FRBSF Economic Letter
2003-26; September 12, 2003
Are We Running out of New Ideas? A Look at Patents and R&D
The question in the title arises from looking at the ratio of patents
issued to dollars spent on research and development (R&D). Patents
often are thought of as the fruition of R&D spending and as measures
of technological progress. As Figure 1 shows, from 1953, the first year
the National Science Foundation began collecting data on R&D, to
2000, real R&D per capita grew 3.7% a year on average, while patents
granted to U.S. inventors per capita grew only 1.7% a year on average.
Do these data suggest that patents, and perhaps innovative ideas themselves,
are becoming harder (more costly) to obtain? Are we in a period of "technological
exhaustion," where there are diminishing returns to innovative effort?
If we are, then we also may face an eventual slowing in economic growth
and in the rate of improvement in living standards, since technological
progress is key to long-run sustainable growth in our living standards.
The good news is that we may not have to throw in the towel on technological
progress just yet. In particular, the declining ratio of patents issued
to R&D spending need not indicate technological exhaustion if the
two are not that closely related. For example, the number of patents
may be determined by non-technology factors, such as patent office staffing
and budgets or the legal environment. In addition, the economic incentives
to patent may have deteriorated over time, leading to a decline in firms'
propensity to seek patents for their innovations. Finally, it could be
that patents per R&D dollar are declining because firms are seeking
higher value patents that require greater research costs; thus, the total
value, or quality, of patents per R&D dollar actually could have
remained constant or even increased over the last half century.
This Economic Letter discusses the available evidence on each of these
possible explanations for the decline in patents per R&D dollar.
Are patents and R&D closely related?
The first step in exploring the divergence between R&D spending and
patents issued is to evaluate the strength of their relationship. Unfortunately,
it is exceedingly difficult to do so using the available time-series
data for two reasons. First, the lag between when R&D is conducted
and when the fruits (i.e., patents) of the research are achieved can
be long and variable. Second, the other ingredients, such as the legal
environment, that affect patents and that one would like to control for
are very hard to measure over time. One approach that gets around some
of these difficulties assesses the "average" (or more ambitiously,
the "equilibrium") relationship between R&D and patents
by taking their averages over a sufficiently long period (as long as
the lag between the R&D spending and the granting of a patent) and
looking at how these averages covary over a cross-section of regions
or industries. Ideally, the cross-section would be one over which the
net effects of the other ingredients are stable. Differences in patent
grants and R&D spending across the country's states provides a good
source of such cross-sectional variation. Such data are available for
most states on an irregular basis from 1977 to 1998.
I use this approach in the following exercise: First, to account for
differences in scale among states, I divide both patents and R&D
for each state and each year by the number of workers in that state in
that year. Second, I take the average of each of these variables (in
logs) over 1977 to 1998. Finally, I regress average log patents per worker
on average log R&D per worker over a panel of 37 states with data
over this period. This is known as a "between" regression since
it focuses on the variation between cross-sectional units rather than
within them over time.  Figure 2 shows a scatterplot of the average
log patents per worker plotted against the average log R&D per worker
for 1977-1998. The line through the points represents the linear regression.
The figure suggests a very strong relationship between patents and
R&D
at the state level. Specifically, the regression results indicate that
74% of the cross-state differences in patents per worker can be explained
by cross-state differences in R&D per worker. The state-level results
are consistent with the results in Bound (1984), finding that R&D
spending explains a great deal of the cross-sectional variation in patents
using firm-level data. R&D does appear to be a very important determinant
of patents.
Nevertheless, other factors that do not vary across states but that
do vary over time also could be important and could have changed in ways
that have contributed to the diverging trends in patents and R&D.
The next section takes a look at those factors.
Have the legal or bureaucratic environments changed?
A potentially important factor affecting the trend in patents is the
legal environment. Patents are only as valuable as their enforceability
in the courts. Over the past half century, U.S. patent law changes have
been relatively few and relatively minor—except for one major development
in 1982. That year, the Ninth Federal Circuit Court of Appeals was established
to handle all of the nation's patent litigation appeals. Before then,
patent appeals were handled by the Appeals Courts for the local Districts,
which varied in terms of their toughness on enforcing patent infringement.
At the time of its establishment, the Ninth Circuit was generally expected
to be "pro-patent," and indeed, to this day it continues to
have a "pro-patent" reputation. Thus, if anything, this legal
environment change would have increased the ratio of patents to R&D
spending.
