Thematics

IPR and innovation

Since the 1995 Green Paper on Innovation, the European Commission and the Governments of several Member States have emphasized the role of Intellectual Property Rights (IPR) as an incentive to firms to invest in innovation and as a means of appropriating their investments in innovation. One of the main concerns over time has been a lower rate of patenting by European firms compared to American firms, as identified in several editions of the EIS1.

The difference in patenting rates between the US and Europe is partly due to a difference in industrial structures. For example, compared to the US, a higher percentage of European value added and employment is from manufacturing sectors with low to moderate background patent rates (the number of patents per employee or unit of value added or sales), such as transportation equipment. The US, conversely, has a higher concentration of firms active in high-technology sectors with high background patent rates such as pharmaceuticals, biotechnology and IT equipment.

Another possibility is that European firms are less likely to patent an equivalent invention than American firms, due to possible differences in attitudes to Intellectual Property (IP), the cost of IP or knowledge about how to apply for IP. In this case, there could be a policy case to promote greater use of IP by European firms. The argument for policy intervention is strongest for small and medium sized firms (SMEs) with less than 250 employees, since larger firms with 250 plus employees are more likely to have the financial resources to exploit IP. A high percentage of Europe’s largest firms also have expert IP services in-house and have experience applying for a patent.
In order to evaluate whether or not policy actions are likely to have beneficial effects, one first needs to know current background rates for the use of IP by SMEs and the possible effect of an increase in IP use by SMEs on total IP. For example, a concerted effort to increase patenting by SMEs would only have minor economic impacts if the background rate of IP use by SMEs is very low, with most IP use concentrated among large firms. The thematic IPR report2 presents estimates of the responses to the following questions3:

1. What percentage of SMEs and large firms use IP?
2. How would an increase in IP by SMEs affect total IP applications?

In all countries a larger percentage of large firms with 250 or more firms applied for a patent than SMEs. The difference between large firms and SMEs ranges from 1.9 times higher in large firms in Belgium to 11.4 times higher in Latvia, with an average of 5.2 times higher. The average ratio between the use rate for large firms and for SMEs is lowest for non-formal protection methods such as secrecy (3.0), design complexity (2.5) and lead times (3.2) than it is for the formal protection methods of design registration (3.9), trademarks (3.5) and copyright (2.9). A large fraction of these differences is probably due to lower rates of innovative activity among SMEs compared to large firms, but these results also stand when limited to the innovative firms.
Assuming that a policy intervention leads to an increase of the number of SMEs that apply for a patent by 25%, simulation results show that patent application rates would increase by 4% in both the innovative (Belgium, Germany, Spain, Iceland, Norway and UK) and the less innovative (Czech Republic, Estonia, Greece, Hungary, Lithuania, Latvia, Portugal, Romania and Slovakia) group of countries. However, in relative percentage terms, the increase is greater in the innovative countries (21%) than in the less innovative countries (5%).