Does a Strong Patent Regime Discourage Innovation

Does a strengthening of the patent regime impact R&D expenditure? For the U.S. semiconductor industry, a strengthening of the patent regime in the 1980s was followed by a sharp increase in patenting but had almost no impact on R&D expenditure. This paper attempts to understand this patent paradox by taking some of the industry features into account. We present a model of invention and product development in complex industries where product development involves putting together a large number of inventions and where licensing of patentable inventions is common. While a stronger patent regime leads to higher patenting both in the presence and absence of licensing, the positive relationship between patenting and R&D is weakened in presence of licensing since licensing provides an alternative way of accessing inventions. A stronger patent regime, therefore, may only create weak incentives to increase R&D, while strongly increasing patenting activities in such an industry