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«Published Annually Vol. 6, No. 1 ISBN 978-0-979-7593-3-8 CONFERENCE PROCEEDINGS Sawyer School of Business, Suffolk University, Boston, Massachusetts ...»

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Edinformatiics, www.edinformatics.com/inventions_inventors Ho Kate and Luban Katherine, National Innovation Systems: A case study of South Korea and Brazil, 25 March 2004 Ho, Li-An, 2011, Industrial Management and Data Systems ‘meditation, learning, organizational innovation and performance, Vol. 111, iss: 1, pp- 113-131 Keirstin, Are people who meditate the top social change agents, CI-shift.com (Conscientious Innovation) March 2011 Kramer Andrew, NYTimes, Feb 4,2010 Laughing Clubs of America News letter, what is your laughter Quotient? May 19, 2011 Lohr Steve, NYT, Nov. 15, 2011 Maddock, Michael et.al, Laugh a Little, Innovate a lot, The innovation Engine, Bloomberg Business Week, Jan. 27, 2009 MindSpace in Business Meditation, study by Mind/ Body Medical Institute Harvard University June 1, 2009 Rediff.com, Amazing Innovations form Rural India, March 16, 2011 Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Ruvinsky, Jessica, Can’t buy me laughter, Stanford Social Innovation Review, Winter, 2011 Sawyer Keith, New Research, Laugh all you want, Sept. 16, 2011, Laugh TM Institute Study, 1991 TM Techniques and Creativity, Cornell, 1979 Yost Cali Williams, Predication- Meditation becomes a core competency, Fast Company, March 25, 2008 Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Patent Policy and Research and Development Expenditure: Evidence from Indian Industry

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The theoretical literature studying the impact of patent policy on research and development (R&D) expenditure by firms advocates ambiguous influence. The appropriability thesis proposes that patent protection influences the firms to increase the R&D expenditure positively. Alternately, due to the reduction in competition and defensive patenting the impact of protection on the expenditure may be negative. This ambiguousness renders the issue essentially empirical. In the Indian context, existing literature focuses on the determinants of R&D expenditure including firm-specific variables, ownership and sources of finance. This paper fills the gap and studies the impact of the patent policy changes on the R&D expenditure of the Indian industry using data from 54 industries at 3 digit NIC classification for the time-period 1990-2010. The results show that the policy changes have a positive impact on the innovation.

Keywords: Patent Policy; Research and Development Patent Policy and Research and Development Expenditure: Evidence from Indian Industry

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The patent policy of an economy is a significant tool of the technology policy to stimulate innovation. The primary objective of the institutional framework of the patent policy is to ensure appropriation of the investments made in the research and development (R&D) activity by the producers. The history of patent system reveals that developed economies formulated patent regime according to the special requirements of their industry. For example, Switzerland introduced mechanical invention patent to protect its watch industry, but initially withheld patent protection on chemical substances and processes because its infant chemical industry relied upon imitating German technology (Kaufer 1989). Traditionally, patent policy is territorial in nature with the level and conditions of protection being determined by national laws and enforcement institutions. The domestic characteristic of the policy was lost with the “Agreement on Trade Related Aspects of Intellectual Property Rights” (TRIPs) under the aegis of World Trade Organization (WTO).

TRIPs agreement lays down minimum substantive standards of protection for member states to formulate their domestic legislation on seven types of intellectual properties including patents. The legislative stipulations with regard to seven IPs include specific provisions for subject matter of coverage, rights covered, exceptions granted, and the duration of coverage.

“When fully implemented, TRIPs will unambiguously strengthen protection of intellectual property rights almost worldwide, feat not achieved by any single international treaty up to now,” Watal (2002, 304).

