The economic value of patent portfolios

• DOI: http://doi.org/10.1111/jems.12210
• Published date: 01 December 2017
• Date: 01 December 2017

Received: 7 May 2014 Revised: 23 February 2017 Accepted: 12 March 2017

DOI: 10.1111/jems.12210

ORIGINAL ARTICLE

The economic value of patent portfolios

Alfonso Gambardella1Dietmar Harhoff2Bart Verspagen3

1Bocconi Universityand ICRIOS, Milan,

Italy (Email: alfonso.gambardella@

unibocconi.it)

2Max Planck Institute forInnovation and

Competition, Munich, Germany (Email:

dietmar.harhoff@ip.mpg.de)

3Maastricht University,Maastricht,

Netherlands (Email: b.verspagen@

maastrichtuniversity.nl)

Abstract

Patent holders may choose to protect innovations with single patents or to develop

portfolios of multiple, related patents. We propose a decision-making model in which

patent holders allocate resources to either expanding the number of related patents or

investing in higher value of patents in the portfolio. We estimate the derived value

equation using portfolio value data from an inventor survey at the level of individ-

ual inventions rather than the firm as a whole. We find that investments in individual

inventions exhibit diminishing returns, and that a good part of the value of a portfo-

lio depends on adding new patented inventions. Also, while diminishing returns to

individual inventions are stable across subsamples, the returns to portfolio size vary

between complex and discrete industries, and between inventions that are science-

based or driven by customer information. When firms seek to strengthen appropri-

ability, the returns to an increase of portfolio size are not different from the sample

average. Thus, a higher number of inventions in a portfolio may reflect both stronger

appropriability via patents and genuine creation of value.

1INTRODUCTION

Much of the literature investigating the role of patents in innovation and value creation has focused on individual patents.

However, it is well known that firms frequently pursue the development of patent portfolios whose patented inventions cover

multiple, yet related aspects of an innovation (Harhoff, & Reitzig, 2001; Knight, 2001). To the best of our knowledge, the

decision-making trade-offs in constructing such portfolios of related patents have not been investigated. It is unclear under

which conditions firms will be content with single patents covering an innovation, and when they will opt for portfolios with

multiple, related patents. Much of the literature has been descriptive, for example, using categories such as “discrete” versus

“complex” technologies (Cohen, Nelson, & Walsh,2000). Moreover, not much empirical evidence has been produced that sheds

light on the question how strongly the value of such patent portfolios is determined by the number of patents contained in them

or by the quality of the individual inventions represented in the patent portfolio.

Our paper seeks to provide a first theoretical and empirical investigation of these issues. The analysis focuses on patent

portfolios related to a particular innovation. Although similar issues have been studied for a firm’s overall patent portfolio in

work by von Graevenitz,Wagner, and Harhoff (2013), we concentrate on determinants of portfolio value and portfolio size and

use data at the disaggregate level of the invention rather than at the firm level. In most industries, patented inventions represent

important outcomes of the upstream research process. Not all inventions are patented, but patents covera high share of invention

output (Giuri et al., 2007) and are important assets of the firm (Hall, Jaffe, & Trajtenberg, 2005; Lev, 2001). Moreover, on many

This paper has benefited from comments and suggestions from many scholarsand par ticipants in scholarlyseminars. We acknowledge in particular the insights

that we received from Raffaele Conti, Bronwyn Hall, Karin Hoisl, PooyanKhashabi, Myr iam Mariani, Mark Schankermann, Nikolaos Thumm, and Giovanni

Valentini. Wealso thank the editor of JEMS, Daniel Spulber, an action editor and two anonymous referees for pushing us to make this a better paper. All errors

remain, of course, ours.

J Econ Manage Strat. 2017;26:735–756. © 2017 WileyPeriodicals, Inc. 735wileyonlinelibrary.com/journal/jems

736 JOURNAL OF ECONOMICS & MANAGEMENTSTRATEGY

occasions, the assessment of the value of relevant patents is central for defining the terms of a technological alliance or in

standard-setting technology pools that involvemany firms (Zuniga, & Guellec, 2009). We consider a portfolio of related patents

linked from a technical point of view or with respect to their impact on the value of an innovation.1Combining related patents

has become increasingly common for two reasons. First, firms have started to apply for different, but related patents to cover

different components of their complex inventions. Second, they have started to create patent “fences” by filing additional patent

applications around core inventions in order to make circumvention of patent protection difficult for rivals (e.g., Knight, 2001;

Ziedonis, 2004). Accordingly, the value of a portfolio of patents might increase because the number of inventions increases or

because the average value of the inventionsin the por tfolioincreases. In our t heoreticalmodel, we study the extent to which the

overall value of the portfolio is determined by the former or the latter.

