Strategic Management of Intellectual Property

In recent years, the primary locus of value for many corporations has been found in their intellectual property rights. By one informed estimate from the late 1990s, some three-quarters of the Fortune 100’s total market capitalization was represented by intangible assets, such as patents, copyrights and trademarks.1 In this environment, IP management cannot be left to technology managers or corporate legal staff alone. Given that the generation of returns from IP rights is a capital-intensive, long-term activity and that decisions affecting intellectual property are usually irreversible at low cost, IP management must be a matter of concern for functional and business-unit leaders as well as a corporation’s most senior officers.

Little of the writing on the subject of intellectual property rights, however, has been directed at top-level executives; instead it has frequently been done by specialists, for specialists. And senior managers, in order to effectively govern and exploit their often huge IP assets, need help to answer these specific questions:2 How can the company use intellectual property rights to gain and sustain competitive advantage? How do IP rights affect the industry’s structure? What options do IP rights offer vis-à-vis competitors? How can IP rights grant incumbency advantage and establish barriers to entry? How can IP rights help the company gain vertical power along the value chain? What organizational design accommodates an intellectual property strategy most effectively?

Enormous knowledge is hidden in the economics literature and in the heads of corporate IP managers about the way companies have developed answers to these questions.3 Making such information available to top-level management will help lead intellectual property rights out of their shadowy existence in patent and legal departments and enable companies to tap into their strategic value. (See “About the Research.”)

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References

1. Peter J. King, managing partner of Arthur Andersen’s Intellectual Property Asset Management Practice, quoted in the introduction to K. Rivette and D. Kline, “Rembrandts in the Attic: Unlocking the Hidden Value of Patents” (Boston: Harvard Business School Press, 1999).

2.The particular order of the questions is inspired by G. Saloner, A. Shepard and J. Podolny, “Strategic Management” (New York: John Wiley, 2000), 160, 165.

3. Next to the specifically mentioned references in the following end-notes, this article builds on the following major contributions: G. Rahn, “Patenstrategien japanischer Unternehmen,” Gewerblicher Rechtsschutz und Urheberrecht (international) 5, (1994): 377–382; E. Kaufer, “The Economics of the Patent System” (New York: Harwood Academic Publishers, 1989); S. Scotchmer, “Standing on the Shoulders of Giants: Cumulative Research and the Patent Law,” The Journal of Economic Perspectives 5 (winter 1991): 29–42; N.T. Gallini, “Patent Policy and Costly Imitation,” RAND Journal of Economics 23 (spring 1992): 52–63; J.R. Green and S. Scotchmer, “On the Division of Profit in Sequential Innovation,” RAND Journal of Economics 26 (spring 1995): 20–33; P.C. Grindley and D.J. Teece, “Managing Intellectual Capital: Licensing and Cross-Licensing in Semiconductors and Electronics,” California Management Review 39 (winter 1997): 8–41; D.J. Teece, “Capturing Value From Knowledge Assets: The New Economy, Markets for Know-How and Intangible Assets,” California Management Review 40 (spring 1998): 55–79; R.C. Levin, A.K. Klevorick, R.R. Nelson and S.G. Winter, “Appropriating the Returns From Industrial Research and Development,” Brookings Papers on Economic Activity 3 (1987): 783–820; and C. Shapiro, “Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard-Setting,” Innovation Policy and the Economy 1 (2001): 119–150.

4. In 1926 Novo Nordisk started exporting insulin to the rest of Scandinavia and Germany. In 1936 Novo was supplying insulin to not fewer than 40 countries.

5.For a comprehensive empirical study of this industry, see R. Bekkers, G.M. Duysters and B. Verspagen, “Intellectual Property Rights, Strategic Technology Agreements and Market Structure: The Case of the GSM,” Research Policy 31 (2002): 1,141–1,161.

6. Ibid. According to the literature, however, it seems legitimate to say that Motorola did not fully sustain this advantage to the present.

7. J. Hudson, “Generic Take-Up in the Pharmaceutical Market Following Patent Expiry: A Multi-Country Study,” International Review of Law and Economics 20, no. 2 (2000): 205–221.

8. For discussions of patent fences, see O. Granstrand, “The Economics and Management of Intellectual Property: Towards Intellectual Capitalism” (Cheltenham, England: Edward Elgar Publishing, 1999): 6–8, W.M. Cohen, R.R. Nelson and J.P. Walsh, “Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not),” working paper w7552, National Bureau of Economic Research, Cambridge, Massachsuetts, 2000; and M. Reitzig, “The Private Value of ‘Thickets’ and ‘Fences’ — Towards an Updated Picture of the Use of Patents Across Industries,” Economics of Innovation and New Technology, in press.

9. A. Arora, “Patents Licensing and Market Structure in the Chemical Industry,” Research Policy 26, no. 4–5 (1997): 391–403.

10. B.H. Hall and R.H. Ziedonis, “The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979–1995,” RAND Journal of Economics 32, no. 1 (2001): 101–128.

11. Arora, “Patents Licensing and Market Structure in the Chemical Industry,” 393.

12. See I. Horstmann, G. MacDonald and A. Slivinski, “Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not To Patent,” Journal of Political Economy 93 (October 1985): 837–858, for a more fundamental discussion of the trade-off between patenting and secrecy.

13. C. Heath, J. Henkel and M. Reitzig, “Who Really Profits From Patent Infringements? Innovative Incentives and Disincentives From Patent Indemnification,” working paper 2002-18, Center for Law, Economics and Financial Institutions at Copenhagen Business School, Copenhagen, Denmark, 2002.

14. T.J. Calabrese, A.C. Baum and B.S. Silverman, “Canadian Biotechnology Start-Ups, 1991–1997: The Role of Incumbents’ Patents and Strategic Alliances in Controlling Competition,” Social Science Research 29, no. 4 (2000): 503–534.

15. H. Ernst, C. Leptien and J. Vitt, “Inventors Are Not Alike: The Distribution of Patenting Output Among Industrial R&D Personnel,” IEEE Transactions on Engineering Management 47, no. 2 (2000): 184–199.

16. According to the database of the German Patent Office, Henkel’s national trademark protection in Germany for detergents comprises 64 trademarks in connection with Persil, 19 in connection with Weisser Riese, 11 with Spee, 13 with Fewa and 9 with Perwoll — to mention five of its nine brands.

17. Granstrand, “The Economics and Management of Intellectual Property”; see also R.H. Pitkethly, “Intellectual Property Strategy in Japanese and U.K. Companies: Patent Licensing Decisions and Learning Opportunities,” Research Policy 30, no. 3 (2001): 425–442.

18. According to the European Patent Register, Toshiba (which includes Kabushiki Kaisha Toshiba as well as those corporations bearing the fragment Toshiba in their corporate name) had filed for 8,427 European patents between 1978 and October 2003. Patents were distributed over 2,430 subgroups.