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*This page is referenced in [[BPP Field Exam Papers]]
+
{{Article
−
 
+
|Has page=Ziedonis (2004) - Dont Fence Me In
 +
|Has bibtex key=
 +
|Has article title=Dont Fence Me In
 +
|Has author=Ziedonis
 +
|Has year=2004
 +
|In journal=
 +
|In volume=
 +
|In number=
 +
|Has pages=
 +
|Has publisher=
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}}
 +
*This page is referenced in the [[Patent Thicket Literature Review]]
 +
*This page is listed on the [[PTLR Core Papers]] page
  
 
==Reference==
 
==Reference==
  
−
*Ziedonis, R.H. (2004), "Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms", Management Science. [http://www.edegan.com/pdfs/Ziedonis%20(2004)%20-%20Dont%20fence%20me%20in.pdf pdf]
+
*Ziedonis, R.H. (2004), "Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms", Management Science, Vol.50, No.6, pp.804--820
  
 +
@article{ziedonis2004don,
 +
  title={Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms},
 +
  author={Ziedonis, R.H.},
 +
  journal={Management Science},
 +
  volume={50},
 +
  number={6},
 +
  pages={804--820},
 +
  year={2004},
 +
  abstract={How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.},
 +
  discipline={Econ},
 +
  research_type={Measures, Empirical},
 +
  industry={},
 +
  thicket_stance={},
 +
  thicket_stance_extract={},
 +
  thicket_def={},
 +
  thicket_def_extract={}, 
 +
  tags={},
 +
  filename={Ziedonis (2004) - Dont Fence Me In.pdf}
 +
}
  
−
==Abstract==
+
==File(s)==
  
−
How do firms avoid being "fenced in" by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based "fragmentation index" and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.
+
*[[Media:Ziedonis (2004) - Dont Fence Me In.pdf|Download the PDF]]
 +
*[[:Image:Ziedonis (2004) - Dont Fence Me In.pdf|Repository record]]
  
 +
==Abstract==
  
−
==Background Facts==
+
How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.
−
 
 
−
*There has been an 'unprecendented' surge in patenting in the US (1.5 million filed 1990-2003 (assumed), 170,000 in 20001 alone)
 
−
*The literature usually assumes that firms have the right to make, use or sell the technologies they internalize, but there are challenges to assembling the rights to outside technologies.
 
−
*The US spent $1b in lawsuits over 1991 patents, about a 1/3rd of the R&D in that year
 
−
*There was a "propatent" shift in IP protection in the 1980's - the 1982 creation of the Court of Appeals for the Federal Circuit. The CAFC was propatent:
 
−
**It expended the boundaries of claims through its interpretation of scope
 
−
**It raised evidentiary standards for challenges to validity
 
−
**It was more willing to grant preliminary injunctions
 
−
**It issued 'propatent' rulings
 
−
 
 
−
Survey evidence suggest that '''primary reasons''' firms patents are:
 
−
#to '''prevent rivals''' from patenting
 
−
#to use patents in '''negotiations''' with owners of outside technologies
 
−
#to '''deter''' infringement lawsuits
 
−
 
 
−
Note that to capture the economic value of an innovation is not mentioned. Instead, '''patents are used for trading''' - to gain favorable access to outside technologies or to reduce expected outflows in licensing.
 
−
 
 
−
 
 
−
==Theory Development==
 
−
 
 
−
Optimal patent policy design is based upon the notion that s'''trong rights''' will '''induce sufficient levels of R&D investment''' (for the first inventor in a cummulative chain). But '''patents''':
 
−
*Are '''inherently difficult to value'''
 
−
*Have blurry boundaries that are '''difficult to demarcate'''
 
−
*Are such that parties in the "cummulative chain" may find it '''hard to identify existing underlying IP'''
 
−
 
 
−
 
 
−
Two theoretical problems include:
 
−
#The costs associated with being '''held up'''
 
−
#The '''diffuse entitlements problem''' - underlying IP might be held by a large number of disparate parties
 
−
 
 
−
 
 
−
===Hold-up in IP Markets===
 
−
 
 
−
'''Hold-up''' occurs when one party is able to '''expropriate rents''' from another. As per Williamson, hold-up requires '''relational-specific investments''' (and '''incomplete contracts''', which are implicit here). '''Transaction cost theory''' predicts that firms will either '''internalize''' the problem (i.e. make rather than buy) or '''underinvest''' when the risk of expropriation is high.
 
