What We Know (and Do Not Know) About IP & Entrepreneurship

Wes Cohen et al., Protecting their Intellectual Assets: Appropriability Conditions and Why U.S. Firms Patent (or not), NBER WORKING PAPER 7552 (2001).
Description: This paper summarizes the results of a questionnaire administered to 1478 R&D labs in the U.S. manufacturing sector in 1994, finding that firms typically protect the profits due to invention with a range of mechanisms, including patents, secrecy, lead time advantages and the use of complementary marketing and manufacturing capabilities.  Of these mechanisms, however, patents tend to be the least emphasized by firms whereas secrecy and lead time tend to be emphasized most heavily.  Yet, patents may be relied upon somewhat more heavily by larger firms now than in the early 1980s, as a comparison of this study to an early study suggests.  For the protection of product innovations, secrecy now appears to be much more heavily employed across most industries than previously.  This article also demonstrates that firms patent for reasons that often extend beyond directly profiting from a patented innovation through either its commercialization or licensing.  In addition to the prevention of copying, the most prominent motives for patenting include preventing rivals from patenting related inventions (i.e., “patent blocking”), using patents in negotiations and preventing suits.  Firms commonly patent for different reasons in “discrete” product industries, such as chemicals, versus “complex” product industries, such as telecommunications equipment or semiconductors.  In the former, firms apparently use their patents to block the development of substitutes by rivals, and in the latter, firms are much more likely to use patents to force rivals into negotiations.

David Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, 15 RESEARCH POLICY 285-305 (1986).
Available at:
Description: This paper attempts to explain why innovating firms, which are first to commercialize a new product or process in the market, often fail to obtain significant economic returns from an innovation, while customers, imitators and other industry participants benefit.  Business strategy is an important factor, particularly as it relates to the firm’s decision to integrate and collaborate.  When imitation is easy, markets do not work well and the profits from innovation may accrue to the owners of certain complementary assets, rather than to the developers of the intellectual property.  In certain cases, therefore, the innovating firm needs to establish a prior position in these complementary assets.  Additionally, innovators may be so ill-positioned in the market that they necessarily fail, despite offering new products and processes that provide value to consumers.  Thus, manufacturing often matters – particularly to innovating nations – because firms without the requisite manufacturing and related capacities may die even if they are the best at innovation.  The implications for trade policy and domestic economic policy are examined.

For Further Reading:

Raymond J. Keating, Patent Reform: Protecting IP, Enabling Innovation, & Bolstering Entrepreneurship, Small Business & Entrepreneurship Council (Feb. 2008).
Available: Download here.
Description: This study examines rationales for protecting intellectual property, the economic significance of innovation and intellectual property industries, the growing role of small firms in these areas, challenges facing the patent system, and proposed reforms.

D. Audretsch and Z. Ach, Innovation and Technological Change in HANDBOOK OF ENTREPRENEURIAL RESEARCH (2003).

Z. Freeman, E. Mansfield, D. Mowery, R. Nelson, and N. Rosenberg, Economics, Law and Intellectual Property: Seeking Strategies for Research and Teaching in a Developing Field, ed. by Ove Gran, R&D MANAGEMENT 35:2 (2005).

When and Why Do Entrepreneurs Seek Patents? The IT Industry

Freear, Sohl and Venkatachalam, Leveraging Intellectual Property in the Financing of Entrepreneurial Ventures: A Technology-based Solution to the Perfection of Security Interests, 4 INTERNATIONAL JOURNAL OF ENTREPRENEURSHIP AND INNOVATION MANAGEMENT 178-193 (2004).
Description: This paper advocates increasing the availability of and access to reliable information about liens on intellectual property assets in the 50 states.  Agents who fund the marketization of technically and commercially viable innovations typically require assurances that their financial interests in the innovations are secure.  This confirmation of a security interest requires both adequate legal protection of intellectual property and patents on which the innovation relies, as well as a rapid and cost-effective search for liens on that intellectual property.  The current system (or lack thereof) of lien registration differs from state to state, from manual systems to remotely searchable computer databases.  Because mounting a full 50-state search is expensive and time-consuming, this paper recommends that there be a state-managed input of data into a state database, which would be linked to other state databases, all using compatible technology and protocols.  To implement this recommendation, states will need to make an investment in mutually compatible electronically searchable databases.  The payoff is a timelier and more effective method of funding intellectual property-based innovation, thereby stimulating economic growth and job creation.  Although the United States is the focus of this paper, its recommendations may be extended internationally.

Ronald J. Mann, Do Patents Facilitate Financing in the Software Industry?, 83 Texas Law Review 961 (2005).
Available at:
Description: This is the first part of a wide study of the role of intellectual property in the software industry.  Unlike previous papers that focus primarily on software patents—which generally are held by firms that are not software firms—this Article provides a thorough and contextually grounded description of the role that patents play in the software industry itself.

