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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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