Innovation: Appropriability and Timing

There are two central issues, which concern the innovator or the innovative firm:

A) APPROPRIABILITY:

The problem of appropriability concerns the degree to which the returns from investments in R&D accrue to the innovator or to other market participants. In the traditional economic analysis of appropriability (Arrow, 1962, Nelson, 1959), it is argued that due to the “public good” nature of information, firms will lack adequate incentives to invest in R&D. Ways of addressing appropriability concerns include patents and related intellectual property rights, along with other forms of market intervention such as government and university sponsorship of basic research. If inventors or innovators could not rely on some means to protect the knowledge they create, they would be at a disadvantage in relation to the rivals who did not incur the often very high fixed costs of creating that knowledge. Such rivals would presumably be able to imitate it at a much lower cost or, in extreme cases, at zero cost. Hence, some kind of incentive is needed to spur private agents to devote resources to innovation activities.

In theory, patents provide a solution to the problem of imperfect appropriabilty, the exclusive right granted by the society enhances the incentives to invent by sanctioning restriction of an invention’s use. To the would-be inventor, the prospect of patent represents the expectation of ex-post monopoly power that Schumpeter claimed was an essential spur to innovation. However industries differ widely in the extent to which patents are effective. The evidence suggests that patents are regarded as a necessary incentive for innovation in only a few industries. The principal reason cited for the limited effectiveness of patents was that competitors can legally ‘invent around’ patents In many industries, firms find other means of appropriation to be quite satisfactory. In some instances imitation is costly despite the absence of strong patent protection. In...