What do Firms Gain from Patenting? The Case of the Global ICT Industry

TL;DR

This paper examines how patent grants influence firm dynamics in the ICT industry, revealing significant impacts on smaller firms' market share and size, primarily due to property rights protection rather than innovation, with no effects on profitability or productivity.

Contribution

It introduces a novel instrumental variable approach at the patent office level to identify the effects of patent grants on firm performance in the ICT sector.

Findings

Patent grants significantly increase market share and size for smaller firms.

Most effects are due to property rights protection, not innovation content.

No significant impact on profitability or productivity observed.

Abstract

This study investigates the causal relationship between patent grants and firms' dynamics in the Information and Communication Technology (ICT) industry, as the latter is a peculiar sector of modern economies, often under the lens of antitrust authorities. For our purpose, we exploit matched information about financial accounts and patenting activity in 2009-2017 by 179,660 companies operating in 39 countries. Preliminarily, we show how bigger companies are less than 2% of the sample, although they concentrate about 89% of the grants obtained in the period of analyses. Thus, we test that patent grants in the ICT industry have a significant and large impact on market shares and firm size of smaller companies (31.5% and 30.7%, respectively) in the first year after the grants, while we have no evidence of an impact for bigger companies. After a novel instrumental variable strategy that exploits information at the level of patent offices, we confirm that most of the effects on smaller companies are due to the protection of property rights and not to the innovative content of inventions. Finally, we never observe a significant impact on either profitability or productivity for any firm size category. Eventually, we discuss how our findings support the idea that the ICT industry is a case of endogenous R&D sunk costs, which prevent profit margins from rising in the presence of a relatively high market concentration.