−
 
 
−
With patents there is an additional twist (due to their public goods like nature). A patent is a '''right to exclude''' - it does not guarantee the owner the right to use if use infringes on the rights of others. Firms must consider the price they expect to pay to use technologies patented by others and so should try to improve their '''ex-post bargaining''' positions.
 
−
 
 
−
'''Ex ante''' a firm could try to '''invent around''' a patent to alleviate hold-up. This is only possible with knowledge of the hindering patent(s) ex-ante, which can not be gauranteed. If the hindering patent is '''discovered after''' the firm has made a '''relational-specific investment''', such as in technology to implement the patent that is difficult to redeploy, the firm can be '''held up'''. Ex ante soltuions are less feasible when a large number of exclusionary rights exist, and perhaps more importantly, when these rights are widely held.
 
−
 
 
−
Here the '''anti-commons therory''' - ''that a large number of exclusionary rights leads to underinvestment'' - is supplemented by the notion of the '''dispersion of rights''', not just the number. Assuming that the '''Coasian setting of zero transaction costs does not hold''' (and it shouldn't!), the nature of the dispersion of the rights will matter.
 
−
 
 
−
With '''concentrated rights''', that is rights held by only one or a small number of holders, the firm may:
 
−
*Contact the owner and '''negotiate''' (alliance, joint venture or acquisition, or licensing etc).
 
−
*Attempt to '''invent around''' the rights
 
−
**The rights are more '''easily identified''' because they are concentrated (this is Ed's addition)
 
−
**Infringement is more likely to be detected
 
−
**The most valuable patents are easier to identify
 
−
**The per-patent licensing cost should be reduced (only license the valuable ones, and through a single agreement)
 
−
 
 
−
However, if the rights are '''fragmented''':
 
−
*'''Ex ante solutions may be infeasible'''
 
−
**The '''costs''' of licensing would be '''higher''', as would any delays - many agreements and a need to identify the value of each and every patent (in part to determine the likelyhood of exclusion ex-post)
 
−
 
 
−
 
 
−
'''Institutions''' such as patent pools, cross-licensing agreements, and collective rights organizations will arise (have arisen) to bundle patents and '''reduce transaction costs'''. '''Acquisition(s)''' may be a valid strategy but this involves direct costs (of the acquisition) and indirect costs (unrealized gains from trade with specialized firms - though this appears a little dubious).
 
−
 
 
−
One mechanism to mitigate hazards is to '''amass a larger patent portfolio''' - this '''improves ex-post bargaining''' by creating an "exchange of hostages" (as per Williamson). The threat of a reciprocal suit may ameliorate rent seeking behaviour.
 
−
 
 
−
 
 
−
===Hypotheses===
 
−
 
 
−
'''Hypothesis 1''': The more fragmented the external technology market, the more aggressively firms will patent
 
−
 
 
−
An '''aggressive strategy''' is particularly important when:
 
−
*External technology markets are fragmented
 
−
*The anticipated cost of being held up is large.
 
−
 
 
−
 
 
−
'''Hypothesis 2''': The effect of fragmentated external rights on incentives to patents will be more pronounced among capital-intensive firms.
 
−
 
 
−
The paper uses '''capital-intensitivity as a proxy for the relational specific investments''' that can be held up. There is considerable rationale in the paper why this might be true particularly in the semi-conductor industry (which is the subject of the data sample).
 
−
 
 
−
 
 
−
'''Hypothesis 3a''': The effect of fragmented external rights on incentives will be stronger following the propatent shift in the US legal environment
 
−
 
 
−
'''Hypothesis 3b''': The interaction effect between fragmented rights and capital-intensity will be greater in magnitude following the propatent shift in the US legal environment.
 
−
 
 
−
 
 
−
==Measures==
 
−
 
 
−
The paper constructs a '''fragmentation measure''' as follows (time subscripts are ignored):
 
−
 
 
−
:<math>FRAG_i = 1 - \sum_{j=1}^J \left ( \frac{NBCITES_ij}{NBCITES_i}\right )^2\, \quad i \ne j\,</math>
 
−
 
 
−
 
 
−
This measure is then corrected for firms with few patents:
 
−
 
 
−
:<math>\hat{F}_i = \left ( \frac{NBCITES_i}{NBCITES_{i-1}}\right ) \cdot FRAG_i\,</math>
 
