What happens when companies in developing countries start using intellectual property?

Carsten Fink, Bronwyn Hall & Christian Helmers (Santa Clara Univeristy), “What happens when companies in developing countries start using intellectual property? Evidence from Chile”

There is plenty of evidence on patenting behavior of companies in the industrialized world, above all the U.S. and Europe. A stylized fact supported by the existing literature is that patenting is rare: Balasubramanian and Sivadasan (2011) find that only 5.5% of all manufacturing companies in the U.S. filed a patent between 1977 and 1997. Similarly, Hall et al. (2013) find that only 2.9% of all registered companies in the UK patent, and even among firms engaged in R&D, the share increases only to 4.0%. The evidence also points to substantial differences in the use of patents across economic activities. For example in the UK, 7.7% of manufacturing firms engaged in R&D patent, whereas only 2.6% in business services do so. Although there is no comparable evidence for lower- and middle-income economies, IP registration data for a number of countries – with the exception of China – suggest that domestic companies hold only a vanishingly small number of patents (Abud et al., 2013).
A small, but growing literature on the use of trademarks finds somewhat higher rates of use. For example, approximately three times as many UK firms hold trademarks as hold patents (Helmers et al. 2011). Trademark registration data for Chile also confirms that the use of trademarks is far more widespread among Chilean companies across a large range of industries (Abud et al., 2013).
The evidence to date suggests that ownership of patents and trademarks is associated with higher productivity and/or higher firm value, at least in developed economies (e.g., Hall et al., 2005; Hall et al., 2013). Balasubramanian and Sivadasan (2011) suggest for the U.S. that the 5.5% of manufacturing firms that patent account for nearly 60% of industry value added and more than 50% of employment. Their findings also indicate that firms grow substantially after they patent for the first time where growth appears to be driven by the sales of new products. In this and in other such studies it is often difficult to tell whether the true association is with the IP right or with the asset that it protects. That is, are the patents and trademarks serving as a (useful) proxy for successful invention by the firm or for the introduction of new products? Or does owning the right itself add something to value? The answer to these questions has policy implications, as it tells us to what degree more firms should be encouraged to spend money on securing IP rights.

In this research project we explore the determinants of the use of IP rights – specifically patents and trademarks – by manufacturing firms in Chile between 1995 and 2008. We are particularly interested in first-time use of IP rights: when do firms start using the IP system, what determines that decision, and what is the short and long-term effect of using the IP system on these companies.

This analysis is possible thanks to a novel, rich data source from Chile that includes production, IP ownership, and innovation data at the firm level. The data were created by collaboration between the Chilean Industrial Property Office (INAPI), the Chilean National Statistics Institute (INE), and the World Intellectual Property Organization (WIPO). INE matched the IP registration data provided by INAPI to 11 annual waves of its manufacturing census (ENIA) and 5 waves of its innovation survey (Innovacion). The matched manufacturing census and innovation survey data cover the period 1995-2005 and 1997-2008 respectively.4 The panel structure and the more than a decade-long time series allow us to analyze changes in the use of IP by companies and to relate IP use to company characteristics, innovative activity, and performance. The data cover a particularly interesting period of Chile’s recent economic history – a time when Chile transitioned from a lower-middle income economy to a high-income member of the OECD. Table 1 gives an overview of the firm observations available on each dataset.

The results of our analysis enrich the existing evidence on innovation and firm performance in Chile and more generally in low- and middle income economies. There are many studies that relate information obtained from innovation surveys to company characteristics and performance. For example, Alvarez et al. (2011) use data for Chile constructed from several waves of the innovation survey and the manufacturing census between 1995 and 2007. They find a positive association between product innovations, internal R&D and employment growth. The association with process innovations is more ambiguous, with some findings even suggesting a negative correlation. While this analysis offers valuable insights into the link between innovation and firm performance, it does not inform us about the role of IP.