When and Why Do Entrepreneurs Seek Patents? Biotech, Pharmaceutical, and Green Tech Industries

D. Audretsch and E. Lehmann, Financing High-Tech Growth: the Role of Banks and Venture Capitalists, 56 SCHMALENBACH BUSINESS REVIEW 340-357 (2004).
Available at:
Description: Because venture financing in Germany tends to be bank-centered, Audretsch and Lehmann study the impact on the success of innovative firms.  By comparing the growth rates of firms backed by venture capital (equity) and those backed by bank financing (debt), the authors conclude that firms backed by venture capital financing perform markedly better and that banks are incapable of adequately financing innovative companies, especially high-tech start-ups.  This phenomenon is explainable based on the technological and industry expertise that venture capitalists tend to have, placing them in a better position to assess investment risks and also provide operational assistance to start-ups.  The authors also explore whether debt and equity financing are complementary, or tend to substitute for each other (i.e. mutual exclusivity), since a start-up may consider pursuing both financing paths to maximize working capital.  Based on data showing that venture-backed firms have significantly less debt across the board, the authors conclude that the two forms of financing substitute for each other.

J. Lerner, H. Shane and A. Tsai, Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances, 67 JOURNAL OF FINANCIAL ECONOMICS 411-446 (2003).
Available at:
Description: In periods characterized by diminished public market financing, small biotechnology firms appear to be more likely to fund R&D through alliances with major corporations rather than with internal funds (raised through the capital markets).  The paper considers 200 alliance agreements entered into by biotechnology firms between 1980 and 1995.  Agreements signed during periods of limited external equity financing are more likely to assign key control rights – e.g. licensing, project termination, and exclusivity rights – to the larger corporate partner because of the smaller R&D firm’s weakened bargaining position when access to capital is constricted.  Such an arrangement results in significantly lower success rates than other alliances. These suboptimal agreements are also disproportionately likely to be renegotiated if financial market conditions subsequently improve.

What Challenges Do Entrepreneurs Face With Licensing or Enforcement of Patents? The IT Industry

J. Gans and S. Stern, The Product Market and the Market for Ideas: Commercialization Strategies for Technology Entrepreneurs, 32 RESEARCH POLICY Research Policy 333–350 (2003).
Description: This paper identifies the central drivers of start-up commercialization strategy and their implications for industrial dynamics.  The authors link this strategy to the commercialization environment—the microeconomic and strategic conditions facing a firm that is in the process of translating an “idea” into a value proposition for customers.  The framework addresses why technology entrepreneurs in some environments undermine established firms, while others cooperate with incumbents and reinforce existing market power.  The article suggests that competitive interaction between start-up innovators and established firms depends on the presence or absence of a “market for ideas”.  By focusing on the operating requirements, efficiency, and institutions associated with markets for ideas, this framework holds several implications for the management of high-technology entrepreneurial firms.

D. Hsu, What Do Entrepreneurs Pay for Venture Capital Affiliation?, 59 THE JOURNAL OF FINANCE 1805–1844 (2004).
Available at:
Description: This study empirically evaluates the certification and value-added roles of reputable venture capitalists (VCs).  Using a novel sample of entrepreneurial start-ups with multiple financing offers, Hsu analyzes financing offers made by competing VCs at the first professional round of start-up funding, holding characteristics of the start-up fixed.  Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10–14% discount.  The evidence suggests that VCs’ “extra-financial” value may be more distinctive than their functionally equivalent financial capital.  These extra-financial services can have financial consequences.

D. Hicks and D. Hegde, Highly innovative small firms in the markets for technology, 34 RESEARCH POLICY 703–16 (2005).
Description: Long-lived small firms with a substantial, public record of innovative success are the focus of this paper.  The authors label such firms “serial innovators” and argue that they are often specialist suppliers in markets for technology.  To survive as specialist suppliers, firms must produce technology that is broadly tradable.  Using Arora, Fosfuri and Gambardella’s markets-for-technology framework, the authors hypothesize that such technology has certain characteristics.  It is: high quality, general purpose, broadly based, quite basic, and concentrated in newer generations of technology.  The research shows that serial innovators, survivors among the specialist technology suppliers, have mastered innovating in technology with these characteristics.  This helps explain why these firms have become serious players in these markets—at least for a few years until a new generation of technology emerges.

What Challenges Do Entrepreneurs Face With Licensing or Enforcement of Patents? Biotech, Pharmaceutical, and Green Tech Industries

Martin Meyer, Academic Inventiveness and Entrepreneurship: On the Importance of Start-up Companies in Commercializing Academic Patents, 31 THE JOURNAL OF TECHNOLOGY TRANSFER 501-510 (2006).
Description: This article presents research that places the academic start-up phenomenon in the broader technology transfer context.  Data on Finnish academic inventions indicates that although a considerable share of university-related patents are utilized in start-up companies, most academic patents are utilized in established and predominantly large firms.  This article also explores differences in utilization patterns for different fields of science and technology, including life sciences, natural sciences and engineering and materials.

What Role for Patents in an Increasingly Open & Collaborative Innovation Environment?

