Appropriability

Preview

• Today
• Appropriability
• Briefing on final quiz
• Nov 2: Final quiz

Policy and strategy

• Policy: How to encourage innovation?
• But not over-encourage
• Strategy: How to exploit innovative capability?
• Perform innovation as principal -- develop innovation and then
• Sell
• License
• Produce (vertical integration)
• Perform innovation as agent (contractor)
• Key factor: Appropriability

Law

• Major factor in appropriability is law
• Three branches of private law
• Property: Allocation of basic rights
• Contract: Rights negotiated away
• Tort: Relations between parties with no contract

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Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy

Intellectual property

• Patent: Exclusive right to invention
• Products
• Processes
• Copyright: Exclusive right to expression
• Not the content
• Trademark: Exclusive right to identification
• Design
• Database
• Geographical indication

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• Limitations
• National jurisdiction
• Time (some forms of IP)

Australia: Innovation-active businesses

Source: Innovation in Australian Business, 2014-15

Ownership

• Residual rights -- all rights other than those contracted away
• Key -- right to exclude => prohibits imitation
• Sale
• License
• Exclusive
• Non-exclusive

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy

Patent: Fundamental exchange

• Exclusive right
• Disclosure of method
• Others can avoid infringing
• After patent expiry, others can freely build on the invention

Patent: Legal standard

• Standard patent
• Utility
• New
• Not obvious (“inventive step”)
• Second-tier patent
• Lower inventive step
• China, Japan, Taiwan, HK, Australia
• Not UK, US, Singapore, New Zealand

Patent: Legal standard

• First to invent
• Can keep invention as secret and then patent at optimal time -- patent is real option
• First to file
• Risk that competitor will pre-empt and lock up
• U.S. changed to first-to-file in March 2013

Patent: Limited term

• WTO TRIPS Agreement: 20 years from filing
• Nanotechnology
• Many inventors patented early
• By time that technology ripe for commercialization, major patents had expired
• Solar power: Similar
• 3D printing: Similar

Patent: Limitations

• Protects against imitation and reverse engineering
• Does not protect against inventing around
• Take care in disclosure

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy

Copyright

• Exclusive right to expression
• Content but not the title
• Domain: Written material, music, audiovisual
• Administrative
• Need not register
• Need not mark symbol ©

Software

• Copyright
• Publishers only license software (do not sell)
• Contract: End-user licensing agreement

Data

• U.S. Supreme Court (Feist Publications, Inc. v. Rural Telephone Service Co., 499 US No. 89-1909, 340 (1991)): “Notwithstanding a valid copyright, a subsequent compiler remains free to use the facts contained in another’s publication …, so long as the competing work does not feature the same selection and arrangement”.
• Mere compilations of facts are not copyrightable
• Only selection and arrangement of information, if sufficiently original, are creative and so, copyrightable.
• Singapore: Similar decision in Global Yellow Pages Ltd v. Promedia Directories Pte Ltd and another, [2017] SGCA 28

Trademark

• Objective: Avoid confusion
• Trademark: Word, phrase, symbol, or design that identifies and distinguishes the source of the goods of one party from those of others
• Service mark: For services
• Basis for brands

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy https://drive.google.com/file/d/1vTg2J0jGGhknGJgF5cBN9nLo8Yxi8quY/view?usp=sharing
• Product
• Complementary assets
• Employment contract
• Public policy

1933: Darlie

1976: Risis

“Of course I am worried about my secret recipes. Some of them are 20 years old.” Gurcharan Singh (owner of Jaggi's Northern Indian Cuisine)

Source: Straits Times

Note: Adapted from James Pooley, Presentation, WIPO, Nov 2010

Secrecy

• Strictly, not an intellectual property right
• Advantages
• No need to (must not) disclose
• Low inventive step (not readily ascertainable)
• Production know-how
• Unlimited in time
• All commercially valuable information – not limited to technical knowledge
• Disadvantages: Does not protect against
• Reverse engineering
• Accidental disclosure

