Patentability of software programs in the EU: some empirical insights Francesco Rentocchini
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Giuditta De Prato
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Department of Economics University of Bologna, Italy Extended Abstract – Draft Version November, 2005
Since a long time the economic literature has recognised the importance of the patent system in shaping and directing the rate of appropriation of the innovative effort of the firm; seminal contributions to this respect are several and they concentrate on different aspects of the patenting procedure (Arrow, 1962; Granstrand, 2000; Mansfield, 1986). Starting from the work of Arrow on the externality content of the innovative process that is shaped in a different way depending on the market structure analysed (social planner, monopoly, perfect competition), considerable contributions have been put forward by the literature introducing the patent system as a natural outcome of the innovation process. All this part of economic literature has been gone under the name of Patent Race Models because the innovation process is theoretically modelled as a race among different firms, where the winner is the one who managed to patent the outcome of the process itself (Loury, 1979; Reinganum, 1989). Even if more complicated modellisation of the problem exists, for example allowing first generation patents to be incorporated into subsequent races, the basic structure always remains the same (Panagopoulos, 2004). Obviously the role played by the patent system in these kind of models is a marginal one: it is the final goal to which all firms tend because it allowed them to fully appropriate results of the innovation process, hence ripping monopolistic profits. It is for this reason that another stream of economic literature has concentrated more on patents per se, recognising that the patent system has an internal structure and particular characteristics which can be manipulated to enhance or hinder R&D spending by firms.
Normative aspects were put forward, in particular optimal length, scope and height of the patent were found by maximizing firms' surpluses (Klemperer, 1990; Gilbert and Shapiro, 1990; Green and Scotchmer, 1995; Nordhaus, 1969). In addition to these contributions, which try to find general patterns attaining to patents, other ones have focused on its idiosyncratic nature. The economics of innovation literature, which relies heavily on Schumpeter contribution to the economic thought (Schumpeter, 1942) and on evolutionary economics (Nelson and Winter, 1982; Nelson, 1995), has underlined as patents may enhance or hinder innovation depending on sectors where firms compete. It is reasonable to think to pharmaceutical sector, given the high research costs, the presence of means of rapid and inexpensive imitation and low costs of manufacturing the final product, as a place where patents are useful tools to assure following spending in research and development (Mansfield, 1986). On the other side in most of segments of the ICTs sector the same relationship is not so clear, given the presence of network effects, and the cumulative nature of the innovation process (Foray, 2000). It may be the case that a firm obtaining a patent could hinder following contributions, ripping monopolistic profits and locking the development in an inferior technology (Arthur, 1989; David, 1985). Therefore, a number of authors underlines that, depending on appropriability conditions of sectors in which they are used; patents might or might not be a useful institutional mechanism in order to promote the variety of technological solutions and the selection by market forces via competition (Mazzoleni and Nelson, 1998; Merges and Nelson, 1990). 1
process must ask for a huge number of licenses to different actors (Shapiro, 2001); this phenomenon is particularly dangerous when the nature of the innovation process is essentially cumulative. For example American semiconductor firms, after that the Court of Appeal for the Federal Circuit (CAFC) was created in the 1982, increased their patent portfolios as a response to the institutional change that made it easier to obtain patents (Hall and Ziedonis, 2001). Our work wants to give an account of the patenting behaviour inside a complex sector such as that of software. While for the American economic system some works have already been presented (Bessen and Hunt, 2004; Graham and Mowery, 2003), European Union has been disregarded, mainly because of art. 52 of the European Patent Convention, which regulates patenting activities inside the Union and expressively do not allow software and business methods patentability. This exception is not applied in the practice, in fact more than 40,000 patents are found to have been accorded by the European Patent Office in 1981-2004 period.
In addition, empirical contributions have shown that firms do not always rate patent as an effective appropriability mechanism: in fact, with the important exception of Drugs and Medical Equipment, lead time, learning economies and secrecy are found to be more important factors affecting the appropriation of innovation outcomes (Cohen et al., 2000; Levin et al., 1987). More in general an important distinction can be drawn between complex technologies and discrete technologies; while the former are composed by separately patentable elements that can be thought as complements (ie. electronics, instruments, transportation, etc), the latter is constituted by few patentable elements which are substitutes (ie. drugs, steel, metal products, etc). In complex product industries patents are found to be used mainly in order to strengthen firms for cross-licensing positions; this is mainly due to the complementary character of elements constituting the final product. Here patents are often amassed not for their appropriability content but for strategic purposes: they assure firms the possibility to continue their innovative activity avoiding blockage by competitors. In discrete product industries, if patents are regarded as effective, they are utilized as a way to obtain streams of monopolistic profits via licensing or to successfully commercialize an innovation. In the same range of industries, if patents are regarded as less effective, they are mainly utilized to reduce competition via blocking rivals (Cohen et al., 2000). Hence, on one side empirical literature has shown how patent is not a suitable appropriability mechanism in a high number of sectors; but, on the other side we witness an explosion in number of patents filed in recent years (Hall, 2004). Why is there such a tradeoff? Which factors contribute to explain it? One of the main reasons refers to strategic patenting which is a strategic behaviour assumed by firms in order to hinder competition, to obtain licensing revenues and to have stronger power in negotiations. In some cases, the term patent thicket has been put forward to explain a situation where patent rights are so interwoven that an actor willing to use a particular good in its production
In order to analyze recent trends in software patenting inside the European Union, we relied on the Gauss.ffii database, by accessing it through a Postgres Client and performing SQL queries. The Gauss.ffii database has been created by a group of developers via multiple sources: the database includes FFIIs database of software patents, as well as Stefan Wagners database of 1900 business method patents. In addition, they perform continuously searches of patent documents with a known software or business method applicants. They also make searches for about 150 words occurring in software patents and, furthermore, searches in ECLA classes with a high probability of containing software patents. The database is constructed as a wiki, which means that not only users are allowed to add content, but also they are permitted to edit the content; thus a very effective way to exchange information through collaborative effort. Interesting statistics can be drawn concerning number of designated countries where the patent must be enforced, number of IPC 2
increasing importance of embedded software into ICTs products one of the reasons that could explain such a behaviour, which is in contrast with the necessity to spur subsequent innovative efforts in software programming, could be related to the need of strategically defending acquired positions or being in a more suitable contracting situation, both for standard setting procedures or for crosslicensing (Calderini and Scellato, 2004).
subclasses, which can be thought as a proxy of patent scope, and average length of the granting procedure for software patents. In addition to these descriptive statistics, we have established a relation between two distinct datasets, Gauss.ffii and the 2004 EU Industrial Research Investment Scoreboard. In order to establish proper linking relations, a specific small software application has been developed performing automatic matching between firms’ values and requiring explicit operator’s confirmation only in cases in which applicants were not univocally identified. A resulting dataset obtained by linking the information available in the two mentioned sources is composed by 1000 firms whose data concerning Research and Development spending, sectoral and geographical classification, number of software patents published, net sales, number of employees and operating profit are available for the period 2000-2004. Aerospace and defence, Automobiles and parts, Electronic and electrical, Pharmaceuticals and Biotechnologies and IT hardware are sectors where the highest level of R&D takes place. Electronic/Electrical, IT Hardware, Media and Entertainment, Telecommunication services and Software and computer services sectors are found to have the highest average number of software patents published for the year 2003. However, when regression analysis is performed, and the relationship between number of software patents published and other variables is in particular investigated by paying attention to sectoral differences and to the impact that research and development spending has on software patents published, only Electronic and electrical and IT Hardware dummies are found to be highly significant in explaining the number of software patents published in the 2003.
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