Journal of Industrial Economics, forthcoming, May 2006
This study looks at software patent’s effects on firms’ choices.
Software patent critics worry that too many software patents give innovators too many patent owners to deal with. This study shows that software patents have benefits that offset any negative effects.
Firms amass many patents because each patent is a bargaining chip the firm can use in case of a patent dispute with a rival (“strategic patenting”).
More research & development spending (R&D) by a firm or its rivals raises the firm’s market value (“R&D spillovers”). Patenting by technology rivals reduces the firm’s R&D investment, patenting and market value.
When few firms hold relevant patents, a firm’s R&D and patenting are reduced—but the firm’s market value is higher because it can more easily coordinate activities.
Stock market valuation of software firms' patents accounts for about twenty percent of the overall private returns to R&D investments.
There has been little change in R&D investment, patenting activity and market value of firms since the expansion of software patents during the 1980s and early 1990s.