Secrecy

• Technology
• More effective for process than product -- easier to conceal processes
• Strategically combine secrecy with patent
• Patent elements that are
• Easier to reverse engineer (not copy)
• Good for marketing
• Keep some critical elements, eg, production process, secret

Secrecy (Png Rev Econ & Stat 2017)

• United States: Secrecy is state jurisdiction
• Prior to 1979: Common law
• From 1979 onward, states enacted Uniform Trade Secrets Act – stronger protection of trade secrets
• Png (2017): Effect of UTSA on company R&D

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Secrecy (Png 2017)

Circles: Companies in states with UTSA in effect on or before 1998.

Triangles: Companies in other states without UTSA in effect on or before 1998 deemed to have UTSA in effect in 1989.

Common pre-trends

Secrecy (Png 2017)

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy

Source: Financial Times, 4 Nov 2013

Technology: Complexity

• Technology
• Product – many technologies (eg, car) or few (eg, pharmaceutical)
• Production
• Difficult to reverse engineer => first mover gets head start
• Complements secrecy
• Secrecy does not protect against reverse engineering
• Irrelevant for patent
• Patent discloses technology

Technology: Complexity

• Complexity depends on science
• 19^th century German dye industry: Major competitors in Switzerland (no patent law)
• Early period: German manufacturers kept formulae secret
• Development of analytical chemical methods -- periodic table => easier to reverse engineer chemicals
• German manufacturers switched to patenting (Moser 2012)

Technology: Complexity

• Strategy -- Modular architecture
• Good: Easier to implement
• Bad: Easier to reverse engineer or invent around

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy

Complementary assets

• Complementary with technology (may be complementary or substitutes for other appropriability mechanisms)
• Production network
• Suppliers
• Manufacturing/operations
• Distributors
• Strategy: How to exploit innovation?
• Sell
• License
• Produce (vertical integration)

Public policy: Complementary assets

• Should country allow production to migrate to cheaper locations?
• Example: U.S. semiconductor industry
• Pure design: Qualcomm, Nvidia, AMD, Apple
• Integrated: Intel, Micron
• Effect on innovation?
• Knowledge base – absorptive capacity
• Appropriability

TSMC

• “The entire process of making a [semiconductor] wafer consists of something like 60, 70 process steps at least. Very few people know the secrets of all the 60, 70 steps.” Morris Chang, former Chairman, Taiwan Semiconductor Manufacturing Co (Financial Times, 6 August 2018)
• “There are a lot of benefits to the way they are running things — especially the close connection between R&D and high-volume manufacturing where you can send an engineer to a fab just an hour away” Peter Hanbury, Partner, Bain.

​

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�Appropriability: Teece (Research Policy 1986)

1. Does stronger protection of intellectual property increase innovation?
2. “Although subsequent court decisions have upheld some of EMI’s patent claims, once the product was in the market it could be reverse engineered and its essential features copied” (Teece 1986: 298).
3. Teece (1986) emphasized the role of complementary assets in securing profit from innovations. Compare the innovation strategies of Qualcomm, a pure design semiconductor firm, and Intel, which is vertically integrated into manufacturing.

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy

Employment contracts

• Key vector by which knowledge leaks out – employees
• Non-competition agreement – limit by
• Function
• Geography
• Time
• Confidentiality, non-disclosure – protect trade secrets

Covenant not to compete: Marx et al. (2009)

• Michigan natural experiment
• 1985: Inadvertantly repealed absolute prohibition against CNC
• 1987: Retrospectively subject CNC to standard of reasonableness
• Assuming that employers and employees did not contract around CNCs
• Repeal should reduce mobility
• Particularly among workers with employer-specific skills
• Particularly among workers specialized in technologies

Covenant not to compete: Marx et al. (2009)

• Michigan law associated with
• 8.1% less mobility among non-auto inventors
• 15.4% less mobility among inventors with employer-specific human capital
• 16.2% less mobility among technology-specialized inventors
• No reduction in patenting => patents and CNCs are complements, not substitutes

