(When) Does Patent Protection Spur Cumulative Research Within Firms?

We estimate the effect of patent protection on follow-on investments in corporate scientific research. We exploit a new method for identifying an exogenous reduction in the protection a granted patent provides. Using data on public, research-active firms between 1990 and 2015, we find that firms decrease follow-on research after a reduction in patent protection, as measured by a drop in internal citations to an associated scientific article. This effect is stronger for smaller firms and in industries where patents are traded less frequently. Our findings are consistent with a stylized model whereby patent protection is a strategic substitute for commercialization capability. Our results imply that stronger patents encourage follow-on research, but also shift the locus of research from big firms toward smaller firms and startups. As patent protection has strengthened since the mid-1980s, our results help explain why the American innovation ecosystem has undergone a growing division of innovative labor, where startups become primary sources of new ideas.

Ashish Arora, Sharon Belenzon, Matt Marx, and Dror Shvadron

NBER

June 2021

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