Biotechnology - Genomic and Proteomics/Overview of Economics of Intellectual Property in BGP

Report April 2009

Where does the literature says IP works and does not work?

Introduction

• Literature review revels that:
  • The past three decades have seen a significant increase in the scope of formal intellectual property (IP) rights, such as patents, over knowledge traditionally maintained in the public domain (Mowery, et al 2001; Heller 2008).
  • This dramatic expansion in IP rights over the earliest stages of research has caused widespread debate about the effectiveness of incentives for innovation (Scotchmer 1991, 1996).
  • The implications of expanding IP rights in the earliest stages of the innovation process are mixed:
    • On the one hand, early stage IP may be important to encourage the establishment of new research lines, since upstream researchers can thereby avoid expropriation by downstream researchers (Scotchmer, 1996).
    • On the other hand, by requiring downstream innovators to contend with a large number of fragmented upstream IP rights, their projects may suffer from "gridlock" as a result of transaction costs and complexity (Heller & Eisenberg 1998; Heller 2008).
  • Additionally, since a single upstream idea can, in principle, be applied across multiple later-stage domains and applications (Breshnahan & Trajtenberg 1995, Rosenberg & Trajtenberg 2001) and it may be extremely difficult in advance to precisely articulate the diversity and range of applications arising from a given upstream idea (Rosenberg 1996), scholars point the diversity of scientific experimentation across a range of research lines also may be affected by the enclosure of ideas. (Murray et all, 2009)
    • Murray et all concludes that: "if IP is used to restrict openness particularly at very early stages of the research line, then it is possible that the rich array of exploration projects that are key to diverse follow-on innovation will be stiffed." (pg 28):
      • • "openness not only impacts innovation incentives within a given research line but also encourages exploration and investment in new and speculative research directions." See more Murray et all - here #1, #3 and #4.
        • "openness favors the cross-fertilization of ideas within stages". See more Murray et all - here #2.
        • "positive shocks to openness foster research intensity, rather than hindering it because of appropriability concerns surround critical research outputs" Murray et all - here #3.
      • "Our theoretical framework suggests that the level and nature of follow-on research depend not only upon the quality and type of research inputs available but also upon the degree of "openness" of these research inputs." (Murray at all 2009)
  • When at least one of the starting materials or end products are non-obvious, biotechnology processes can be patented. This probably makes it less likely that people will keep trade secrets if they believe there is a possibility of licensing the process (Ladas & Parry "Patentability of Process Claims in the United States")

When IP does work

• When R&D costs are high
  • “On average, a lack of patent protection would have prevented the development of 60% of pharmaceutical and 38% of chemical inventions. In most sectors, a lack of patent protection would have had little impact, resulting in 17% fewer inventions in machinery, 12% less in fabricated metals, 11% less in electrical equipment, and no effect at all in office equipment, motor vehicles, rubber, and textiles.” (Arundel pp. 11)
  • “Only four chemical industries (drugs, plastic materials, inorganic chemicals, and organic chemicals) and petroleum refining rated process patent effectiveness higher than four on a seven-point scale, and only these four chemical industries and steel mills rated product patents higher than five.” (Levin pp. 796)
• When research methods can be patented (as in Biotech)
  • research tools develop faster in biotech than in other industries - so there's a profit to be had just coming up with new research processes (Harison pp. 26)
  • Current US IP law does not make a distinction between discovery and invention, could have possible impact on innovation (pp. 28)
• When patents can be used strategically
  • “The patenting strategies of American firms appear to be strongly driven by the wish to block competitors and to prevent copying. The use of patents as a means of sharing information, for example through licensing or in negotiations, is less important for American firms than for European and Japanese firms.” (Arundel pp. 13)

When IP doesn't work

• When lead time is a primary competitive advantage
  • von Hippel and Levin both found that companies preferred to protect innovations through secrecy and lead times (pp. 3)
• When the goal is spreading information
  • only a small number (3%) of high technology firms use patent and copyright publications sources of new information. Compare to trade conferences: 70% (Arundel pp. 3,5)
• When there are other means of protecting competitive advantages (Levin pp. 794):
  • on a scale of 1-7 (7 being the most important), business executives were asked to rate the importance of various techniques for protecting competitive advantages. The number is the average score, and the bracketed number is the margin of error. Compare between Products and Processes:

