Monday, October 04, 2004

BusinessWeek on innovation

from an article by Michael J. Mandel:

GET THE MAXIMUM BENEFIT FROM GLOBAL INNOVATION For the first time ever, innovation is spreading from a few large industrial countries to a broader stage. That's good news: The rise of higher education and R&D spending around the world can create a global division of labor where the U.S. specializes in areas such as biotech and advanced software while South Korea and Taiwan focus on areas such as flat-panel displays and chips.

Countries have to take two steps to fully participate in the new global innovation economy. First, they need to be willing to engage in collaborative research across national boundaries, and allow the free movement of ideas and people. Building up walls around intellectual property is simply a bad idea.

Second, to make the best use of innovations elsewhere, a country, including the U.S., has to spend enough on R&D and education to maintain a substantial presence in critical fields of research, including the ones where it is not the leader. That's the ante to get into the global game.

SUPPORT THE PATENT OFFICE A well-functioning patent office is key in an Innovation Economy. In the U.S., however, it's not working very well. Since 1997, the number of patent applications has risen by 50%, but the backlog of patents waiting for action by a patent examiner has quadrupled. Moreover, Congress, desperate for funds to reduce the budget deficit, has not allowed the Patent & Trademark Office to spend all the money brought in by application fees. "The patent office has been transformed into a profit center," says Josh Lerner, a professor at Harvard Business School.

Faced with a mountain of applications, patent examiners are compounding the problem by approving patents too quickly, and giving protection to far too many broad or mundane ideas. The result, says Lerner, is a "litigation tax" on innovation, which forces new companies to spend time and money wending their way through a forest of existing patents before they can launch a new product.

The right level of protection for intellectual property is a divisive subject. Perhaps the simplest fix is to give the patent office more funding, including allowing it to tap its own funds. More examiners, and more time to look into what has been done before -- "prior art" -- may improve the quality of patent grants.

BETTER NUMBERS ON INNOVATION An Innovation Economy requires political support to prosper. Politicians have to speak in favor of investments in new technologies that may not pay off for years.

It's easier to muster support for innovation with concrete evidence of its positive effects. Unfortunately, the government's statistical system typically does a much better job measuring old technologies and industries than it does measuring new ones, so it can take years before an innovation is fully reflected in the data.

For example, the first single-chip microprocessor was introduced by Intel Corp. (INTC ) in 1971, triggering a period of rapid decreases in the price of computing power. But that wasn't measured by the government until 1985.

Today, the statistical system needs to be retooled again to better quantify the impact of such health-care innovation as new drugs and surgical techniques. The cost of the health-care sector today is well counted, but there's no good measure of its true output, which is years of good health. That makes it much harder to assess the payoff from the billions of dollars spent on medical research.

MAINTAIN FREE MARKETS The rapid innovation of the past 75 years has been accompanied by the spread of the market-based economic system around the globe. In terms of innovation, this is no coincidence. "The historical record shows that this is the one system that has worked," says Northwestern University economic historian Joel Mokyr.

It is far easier to protect the status quo than it is to adopt the policies that promote change and innovation. Yet in the end, it is competition and free markets that spur innovation -- and that is what will make the next 75 years as fruitful as the past 75.


More on book by Jaffe and Lerner

From his home outside Boston, Lerner last week described the patent system after the reforms as mired in "the land of unintended consequences."

The patent agency has often struggled to keep up with the times. In recent years, the agency has confronted entirely new areas like biotechnology, software-related inventions, financial and business methods, Internet-based inventions and other information-technology innovations.

Some of the changes intended to deal with these occurred amid extensive public debate. Others got little attention because they seemed like innocuous administrative reforms -- like the ones that made patents easier to get, Lerner said. But many of those patents caused a secondary reaction, he added.

"The ability to litigate and expect to get substantial award from litigation increased," Lerner said. "So as a result we've got somewhat of a vicious cycle. Once you get one firm in an industry beginning a strategy of aggressive patent enforcement, it creates an almost inevitable response -- an almost arms-race dynamic -- where everyone else in the industry says, 'We better be doing the same thing.'"

He suggested that these changes for the worse occurred because "there's a relatively small group of people in the D.C. patent bar, and they have a very powerful influence on how patent policy gets decided. There is a powerful incentive for them to keep a patent system that is complicated, and one that involves protracted, costly litigation."

Also, Lerner said, businesses often fail to understand the importance of subtle changes in patent law.

"It is perhaps because of the complexity of patent issues, and because there is no long tradition of work by economists in this area, because a lot of corporations see it as second order relative to tax policy changes, for example, which directly affect their bottom line," he said. "Patent policy has an indirect effect."

The book lays out a strategy. "Our idea is that three things will potentially make a big difference," Lerner said. "First of all, this idea which may well have made sense in 19th century of a patent examiner being able to sit and in few hours figure out what a relevant technology is, and then go out and make a decision as to whether a patent should be granted or not, that really doesn't make sense in an era like today.

"Second, to see the patent review process as 'one size fits all' is again a mistake. There has to be way to figure out how to devote more resources to those patent applications which are really the important ones, and less to the unimportant ones."

The authors' third remedy is to reverse the trend toward jury trials for patent lawsuits.


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