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Patents, Thickets, and the Financing of Early-Stage Firms: Evidence from the Software Industry

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  • Iain M. Cockburn
  • Megan MacGarvie

Abstract

The impact of stronger intellectual property rights in the software industry is controversial. One means by which patents can affect technical change, industry dynamics, and ultimately welfare, is through their role in stimulating or stifling entry by new ventures. Patents can block entry, or raise entrants' costs in variety of ways, while at the same time they may stimulate entry by improving the bargaining position of entrants vis-à-vis incumbents, and supporting a "market for technology" which enables new ventures to license their way into the market, or realize value through trade in their intangible assets. One important impact of patents may be their influence on capital markets, and here we find evidence that the extraordinary growth in patenting of software during the 1990s is associated with significant effects on the financing of software companies. Start-up software companies operating in markets characterized by denser patent thickets see their initial acquisition of VC funding delayed relative to firms in markets less affected by patents. The relationship between patents and the probability of IPO or acquisition is more complex, but there is some evidence that firms without patents are less likely to go public if they operate in a market characterized by patent thickets.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13644.

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Date of creation: Nov 2007
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Publication status: published as William J. Baumol, Melissa A. Schilling, Edward N. Wolff. "The Superstar Inventors and Entrepreneurs: How Were They Educated?," in Thomas Hellman and Scott Stern, editors, "Entrepreneurship: Strategy and Structure" Journal of Economics and Management Strategy 18(3), Fall 2009 (Blackwell Publishing) (2009)
Handle: RePEc:nbr:nberwo:13644

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  1. Carl Shapiro, 2003. "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting," Law and Economics 0303005, EconWPA.
  2. Bronwyn H. Hall & Megan MacGarvie, 2006. "The Private Value of Software Patents," NBER Working Papers 12195, National Bureau of Economic Research, Inc.
  3. Iain M. Cockburn & Megan J. MacGarvie, 2006. "Entry and Patenting in the Software Industry," NBER Working Papers 12563, National Bureau of Economic Research, Inc.
  4. Wagner, S. & Cockburn, I., 2010. "Patents and the survival of Internet-related IPOs," Research Policy, Elsevier, vol. 39(2), pages 214-228, March.
  5. James Bessen & Michael J. Meurer, 2005. "Patent Litigation with Endogenous Disputes," Working Papers 0502, Research on Innovation.
  6. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December.
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Cited by:
  1. Johannes Koenen & Martin Peitz, 2011. "The Economics of Pending Patents," CESifo Working Paper Series 3657, CESifo Group Munich.
  2. repec:dgr:unumer:2012053 is not listed on IDEAS
  3. Cockburn, Iain M. & MacGarvie, Megan J. & Müller, Elisabeth, 2009. "Patent thickets, licensing and innovative performance," ZEW Discussion Papers 08-101 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Ashish Arora & Lee G. Branstetter & Matej Drev, 2010. "Going Soft: How the Rise of Software Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley," NBER Working Papers 16156, National Bureau of Economic Research, Inc.
  5. Mueller, Elisabeth & Harhoff, Dietmar & Haeussler, Carolin, 2009. "To Be Financed or Not : The Role of Patents for Venture Capital Financing," ZEW Discussion Papers 09-003, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper 2011-044, Tilburg University, Tilburg Law and Economic Center.
  7. Huang, Can & Jacob, Jojo, 2012. "Determinants of quadic patenting: Market access, imitative threat, competition and strength of intellectual property rights," MERIT Working Papers 053, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  8. Haeussler, Carolin & Harhoff, Dietmar & Mueller, Elisabeth, 2009. "To Be Financed or Not… - The Role of Patents for Venture Capital Financing," CEPR Discussion Papers 7115, C.E.P.R. Discussion Papers.
  9. NAGAOKA Sadao & NISHIMURA Yoichiro, 2014. "Complementarity, Fragmentation, and the Effects of Patent Thickets," Discussion papers 14001, Research Institute of Economy, Trade and Industry (RIETI).
  10. Pontikes, Elizabeth G. & Hannan, Michael T., 2012. "Toward an Ecology of Market Categories," Research Papers 2110, Stanford University, Graduate School of Business.
  11. James B. Ang & Jakob B. Madsen, 2012. "Risk capital, private credit, and innovative production," Canadian Journal of Economics, Canadian Economics Association, vol. 45(4), pages 1608-1639, November.
  12. Subramanian, Annapoornima M. & Lim, Kwanghui & Soh, Pek-Hooi, 2013. "When birds of a feather don’t flock together: Different scientists and the roles they play in biotech R&D alliances," Research Policy, Elsevier, vol. 42(3), pages 595-612.
  13. Harhoff, Dietmar & von Graevenitz, Georg & Wagner, Stefan, 2013. "Conflict Resolution, Public Goods and Patent Thickets," CEPR Discussion Papers 9468, C.E.P.R. Discussion Papers.
  14. Johannes Koenen & Martin Peitz, 2013. "Firm Reputation and Incentives to "Milk" Pending Patents," CESifo Working Paper Series 4355, CESifo Group Munich.
  15. Mueller, Elisabeth & Cockburn, Iain M. & MacGarvie, Megan, 2013. "Access to intellectual property for innovation: Evidence on problems and coping strategies from German firms," Research Policy, Elsevier, vol. 42(2), pages 529-541.

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