	Processes	Products
Patents to prevent duplication	3.52 (0.06)	4.33 (0.07)
Patents to secure royalty income	3.31 (0.06)	3.75 (0.07)
Secrecy	4.31 (0.07)	3.57 (0.06)
Lead time	5.11 (0.05)	5.41 (0.05)
Move down the learning curve	5.02 (0.05)	5.09 (0.05)
Sales or service efforts	4.55 (0.07)	5.59 (0.05)

• As you can see from the table above, IP was viewed as marginally effective for protecting processes, and least effective compared to other methods for protecting products

Academic Research versus Private Research: relation between freedom of research and openness

• Academic freedom tends to dominate private sector focus at early stages on a research line (Aghion, Dewatripont and Stein 2008).
• "Academic research (or freedom) differs from private-sector research in that it leaves control rights over the research strategy in the hands of the researcher." (pg 7) (Murray et all, 2009)
• "The key result is therefore that academic freedom will be the optimal governance structure at earlier stages and private sector research will be optimal at later stages." (pg 8) (Murray et all, 2009)
• In reality however there is value in experimenting with ideas that may lead to an entirely new research lines, consistently with the idea that scientific discoveries do not follow a purely linear" model. This does not alter the relative optimality of academia (vs. private research) in earlier (vs. later) stages of research. It does, however, raise the desirability of freedom in general (and academia as the institutional regime that supports such freedom), if we make the realistic assumption that pursuing the alternative strategy confers a higher probability of generating entirely new research lines than pursuing the practical strategy (note that, realistically, the probability of such an event, possibly the result of an \accidental" discovery, is nonzero for both strategies)" (pg 8-9) (Murray et all, 2009)
• The fact that academic research in developed, in general, in non-profit institutions implies that (1) in relation to freedom: institutions will not incur in the cost of monitoring academics research and (2) in relation to openness: he reduction in the cost of accessing research inputs, should make a bigger difference for academic research than private sector research. (Murray et all, 2009)

Openness and Publication outputs

"If openness enhances basic research and the creation of new lines, this implies that it should have a long-lasting effect on the ow of subsequent publications. This is because new lines take a significant amount of time before maturing, and their development could lead to even more research lines being created. Indeed, starting a new line means a positive probability of a long dynamic flow of new discoveries whose research lines continue long after the original line has ended." (pg 9-10) (Murray et all, 2009)

What are the other incentives mentioned by the literature?

• Variety of reasons for choosing not to patent (Levin pp. 784):
  • not perfect appropriable
  • often not worth the cost of the application process
  • patents considered easily circumvent-able
• As seen in above table, there seem to be other means of capitalizing on competitive advantage

Is there data on "how much of an increase of the tendency towards enclosure".

• Between 1965 and 1989, university patents rose 15-fold. At the end of that period, drug and medical patents accounted for 35% of the total, up from 15% at the beginning of that period (Henderson pp. 121)
• In 1980s, the Supreme Court decision in Diamond v Chakrabarty established the patentability of genetically engineered organisms
• In 1980s, the Bayh-Dole Act affirmatively allowed universities to seek patent protection and licensing revenues from Federally-funded research (Mowery et al 2004)
• By the mid-1990s, US universities receiving over 3,000 patents each year. While many observers took this as an indicator of universities' evolving role as engines of innovation and commercialization (Henderson, Jaffe & Trajtenberg 1998), some argued that strong IP rights over scientific research discoveries were detrimental to research productivity and cumulative discovery (Heller & Eisenberg 1998).
  • In particular, some universities placed significant restrictions on the distribution of patented research materials to academic researchers (e.g., the University of Wisconsin restricted the open distribution and use of patented stem cell lines (see Murray 2007)) while other universities were accused of rent-seeking when they sought to enforce IP claims over independent commercial discoveries (e.g. the University of Rochester's enforcement of its patents on the Cox-2 pathway (Shane & Somaya 2007).

• remaining points of investigation: how are practices of emerging and established private institutions changing?

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Bibliography for Item 1 in BGP
Biotechnology_-_Genomic_and_Proteomics