Patent Protection, Market Uncertainty, and R&D Investment

Dirk Czarnitzki and Andrew A. Toole
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Andrew A. Toole: Resource, Environmental and Science Policy Branch, U.S. Department of Agriculture, Economic Research Service

The Review of Economics and Statistics, 2011, vol. 93, issue 1, 147-159

Abstract: 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.

Date: 2011
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Working Paper: Patent Protection, Market Uncertainty, and R&D Investment (2008)
Working Paper: Patent protection, market uncertainty, and R&D investment (2006)
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