Why Are Patents Necessary?
If you’re wondering why are patents necessary, you’re not alone. Patents are a necessary part of the business world, but they aren’t enough by themselves. They can also provide incentives to create new products, raise venture capital, and license inventions. Here are some other reasons why patents are necessary. Read on to discover the most important reasons why they’re needed. Also, you might be surprised to learn that many ideas end up never making it to the market.
Incentives for inventors
Many companies are recognizing their employees’ inventions through public recognition, cash bonuses, or framed plaques. The incentives vary widely, but many include the possibility of a bonus for a first patent, and some even offer recognition in corporate publications or awards dinners. Many larger companies also offer rewards based on the value of patented work. For example, Motorola pays bonuses to engineers each time their inventions receive a patent, and it presents its engineers with a large check when an employee obtains their 10th patent. This means that a patent can be worth up to $40,000 for one individual, and for the inventor of a multiple-patent invention.
For a well-functioning incentive mechanism to be effective, organizations must consider the goals of the organization and the type of inventive activity. Any imbalance between the two may hinder the promotion of inventions within the organization. In order to establish a balance between the two, an organization should examine its structure, technology processes, and inventive activity. Then, a compensation plan should be developed. The process should include a range of incentives and benefits.
Depending on the criteria, HNC may provide a flat bonus. This bonus can be in the form of cash or formal recognition. However, the company should be clear about who is the actual inventor and who is not. This can lead to disagreements and disputes over who is the original inventor. However, it is worth noting that the company may not offer the full amount of the bonus. Smaller startups may opt for the bonus scheme instead of paying a percentage of the company’s profits to employees.
Prize money for solving pre-specified problems is another incentive for research. It is often provided in the form of prize money and grants, and does not cause significant welfare losses. However, prize money is often not based on strict performance criteria and can lead to nepotism. And while it is an effective way of promoting innovation in under-funded areas, the incentives are not very transparent. So, it’s always better to find other ways of rewarding innovators.
Patents offer significant incentives for innovation, but their benefits may be limited if patent protection is weak. Patents are expensive to protect, and granting monopoly rights to a single technology would be hostile to innovation. Because patents allow companies to examine the exact outcomes of workers’ inventiveness, patents can encourage private investment in expensive innovation projects. But these benefits come at a high cost. And when a company’s profits are less than their profits, it’s not likely that they’ll invest in the project.
The biggest reward for an employee inventor is a wage premium equal to 20-30% of the inventor’s annual salary. In Finland, employee-inventors receive high-powered financial rewards for their inventions. And this is one of the most important ways to motivate employees to patent their inventions. The reward for the work put into these efforts is often based on how successful the inventions are. If the rewards are high enough, it may be worthwhile to award a higher premium for highly cited patents.
Incentives for licensing inventions
Whether licensing contracts are practical and desirable depend on how patents are enforced. For example, it is difficult to identify subsequent inventors before the pioneer commercializes his or her invention. Further, later researchers may have to spend significant amounts of money on R&D before signing a licensing contract. After all, these costs may not be recovered once the negotiations have ended. Additionally, disparate expectations of the value of an invention may keep inventors from agreeing on an acceptable royalty rate.
Incentives for licensing inventions are one reason for strong patent protection. Strong patent protection encourages vertical specialization, attracts financial capital, and permits researchers to specialize in intellectual assets that are licensed to users. Patents also reduce the transaction costs of negotiating contractual agreements and encourage users to license patented inputs. In addition, strong patent protection limits the social costs of suboptimal use during the life of a patent.
Incentives for licensing inventions are essential for fostering innovation. However, a patent system can be detrimental in times of public health emergencies. While the basic patent bargain rewards innovation in the future, it slows down the diffusion of innovations today. In situations where diffusion of treatments is needed, patent protection can hold up the diffusion of new treatments and raise prices for patients. The implications of this situation can be life-threatening.
There are numerous ways to license patented components. Patent owners may choose to license individual components or bundle them with other pooled patents. However, patents may be difficult to identify as “essential” in the early stages of the industry. Further, patents may be difficult to admit to a pool if competing patents are also admitted. Furthermore, high-tech markets often involve network externalities. As such, intellectual property rights may act as a powerful tool to leverage related markets.
Patents may not be the primary spur for innovation, but they may be socially beneficial if they induce inventors to disclose their discoveries. Incentives for licensing inventions also include monetary incentives. Ultimately, a well-designed patent system should promote technological advancement. If patents aren’t effective, innovation may slow down and innovation may cease to occur. But if patents aren’t used, most innovation will go unnoticed.
The term of patents is a key factor. The longer a patent lasts, the higher its DWL. This, in turn, reduces the incentives to pursue innovations. Further, a longer term could deter some innovations while weakening the incentives for others. A shorter term would be optimal. For a given idea, a 10 year patent should last at least 10 years.
The cost of patents is an incentive to innovate, but the benefits of innovation far outweigh the cost. Without patents, an idea is unlikely to be developed by private agents. As a result, the entire welfare associated with an innovation would be lost. However, a long-term incentive for innovation should exist to keep people motivated to continue developing their ideas. Alternatively, a prize should be provided for basic innovation.
Incentives for raising venture capital
To test this hypothesis, Kortum and Lerner use yearly data from 1965 to 1992 for twenty manufacturing industries as the dependent variable. Their explanatory variables are measures of venture capital funding collected by Venture Economics and industrial R&D expenditures reported by the U.S. National Science Foundation. They find a strong positive relationship between venture capital and patenting, with the dollar amount of VC funding being three times as effective in spurring patenting as traditional corporate R&D spending.
The amount of funding raised in the first funding round of a startup is positively related to the number of citations and patent applications. In addition, patent applications have been associated with an increased number of funding rounds. This correlation is further strengthened by Crunchbase data, which collects financing data. And despite the positive relationship, the study still needs to be replicated. However, this study is expected to yield useful insights.
The study also provides evidence of the market for venture loans, which is unusually active and a relatively unexplored arena in innovation financing. Further, it suggests that thicker trading in the secondary market for patent assets may facilitate lending to innovative companies with high risk. It also identifies the role of equity-owner intermediation and contract theory in facilitating the flow of venture capital to innovative projects. This could help Midwestern universities attract venture capital.
While the benefits of patents are well-known, their impact is limited in the early stages of a startup. Later-stage funding activities tend to focus on established startups and venture capitalists seeking funds in the public equity markets. The authors point out that it is hard to analyze patents’ role in signaling, since the informational asymmetries are likely to be reduced in such later funding rounds. Thus, the effect of patents will be stronger in earlier funding rounds, where the informational asymmetry is the lowest.
The value of patents is skewed, however. The vast majority of patents are worth very little while a small fraction are extremely valuable. Hence, the economic impact of patents may vary greatly from one startup to another. In addition, the number of patents may vary based on the industry, requiring a particular analysis. In contrast, a startup with a patent may be more successful in attracting venture capital funding than a company with no patents at all.
Moreover, a study conducted by Kortum and Lerner in 2000 reveals that VC financed companies are more likely to patent their innovations than non-VC backed firms. Although they did not examine the reasons behind this, their results suggest that the patenting process generates important quality signals. And, if the patenting process is used for the right purpose, it can help the company avoid liabilities associated with being new.