  
 +
==Review==
  
−
where <math>NBCITES_i\,</math> is the total number of citations to a patent assigned to a firm (on an annual basis)
+
===Measures of thicket===
  
 +
Patent thickets is measured using a citations-based Fragmentation index.
 +
*Fragmentation for each firm (at a point in time) is equal to 1 minus the sum of squared shares of the firm's patent's citations that cite to other firms.
 +
*The fragmentation is also normalized the number of the firm's annual cites divided by the number of a firm's cites minus 1.
 +
**The definition claims to follow Hall (2002), but subscript notation is confusing - the bias correction formula in Ziedonis is: N(i)/N(i-1) with (i-1) as a subscript, but Hall formula is N(i)/[N(i)-1] with 1 not as a subscript. Presumably, the correction factor should be interpreted following Hall, for a firm with 10 cites, as: 10/(10-1).
 +
*Drawbacks of the fragmentation measure are:
 +
**A citation may be observed when there is no risk of infringement/need to license;
 +
**A citation may not be observed when there is a risk of infringement/potential need to license another firm's patents.
  
−
There are '''two types of error inherenent''' in such a measure:
+
:''"[The fragmentation measure] distinguishes between firms for which the anticipated costs and delays associated with ex ante contracting [licensing of patents] may render such an approach infeasible [high fragmentation value] and those for which ex ante contracting is a more viable strategy [low fragmentation value]."''
−
*Type 1: a citation is observed but there is no risk of infringement or no need to license
 
−
*Type 2: There ia risk of infrigement or a potential need to license but a citation is not observed.
 
  
 +
===Sample===
  
−
'''Capital intensity''' is measured as the deflated book-value of a firm's property, plant and equipment, normalized by the number of employees. Note that firm size is included as a covariate and is the number of employees (logged). The era in which the "new power of patents" was known, was defined to be 1985 onwards, after a series of important court cases.  
+
Size, data source, industries, geography:
 +
*667 observations on 67 firms from 1980-1994.
 +
**Firm data is drawn from the universe of U.S. semiconductor firms between 1980 and 1994 whose principal line of business is semiconductors and related devices (SIC 3674) recorded in Compustat between 1975 and 1996.
 +
**Patent citations are drawn from MicroPatent database, and unique assignee names were assembled based on a variety of sources.
  
 +
===Results===
  
−
==Results==
+
:''"...larger firms and firms investing more heavily in R&D have a higher propensity to patent."''
 +
*Firm size is significantly positively related to patenting (coefficient from 0.905-.705 depending on fragmentation controls)
  
−
The paper runs a base model (without the key explanatory variables) first, to get a baseline propensity to patent.  
+
:''"...capital-intensive firms do not patent more intensively than other firms in the sample (again, controlling for other factors) unless they build on fragmented pools of outside technologies...provides indirect evidence  [that]...Firms building on technologies owned by a more concentrated set of parties may rely more heavily on mechanisms other than patents (such as joint ventures, alliances, and other ex ante agreements) to safeguard investments that are difficult to redeploy ex post."''
 +
*R&D intensity is significantly positively related to patenting in models including only the Fragmentation index, but the sign of the effect changes to significantly negative when an interactions between Fragmentation and capital intensity are included.
 +
**The total slopes of patenting with respect to R&D intensity (from model with the R&D intensity and interaction term with Fragmentation) are only positive when fragmentation is above the mean value of Fragmentation, >0.75.
 +
*Results are robust to alternative models:
 +
**That include a technological opportunity variable that counts number of semiconductor patents sought by applicants in US, Germany or Japan between 1980-1994;
 +
**That allows for firm and year effects;
 +
**That interacts fragmentation index with R&D spending;
 +
**That allows for a firm fragmentation index based on a 3 year moving average instead of based on just the current year.  
  
−
Firms that have a capital intensive one standard deviation above the mean patent '''five times''' more aggressively in response to average levels of fragmentation, even after controlling for R&D and firm size. More importantly, capital-intensive firms do not patent more intensively '''unless''' they build upon fragmented technology pools.
+
:''"[S]emiconductor firms’ decision to patent became less responsive to changes in their R&D investments during the era of strong patent rights; and capital-intensity emerges as a strong, significant predictor of these firms’ patenting behavior only under the “propatent” regime (supportive of the hypothesis that capital-intensive firms responded strategically to the legal reforms by amassing portfolios of patents)....however,...the shift in patenting behavior was not driven by capital-intensive firms per se, but by the subset of capital-intensive firms that draw on technologies owned by a disparate set of outside parties."''
 +
*Coefficients on the log of R&D per employee decline in size and significant after 1986;
 +
*In model without fragmentation measures, coefficients on capital intensity measures increase in size and significance after 1986 from 0.116 to 0.540;
 +
*In models with fragmentation measures, the coefficients on the interaction of capital intensity and fragmentation before and after 1986 increases in size and significance from 1.143 to 2.138.
  
