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Carlos Rosell

Ajay Agrawal

Working Paper 12640



1050 Massachusetts Avenue Cambridge, MA 02138 October 2006 We are grateful to Azim Essaji, Maryann Feldman, Avi Goldfarb, Brent Goldfarb, Aamir Hashmi, Ignatius Horstman, Rhys Mendes, Diego Puga, Frank Rothaermel, Bhaven Sampat, Mark Schankerman, Tim Simcoe, Nadia Soboleva, Marie Thursby, Daniel Trefler, Rosemarie Ziedonis, and participants at the 2005 Canadian Economic Association meeting, 2005 Roundtable for Engineering Entrepreneurship Research conference (Georgia Tech), and 2006 ExTra workshop (EPFL) for helpful comments. Errors and omissions are our own. This research was partially funded by the Social Sciences and Humanities Research Council of Canada (Grant No. 410-2004-1770). Their support is gratefully acknowledged.

The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

© 2006 by Carlos Rosell and Ajay Agrawal. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

University Patenting: Estimating the Diminishing Breadth of Knowledge Diffusion and Consumption Carlos Rosell and Ajay Agrawal NBER Working Paper No. 12640 October 2006 JEL No. I23,O33,O34


The rate of university patenting increased dramatically during the 1980s. To what extent did the knowledge flow patterns associated with public sector inventions change as university administrators and faculty seemingly became more commercially oriented? Using a Herfindahl-type measure of patent assignee concentration and employing a difference-in-differences estimation to compare university to firm patents across two time periods, we find that the university diffusion premium (the degree to which knowledge flows from patented university inventions are more widely distributed across assignees than those of firms) declined by over half during the 1980s. In addition, we find that the university diversity premium (the degree to which knowledge inflows used to develop patented university inventions are drawn from a less concentrated set of prior art holders than those used by firms) also declined by over half.

Moreover, in both cases the estimated increase in knowledge flow concentration is largely driven by universities experienced in patenting, suggesting these phenomena are not likely to dissipate with experience.

Carlos Rosell Department of Economics University of Toronto 140 St. George Street, Suite 707 Toronto, ON, M5S 3G6 CANADA carlos.rosell@utoronto.ca Ajay Agrawal Rotman School of Management University of Toronto 105 St. George Street Toronto, Ontario M5S 3E6 CANADA and NBER ajay.agrawal@rotman.utoronto.ca 1 Introduction Amongst the most striking developments on American university campuses over the past quarter century has been the rapid rise of patenting to lay claim to and protect intellectual property associated with novel and practical inventions developed by university researchers.

Indeed, in just 13 years, from 1980 to 1993, the number of patents issued annually to US universities increased by 315%, from 390 to 1620.1 This dramatic shift in academic behavior has been attributed to many factors. Principal among these are developments in the fields of microbiology and computer science, an expansion in the range of patentable matter (e.g., genetically modified life forms, software), the creation of the Court of Appeals for the Federal Circuit, and, most commonly, the passage of the Bayh-Dole Act (1980), which granted universities extensive rights to patent and retain ownership of innovations produced with federal government funding.

Although many observers have characterized the dramatic rise of university patenting as a windfall for the American economy - indeed, The Economist went as far as describing the Bayh-Dole Act in particular as “possibly the most inspired piece of legislation to be enacted in America over the past half century” and citing university-based innovation as a key factor that facilitated America’s industrial renaissance in the 1980s2 - others have

expressed a variety of concerns, most of which can be grouped into one of three categories:

1) a shift in focus from “basic” to “applied” university research,3 2) a decline in quality of university inventions, and 3) a decline in the dissemination of knowledge associated with university inventions.

Surprisingly, given the increasing level of concern over university patenting expressed in both policy circles and the popular press,4 the evidence to date offers little support for the 1 By comparison, the number of patents issued to other US non-government organizations increased by only 48% over the same time period.

2 “Innovation’s Golden Goose,” The Economist, December 14, 2002, Vol.365 (8303), p. 3.

3 Notwithstanding Stokes’ legitimate grievances with respect to the basic/applied taxonomy (Stokes (1997)), we reference it here since most of the discourse on this topic has characterized research this way.

4 “Patent on Human Stem Cell Puts U.S. Officials in Bind,” New York Times, August 17, 2001, p. A1;

“University Resolves Dispute On Stem Cell Patent License” New York Times, January 10, 2002, p. C11;

2 first two of these concerns. The first concern, that an increased focus on commercialization may induce university researchers to divert their energies away from basic research (Cohen et al. (1998); Henderson et al. (1998)), is predicated on the notion that it is more important for universities to provide basic than applied research. This is because the market is more likely to under-provide basic than applied research due to greater appropriability problems.

Basic research is important though, since it often provides knowledge for subsequent applied research and product development, which in turn is the basis for long run productivity and economic growth.

However, empirical studies that examine whether professors substitute patenting for publishing, a rough proxy for changes in research focus, do not provide evidence of such substitution. Agrawal and Henderson (2002) examine the publishing and patenting output of electrical engineering, computer science, and mechanical engineering faculty at a major research institution (MIT) and present evidence suggesting that these two activities are complements rather than substitutes. Furthermore, Markiewicz and DiMinin (2005) and Goldfarb et al.