India as a founding member of World Trade Organization (WTO) complied with the TRIPs agreement by 2005 and changed domestic legislation as per the agreement's stipulation. This compliance increased the strength of patent rights provided to right-holders. The most significant changes in the patent policy following TRIPs compliance included increase in the duration of patent protection to 20 years, provision for product patents for food and pharmaceutical industry, signing of Paris Convention and Patent Cooperation Treaty, and making provisions for the preliminary injunctions, contributory infringement and burden of proof reversal. These changes have raised concerned about the gains from signing the agreement. The literature shows that an economy predominantly gains through two channels as the patent protection increases. These channels include Conference papers © Knowledge Globalization Institute, Pune, India, 2012 The need for the international protection of intellectual property rights (IPRs) became evident when foreign exhibitors refused to attend International Exhibition of Inventions in Vienna in 1873 (WIPO 2005). IPRs became part of international agreements with Paris Convention (1883) and Berne Convention (1886. Following this there were many developments at international level that lead to the establishment of World Intellectual Property Rights Organization (WIPO) in 1970. The treaties monitored by WIPO do not require its member states to stipulate similar standards of protection in their domestic legislations covering different IPRs, the condition required by TRIPs. stimulation given to the domestic innovation and the facilitation of technology transfer through strong rights. In the Indian context, Sharma and Dutta (2008) empirically investigate the impact of the patent policy on domestic innovation and found positive results. The study uses difference-in-difference approach and classify the industries into paten-sensitive based on US data. Clearly, there is a need to study the impact of patent policy on the innovation in the Indian industry. This paper studies the impact of patent policy changes on the innovation of the Indian Industry using data from 54 industries at 3 digit NIC classification for the time-period 1990--2010. The results show that the policy changes have a positive impact on the innovation.





The paper is organized as follows: Section 2 present the background of the relationship between innovation and patent policy along with the literature review. Section 3 give details of the variables, data and empirical strategy. Section 4 discusses the results followed by the concluding Section 5.

2. The Background

Non rivalry and partial excludability as defining characteristics of knowledge render knowledge goods as impure public goods (Romer 1990). Once fixed costs have been incurred to produce knowledge sensitive goods, marginal cost of providing additional unit of these goods is zero or minimal. According to the marginalistic principle of optimization, the price of knowledge good must be zero. A zero price of knowledge good adversely affects the incentive of innovators who make extensive investments for generating these knowledge goods. The appropriability of R&D resources can be ensured by the patent policy of a country. A government‟ s intervention by means of patent policy makes knowledge goods excludable limited to the commercial use of products. This commercial use implies making, using, offering for sale, selling, or importing of patent policy sensitive goods according to TRIPs. The patent regime involves trade-off between static losses due to the monopoly rights given to the right-holders and dynamic gains to the society in the form of incentives to innovators to create knowledge goods. An additional benefit of patents is due to the disclosure requirement of the patent applications to ensure that sufficient information is made available to other researchers and new knowledge has not been kept secret under imitation threat. Mazzoleni and Nelson (1998) elaborate that disclosure requirements are important for furthering technological change of an economy as a single inventor cannot exploit all the possible uses of an invention.

Theoretical reasoning espouses that the producers of knowledge goods facing competitive markets deal with the threat of imitation. A study by Mansfield (1985) on 100 firms from 13 manufacturing industries indicates that for products and process, odds are better than 50-50 that a development decision leaks out in less than 18 months. The personnel turnover, informal communication networks among engineers and scientists working at various firms, professional meetings, input suppliers, and customs are different channels through which information leaks out. This information leaks do not imply that the imitation of the product also takes place immediately. Mansfield, Schwartz and Wagner (1981) study on 48 product innovations has shown that the ratio of imitation costs to that of innovation cots is as high as 0.65 and the ratio of the imitation time to the innovation time is 0.70. Industry specific characteristics (Mansfield 1986), tacitness of technology, circumstantial sensitivity of the industry technology (Evenson and Westphal 1995), and R&D undertaken by competitors that affects absorptive capacity of the firms (Cohen and Levinthal 1989) determine the extent of imitation. The excessive imitations reduce R&D expenditure by firms as these firms are not able to recover these investments.