−
Increases in technological opportunity are discounted as an explantion - patenting in non-US jurisdictions is used as a measure. Possibly higher capital-intensive firms with higher fragmentation are also engaged in a broader range of alliances (e.g. R&D agreements with other firms, universities, etc), which increases the efficiency of their R&D. However, this is discounted in unreported results that interact R&D with fragmentation. Likewise some firms may just be better - fixed and random effects models do not support this hypothesis.  
+
===Social Welfare Consequences===
 +
:''"the results suggest that the distribution of rights to proprietary technologies may not only shape the expropriation risks firms face in the manufacture or sale of their products, but also how firms choose to safeguard their investments in light of those  risks...Accumulating exclusionary rights of their own may enable firms to safeguard their investments while foregoing some of the costs and delays associated with ex ante contracting. In effect, these intangible assets provide firms with a flexible set of “hostages” for use in ex post license negotiations...By increasing the likelihood that the firm can threaten others with reciprocal suit, the firm may be able to avoid rent expropriation from external patent owners or, at least, to minimize its effects."''
  
−
Finally, it does appear that the propatenting environment had the hypothesized effect: stricter IP regimes increased the hold-up problem.
+
===Dependent Variable and Model===
 +
*Number of successful patent applications by a firm in a given year.
 +
**A negative binomial model is used over Poisson model because a Lagrange Multiplier test favored a model in which the variance is proportional to the mean.
 +
*Patent thicket measures in the model are:
 +
**The fragmentation index described above;
 +
**an indicator for observations with missing index values;
 +
**an interaction term between the fragmentation index and capital intensity described below.
 +
*The model accounts for variable expected to affect the propensity to patent:
 +
**Firm size as measured by the log of employment at the firm;
 +
**R&D spending in a given year divided by number of employees;
 +
**Deflated Book value of a firm's capital investments in property, plant and equipment per employee (to proxy for investments in technology specific assets);
 +
**An indicator for Texas Instruments that was unusually aggressive in patenting and enforcement;
 +
**Time dummies;
 +
**In some specifications, technological opportunity is measured with a variable that counts number of semiconductor patents sought by applicants in US, Germany or Japan between 1980-1994.
 +
*The data is also split into sample of 36 firms present before and after 1985 to study impact of the strengthening of patent regime in 1982 and subsequent landmark legal decisions.

Latest revision as of 19:15, 29 September 2020

Article
Has bibtex key
Has article title Dont Fence Me In
Has author Ziedonis
Has year 2004
In journal
In volume
In number
Has pages
Has publisher
© edegan.com, 2016

Reference

  • Ziedonis, R.H. (2004), "Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms", Management Science, Vol.50, No.6, pp.804--820
@article{ziedonis2004don,
  title={Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms},
  author={Ziedonis, R.H.},
  journal={Management Science},
  volume={50},
  number={6},
  pages={804--820},
  year={2004},
  abstract={How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.},
  discipline={Econ},
  research_type={Measures, Empirical},
  industry={},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Ziedonis (2004) - Dont Fence Me In.pdf}
}

File(s)

Abstract

How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.

Review

Measures of thicket

Patent thickets is measured using a citations-based Fragmentation index.

  • Fragmentation for each firm (at a point in time) is equal to 1 minus the sum of squared shares of the firm's patent's citations that cite to other firms.
  • The fragmentation is also normalized the number of the firm's annual cites divided by the number of a firm's cites minus 1.
    • The definition claims to follow Hall (2002), but subscript notation is confusing - the bias correction formula in Ziedonis is: N(i)/N(i-1) with (i-1) as a subscript, but Hall formula is N(i)/[N(i)-1] with 1 not as a subscript. Presumably, the correction factor should be interpreted following Hall, for a firm with 10 cites, as: 10/(10-1).
  • Drawbacks of the fragmentation measure are:
    • A citation may be observed when there is no risk of infringement/need to license;
    • A citation may not be observed when there is a risk of infringement/potential need to license another firm's patents.
"[The fragmentation measure] distinguishes between firms for which the anticipated costs and delays associated with ex ante contracting [licensing of patents] may render such an approach infeasible [high fragmentation value] and those for which ex ante contracting is a more viable strategy [low fragmentation value]."