(2006) examine the complement-substitute question more directly with data from a much broader sample of university researchers and find similar results. Moreover, these findings are not specific to US universities; several studies that examine the patenting-publishing relationship at various European institutions yield similar conclusions (VanLooy et al. (2005)

- K.U Leuven in Belgium; Buenstorf (2005) - Max Planck Institute in Germany; Carayol (2005) - University Louis Pasteur in France; Breschi et al. (2005) and Calerini and Franzoni (2004) - various institutions in Italy).

The second concern is predicated on the notion that an increased focus on commercialization may induce researchers to shift resources towards the disclosure and patenting of lower quality inventions (Henderson et al. (1998)).5 However, evidence presented by Mowery et al. (2004) shows that although the quality of inventions did decline after 1980, this was “Bayhing for blood or Doling out cash?” The Economist, December 24, 2005, p. 115; Lieberwitz (2005);

“Lilly Loses Patent Case to Ariad,” New York Times, May 5, 2006, p. C1.

5 The quality of inventions is measured by “importance,” reflected by a count of subsequent citations, and “generality,” reflected by the dispersion of citations received from patents in different technology fields.

3 due to the entry of universities with little patenting experience; it was not due to a general decline in quality of inventions patented by all universities. The implication of this finding is that the estimated decline is likely to be only temporary, while inexperienced universities learn the patenting process and how to most effectively manage their intellectual property portfolio.

Thus, it is only the third concern, relating to how the anti-commons limits the flow of knowledge, that has found traction in empirical evidence. In a study employing a differencein-differences identification based on patent-paper pairs, Murray and Stern (2005) report findings that although publications linked to patents are associated with a higher overall citation rate, after the patent is actually issued, the rate declines substantially (by 9-17%).

The authors note that the decline is particularly salient for articles authored by researchers with public sector affiliations, such as university professors. They interpret their findings as evidence of an anti-commons effect that results from moving intellectual property from the public into the private domain.

Our paper further addresses the third concern: restricting the widespread flow of knowledge associated with university inventions. However, where Murray and Stern focus on the decline in the level of knowledge flows, we focus on the narrowing of knowledge flows to a smaller set of recipients. Specifically, we examine whether, over time and conditional on being patented, university inventions are more likely to be cited by a more concentrated set of subsequent patent owners. Such a finding could reflect the outcome of a change in the management objectives of university intellectual property from broad knowledge dissemination towards limiting access, perhaps to maximize private returns to licensors.

Using a Herfindahl-type measure of patent assignee concentration associated with forward citations as a dependent variable and employing a difference-in-differences estimation (taking the difference of the change in concentrations over time between university versus firm patents), we estimate that the university diffusion premium (the degree to which knowledge flows from patented university inventions are more widely distributed across assignees 4 than those of firms) declined by over half between the early and late 1980s. Furthermore, unlike the decline in invention quality that occurred during the 1980s that Mowery et al found to be due to the entry of inexperienced universities, the increase in knowledge flow concentration we discover is largely driven by experienced universities; this finding suggests that the phenomenon we identify is unlikely to disappear with time but may actually increase as inexperienced universities become more like their experienced counterparts with respect to the manner in which they manage their intellectual property.

In addition to examining the pattern of knowledge flowing out from university inventions, we also study the pattern of flows into these inventions. Although the approach we employ to examine inflows is similar to the one we use to examine outflows, the phenomenon itself is distinct. Relative to firms, we expect universities draw from a wider set of prior art holders since academia is largely shielded from the anti-commons problem. This problem occurs when prior art is strongly enforced and widely distributed (Heller and Eisenberg (1998);

Argyres and Liebskind (1998); David (2001); David (2003); Lessig (2002); Etzkowitz (1998);

Krimsky (2003)).

Under these conditions, Cournot’s “complements problem” can arise (Shapiro (2001)).

Each upstream patent owner prices royalties without coordinating with owners of complementary patents. Without coordination, the marginal cost of utilizing complementary technologies is higher than if all patents were owned by a single agent. Moreover, a larger number of prior art holders may simply increase transactions costs incurred negotiating the rights to use the complementary technologies required to practice the invention (Ziedonis (2004)).

While firms may consciously conduct R&D with this in mind to minimize exposure to the anti-commons,6 university researchers are largely insulated for two reasons. First, universities have traditionally been shielded from patent infringement liability due to the “experimental 6 For example, from the outset of Kodak’s efforts to develop its instant photography technology, the firm employed its legal counsel to work along with its R&D engineers to minimize the likelihood that any new technology would infringe on existing Polaroid patents (Warshofsky (1994); Rivette and Kline (2000); Jaffe and Lerner (2004)). In addition, Hall and Ziedonis (2001) and Ziedonis (2004) present evidence suggesting that firms building on prior art that is more fragmented patent more aggressively in order to facilitate cross-licensing and mitigate against potential infringement costs.

5 use exemption” (Eisenberg (2003)). Under this doctrine, otherwise infringing activity is permitted if it occurs “for amusement, to satisfy idle curiosity, or for strictly philosophical inquiry.”7 Second, to the extent that university researchers choose their research projects to advance knowledge and only concern themselves with patenting ex post – after something they have discovered is shown to work and offer commercial potential – their project selection and prior art decisions will not be influenced by concerns about potential hold-up during the subsequent product development phase.

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