How do patents encourage innovation

Proponents often say that patents promote innovation and thus benefit society at large.3 min read

"How do patents encourage innovation?" is a question many people have. Proponents often say that patents promote innovation and thus benefit society at large. That's because patents give inventors more incentive to make technological and procedural advances.

How Patents Can Lead to Innovation

According to proponents of patents, the primary benefit for inventors is the temporary monopoly patents give them. In other words, when someone is granted exclusive benefits for their invention, they will have more incentive to make advances in things like technology and general processes.

Over the past half-century, many economists have agreed that patents increased the number of inventions because people were driven by the possibility of making money from their work; and they have studies to support their conclusions.

  • Generally, firms can expect a 50 percent average increase in earnings from their technologies by holding patents. Firms that work in the health industry can experience a 60 percent increase in revenues and electronics firms can expect a 40 percent revenue increase at the most by holding patents.
  • According to a 2007 study entitled, "R&D and the Patent Premium," patents have led to significant financial gains, especially for firms that held patents.
  • Several studies by economists at the Intellectual Property Research Institute of Australia (IPRIA) support the notion that patents drive people to invent things because of the monetary benefits. According to one study, people are 13 percent less likely to invent things if they know that their work will not be patented. Another paper used the same data from the first study but looked specifically at the commercial benefit of patents. While using the monetary value of the invention for control, researchers found that patent holders made between 40 percent and 50 percent more for their inventions.

Additionally, many researchers and inventors have found ways to work around patents. These "workarounds" include efforts to combine older technologies to create better processes and the decision to focus on related areas of research. Since there are clear restrictions due to patent law, those who are so inclined will find new ways to do certain things. That by itself is innovation.

Arguments Against Patents

One argument against the use of patents is the prospect that patent holders will block others from studying and making their own advancements in newer areas of technology, thus stifling innovation. For example, people doing breast cancer research have often found that they have been blocked from studying the connections between breast cancer and certain genes because patents were connected to those genes.

The sheer complexity of patent laws can also stifle innovation. Since some patents are so broad and/or complex, it might be impossible for people to avoid infringement. As a result, their livelihood is being threatened, especially if they are sued. On average, it costs $2 million in attorney fees when someone is sued for infringing on a patent.

This problem feeds into the persistent problem of patent trolls. Patent trolls take advantage of smaller companies and individuals to get thousand-dollar settlements and to scare people away from using certain technologies and processes.

Another argument that can be made against patents is how hard it is to work around them. However, the workaround is a solid counterargument.

The Societal Benefit of Patents

Zorina Khan and the late Kenneth Sokoloff argued for the societal benefit of patents. The two concluded that the U.S. patent system played a key role in promoting innovation and transforming the country's economy. In their paper, Khan and Sokoloff argued that the U.S patent system paved the way for startups and technological advancements by giving property rights to more people and for making patents public. In short, the marriage between startups and patents led to more jobs and economic growth.

How We Can Use the Patent System to Encourage More Innovation

It is unrealistic to do away with the patent system, but there are things we might do to use the system to encourage more innovation.

  1. For starters, we need to clarify what can be patented and what doesn't need a patent.
  2. We can improve the quality of patents.
  3. We can make patents more transparent.
  4. We can change the role competition law plays in the process.

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