Knowledge specificity

• General, eg, Python
• Specific, eg, Google proprietary machine learning tools

Outline

• Intellectual property rights
• Patents
• Copyright and Trademark
• Secrecy
• Product
• Complementary assets
• Employment contract
• Public policy [skip]

Public policy

• Fundamental trade off: Exclusive right
• Gain from incentive for innovation
• Loss due to under-utilization of existing knowledge
• Existing knowledge is a public good -- use is non-rival
• But cost of absorbing knowledge
• Central empirical question: How do stronger intellectual property rights affect innovation?
• Larger reward for innovation
• Less follow-on innovation?
• Depends on efficiency of negotiation

Cumulative innovation:

Patent law (Hu and Png 2013)

• Study effect of patent law on industry value-added
• Aggregates effect on original inventing company and follow-on inventors in same and other industries
• Up to 54 manufacturing industries in up to 72 countries, 1981-2000
• Estimation
• Challenge: Patent law may be endogenous to innovation and growth
• Identification: Effect of stronger patent law on growth of value-added contingent on patent-intensity

Cumulative innovation: �Patent law (Hu and Png 2013)

• Findings
• Stronger patent rights associated with faster growth in more patent-intensive industries
• Larger effect in higher-income countries
• Mechanisms
• Factor accumulation and
• Increased productivity

Cumulative innovation:

Human genome (Williams 2013)

• Study effect of intellectual property rights on scientific publications, discovery, and new products
• Context: Human genomics
• Effect of Celera
• https://www.youtube.com/watch?v=AhsIF-cmoQQ
• Human Genome
• Public sector: Human Genome Project, 1990-
• Private sector: Craig Venter – Celera, 1998-
• Gene => mRNA => protein => phenotype

Cumulative innovation:

Human genome (Williams 2013)

Celera applied for patents; pending patent, offered license by contract

Cumulative innovation:

Human genome (Williams 2013)

But, negative selection: Human Genome Project targeted more valuable genes => Celera genes less valuable

Cumulative innovation:

Human genome (Williams 2013)

• Celera reduced subsequent scientific research and product development by 20–30 percent
• Puzzles
• Celera offered free license to academic researchers, but yet, reduction in scientific research
• Scientific research did not catch up after HGP published sequence
• Implications for U.S. Bayh-Dole Act

Data

• Not copyright (Feist)
• Database rights
• European Community: Directive 96/9/EC on the legal protection of databases (11 March 1996)
• Not in U.S. or Singapore

Data: Personal rights

• EU: General Data Protection Regulation (14 April 2016), effective 25 May 2018, replaced Data Protection Directive 95/46/EC: Safeguard personal data and privacy
• Extra-territorial: Applies to all organizations processing personal data of EU residents, regardless of location
• Consent: Must be clear, intelligible and easily accessible form; as easy to withdraw as to give
• Portability: Right to get personal data in machine readable format and right to transmit data to another party ​
• Implications for social media (eg, Facebook), financial institutions

Functional Regulation

• Functional regulation can be source of appropriability – like complementary asset
• License for product
• License for manufacturing/operations
• Example: Pharmaceuticals
• HSA -- approve the use of drug
• HSA -- approve the manufacturing facility
• IPOS -- patent: Chemical/biological
• Test data

Administration

• Review: NUS Mods
• Feedback: Only 3 of 27 have responded ☹
• Favorite three papers
• Least useful three papers

Final quiz: Wed, 2 Nov, 9-11am (2 hr)

• In same classroom: New seating plan
• Please arrive by 8.50am
• Open book, essay questions: Answer any 5 of 10
• From entire syllabus
• Maximum: 1500 characters
• Examplify
• Works only on computers (not tablets)
• Install and try before quiz
• Do not update your laptop OS after installing and trial
• No WiFi: Download all research papers and other documents in advance (if not, rely on your memory)
• Illness: MC + Makeup on Sat, 26 Nov
• Weightage: 30%

期末考試順利

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