The Economic Case for a Strong Patent System

November 12, 2013

Strong patent rights have played a crucial role in the U.S. since its founding. Article I, section 8, clause 8 of the Constitution gives Congress the power “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries,” and leaders like George Washington, James Madison, and Abraham Lincoln have spoken of the importance of patent rights. Today, a strong U.S. patent system remains an essential component of American economic success.

Strong Patent System → Innovation → Economic Growth. Protecting U.S. investment in domestic IP is crucial to economic growth and stability.
  • Strong patent rights incentivize investments in innovation, a key engine of American economic growth. According to the U.S. Department of Commerce, technological innovation has accounted for roughly three-quarters of the United States’ average annual economic growth since the mid-1940s.
  • In total, U.S. intellectual property is estimated to be approximately $5.5 trillion -- greater in value than the entire GDP of any other nation save Japan and China.
  • From 2008 to 2012, the United States received an average of $110 billion per year in cross-border license fees and royalties for the use of U.S. intellectual property. In 2012, license fees and royalties contributed over $84 billion in surplus to the overall trade balance.
Strong Patent System → Higher Income Levels. The economic success of state and local economies is tied to patent ownership.
  • Patent ownership is the most important indicator of state income growth rates and per capita incomes. The higher a state’s patent stock, the higher that state’s per capita personal income.
  • For example, due primarily to their relatively high patent stocks, Connecticut, Massachusetts, and Delaware’s 2004 per capita incomes were over 20% higher than the state average. The lack of patent stocks in states like Mississippi and Arkansas, on the other hand, account for the fact that those states’ 2004 per capita incomes were almost 30% below the state average.
Strong Patent System → Prosperous Companies → More Jobs. Protecting the innovation derived from intellectual property is essential to job creation and a strong economy.
  • Empirical studies have shown that patent rights have a strong, positive influence on a firm’s propensity to invest in innovation.
  • In 2010, America’s most IP-intensive industries accounted for $5.06 trillion in value added, or 34.8 percent of U.S. gross domestic product.
  • IP-intensive industries also generated direct employment of 27.1 million jobs in 2010 and an additional 12.9 million jobs through indirect activities associated with these industries. In total, these 40 million jobs represent 27.7 percent of all jobs in the U.S. economy, and typically provide higher and faster-growing wages than non-IP-intensive jobs.
Strong Patent System → Efficient Technology Transfer. Strong patent rights encourage private and public actors to invest in cutting-edge technologies and commercialize valuable innovations.
  • Empirical research has shown that university-based inventions with a broader scope of patent protection are more likely to be commercialized--that is, licensed or optioned to businesses to produce new technologies.
  • In 2012, technology transfer--the process of universities commercializing their research findings--resulted in approximately 6,400 patent optioning and licensing deals.
  • In the same year, technology transfers resulted in the creation of 705 start-up companies. High-growth, young firms like these start-ups generate 10 percent of all new U.S. jobs each year.
Strong Patent System → Small Business Innovation and Growth. Protecting patents means protecting the most innovative firms in the U.S. -- small, high-growth businesses.
  • Firms with fewer than 25 employees produce the greatest number of patents per employee and for nearly one-quarter of U.S.-held patents in emerging technologies, including “game-changing” health and alternative energy fields.
  • Strong patent protection improves the chances of success for small companies, enhances their bargaining position when negotiating with large firms, and increases their chances of securing financing from investors.
  • A significantly higher percentage of venture capital-backed winners (companies that have been acquired or have gone public) have patent portfolios as opposed to losers (companies that are out of business).
Strong Patent System → Maintaining America’s Global Competitive Edge. Strong patents support the United States’ large “IP reserve,” which fuels its exports and protects its domestic markets.
  • By virtue of its large IP portfolio, the United States has a technological advantage over much of the rest of the world that will last decades.
  • Other countries recognize the role of IP rights in the global economy. In the European Union, over 39 percent of all annual economic activity arises from IP rights. Former Chinese Premier Wen Jiabao has repeatedly stated that “[t]he future world competition will be for intellectual property rights.”
  • By controlling a large portfolio of strong patent rights, the United States holds a non-tariff form of protection for its domestic market and a lever that can be used to open export markets. Merchandise exports of IP-intensive industries accounted for 60.7 percent of merchandise exports in 2010.
  • Strong and certain intellectual property rights ensure that the majority of profits earned from selling products that use American IP--even products that are manufactured elsewhere--actually flow back to domestic companies.