Sample

Size, data source, industries, geography:

  • 667 observations on 67 firms from 1980-1994.
    • Firm data is drawn from the universe of U.S. semiconductor firms between 1980 and 1994 whose principal line of business is semiconductors and related devices (SIC 3674) recorded in Compustat between 1975 and 1996.
    • Patent citations are drawn from MicroPatent database, and unique assignee names were assembled based on a variety of sources.

Results

"...larger firms and firms investing more heavily in R&D have a higher propensity to patent."
  • Firm size is significantly positively related to patenting (coefficient from 0.905-.705 depending on fragmentation controls)
"...capital-intensive firms do not patent more intensively than other firms in the sample (again, controlling for other factors) unless they build on fragmented pools of outside technologies...provides indirect evidence [that]...Firms building on technologies owned by a more concentrated set of parties may rely more heavily on mechanisms other than patents (such as joint ventures, alliances, and other ex ante agreements) to safeguard investments that are difficult to redeploy ex post."
  • R&D intensity is significantly positively related to patenting in models including only the Fragmentation index, but the sign of the effect changes to significantly negative when an interactions between Fragmentation and capital intensity are included.
    • The total slopes of patenting with respect to R&D intensity (from model with the R&D intensity and interaction term with Fragmentation) are only positive when fragmentation is above the mean value of Fragmentation, >0.75.
  • Results are robust to alternative models:
    • That include a technological opportunity variable that counts number of semiconductor patents sought by applicants in US, Germany or Japan between 1980-1994;
    • That allows for firm and year effects;
    • That interacts fragmentation index with R&D spending;
    • That allows for a firm fragmentation index based on a 3 year moving average instead of based on just the current year.
"[S]emiconductor firms’ decision to patent became less responsive to changes in their R&D investments during the era of strong patent rights; and capital-intensity emerges as a strong, significant predictor of these firms’ patenting behavior only under the “propatent” regime (supportive of the hypothesis that capital-intensive firms responded strategically to the legal reforms by amassing portfolios of patents)....however,...the shift in patenting behavior was not driven by capital-intensive firms per se, but by the subset of capital-intensive firms that draw on technologies owned by a disparate set of outside parties."
  • Coefficients on the log of R&D per employee decline in size and significant after 1986;
  • In model without fragmentation measures, coefficients on capital intensity measures increase in size and significance after 1986 from 0.116 to 0.540;
  • In models with fragmentation measures, the coefficients on the interaction of capital intensity and fragmentation before and after 1986 increases in size and significance from 1.143 to 2.138.

Social Welfare Consequences

"the results suggest that the distribution of rights to proprietary technologies may not only shape the expropriation risks firms face in the manufacture or sale of their products, but also how firms choose to safeguard their investments in light of those risks...Accumulating exclusionary rights of their own may enable firms to safeguard their investments while foregoing some of the costs and delays associated with ex ante contracting. In effect, these intangible assets provide firms with a flexible set of “hostages” for use in ex post license negotiations...By increasing the likelihood that the firm can threaten others with reciprocal suit, the firm may be able to avoid rent expropriation from external patent owners or, at least, to minimize its effects."

Dependent Variable and Model

  • Number of successful patent applications by a firm in a given year.
    • A negative binomial model is used over Poisson model because a Lagrange Multiplier test favored a model in which the variance is proportional to the mean.
  • Patent thicket measures in the model are:
    • The fragmentation index described above;
    • an indicator for observations with missing index values;
    • an interaction term between the fragmentation index and capital intensity described below.
  • The model accounts for variable expected to affect the propensity to patent:
    • Firm size as measured by the log of employment at the firm;
    • R&D spending in a given year divided by number of employees;
    • Deflated Book value of a firm's capital investments in property, plant and equipment per employee (to proxy for investments in technology specific assets);
    • An indicator for Texas Instruments that was unusually aggressive in patenting and enforcement;
    • Time dummies;
    • In some specifications, technological opportunity is measured with a variable that counts number of semiconductor patents sought by applicants in US, Germany or Japan between 1980-1994.
  • The data is also split into sample of 36 firms present before and after 1985 to study impact of the strengthening of patent regime in 1982 and subsequent landmark legal decisions.
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