Finance & Accounting Aug 3, 2023
Want to Find the Next Big Company? IP Offers a Clue.
A company’s early efforts to protect its intellectual property are a good signal that it intends to grow—one of many lessons from a wide-ranging investigation of U.S. IP practices.
Protecting intellectual property is a high-stakes endeavor. After all, collective IP in the United States alone is worth $6.6 trillion, according to the U.S. Chamber of Commerce Global Innovation Policy Center.
But how U.S. companies across industries actually use common IP protections—among them, patents, copyrights, trademarks, and trade secrets—is not well understood. That’s because comprehensive administrative data about the use of IP by firms does not exist, and the only way to collect systematic information is through surveys. However, data used in previous research is now relatively old and generally limited in scope, since it tends to focus only on a specific subset of the economy.
Anecdotal evidence suggests that some companies care more about IP than others, according to Filippo Mezzanotti, an associate professor of finance at the Kellogg School. But answers to the natural follow-up questions have proven elusive: What types of businesses go out of their way to protect their IP, and what tools do they use? Do companies maintain the same IP strategies over their life cycles?
Understanding these details could be useful for policymakers as they decide how to encourage innovation or reform key aspects of the U.S. patent system.
In a recent paper, Mezzanotti and Timothy Simcoe of the Boston University School of Management address these questions by drawing on a dataset from the U.S. Census Bureau.
Some of their findings were surprising. For instance, Mezzanotti and Simcoe discovered that a company’s approach to IP protection generally doesn’t change much as it ages—meaning the companies that use IP safeguards do so from the beginning. What’s more, firms that embrace IP protection from the start tend to grow large, suggesting that a company’s early-stage approach to IP is a good indicator of its future success.
Examining IP activity, therefore, could help policymakers identify the young companies and industries destined for significant growth—and funnel them support.
“Our research suggests that tailoring policy based on early sign of innovativeness, e.g., patenting, could be beneficial,” Mezzanotti says.
The whys and wherefores of IP protection
Companies can safeguard their innovations in several ways. Patents, for example, offer exclusive rights over an invention and are granted only after the registration of an application that discloses the invention’s technical details. Depending on the situation, firms can also employ copyrights, trademarks, and trade secrets.
Patent activity is relatively easy to observe, since patent applications are made public. But the same is not true for trade secrets, for example, which are protected without registration or procedural formalities of any kind.
“There’s clearly something more fundamental going on here, beyond saying that this is simply capturing the innovation process.”
Enter the Business R&D and Innovation Survey (BRDIS).
In the 1950s, the National Science Foundation and the U.S. Census Bureau began collaborating on a survey assessing trends in corporate research and development. Between 2008 and 2016, the government updated and expanded the annual survey, today called BRDIS, to include questions about how heavily companies relied on various types of IP protection. This provided a window into IP practices at more than 40,000 firms that would be hard to observe in any other way. A key feature of the survey data is that it collects information from all types of firms in the economy and therefore can be used to generate insights that are representative of the average firm in the economy.
When Mezzanotti and Simcoe analyzed the BRDIS data collected between 2008 and 2016, they identified several trends—including a few surprises.
For one, firms that register patents are a rare breed in the country’s economy: only 2 percent of firms in the economy had done so within five years. At the same time, that small subset is an important one, accounting for 90 percent of all R&D investment.
And while patents are highly valued by companies in the life-sciences sector, for all other industries in which IP protection is important (mainly IT, manufacturing, and retail), trade secrets, and to a lesser extent copyrights and trademarks, are more widely used than patents.
Mezzanotti had expected that age would have been an important variable to explain differences in IP behavior. But to his surprise, age didn’t predict IP activity at all. Firm size, however, did, with larger firms engaging in more IP activity.
In fact, large firms of all kinds were more likely to use IP protections than small ones, even after controlling for how innovative they were or the kind of technology they used. This evidence suggests that a firm’s scale may be a leading factor in explaining differences in IP use across firms.
To Mezzanotti, the lack of differences across age groups suggests that the use of IP can be considered a strategic decision that firms make early in their life (based on business model, industry, etc.) and does not change significantly over time. “There’s clearly something more fundamental going on here, beyond saying that this is simply capturing the innovation process,” he says. One implication of this idea is that a young firm’s IP activity can be seen as a proxy for its desire to grow and scale its business. This is indeed what the researchers find in their data.
Why policy makers should care about IP
Mezzanotti believes that bringing more detail and clarity to discussions about IP could assist policymakers in a number of ways.
It could aid in the ongoing debate over how (and whether) to reform the U.S. patent system, for example.
The research could also inform policies that seek to funnel investment, tax breaks, and other forms of support to the companies most likely to benefit the economy long-term.
Mezzanotti argues that when such policies treat all new companies as equally likely to become major economic players, they’re less efficient with their support than they could be.
“The average young company is not going to be the next Facebook; the average young company is probably a retail business somewhere—they’re not even aiming to be the next Facebook,” says Mezzanotti. “Those companies are important for other reasons, but they’re not the type of company we have in mind when we think about spurring high-growth startups.”
To nurture the next big thing, then, zeroing in on the IP-curious could be a useful starting point.
Katie Gilbert is a freelance writer in Philadelphia.
Mezzanotti, Filippo, and Timothy S. Simcoe. “Innovation and Appropriability: Revisiting the Role of Intellectual Property.” Working paper.