Ziedonis (2004) - Dont Fence Me In

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Reference

• Ziedonis, R.H. (2004), "Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms", Management Science, Vol.50, No.6, pp.804--820

@article{ziedonis2004don,
  title={Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms},
  author={Ziedonis, R.H.},
  journal={Management Science},
  volume={50},
  number={6},
  pages={804--820},
  year={2004},
  abstract={How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.},
  discipline={Econ},
  research_type={Measures, Empirical},
  industry={},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Ziedonis (2004) - Dont Fence Me In.pdf}
}

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Abstract

How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.

Review

Measures of thicket

Patent thickets is measured using a citations-based Fragmentation index.

• Fragmentation for each firm (at a point in time) is equal to 1 minus the sum of squared shares of the firm's patent's citations that cite to other firms.
• The fragmentation is also normalized the number of the firm's annual cites divided by the number of a firm's cites minus 1.
  • The definition claims to follow Hall (2002), but subscript notation is confusing - the bias correction formula in Ziedonis is: N(i)/N(i-1) with (i-1) as a subscript, but Hall formula is N(i)/[N(i)-1] with 1 not as a subscript. Presumably, the correction factor should be interpreted following Hall, for a firm with 10 cites, as: 10/(10-1).
• Drawbacks of the fragmentation measure are:
  • A citation may be observed when there is no risk of infringement/need to license;
  • A citation may not be observed when there is a risk of infringement/potential need to license another firm's patents.

"[The fragmentation measure] distinguishes between firms for which the anticipated costs and delays associated with ex ante contracting [licensing of patents] may render such an approach infeasible [high fragmentation value] and those for which ex ante contracting is a more viable strategy [low fragmentation value]."

Sample

Size, data source, industries, geography:

• 667 observations on 67 firms from 1980-1994.
  • Firm data is drawn from the universe of U.S. semiconductor firms between 1980 and 1994 whose principal line of business is semiconductors and related devices (SIC 3674) recorded in Compustat between 1975 and 1996.
  • Patent citations are drawn from MicroPatent database, and unique assignee names were assembled based on a variety of sources.

Results

"...larger firms and firms investing more heavily in R&D have a higher propensity to patent."

• Firm size is significantly positively related to patenting (coefficient from 0.905-.705 depending on fragmentation controls)

"...capital-intensive firms do not patent more intensively than other firms in the sample (again, controlling for other factors) unless they build on fragmented pools of outside technologies...provides indirect evidence [that]...Firms building on technologies owned by a more concentrated set of parties may rely more heavily on mechanisms other than patents (such as joint ventures, alliances, and other ex ante agreements) to safeguard investments that are difficult to redeploy ex post."

• R&D intensity is significantly positively related to patenting in models including only the Fragmentation index, but the sign of the effect changes to significantly negative when an interactions between Fragmentation and capital intensity are included.
  • The total slopes of patenting with respect to R&D intensity (from model with the R&D intensity and interaction term with Fragmentation) are only positive when fragmentation is above the mean value of Fragmentation, >0.75.
• Results are robust to alternative models:
  • That include a technological opportunity variable that counts number of semiconductor patents sought by applicants in US, Germany or Japan between 1980-1994;
  • That allows for firm and year effects;
  • That interacts fragmentation index with R&D spending;
  • That allows for a firm fragmentation index based on a 3 year moving average instead of based on just the current year.

"[S]emiconductor firms’ decision to patent became less responsive to changes in their R&D investments during the era of strong patent rights; and capital-intensity emerges as a strong, significant predictor of these firms’ patenting behavior only under the “propatent” regime (supportive of the hypothesis that capital-intensive firms responded strategically to the legal reforms by amassing portfolios of patents)....however,...the shift in patenting behavior was not driven by capital-intensive firms per se, but by the subset of capital-intensive firms that draw on technologies owned by a disparate set of outside parties."

• Coefficients on the log of R&D per employee decline in size and significant after 1986;
• In model without fragmentation measures, coefficients on capital intensity measures increase in size and significance after 1986 from 0.116 to 0.540;
• In models with fragmentation measures, the coefficients on the interaction of capital intensity and fragmentation before and after 1986 increases in size and significance from 1.143 to 2.138.

Social Welfare Consequences

"the results suggest that the distribution of rights to proprietary technologies may not only shape the expropriation risks firms face in the manufacture or sale of their products, but also how firms choose to safeguard their investments in light of those risks...Accumulating exclusionary rights of their own may enable firms to safeguard their investments while foregoing some of the costs and delays associated with ex ante contracting. In effect, these intangible assets provide firms with a flexible set of “hostages” for use in ex post license negotiations...By increasing the likelihood that the firm can threaten others with reciprocal suit, the firm may be able to avoid rent expropriation from external patent owners or, at least, to minimize its effects."

Dependent Variable and Model

• Number of successful patent applications by a firm in a given year.
  • A negative binomial model is used over Poisson model because a Lagrange Multiplier test favored a model in which the variance is proportional to the mean.
• Patent thicket measures in the model are:
  • The fragmentation index described above;
  • an indicator for observations with missing index values;
  • an interaction term between the fragmentation index and capital intensity described below.
• The model accounts for variable expected to affect the propensity to patent:
  • Firm size as measured by the log of employment at the firm;
  • R&D spending in a given year divided by number of employees;
  • Deflated Book value of a firm's capital investments in property, plant and equipment per employee (to proxy for investments in technology specific assets);
  • An indicator for Texas Instruments that was unusually aggressive in patenting and enforcement;
  • Time dummies;
  • In some specifications, technological opportunity is measured with a variable that counts number of semiconductor patents sought by applicants in US, Germany or Japan between 1980-1994.
• The data is also split into sample of 36 firms present before and after 1985 to study impact of the strengthening of patent regime in 1982 and subsequent landmark legal decisions.