Intellectual Property Rights and New Technology Development: How the Replacement Effect and Capabilities Influence Firm Investment Following a Reduction In IPR

Abstract

This study investigates a key question in the intellectual property rights (IPR) literature: will a reduction in IPR increase or decrease investments in technology development by firms already operating in an industry? We examine investments in the form of new phase 1 clinical trials by pharmaco-genetics firms before and after the invalidation of gene patents by the 2013 United States Supreme Court Myriad decision. We use a difference-in-differences design, with the European Union, where gene patents remained valid, as the control group. Fine-grained analysis reveals substantial differences between the US and the EU, depending on firms’ presence in specific technological areas, defined along medical conditions, and on firms’ capabilities. In aggregate, investments following Myriad neither increased nor decreased. However, when we investigated different categories of firms, including pre-shock startups and pre-shock established firms, with distinct strengths of technological and complementary capabilities, we found three differences. First, pre-shock startups decreased investments while pre-shock established firms as a group did not change their total activity. Second, pre-shock established firms reduced investments in home technological areas and increased investments in medically-related new areas, indicating what the literature calls a replacement effect: in this case, from prior investment targets to new related targets. Third, possession of strong technological and generic complementary capabilities reinforced the replacement effect by incentivising pre-shock established firms to diversify into related new areas, while strong area-specific complementary capabilities attenuated the replacement effect by making firms more likely to maintain investments in home areas.