Complementary Assets, Patent Thickets and Hold-Up Threats – Do Transaction Costs Undermine Investments in Innovation?

Patents are frequently viewed as major policy tool in order to stimulate R&D. In recent years however, doubts emerged whether this is the case for all technology areas. Theoretical research has shown that when research is sequential and cumulative, stronger patents may in fact discourage follow-on inventions. So called patent thickets are accused to stifle the commercialization of technology in innovations. These thickets refer to a multitude of overlapping patent rights that an innovating firm requires access to.

Recent empirical research provides evidence that firms facing patent thickets have lower innovation performance. By which mechanism patent thickets affect innovation activities remains, however, unclear. Two mechanisms could cause such a negative impact: royality stacking and hold-up threats. Using survey data of the Mannheim Innovation Panel for German manufacturing firms and balance sheet data from Creditreform's Dafne database, I investigate whether investments in innovations are affected by proxies for the pervasiveness of royality stacking and hold-up threats. The former is empirically characterized in terms of fragmented ownership of patent rights. The latter is characterized by differences in fixed tangible assets between the downstream innovating firm and upstream owners of relevant patents. This measure proxies for the maximum amount of accumulated sunk investments that holding-up patent owners could expropriate.

I find that both measures, ownership fragmentation and differences in non-current, tangibles assets, affect investments in innovation negatively. Ownership fragmentation reduces innovative investments for firms with small patent portfolios. Capital stock differences reduce investments in innovation for firms with large patent portfolios. Differences in fixed capital reduce investments in innovation irrespective whether they refer to blocking or non-blocking patent owners and irrespective to size characteristics of the cited patent owners.

These effects are specific to investments in innovation. There are no comparable effects on investments in R&D or residual physical investments. This evidence suggests that negative effects of patent thickets on innovation are not uniform and depend on characteristics of the innovating firm.

Schwiebacher, Franz (2012), Complementary Assets, Patent Thickets and Hold-Up Threats – Do Transaction Costs Undermine Investments in Innovation?, ZEW Discussion Paper No. 12-015, Mannheim.