Does Winning a Patent Race lead to more follow-on Innovation?

Abstract

Competition between firms to invent and patent an idea, or “patent racing,” has been much discussed in theory, but seldom analyzed empirically and never at scale. This article introduces an empirical way to identify patent races, and provides the first broad-based view of them in the real world. It reveals that patent races are common, particularly in information-technology fields. The article then analyzes the effect of winning a patent race, showing that patent race winners do significantly more follow-on innovation, and their follow-on research is more similar to what was covered by the patent. (JEL CODES: O34, O32, O31)

Beyond the finish line: How losing in patent race drives post‐race innovation

“…First, we examine the direction of innovation following a patent race loss. We observe that losing firms bolster their innovation in neighboring technology categories related to the lost patent (Cyert & March, 1963), while concurrently reducing their emphasis on follow‐on innovation (consistent with Thompson & Kuhn, 2020). This suggests that after a loss, firms shift their innovative attention away from the defeated technology to a closely related technological domain where they have expertise, likely as a strategy to circumvent the constraints of the lost technology.…”

“…Technology competitions occur when two or more firms develop a technology in parallel and race to obtain a patent before the others (Fudenberg et al, 1983; Gilbert, 2006; Storz, 2022; Thompson & Kuhn, 2020). Classic examples of such patent races include that of Alexander Graham Bell and Elisha Gray as they independently developed telephones and filed for a patent on the same day.…”

“…Overall, these studies suffer from endogeneity problems since unobservable factors such as firms' inherent innovation capability influence both the outcome of the innovation race and their subsequent innovation (Gilbert, 2006). More recently, utilizing advanced computational text analyses, one study takes duplication of a patent claim to identify patent race and finds that a losing firm tends to pursue less follow‐on innovation at the project level, measured by a decrease in internal citations to the racing patent, compared to the winner (Thompson & Kuhn, 2020). However, as these findings are at the project level, it remains empirically unclear how the outcome of a patent race affects firm‐level innovation.…”

“…In this study, by constructing a natural experiment of the patent race for firm‐level analysis (cf., Thompson & Kuhn, 2020), we investigate whether a losing firm can indeed outperform the winning firm in innovation after the patent race and suggest its underlying mechanism. Grounded in agency theory, we propose that a losing firm produces more innovation than the winning firm due to escalated managerial concerns (Eisenhardt, 1989; Jensen & Meckling, 1976).…”

“…To test our theory, we identify a unique dataset of simultaneous invention at the application level (cf., Bikard, 2020; Ganguli et al, 2020; Thompson & Kuhn, 2020). Patent races in our dataset occur as application information typically remains undisclosed by the United States Patent and Trademark Office (USPTO) for approximately 18 months post‐filing (Hegde & Luo, 2017), which leads laggard firms to file their applications without having access to specifications concerning technology details of the competing applications.…”