Secrecy, the patent puzzle and endogenous growth

Endogenous growth models typically assume that innovations are protected solely by patents. Consequently, they predict that strengthening patent protection stimulates innovation by increasing the private return to R&D. This contrasts with empirical evidence that: (1) firms routinely employ a combination of patents and secrecy and (2) stronger patent regimes have been associated with increased patenting but not increased innovation, a finding referred to as the “patent puzzle.” In this paper, I develop a novel model of endogenous growth that is consistent with this evidence. Successful innovators’ choose an appropriation strategy in the form of a patent, secrecy mix. Both protection methods are imperfect, and innovators face a trade-off between secrecy’s superior protection against imitation and patenting’s protection against rival innovation. I demonstrate that growth oriented policy changes generate important economic effects through their impact on the endogenous appropriation strategies of innovators.