The main idea that is generally put forward to justify public intervention in matters of innovation is that innovation results from “flashes of genius” which are not subject to rivalry in use. This means that once an individual has developed an idea in the form of an invention, that invention can be used almost without cost by others. This is a simplistic view of things, because an effort to understand the ideas that led to the invention is generally required to mobilize it, but the main principle is that the cost of understanding with the view of reproducing the invention is minimal, compared to the cost of the rediscovery ex nihilo of the invention. It is therefore collectively desirable to spread the idea and its realization in the form of an invention to everyone. This prevents wasting resources, even if only time, in the economy1.
Nevertheless, non-rivalry in the use of ideas has economic consequences that are quite different if it intersects with another property: the possibility of precluding use (or not). The impossibility of preventing use can result in a potentially strong disconnect between the private valuation that the economic agent who came up with the idea can expect from the invention he or she created and what the invention contributes to the community. Pushed to an extreme, such a disconnect eliminates all monetary incentives that endeavor to support innovation. It therefore greatly slows the rate at which innovations appear, limiting them to innovations that occur by chance or through motivations other than the pursuit of private interest. Long recognized by public authorities, this problem is at the root of the patent system, which is supposed to respond to it by establishing a right of intellectual property over inventions that result from flashes of genius. It is this incentivizing role of the patent that has long prevailed, and still largely prevails, over the debate about the relevance of the patent system. If there is a debate, it is because patents do not establish a property right like any other. This is what the first section intends to demonstrate.
1.2.1. The key question of appropriability of returns for innovation
What economists call “club goods” are the result of the combination between non-rivalry and the possibility to preclude usage. The economic model of club goods consists of requiring payment in exchange for access to the good. It is therefore possible for the individual or company who produces a club good to receive a part of their return from the use by each individual to whom access to the good has been granted. The compensation for the producer of this kind of good is therefore proportionate to the number of individuals who are willing to pay the asking price, and when applicable, the number of units that each individual wants. A live performance is generally a club good. Provided that the number of spectators does not damage the perception that each individual has of the performance, there is a non-rivalry. It is also possible to exclude individuals from accessing the location where the performance is occurring. On the other hand, when it is not possible to exclude usage, the individual or company who produces the good finds themself unable to derive returns from individual beneficiaries through an appropriate price structure. It is therefore not a viable economic model in the context of private production. An air show is an example of this. Even if, like the live performance, there is indeed non-rivalry as long as the number of spectators remains limited so that no one interferes with one another while watching the air show, it is generally impossible to prevent individuals outside of the airfield from watching the show. In the absence of market incentives to produce them, goods that have both properties of non-rivalry and non-excludability are produced either directly by public authorities or indirectly by public commission of private actors. What about innovations? To answer this, it is necessary to distinguish different steps in the process of creating innovations and, at the same time, clarify the term “innovation”.
Innovations are a link in a larger process of knowledge creation in which we can identify three major steps:
- – the domain in which they are implemented;
- – the primary activity that characterizes them;
- – the result that they produce.
The first step falls under the domain of science and is characterized by research that can be either purely speculative or oriented toward a concrete goal but its result is always a kind of scientific discovery. The application perspectives are generally too distant in time to be correctly predicted or even suspected. Their production therefore cannot rely on a market process. As scientific discoveries are a base for the following steps, it is nonetheless necessary to ensure their production with adequate incentives. The economics of science tends to highlight the role of peer evaluation in the careers of scientists, even simply the personal satisfaction derived from moral recognition by others or from the very fact of having solved a problem2. The absence of rivalry in the use of scientific knowledge is obvious. There is a possibility of direct excludability, for instance by controlling access to conferences or to publications that present discoveries. In contrast, there is generally an impossibility for indirect excludability, in the sense that we cannot often prevent a person who has had access to the discovery from passing on the discovery to others. Consequently, scientific production is essentially supported by public funds.
The second step falls under the domain of technology and is characterized by the production of inventions that make it possible to solve a practical problem. The concrete character of the problem solved makes it possible to consider a more or less short-term application for the invention and therefore a potential market value. There is no rivalry in the use, as one application can be developed without preventing other applications. The possibility to exclude is, however, subject to discussion. It can be imposed by force3. It also partly depends on the technological field under consideration and the possibility for reverse engineering in that field. This consists of finding the concept for the invention by examining what is produced thanks to the invention. This is a common practice in the engineering industries. It is more difficult in the tire industry, which relies on tacit knowledge, appropriable with difficulty, as opposed to explicit knowledge. Where the possibility of excludability is not imposed by the very nature of the inventions, notably by the difficulty to proceed with reverse engineering, it can be imposed by law. This can happen through prohibitions. Over time, the law has moved more toward the attribution of rights. This is how the issue of patents, the subject of this book, emerged. Before discussing this issue in more detail, we will present the third step of the process.
The third step falls under the domain of the economy, and is characterized by the creation of value within a society. The creation of value can be achieved in a marketable form, such as through the successful commercialization of a new product, or a non-marketable form, through the dissemination of best practices regarding how to produce a good. It is only when the creation of value becomes effective that we are talking about innovation. It then becomes important to distinguish innovations, which are inventions that have created value, from inventions in general that have not, or not yet, led to the creation of value. In addition, innovations are not exclusively technological. A typology by object, directly inspired by the definition given by Schumpeter [SCH 11], led to the present distinction between four types of innovations (Oslo Manual [OEC 05]):
- – Process innovation (implementation of a new production technique). Thanks to this kind of innovation, a company can produce an existing good for a lower cost than its competitors. This type of innovation follows a logic of vertical differentiation in production tools. A classic example is the process invented and patented by the English engineer and inventor Henry Bessemer in 1855 to manufacture steel in a more efficient way.
- – Product innovation (commercialization of a product that offers new features or responds to needs that were hitherto not satisfied or poorly satisfied). Thanks to this kind of innovation, a company can be the only one to supply the new good on the market. This type of innovation follows a logic of differentiation that is at least as much horizontal as vertical. A relatively recent example is the development of mobile phones in the 1990s and then smartphones in the 2000s. The iPhone from Apple Inc., commercialized as of June 2007 in the United States, was the first smartphone with a touch screen interface available at that time.
- – Organizational innovation (rethinking the organization of tasks, human resources, decision procedures, and client and supplier relations). Thanks to this kind of innovation, a company can reduce its production inefficiencies or informational inefficiencies. This type of innovation is the responsibility of management and can be paired with an engineering logic. One widely documented example is the Taylor system adopted for the assembly-line production of the Model T by the Ford Motor Company from 1908 to 1927.
- – Marketing innovation (modification to the design of a product or the way of selling it). Thanks to this kind of innovation, a company can succeed in attracting new customers. This type of innovation follows a ...