We use the insights from our theoretical analysis to estimate the returns associated with single inventions as well as patent

portfolios using data from an inventor survey. We find evidence of diminishing returns on the work-months invested in an

individual patented invention, as well as evidence of synergies across inventions. Our results indicate that, on average, much

of the value of a portfolio of inventions depends on the addition of new inventions, rather than persistent investments devoted

to increasing the value of one particular invention. We also find that while the estimated diminishing returns on the resources

invested in individual inventions are stable across subsamples, the returns on expanding the portfolio are more heterogeneous.

They are more pronounced in pharmaceuticals and biotechnology than in electronics, the former being two examples of discrete,

and the latter one of complex, industries. In addition, the returns are higher when customers provide useful information about the

market potential of the invention than in the case of patents that rely on science as a source of knowledge. Moreover, wefind that

the returns on portfolio expansion experienced by firms seeking to strengthen protection do not differ much from the rest of the

sample pursuing larger portfolios. For example, the returns on expansion when firms patent to block rivals are similar to patents

that exploit information from customers. This squares with the common wisdom that appropriability is a driver of the expansion

of portfolio size; however,t here may be other reasons to expand portfolio size, and they may be associated with similar returns.

Our study contributes to the growing body of work on the value of patents, but our focus on the economic logic of patent

portfolios is relatively new in the economics literature.2Filling this research gap is tantamount to understanding real-world

patenting behavior and the recent rise in patent filings in many patent systems. Our paper also offers additional contributions

to the study of the relationship between resource utilization and patenting. Following Hausman, Hall, and Griliches (1984), a

vast literature reviews the relationship between Research & Development (R&D) (or other measures of investments) and the

number of patents at the firm level. However,little research considers the relationships between innovation or patent output and

the resources invested in the project that leads to an invention. Although the literature on value indicators providesinsights into

the distribution of patent value, it does not address the question of what determines that value causally. Similarly, the main goal

of the literature investigating the link between market value and patent counts or citations is to estimate the market’s evaluation

of a firm’s patents; it does not seek to identify the mechanisms or factors that affect this value. The current study is also one

of the few to consider, along with firm and technological factors, the impact of inventor characteristics on the value of patents

(Gittelman & Kogut, 2003; Toivanen, & Väänänen, 2012). Moreover, we are the first to study this relationship at the level of

empirically identified portfolios of related patents.

In the next section, we develop our model before presenting the data in Section 3. Section 4 presents the empirical results,

and in Section 5, we conclude with an in-depth discussion.

2THEORY

2.1 A model of the patent portfolio decision

The goal of our theoretical analysis is to guide us in setting up the empirical test and in interpreting our empirical results. We

model the decisions of a firm that allocates resources to inventive activity. Rather than investing all resources in one patented

invention, the firm has to decide how many related inventions it wants to develop and how much to invest in each of them.3

The invention process unfolds in two stages. In the first stage, the inventor performs some initial, exploratory research. This

phase yields a joint output captured by the function Q(q,N), where qis the quality of the overall invention and Nis the number

of ideas that the inventor decides to patent. At this stage, the inventor chooses qand N—that is, it chooses the quality of the

invention and the extent to whichit wants to divide it into separate patentable inventions. Assume that Qis generated by a Cobb–

Douglas constant-returns-to-scale production function with inventor’s time, capital equipment, and other resources as inputs.

Cost minimization implies that variable costs Cis proportional to expenditure on inventor’stime, which is, in turn, propor tional

to Q—that is, C=WZ(⋅)Q(q,N), where Wis the unit cost of inventor’s time and Zis a function of W, the price of any other

input chosen to minimize costs, and the quantity of fixed inputs not optimized for this project (e.g., because they spread across