Patent law and the secret to success

ASK: NUS ECONOMISTS
By Ivan Png, Published The Straits Times, 10 Dec 2014

What's the connection between intellectual property and innovation?

OUR leaders repeatedly stress that we need to raise productivity. There are three ways to increase productivity. Two are costly - giving workers more education and raising their skills, and investing in more and better equipment and machinery. The third - working smarter - may be more cost-effective.

The key to working smarter is innovation - better products, better processes, and better management and organisation. So how do we get businesses to innovate? Businesses innovate to increase profit (or, in some industries, such as restaurants and movies, businesses innovate just to sustain demand). Policymakers and scholars widely believe that society can stimulate innovation by strengthening intellectual property rights.

Intellectual property rights - patents for inventions, copyrights for expression and trademarks for distinctive identifiers - give the owner exclusivity. The thinking is that, during the period of exclusivity, the owner will be legally protected from competition and can earn more from the innovation. The increase in earnings will stimulate businesses to invest more in innovation.

Singapore has been busy reforming intellectual property law. In February, our patent system changed from one of "self-assessment" to one of "positive grant". Under the new system, the Intellectual Property Office will issue a patent only if the invention is examined and determined to meet the requirements of novelty, inventive step and industrial applicability. Under the previous system, the applicants for a patent made these determinations themselves.

But will stronger patent law increase innovation? The answer is not clear. While the stronger patents may increase the innovator's profit, they might frustrate others trying to build on earlier innovations. Consider the fashion and food industries: one designer inspires another, one chef's recipe prompts others to create similar dishes.

So, whether stronger patent law will increase innovation may depend on the circumstances - the industry, overall stage of economic development, and the distribution of resources, particularly knowledge workers.

A recent survey commissioned by the IP Academy of Singapore provides some insight. Eighty-seven companies of different sizes and spread across multiple industries responded. They were asked to evaluate various ways of protecting their innovations.

On a scale of one (not effective) to seven (very effective), businesses rated secrecy as the most effective, with an average rating of 5.43 for product innovation and 5.44 for process innovation.

What about patents?

For product innovations, the companies rated patents least effective, behind trademark, copyright and design. For process innovations, the firms rated patents a distant second after secrecy.

This finding - that secrecy is more effective than patents in protecting innovations - is not unique to Singapore. Surveys of businesses in Australia, Europe and the United States have found similar results.

The reported effectiveness of secrecy was not significantly related to either employment or the number of patents. Apparently, among larger businesses and those with more patents, the effectiveness of secrecy was not lower than that among smaller businesses and those with fewer patents.

What do these findings mean for innovation? I should qualify that the survey reveals the average effectiveness of each way of protecting innovation. Strictly, the survey does not inform the marginal effectiveness, or how businesses would respond to changes in the relevant law.

Subject to that proviso, the IP Academy survey suggests that a relatively more effective way to stimulate innovation is to strengthen laws to protect trade secrets rather than patent and copyright laws. Indeed, in a study using US data, I find that stronger trade secret laws were associated with more research and development spending.

The writer is a Distinguished Professor at the NUS Business School and departments of economics and information systems, National University of Singapore