Economic researchers have developed a new way to measure innovation based on the
quality of patents. Jean Lanjouw and Mark Schankerman have used data on more than
100,000 US patents produced in seven technology areas to construct their index.
Their study, published in the April Economic Journal, shows that patent quality is strongly
associated with variations in the stock market value of firms, especially in
pharmaceuticals and other health sectors. This suggests that the patent quality index may
be useful for understanding how the stock market values patents, and for evaluating
bundles of patents for cross-licensing and patent pooling arrangements.
The index also reveals that average patent quality has increased over time and that this
accounts for a significant part of the apparent decline over time in research productivity.
Research productivity, as measured by the number of patents per dollar of R&D, has
declined sharply over the last 40 years in the United States and elsewhere. By 1990, the
number of patents produced per US scientist or engineer had fallen to just 55% of its
1970 level, with even steeper declines in Europe. These statistics have attracted attention
because of concern about the apparent slowdown in total factor productivity.
This fall in research productivity could be due to expanding markets. Market growth
increases the profitability of R&D. In response, more investment is directed toward R&D.
Since the extra dollars are invested in more ‘marginal’ projects, this would naturally lead
to falling productivity. But earlier studies have found that markets have not grown fast
enough to explain the observed fall in the ratio of patents to R&D inputs.
The evidence of declining research productivity raises the spectre of ‘technological
exhaustion’ – getting less inventive output for a given level of R&D investment. This
would lower innovative output directly and, by reducing the private payoff to R&D, it would
also reduce private R&D investment and undermine productivity growth.
Is this threat real? Are we really getting less innovation for our R&D investments? This
research uses extensive data on US firms and detailed information about the patents they
hold to show that there is no evidence of technological exhaustion.
Changes in the number of patents per R&D reflect two very different things: the number
of patents per invention, and the number of inventions per R&D. A fall in research
productivity, as it is typically measured, may be real – a declining invention/R&D ratio – or
only apparent – a declining patent/invention ratio.
Since we do not have information on the number of inventions, what appears to be
technological exhaustion may be a consequence of bad measurement. If inventors make
less use of the patent system, or if the average value of a patent is increasing, growth in
the number of patents understates true growth in the amount of innovation. To identify
technological exhaustion, these measurement issues need to be addressed.
To do so, the researchers develop a composite index of patent quality using four different
variables: the number of claims specified in the patent, the number of subsequent
citations to the patent, the number of citations the patent makes to previous patents and
the number of countries in which the patent is applied for.
Using data on more than 100,000 US patents during 1975-93 in seven technology areas
– drugs, biotechnology, other health, chemicals, electronics, computers and
communications, and mechanical – they construct an estimate of quality for each patent
and show that this composite index greatly improves our ability to identify patent quality.
The index shows that rising patent quality over time accounts for a significant part of the
apparent decline over time in research productivity. But it varies by technology area.
For example, in electronics and medical instruments, the patents/R&D ratio first fell
sharply until the late 1980s and then recovered, ending 13% and 20% higher,
respectively. But adjusting for changes in quality, the increase in productivity over the
period was more than twice as large. In chemicals, the patents/R&D ratio fell by 20%, but
adjusting for patent quality, the decline is only 7%. In pharmaceuticals, there was a very
sharp rise in R&D spending and a precipitous decline in R&D productivity, by about 50%,
and adjusting for quality makes almost no difference in this sector.
In addition, as predicted by economic theory, R&D productivity at the firm level is
negatively related to the level of market demand and patent quality. Importantly, however,
there is no evidence of technological exhaustion at the firm level: there is no evidence of
negative time trends in research productivity, given the level of R&D.
Contrary to expectations, R&D productivity over time is not strongly (negatively) related to
the quality of patents held by a firm. But there is a strong association between the stock
market valuation of firms and the average quality of the patents they hold. This
relationship is particularly strong in pharmaceuticals and medical instruments.
The researchers estimate that increasing the average patent quality of a firm from the 50th
percentile (median) to the 95% percentile would raise market value by 20% for firms in
pharmaceuticals and medical instruments, 7.3% in electronics and 3.9% in mechanical
sectors.
ENDS
Notes for Editors: ‘Patent Quality and Research Productivity: Measuring Innovation with
Multiple Indicators’ by Jean Lanjouw and Mark Schankerman is published in the April
2004 issue of the Economic Journal. Lanjouw is in the ARE Department at the University
of California, Berkeley and the Brookings Institution; Schankerman is at the London
School of Economics.
For Further Information: contact Mark Schankerman on 020-7955-7518 (email:
M.Schankerman@lse.ac.uk); or RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com).