Innovation and entrepreneurship

Intellectual property rights play a central role in innovation and entrepreneurship in our society. The economic theories that aim to quantify the value of protecting intellectual property take different approaches. The rise of new technologies has created an expansion in intellectual property claims, and there is now a demand for new approaches to intellectual-property protection.

Our technology-based, post- industrial society is dependent on creativity and innovation to drive advances in long-term economic and societal well-being. These advances are heavily influenced by legal structures that provide incentives for innovation. Intellectual property rights are a central part of these incentives and, until recently, protecting intellectual property was considered to be a cornerstone of innovation.

Yet this digital age has seen an extreme expansion of such protections in the form of patents, copyrights and trademarks. Should this expansion continue or is a new understanding of intellectual property needed? It is important to look at the fundamental reasoning behind intellectual property, to understand the role that free markets play in innovation and to form new perspectives to challenge the prevailing view of intellectual-property protection. Such studies can provide insight into how well positioned our society is to take advantage of the technological challenges of the future.


The Western system for protecting ideas, now called intellectual property, arose in the second half of the nineteenth century and is based on some independent concepts. The view from continental Europe is based on the rights of the individual, whereas the United States provides a more utilitarian view of intellectual property as a tradable commodity, anchored in the Constitution of the United States of America1.

Although systems for protecting intellectual property have been in place for some time, empirical research on its effects is a much younger field.

One approach to intellectual property is the public-goods theory, which states that intellectual-property protection is a pre- requisite for creativity and innovation. A public good is non-exclusive, so without intellectual-property protection an innovation can be utilized by competitors as soon as it becomes available. It is also non- rivalrous, so consumption by one person does not compete with that by another. Under the public-goods theory, a system without intellectual-property protection will have too little innovation, as businesses will hesitate to make an investment if they have to share the result with their competitors. However, this theory fails to determine exactly where the optimal border is between protection and free use.

Additional insight is provided by the property-rights theory. This states that exclusive rights also limit access to, and use of, goods, and thereby produce costs for society. Thus, the property rights of an entitled person should represent a trade-off, and be limited to cases in which the societal benefit from protection — namely creativity and innovation — exceeds the loss created by this exclusivity.


Intellectual-property activists belonging to Sweden’s Pirate Party, which campaigns to reform laws on copyrights and patents.

Protection alone does not provide everyone with sufficient incentive to innovate: for firms, it is more important that their property rights lead to generation of profits in the marketplace. The correlation between markets and innovation is thus an important component of innovation research. Two competing and strongly disputed schools of thought dominate in this area. One side was championed by Joseph Schumpeter, who saw innovation coming from a monopoly position: according to his idea of creative destruction, it is the prospect of monopoly profits in particular that will drive firms to invest in innovation and to throw incumbents from their thrones by bringing even better products to the market2. Large monopolistic firms are also held to be better placed to invest in innovation. An alternative viewpoint, such as that ascribed by Kenneth Arrow, is that only pressure from free competition will induce innovation, as the monopolist will not be able to generate any higher revenues by investing in better products for consumers.

More modern thought focuses on the impact that transaction costs and information have on an economy. Specifically, new institutional economics examines the lim-ited rationality and self-interest of market participants, the existence of transaction costs and the influence of information on behaviour. Within this paradigm, transaction-cost economics focuses on the need for rules to help lower transaction costs, whereas information economics looks at solutions to the problem of asymmetric distribution of information to market participants3,4.


Until relatively recently, there was a consensus on the utility of patents in spurring research and development in technology-orientated industries. Investing in innovation, the thinking went, was only worthwhile for the inventor if he or she were granted broad protective rights that guaranteed income based on a monopoly position. Otherwise imitators could enter into competition with the innovator, without themselves investing in relevant development costs. Over the past 20 years, however, claims for intellectual-property protection — in the form of copyrights, patents or design rights — have been steadily broadened, in particular since the signing of the World Trade Organization’s Trade Related Intellectual Property Rights (TRIPS) agreement in 1994.

1935 patent for the board game Monopoly, which was named after the economic concept of the domination of a market by a single entity. The legal status of the trademarks on the game was not settled until the 1980s after years of legal wrangling.

Increasingly, various people have questioned this expansion. They argue that many sets of individual rights, held by a few protected entities, might hinder innovation and frustrate a socially desirable outcome; economic theorists call this the anti-commons problem5. Consequently, there is a call for a fundamental change to a leaner, more efficient intellectual property system to foster a more innovation-friendly maket-place6.

No area of intellectual property has been spared from this debate. Notable examples include patenting of software7 and biotechnology8 inventions, which deter rather than promote further research and development with ‘patent thickets’, for example. Lobby groups also criticize corporate or government attempts to restrict access to Internet content, as well as the attempt by the entertainment industry to clamp down on copyrighted material.


As we have seen, modern technological advances are challenging traditional thinking on intellectual property, creating the need for ongoing empirical research into what promotes innovation. Some studies have examined the links among entrepreneurial behaviour and legal frameworks, personal networks and value systems, whereas others have sought to determine the optimal mix of incentives and motivational instruments for innovation9,10.

It is probable that free-market competition alone does not provide enough incentive for investing in the creation of new intellectual property. However, determining under which circumstances ownership helps rather than harms innovation remains a challenge, and the legal solution is currently to overprotect intellectual property. Research that draws from the fields of both economics and legal scholarship could help in illuminating these difficult issues.

In cooperation with the law, economics and business-management departments of the University of Munich, the Max Planck Society has established an International Max Planck Research School for Competition and Innovation (IMPRS-CI) at the Institute for Intellectual Property, Competition and Tax Law. Within its framework, PhD students engage in interdisciplinary research on how intellectual property rights influence market competition, and how to optimize the incentives for innovation in different fields of intellectual property law.


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