European policy-makers have focused on two particular areas in their efforts
to close the substantial gap in expenditure on research and development
(R&D) between the United States and Europe: encouraging research joint
ventures (RJVs) among private firms; and developing patent policy that
protects innovators. But according to Vania Sena, writing in the June 2004
Economic Journal, these policies can only be effective under specific
circumstances.
Consider first the promotion and the creation of RJVs (or corporate venturing)
among private firms. These involve the generation, exchange and adaptation
of technological knowledge among firms, with the idea that firms can share
the costs of developing innovative products. But recent developments in the
economics of innovation indicate that they can only be successful under the
following conditions:
· They have to be created in industries where the degree of ‘externality’
generated by the investment in R&D is high and therefore firms are
aware of the fact that they cannot appropriate all the benefits from the
innovation.
· The partners follow complementary R&D avenues and so they perceive
that there are potential synergies to be exploited.
· The partners have to be of the same size or when they are different
sizes, the returns from participation in the joint venture must be
proportional to partners’ size.
· Partners must produce differentiated products, so that they do not
compete in exactly the same market and therefore sharing information
fully is not perceived to be increasing competition and hence reducing
joint profits.
Similar observations apply to patent policy, the second area of government
intervention, where the basic tenet is to give inventors protection long enough
that they can appropriate all the financial returns from their inventions. But
research shows that:
· Granting an inventor a long patent may be counterproductive in the
case of sequential innovations. In this case, an early innovation is the
inspiration for a whole generation of following innovations.
· There is some indication in the economic literature that short patents
(with a broad protection) are better suited in the case of cumulative
innovations because they prevent the duplication of R&D costs,
facilitate the development of second-generation products and protect
early innovators who lay a foundation for later innovators.
· But these benefits disappear if licensing from the first innovator is not
possible and so it is necessary to revert to narrow patents.
An economy’s competitiveness depends increasingly on advances in
technology and therefore on the size of its investment in R&D. Not
surprisingly, given the substantial gap in R&D expenditure between the United
States and Europe, the design of policy measures that would close this gap is
one of the priorities in European government circles. But this research
suggests that two areas that have gained support from policy-makers may not
provide the desired solutions.
ENDS
Note for Editors: ‘The Return of the Prince of Denmark: A Survey on Recent
Developments in the Economics of Innovation’ by Vania Sena is published in
the June 2004 issue of the Economic Journal.
Sena is at Aston Business School.
For Further Information: contact RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).