Patents: Ability or Choice?

Jack (Xiaoyong) Fu, Phd Candidate, The Wharton School

Abstract: Do patents reflect a firm’s innovation ability or patenting choice? While classical views consider more patents as a sign of having higher innovation ability, existing literature emphasizes the differences in patenting choices across firms. Although we know firms make different patenting choices for various reasons, most of these patenting choices are endogenous, and thus little is known about how an exogenous variation in patenting choices affects innovation outcomes. This paper’s main contributions are to use a novel data set, introduce a new natural experiment, and exploit a quasi-random shock to show that patenting choices affect three important dimensions of innovation outcomes: the patent quantity, the patent quality, and the firm-level inputs (R&D, investment, and employees). Finding a causal relationship between patenting choice and innovation outcomes bears first-order economic importance because it challenges the common practice of using patents to measure innovation ability. The preliminary result shows that firms strategically choose not to patent a large portion of innovation output. The key insight for innovation management is that there is a significant disconnection between patenting activity and innovation activity. Patent quantity and quality are not good measures of innovation activity without the controls for patenting choices.