Another factor affecting patents is bureaucratic changes at the U.S.
Patent and Trademark Office (PTO). Griliches (1990) showed that while
the fraction of patent applications eventually granted remained roughly
constant at 65% on average over the period 1947-1989, fluctuations in
the PTO's budget have had substantial effects on the average lag between
application and grant. Increases in this lag can deter inventors from
applying for patents since it reduces their value. However, over the
period 1947-1989, Griliches finds no evidence of a positive trend in
the average lag length. So it does not appear that the ratio of patents
to R&D spending has been substantially affected by bureaucratic changes.
Has the propensity to patent changed?
Another potential explanation of the trend in declining patents per
R&D
expenditure is that the "propensity to patent" may be declining.
That is, firms may be relying less and less on patents as a mechanism
for appropriating returns from their R&D investments. This could
occur because the nature of innovations is changing in such a way that
patents are becoming less effective appropriation mechanisms. The available
evidence on this hypothesis is limited but supportive. Based on results
from two separate surveys of U.S. R&D labs conducted in 1983 and
1994, Cohen, Nelson, and Walsh (2000) report that patents appear to be
considered less effective by lab managers as an appropriation mechanism
in the later survey than in the earlier survey, suggesting that the propensity
to patent may well be declining.
Has the quality of patents gone up?
A third possible factor behind the decline in patents per R&D dollar
is that ideas, codified in patents, are increasing in quality, that is,
in social value. Therefore, even though the extensive margin of innovation—patent
counts—is growing slower than R&D spending, the intensive margin—quality
per patent—could be growing faster than R&D spending; and the product
of the two—total patent quality—could, in fact, be growing as fast
or faster than R&D spending. Indeed, there is some evidence supporting
this notion. In the economic literature on patents, the number of times
a patent is cited by other patents often is used as an indicator of the
social value of the patent, which, of course, is unobserved and can vary
quite a bit from patent to patent. Hall, Jaffe, and Trajtenberg (2002)
find that the average number of citations (of other U.S. patents) made
by a patent increased around 3.3% a year from 1975-1999. Ideally, we
would instead like to know the trend in the average number of citations
received by a patent over this period. However, since citations are made
many years into the future—the citation lag is typically around 15 years—we
do not yet know how many citations will eventually be received by recent
patents. Nonetheless, over long periods of time, the trend in citations
made and citations received must be equal. Thus, if we weighted patents
by the number of citations they receive, they may, in fact, be keeping
up with or even outpacing real R&D spending.
Conclusion
It appears that the decline in patents per real R&D expenditure over
the last half century may not be as distressing as it initially seems.
The cross-state regression discussed above suggests that the number of
patents is, on average, determined by R&D, lending credence to the
notion that patent counts are useful indicators of technological change
over extended periods of time. However, they are not perfect indicators.
Simple patent counts miss some dimensions of technological change. And
it appears that these other dimensions actually have increased in recent
decades. First, there is tentative evidence that firms are increasingly
moving away from patents as a means of appropriating returns from their
R&D investments and toward other means, such as secrecy. Second,
the number of citations received by the average patent has increased
over the last couple of decades, suggesting that the social value of
the average patent has increased. The possibility that more and more
technological change is not being patented and that the "size" of
the technological change codified in the average patent is increasing
leaves open the possibility that the relationship between research input
and true technology output has not changed over time.
Daniel Wilson
Economist
References
Bound, John. 1984. "Who Does R&D and Who Patents?" In NBER
Conference Report, ed. Zvi Griliches, pp. 21-54. Chicago: University
of Chicago Press.
Cohen, Wesley M., Richard R. Nelson, and John P. Walsh. 2000. "Protecting
Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing
Firms Patent (or Not)." NBER Working Paper 7552 (February).
Griliches, Zvi. 1990. "Patent Statistics as Economic Indicators:
A Survey." Journal of Economic Literature 28 (December) pp. 1661-1707.
Hall, Bronwyn H., Adam B. Jaffe, and Manuel Trajtenberg. 2002. "The
NBER Patent-Citations Data File: Lessons, Insights, and Methodological
Tools." In Patents, Citations, and Innovation, eds. Adam Jaffe and
Manuel Trajtenberg, pp. 403-459. Cambridge, MA: MIT Press.
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