Scherer (1980) argues that the existence of non-patent barriers; substantial natural imitation lags, first-mover advantage, and oligopolistic market structure are important factors that diminish significance of the patent policy as a mechanism to appropriate returns from R&D investments. Levin et al. (1987), in their popular study referred to as “Yale Survey”, explore patents vis-à-vis alternative means of appropriation in the U.S. manufacturing industry. The survey confirms that the other means of appropriation namely lead time, secrecy, learning advantages, and sales and services efforts are typically more important than the patent system. Levin et al. (1987, 816) conclude, “… the patent system and related institutions to protect intellectual property should be understood as social structures that improve the appropriability of returns from innovation. They are not the only nor necessarily the primary barriers that prevent general access to what would otherwise be pure public goods.” Cohen, Nelson and Walsh (2000) have conducted another survey in R&D labs of the U.S. manufacturing industries in 1994 and reconfirmed results of the “Yale Survey”. Cohen et al. (2000) show that firms also use patents for strategic defensive purposes including “patent blocking”. Patents play multifaceted role among firms including “regulatory capture” (Kortum and Lerner 1998), and “strategic response” (Hall and Ziedonis 2001). Kortum and Lerner (1998) confirm the

Conference papers © Knowledge Globalization Institute, Pune, India, 2012

“regulatory capital” hypothesis that is firms do aggressive patenting to improve their negotiating position with larger owners of the patent policy. “Strategic response” hypothesis proposed by Hall and Ziedonis (2001) implies that the firms with a large sunk cost expand patent portfolio to trade. As an alternate to patent system, state can also reward innovators to recognize their contribution to the society and make innovations available to public. It is evident that the relationship between the patent policy and R&D expenditure by the firms is ambiguous leaving the issue for empirical investigation.

In the Indian context, the empirical literature studies the determinants of R&D expenditure with each study focusing on a specific aspect. These determinants include firm size, market structure, export intensity (Nagesh and Aggarwal 2005; Mishra 2007;

Gosh 2009), technology imports (Aggarwal 2000), export intensity and ownership related aspect (Gosh 2009). Sharma and Dutta (2008) have undertaken study for the Indian firms using difference-in-difference approach with the classification of the industries into patent sensitive based on the trend in U.S. industries. Such a classification need not be appropriate for an emerging economy like India that may purchase technology from international market instead of creating it. Such transfers and consequent adoption, adaptation and imitation may effectively alter the relationship between the R&D expenditure by Indian industry and patent policy. Evidently, there is a need to conduct a study to understand the relationship between the changes in the Indian patent policy introduced after TRIPs compliance and its influences on the domestic innovation.

–  –  –

The present study uses R&D expenditure as a proportion of sales that is research intensity (RDI). The relationship between patent protection and RDI needs to be conditioned for various variables.

Demand Factors The demand forces, that affect the expected profit from an invention, play a leading role in determining both the direction and magnitude of R&D activity (Schmookler 1954). Scherer (1982) corroborates demand-pull hypothesis of the innovative activity. Rosenberg and Frischtak (1984) argue for the bi-directional relationship between demand and innovative activity. The initial stimulus is however provided by macroeconomic conditions that regulate “… demand conditions in most sectors, so that introduction of new products and processes tend not to occur unless the economic environment is conducive to increases in consumer spending and investment activity,” (Rosenberg and Frischtak 1984, 16). The growth rate of sales (SAL) captures the market growth in the present model (Aggarwal 2000).

With the increasing globalization the demand factors are not only limited to domestic boundaries and are spread beyond national borders. Zimmerman (1987) finds stronger impact of the demand created by exports as compare to the domestic demand.

Furthermore, exporting companies are aware of the international technology trends and are more likely to adopt the same (Evenson and Joseph 1997). Therefore, the model includes export intensity measured by the percentage of exports to total sales (EXP) as an exogenous variable.

Supply Factors



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