PATENTABILITY, R&D DIRECTION, AND CUMULATIVE INNOVATION

Abstract

We present a model of cumulative innovation where …rms can conduct R&D in both a safe and a risky direction. Innovations in the risky direction produce quality improvements with higher expected sizes and variances. As patentability standards rise, an innovation in the risky direction is less likely to receive a patent that replaces the current technology, which decreases the static incentive for new entrants to conduct risky R&D, but increases their dynamic incentive because of the longer duration-and hence higher reward-for incumbency. These, together with a strategic substitution and a market structure e¤ect, result in an inverted-U shape in the risky direction but a U shape in the safe direction for the relationship between R&D intensity and patentability standards. There exists a patentability standard that induces the e¢ cient innovation direction, whereas R&D is biased towards (against) the risky direction under lower (higher) standards. The optimal patentability standard may distort the R&D direction to increase the industry innovation rate that is socially de…cient.

Does Administrative Approval Impede Low-Quality Innovation? Evidence from Chinese Manufacturing Firms

“…Obviously, the target encourages the innovative firms to improve the structure of innovation, including decreasing the proportion of low-quality innovation. Additionally, firms have to allocate R&D more efficiently across different R&D types to gain profits by innovation since the AAC establishment brings in a higher level of marketization [36]. To achieve the targets, firms need to change their direction of innovation, and cut off low-quality innovation.…”

“…The government plays a regulatory role firmly due to the AAC establishment, which might change the firms' direction of innovation. Innovation policy and approval procedure can influence the innovation direction of firms, and firms will choose between high-difficulty innovation and low-difficulty innovation under different returns [36,64]. Regulation may change the direction of innovation, reducing the proportion of low-quality innovation.…”

Mergers and Innovation Portfolios

“…To show that equilibrium investment x˚increases in ⇡ A and ✏ B and decreases in ✏ A and ⇡ B , we apply implicit differentiation to Equation (11). We then obtain:…”

“…Using the first order condition evaluated at the pre-merger equilibrium (11), this difference can be rewritten as px˚q "…”

Mergers and Innovation Portfolios

“…We model these contests as "winner-take-all". 11 In the post-innovation stage, thus, the "winning" firm obtains the (monopoly) profits from the market created by the innovation; "losing" firms make no profits. 12 We assume that the probability that no firm wins the contest is strictly positive; as we will see later, this assumption makes our welfare analysis meaningful.…”