From 1949 authorities pursued a case against AT&T’s Bell Labs, which ultimately resulted in the forced divestiture of their non-telecoms arms, separation from their vertically integrated manufacturing, and compulsory no-fee licensing of all 7,820 of its non-telecoms patents (1.3% of the total stock of patents in force in the USA at the time). There is evidence that this move rippled across the US economy, providing a foundation for many of the great innovations of the next fifty years. But this would be true of almost any mass patent invalidation: the monopoly restrictions of patents once they are granted are the cost we pay for the investment in innovation that came before.
He raises the possibility that whatever short-run gains there were from going after AT&T, the long-run impact was to reduce R&D and growth.
In a business environment with no barriers to entry, it is impossible for a firm to capture the benefits of innovation. Hence, there is little incentive to innovate.
Patents provide one barrier to entry. But that approach has a number of flaws. I am not a fan of patents in general.
The main alternative is barriers to entry that are created by business strategy and execution. Microsoft in the 1990s was the master of using business strategy to erect barriers to entry.
These strategic barriers to entry can work both ways. To the extent that an innovation expands profit opportunities for the incumbent firm, it is encouraged. To the extent that it cannibalizes opportunities for the incumbent firm, it is stifled.
This may explain why Xerox “fumbled the future.” The personal computer and the network appeared to create the possibility of a “paperless office,” which is not a welcome development for the copy machine business.
It’s an interesting question how patents organize innovation. In my observation, investors compare the yield on monopoly investments (protected by patent thickets) on a sliding scale within a business area (like energy technology, or pharmaceuticals) and then invest in the most defensible areas because they have disproportionate short term yields.
Two thoughts.
One wonders if the creation of standard essential patents (SEPs) has more to do with limiting the profit potential of R&D than antitrust. “Fair, reasonable and non-discriminatory” (FRAND) royalties may induce suboptimal R&D investment. Of course without the AT&T breakup standards may never have come to play the defining role in tech that they have today. One might wonder if we would have the plethora of standards setting organizations that we have today, if a monolithic Bell Labs ruled industry innovation. Perhaps we would be on the left leg of the public choice curve. And the Samsung R&D Institute, probably the largest corporate-funded R&D lab in the world has gotten increased investment despite Korea’s anti-trust (despite, admittedly, having to bear the burden of FRAND litigation.
Second, one wonders what the shifts in corporate tax policy imply for R&D investment. Switzerland, Japan, and Korea seem to all have had more favorable ratings on the Tax Foundation’s international tax competitiveness up until the most recent USA tax reform as well as better performance on R&D outputs.
The International Innovation Index from 2009 was a global index measuring the level of innovation of a country, produced jointly by The Boston Consulting Group , the National Association of Manufacturers and The Manufacturing Institute. It combined separate measures of innovation inputs and outputs. On outputs, the USA scored 2.16 compared to Switzerland’s 2.74, Korea 2.55, and Japan 2.25. On the 2014 corporate tax sub scale of the international competitiveness index (the oldest one I can access on my cell phone) the USA was ranked 32 of 34 countries, Switzerland 1st, Korea 14, and Japan 25. It will be interesting to see whether improved tax competitiveness of the USA may foster any better R&D performance in the short term or as long as it lasts anyway.
Korea does seem to offer support for the relative importance of business strategy.
“one of the chaebols’ strategies to become global technology leaders was to invest heavily in R&D and develop a global footprint through mergers and acquisitions in the US and Europe, which, in turn, allowed them to enhance their technological capabilities.”
https://m.dw.com/en/why-innovation-is-king-in-south-korea/a-19038625
“Microsoft in the 1990s was the master of using business strategy to erect barriers to entry.”
Could you please clarify? Is this on the consumer side or enterprise side?
If the former, I don’t recall MSFT’s ability to erect significant barriers to entry. I do recall the bundling of a mediocre and completely free web browser, but not much else.
Was IBM’s OS/2 remotely interesting? WordPerfect? Lotus 123? What about Apple’s Mac OS?
Nostalgia alert: does anyone remember MSN dial-up? How did that work out?
Xerox didn’t understand that they weren’t in the office copier business but in the office business. Same as Kodak not seeing they were not in the developing film business and handing decades of instant photos to Polaroid and then piling on by not accepting they were in the image and not firm market.
Entrenched management who gained their position by bureaucratic infighting rather than technical excellence will always doomed any business. Boeing public auto-self-suicidal destruction is the latest sorry example. Designing was fine as long as engineers (who often were pilots) were in charge but was replaced by design-by-managers for thé 737Max. And now we learn that assembling the 787 by under qualified workers, because they were non-unionized and cheaper leads to a new round of groundings (it has escaped public notice due to Covid slowdown by airlines but many 787 will never fly again.) https://www.seattletimes.com/business/boeing-aerospace/boeing-admits-a-new-quality-issue-on-the-787-and-tallies-more-737-max-cancellations/
And to add viz Boeing: when your business model turn to winning bids by lobbying (and probably worse), you get the calamitous KC-46, years late and with so many defects (more than 700 and counting) that it is unusable while the excellent KC-45, which had won the original contest, defend the European sky. At some point, bad business practices can amount to almost treason…
Patents have issues, and they are not necessary for innovation to occur per se. But they are helpful to promote innovation in technologies that are subject to reverse engineering and where copying is cheaper then doing original R&D. Without patents, investment flees toward technologies that can be protected by trade secret. Overall advancement in other industries slows.
I would like to hear more on our host’s views on patents and his experience using them.