A. Arora and R. Merges, Specialized Supply Firms, Property Rights and Firm Boundaries, 13 INDUSTRIAL AND CORPORATE CHANGE 451 (2004).
Available at:
Description: The proper specification of intellectual property rights (IPRs) is a delicate and controversial matter.  This paper considers one specialized context in which IPRs can add to efficiency.  The authors build on contributions of both ‘firm capabilities’ scholars (e.g. Teece, Pisano et al.) and ‘property rights’ economists (e.g. Hart) to show that IPRs can affect efficiency by influencing the location of technological innovation.  Using a simple set up, where the key choice is whether a technology-intensive input will be supplied by an independent firm or produced in-house, the authors analyze how the choice is affected by the strength of IPRs and by the existence (and nature) of information spillovers.  Specifically, when the supply relationship is likely to produce new information of value to the supplier, stronger property rights favor independent suppliers over vertical integration.  An important implication of the authors’ model (backed by empirical case studies) is that strong IPRs therefore encourage investments in specialized firms with strong ‘firm capabilities’ in the area of innovative input supply.  IPRs therefore may play a role—along with multiple other factors—in the location of firm boundaries in some cases.  This contribution to the viability of small, specialized firms, with their superior ability to innovate in some cases, must be taken into account in evaluating recent criticisms of over-fragmented IPR ownership (i.e. the ‘anticommons’ problem).  It also contributes to an understanding of IPRs in the ‘post-Chandlerian’ economy, where smaller, specialized firms play a prominent role.

Michael Cusumano, Reflections on Free and Open Software, 47 COMMUNICATIONS OF THE ACM 25–27 (2004).
Description: A consideration of the often overlapping perspectives in the software development realm.

D. Evans and A. Layne-Farrar, Software Patents and Open Source: the Battle Over Intellectual Property Rights, 9 VIRGINIA JOURNAL OF LAW AND TECHNOLOGY 10 (2004).
Available at:
Description: In the wake of a series of court cases extending patents to software, open-source software proponents have proposed a number of arguments for limiting or even eliminating software patents.  In particular, they claim that the U.S. Patent and Trademark Office (USPTO) has done a poor job of reviewing software patent applications, resulting in obvious, trivial patents.  Open-source proponents also maintain that software patents hinder the standards-setting process important for high-technology industries, and that patents will lead to intellectual property rights “thickets” that slow down or stop the innovative process in the software industry.  This paper evaluates these claims, examining relevant empirical evidence where available.  While it is clear that problems exist with the patent-granting process, they do not rise to the level of justifying a ban on software patents.  Instead, other reasonable – and far less drastic – measures are available.  The USPTO has already begun reforms that should improve its software patent-review process.  As for patent thickets, theory suggests they could form in the software industry, but empirical evidence suggests that in fact this has not occurred.  Moreover, tools such as patent pools and cross-licensing can increase innovation sharing and are available to limit the development of thickets.  While the academic literature is still debating the link between patents and innovation, patents have been shown to have some positive effects, including increased venture capital funding for small firms.  In the end, reform is far more attractive than abolition, because it retains the good while minimizing the bad.

J. Lerner and J. Tirole, The Economics of Technology Sharing: Open Source and Beyond, National Bureau of Economic Research Cambridge, Mass., USA. (2004).
Available at:
Description: This paper reviews the growing open source movement and highlights how many aspects of open source software appear initially puzzling to an economist.  However, the ability to confidently answer many of the issues raised in the paper is likely to increase as the open source movement itself grows and evolves.  At the same time, much open source activity can be understood within existing economic frameworks.  The labor and industrial organization literature provides lenses through which the structure of open source projects, the role of contributors, and the movement’s ongoing evolution can be viewed.

J. Lerner, Patenting in the Shadow of Competitors, 38 J. LAW ECON. 463 (1995)
Description: This article empirically examines the patenting behavior of new biotechnology firms that have different litigation costs.  Firms with high litigation costs are less likely to patent in subclasses with many other awards.  This pattern is consistent with the literature on costly litigation, which suggests that firms that have high litigation costs will take greater precautions to avoid litigation.  These results are robust to a variety of control variables and modifications that seek to test alternative explanations.

R. Mann, Commercializing Open Source Software: Do Property Rights Still Matter?, 20 HARVARD J. OF LAW AND TECHNOLOGY 1 (2006).
Available at:
Description: For several years now, open source software products have been gaining prominence and market share.  Yet, the products themselves are not as provocative as the way in which they are developed and distributed.  Two related features of the open source model are distinctive: the use of collaborative development structures that extend beyond the boundaries of a single firm, and the lack of reliance on intellectual property (“IP”) rights as a means of appropriating the value of the underlying technologies.  Firm-level control of intellectual property is replaced by a complex set of relations, both informal and sometimes contractual, among strategic partners not joined by firm boundaries.  Those relations reflect not coalescence towards industry norms driven solely by superior output, but rather a series of strategic moves and countermoves that have had the effect of opening some markets while closing others, substantially reducing profit margins, and fostering consolidation of a traditionally fragmented industry.



Note: Article descriptions are based on article abstracts and posted with authors’ permission. Several of the articles are available on a subscription-only basis.