Why Do Patents Encourage Innovation?

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2 The Status Quo: Patents Encourage Innovation
The two ideas that raise the most to support the positive role of patents to encourage innovation are: a) The utilitarian-based argument; and b) The Knowledge spillover argument.
a) Utilitarian-Based Argument
The solidest theoretical explanation about patents is the utilitarian incentive-based argument. In which patents reward the inventive skills of the innovator to continue working beyond in such field (Rai & Jagannathan, 2012).
Patents encourage Innovation because they protect innovators from imitators and assure them to receive the future economic benefits derived from innovation. Such protection is necessary in order to recover the money invested to develop the innovation (Bessen & Maskin,
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In contrast, this section present four ways in which the patents may discourage innovation: a) Patent quality; b) Type of innovation; c) Developing country; and d) Size of the company.
a) Quality of the Patents and Innovation
This is about the output of the patent system in terms of the quality of the patents granted. If the Patents Office of any given country behaves with laxity and does not engage in reasonable patent examination the outcome are patents on inventions that are totally obvious. What is to say an awful patent quality.
Thusly, people are obtaining patents that are not novel and/or are obvious. While instead, inventors should get patents only when they come up with a truly new, nonobvious invention. In that case, the patent could address the property right to secure investment in the invention (Jaffe & Lerner, 2004).
For example, The United States by weakening the examination standards in the 1982 of the Patents Office led to a shocking increment in the quantity of patents extended. The patents granted from 1930 until 1982 increased by one percent per year, but between 1983 and 2004 that rate approximately tripled (Jaffe & Lerner,
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It may distort competition enabling inefficient allocation of resources, setting obstacles for the subsequent innovations (Rai & Jagannathan, 2012).
In that sequence of ideas, patents deter incremental innovation, because its power as an incentive appears when: 1) An important amount of investment is required to refine the invention; 2) It is unmanageable to keep secret the innovation; or 3) It is easy to imitate. And such traits are strongly related with the less common radical innovation (Rai & Jagannathan, 2012).
For instance, the obligation to pay some really expensive licensing fees to the original innovators is a disincentive to the follow-on innovation in that area or industry. Moreover, the problem gets even worse in complex industries, where many patents are needed because several technological pieces are fundamental. Those transaction costs may discourage innovation on the whole.
So, Patents are ill-suited for incremental innovation because each innovation constructs based on previous innovations. Indeed, the patents may incite opportunistic behavior and unbalanced negotiating power for one of the parts involved (Rai & Jagannathan, 2012). In this setting, those who try to benefit parasitically from patent speculation, without innovation efforts, are called

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