation, as defined by Chesbrough, is: "The purposive use of inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation"
• Vertical Specialization - is the specialization in one component of the vertical supply chain, and outsourcing of this component
• IPAs (Institutional Patent Agreements) were used by the NIH and other government funders prior to Bayh-Dole.

Innovation Market Failures

Arrow (1958) gives three market failure reasons:

• Indivisibility - may prevent optimum allocation
• Inappropriability - private benefits are less than the social benefits
• Uncertainty - Insurance against risk dulls incentives.

In addition Arrow's information paradox prevents the transfer of information (though patenting partially solves this), and absent transfer costs the social optimum would be unlimited distribution at a price of zero. Interdependent innovative activity magnifies the problems. And a monopolist has no incentive to innovate. Nelson (1959) counters that the long lag between project conception and commercialization would discourage short-term profit seeking firms in a competitive market - therefore monopolists should innovate.

Nelson (1959) focuses on the externalities arguments (i.e. we should maximize social profit), at least with respect to basic research, claiming that the "finding that private laboratories do basic research at all is evidence that we should increase our expenditure".

In addition he claims:

• Science makes better citizens,
• Incentives in profit maximizing firms lead to secrecy and so static inefficiency. The marginal cost of using knowledge that already exists is zero, and knowledge is non-rivalous, so knowledge should be contributed to a common pool. But if this is implemented, the incentives to create knowledge will be reduced, leading to dynamic inefficiency.

Basic vs. Applied Research

• There is a continuous spectrum
• applied research is closely constrained
• the goal of basic research is adaptive
• basic research has greater uncertainties
• both are path dependent: "the greater a researcher's relevant knowledge the more likely he will eventually find a satisfactory path"
• Firms with a broader technology base are better suited to more basic research (they can apply results whereever they may lead)

Why Patent?

According to Ziedonis (2004) the primary reasons firms patents are:

• to prevent rivals from patenting
• to use patents in negotiations with owners of outside technologies
• to deter infringement lawsuits

A patent is a right to exclude - it does not guarantee the owner the right to use if use infringes on the rights of others. Firms must consider the price they expect to pay to use technologies patented by others and so should try to improve their ex-post bargaining positions. Capturing economic value directly from the patent is apparently secondary.

They assess hold up problems based on a fragmentation measure and capital intensity (proxying for relational specific investments) and find that firms that have a capital intensive one standard deviation above the mean patent five times more aggressively in response to average levels of fragmentation, even after controlling for R&D and firm size. More importantly, capital-intensive firms do not patent more intensively unless they build upon fragmented technology pools. Furthermore, stricter IP regimes increase the hold-up problem.

Merges (1999) considers the incentives of the PTO and its optimal re-design.

Transfer of Knowledge from Universities

Agrawal and Henderson (2002) provide the following list of methods through which faculty transfer knowledge to the outside world (from thier supply side view):

• Mentoring students (who may do research or be recruited, etc)
• Giving conference presentations
• Free publication of ideas in refereed journals (60% of faculty publish each year, accounts for ~18% of knowledge transfer)
• Consulting
• Collaborative research
• Patenting (accounts for ~7% of knowledge transfer, 11% according to Cohen et al.)

Patenting is independent of publishing. But patent are predictors of research citations (i.e. more important research). Patenting and publications are different channels used by different outsiders.

Mowery and Ziedonis, (2001) study 3 universities' patenting and licensing history circa the Bayh Dole Act. While they do find a change in the volume of patenting, and evidence that 'new' universities are entering the market, they suggest that the effect that can be attributed directly to Bayh-Dole is small, and that the effects were part of broader changes.

Murray and Stern (2005) find that the size of an anticommons effect is small but statistically significant using Patent-Paper pairs. They have no evidence that basic research tools are effected by property rights.

Mowery (2009) comments on biotech's relations with univerities in a historical context. This paper also provides the most detailed account of the Bayh-Dole act.

Patent Events

The following is a table of events that have affected patenting, from Hall (2004) unless otherwise stated.

Year    Event or case                          Result
---------------------------------------------------------------------------------------------------------

1787    Legislation                            Intellectual Property Clause in the US Constitution Merges (1999) 
1834    Legislation                            PTO required to have trained examiners (Lamoreaux and Sokoloff (2005))
1890's  Legislation                            Revisions to Antitrust law Mowery (2009)

1904    Legislation                            Supreme Court's Northern Securities limits horizontal mergers Mowery (2009)

1912    Industry Event                         Research Corporation founded Mowery and Ziedonis, (2001)
1974    Cohen-Boyer DNA splicing patent        is disclosed and licensed to UC and Stanford Mowery and Ziedonis, (2001)
1970's  Nixon's War on Cancer                  more funding to biotech Mowery and Ziedonis, (2001)
1970-5  Industry Event                         Biotech begins to become a productive field. Mowery and Ziedonis, (2001)
1980    Diamond v Chakrabarty                  patentability of artificially engineered genetic organisms
1980    Bayh-Dole legislation                  increase in university patenting (took effect July 1st 1981)
1981    Diamond v Diehr                        patentability of software
1982    legislation                            Creation of CAFC; patent validity more likely to be upheld
1984    Hatch-Waxman Act                       increased importance of patents for drug firms 
                                               vis a vis generic producers
1985/6  TI sues Japanese semiconductor firms   wins suits; turns to suing U.S. semiconductor firms,
                                               funding R&D from licensing royalties
1986    Kodak-Polaroid Decision                on instant camera patent; 
                                               final injunction against Kodak leading to $1B judgment
1986    Legislation                            Federal Transfer Act - authorized federal labs to conduct commercial research Mowery (2009)

                                               and development agreements (CRADAs) with private firms 
1994    TRIPS agreement                        harmonization drive begins
1998    State Street and ATT vs. Excel         patentability of business methods

History of Innovation

• 1870-1911: See Lamoreaux and Sokoloff (2005)
• circa 1980: For university research see Mowery and Ziedonis, (2001)
• 1900-2000: See Mowery (2009)

Non-Inline References

• Hall, B.H. (2004), "Exploring the Patent Explosion", NBER working paper #10605. pdf
• Schumpeter, J.A. (1911), "The Theory of Economic Development", Chaps. 2, 4, 6.
• Schumpeter, J.A. (1950/1942), "Capitalism, Socialism & Democracy", pp. 81-163. pdf