Intellectual property – How key technology patents stimulate economic growth

The question of how to stimulate economic growth in increasingly knowledge-based economies is complex and being addressed by policymakers worldwide. As a new research approach shows, key technology patents could play a more significant role than previously assumed.

The rise of Intellectual Property

In the past decades, intellectual property (I.P.) has increasingly become a competitive advantage in modern knowledge-based economies. Reasons for this development can be found in the fundamental change of modern economies’ value creation.

As early as 2002, “J. H. Daum” has described this ongoing change as a “transition from industrial capitalism, in which economic activity was based on tangible assets, to a new economy in which the production of goods and services, and value creation in general, is essentially built on invisible, intangible corporate assets.”

In recent years, the need to protect these intangible assets such as knowledge, information, and reliable know-how has led to a massive rise in worldwide patent activity.

The macroeconomic effects of patent protection are highly controversial

In search of solutions to stimulate economic growth, policymakers now heavily rely on strong patent systems. By granting exclusive exploitation rights, countries hope to offer market participants the prospect of adequate returns and thus stimulate a country’s long-term innovation activities.

However, from a scientific point of view, the macroeconomic impact of patent protection is highly controversial. Do patents provide the desired innovation incentives, or does the monopoly-like position of the innovator inhibit technology diffusion and thus hinder the emergence of follow-on innovations?

In search of answers

When analyzing the relationship between patent protection, innovation, and economic growth, it turns out that generally valid statements, as well as monocausal causalities regarding the relationship, often fall short.

Innovations now have been scientifically proven to be growth drivers, especially in highly developed countries. However, the exact role of patent protection in the process of stimulating economic growth remains unclear.

On the one hand, criticism concerning the patent system is fed by assumptions that they hinder knowledge diffusion and the low degree of transparency. Opponents will also highlight the long application times for patent grants, insufficient global harmonization, and high transaction costs accompanying the patent system.

On the other hand, proponents emphasize the indispensable role of the patent system as it enables market participants to appropriate the returns from innovation activities. In their view, patents provide incentive structures that encourage companies to incur the necessary research and development costs and thus stimulate long-term innovations.

Previous research approaches suffered from shortcomings

Following Overdiek et al. (2020), previous research suffered shortcomings, which made it difficult to shed more light on the subject:

Most analyses simply focused on quantitative patent data without taking into account the quality of the underlying patents. This approach is increasingly criticized in scientific literature, as the economic value of the analyzed patent data is not measured by the pure number of patents, but above all, by their quality.

The analyses also rarely distinguished between different types of technologies. Thus, patents from particularly innovative technology areas, such as artificial intelligence, are weighted as equal to less relevant technologies.

Frequently, the only figures used are ones regarding a country’s patent applications. Many years may pass between the patent application and the final grant. Therefore, it is a country’s active patent portfolio and not merely the number of patent applications relevant to economic analysis.

A new research approach that focuses on key technology patents

Although these shortcomings have been considered in isolated research, a holistic approach that would allow the implementation of a global analysis has been missing. For this reason, the Bertelsmann Foundation recently, in cooperation with EconSight GmbH, conducted a global mass data analysis, which for the first time enables research to only focus on key technology patents.

These types of patents belong to the top 10 % of 58 predefined key technologies and are characterized by their high economic value.  These key technologies fall into specific technological fields: Mobility, Energy, Nutrition, Health, Industry, Digitization, Materials, Infrastructure, Security, and the Environment.

The criteria for classifying a patent as belonging to the top 10 % of the key technologies focuses on its technological impact. The degree of a patent’s technological impact is determined by its citations at patent offices as well as its individual market coverage. Both the active patent portfolio and the pending applications are considered as proposed by Ernst and Omland (2011).

Key technology patents as drivers of economic growth

This key technology patent data set was used to analyze the relationship between key technology patents and the GDP income per capita in high-income economies to gain deeper insights.

As research results show, a significant relationship exists between key technology patents and the GDP per capita income. Overall regression results for the year 2018 considering all 27 E.U. countries (including Norway and Switzerland), North America, and Asia (China, Hong-Kong, Singapur, South Korea, and Japan) show that a 1 % increase in key technology patents results in an average increase of 0.108 % in GDP per capita income. The long-term effects of the dynamic time series analysis for the USA turn out to be nearly twice as high.

The contribution of key technology patents

Exemplary calculations put these effects in a broader macroeconomic context. Given the long-term average effect for the USA of a GDP per capita increase of 0.188 % per 1 % increase in key technology patents, each additional key patent increases per capita income by 0.084 US$.

With an average U.S. population of 306,986,353 people over the observation period, this corresponds to an increase in the GDP (constant 2010 US$) of 25.786.853 US$ per key patent. Extrapolated to the average U.S. patent portfolio of 110,880 key technology patents, they are responsible for an overall contribution of almost 2.85 trillion US$ to GDP per year.

Conclusion and Outlook

As the research results show, key technology patents foster economic growth in high-income economies. These findings support the prevailing opinion that the economic impact is not caused by the pure number of patents but by a few patents of extraordinary relevance.

It would now be of particular benefit to conduct further academic research, focusing on the individual state-level and lower-income economies, to better understand the underlying mechanisms determining how key technology patents contribute to economic growth and innovation.

Even though further research is needed to investigate this relationship in-depth, one must expect the rising importance of key technology patents, especially in modern knowledge-based economies, where intellectual property is increasingly becoming a strategic competitive advantage.

Sources

Daum, J. H. (2002): Intangible Assets – oder die Kunst, Mehrwert zu schaffen. Bonn.

Ernst, H./ Omland, N. (2011): The Patent Asset Index – A New Approach to Benchmark Patent Portfolio. In: World Patent Information, Vol. 33, No. 1/2011, 34-41.

Overdiek, M./ Rausch, T./ Gramke, K. (2020): Weltklassepatente – das „Gold“ der Wissensökonomie? In: Wirtschaftsdienst, Nr. 9/2020, S. 718-723.