One of my pet peeves has always been that we measure innovation in a country by using patents as a proxy. Now, there is a lot to be said for the patent system, and a well working and built out patent system can be a force for good. But the mere number of patents seems a very bad measure. So it is with great interest that I see new research coming out that seems more geared towards understanding the distribution of patents between individuals and the concentration to a few firms. In the paper “Power Law Distributions of Patents as Indicators of Innovation” the authors examine who actually gets the patents. They write:
In conclusion, we have found that distribution of patents amongst applicants within OECD countries generally follow power laws. This provides a new way of looking at the structure of national economies and strengthens the analogy between innovating firms and ecosystems. Indeed, we find that the power law exponents that describe these distributions differ between countries and are correlated with measures such as national expenditure on research and development, and the ubiquity, or degree of specialisation, of the basket of goods that a country exports. Countries that export more specialised goods tend to have a smaller proportion of companies that hold a larger share of the patents where countries that export more ubiquitous goods tend to have a larger share of patents held in small portfolios. It seems that the innovator of today is more likely to work in the research laboratory of a large multinational company than in the suburban garage or small start-up company.
But this is where I think they go wrong. What the authors have shown is not that the innovators work in research laboratories and large companies, but that the patent holders do. And they are not the same. The power law that the study finds seems to be an indicator of patent concentration in systems, and hence also of lack of patent holder diversity. Both factors that should be used to gauge the health of a patent system.
And this is where I think we need to go. We need to look not at patents as a proxy for innovation, but dig deeper and examine the patent system quality, diversity and concentration to understand if it is serving the purposes it set out to serve, or if it is just creating an economy of transaction costs on top of the small start-ups that do not necessarily patent what they do to the same extent.