ENCOURAGING EUROPEAN R&D INVESTMENT: CAN PATENT POLICY AND RESEARCH JOINT VENTURES MAKE A DIFFERENCE?

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).