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Patent Protection, Market Uncertainty, and R&D Investment

  • Dirk Czarnitzki

    (K U Leuven, Centre for R&D Monitoring at K U Leuven, Centre for European Economic Research, Centre for Industrial Economics at University of Copenhagen)

  • Andrew A. Toole

    (Resource, Environmental and Science Policy Branch, U.S. Department of Agriculture, Economic Research Service)

The main reason governments grant patent protection is to spur innovation. However, the size of the R&D stimulus from patent protection is far from clear because it depends on how effective patents are as a mechanism for appropriating returns. Drawing on real options investment theory, this paper highlights one mechanism through which patents may improve appropriability and stimulate R&D investment: patents reduce the effect of market uncertainty on the firm’s investment decision. We find that firm-level R&D investment falls in response to higher levels of uncertainty, but that patent protection partially mitigates the influence of uncertainty. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 93 (2011)
Issue (Month): 1 (February)
Pages: 147-159

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Handle: RePEc:tpr:restat:v:93:y:2011:i:1:p:147-159
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  1. Mark Schankerman, 1998. "How Valuable is Patent Protection? Estimates by Technology Field," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 77-107, Spring.
  2. Wesley M. Cohen, 2005. "Patents and Appropriation: Concerns and Evidence-super-1," The Journal of Technology Transfer, Springer, vol. 30(2_2), pages 57-71, 01.
  3. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, School of Economics, University of Kent.
  4. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September.
  5. Arora, Ashish & Ceccagnoli, Marco & Cohen, Wesley M., 2008. "R&D and the patent premium," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1153-1179, September.
  6. Sunil Kanwar & Robert Evenson, 2003. "Does intellectual property protection spur technological change?," Oxford Economic Papers, Oxford University Press, vol. 55(2), pages 235-264, April.
  7. Goel, Rajeev K. & Ram, Rati, 2001. "Irreversibility of R&D investment and the adverse effect of uncertainty: Evidence from the OECD countries," Economics Letters, Elsevier, vol. 71(2), pages 287-291, May.
  8. Lanjouw, Jean Olson, 1998. "Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 671-710, October.
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