The Difficulty of Measuring the Impact of Patent Law on Innovation

I'm teaching an international and comparative patent law seminar this fall, and I had my students read pages 80–84 of my Patent Experimentalism article to give them a sense of the difficulty evaluating any country's change in patent policy. For example, although there is often a correlation between increased patent protection and increased R&D spending, it could be that the R&D causes the patent changes (such as through lobbying by R&D-intensive industries), rather than vice versa. There is also the problem that patent law has transjurisdictional effects: increasing patent protection in one country will have little effect if firms were already innovating for the global market, meaning that studies of a patent law change will tend to understate the policy's impact.

It is thus interesting that some studies have found significant effects from increasing a country's patent protection. One example I quote is Shih-tse Lo's Strengthening Intellectual Property Rights: Experience from the 1986 Taiwanese Patent Reforms (non-paywalled draft here). In 1986, Taiwan extended the scope of patent protection and improved patent performance. Lo argues that this change was plausibly exogenous (i.e., externally driven) because they were caused by pressure from the United States rather than domestic lobbying, and he concludes that the strengthening of patent protection caused an increase in R&D intensity in Taiwan.

One of my students, Tai-Jan Huang, made a terrific observation about Lo's paper, which he has given me permission to share: "My first intuition when I see the finding of the article is that the increase of R&D expenses may have something to do with the tax credits for R&D expenses rather than stronger patent protection." He noted that in 1984, Taiwan introduced an R&D tax credit through Article 34-1 of the Investment Incentives Act, which he translated from here:

If the reported R&D expenses by manufacturing industry exceeds the annual highest spending on R&D in the last five years, 20% of the exceeding expenses could be used for tax credit for income tax. The total tax credit used could not exceed the 50% of annual income tax, but the unused tax credit could defer to next five years.

Additional revisions were made in 1987, related to a tax credit for corporations that invest in technology companies, which might indirectly lead to an increase in R&D spending by tech companies. As I've argued (along with Daniel Hemel) in Beyond the Patents–Prizes Debate, R&D tax credits are a very important innovation incentive, and Lo doesn't seem to have accounted for these changes in the tax code. Yet another addition to the depressingly long list of reasons it is hard to measure the impact of patent laws on innovation!