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Long Term Economic Development pp 395–416Cite as

Financial Factors and Patents

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Part of the book series: Economic Complexity and Evolution ((ECAE))

Abstract

This paper conjectures that equity supply is crucial for firms in order to maintain a smooth patenting profile through time. This hypothesis is tested on Swedish firm-level observations from 1997 to 2005. Patent applications growth in Sweden has been highly volatile in recent years. During the economic downturn, following the burst of the IT-bubble, applications dropped substantially, but results here show that the downturn had little effect on the patenting of high-equity firms. Instead, the entire decline in patent applications is confined to firms with lower levels of equity. This effect is consistent across sectors, firm-size, corporate-affiliation, and human-capital intensity.

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Notes

  1. 1.

    Klette and Kortum (2004) maintain that patents and R&D are related across firms. However, this relationship is the strongest for large firms. Smaller firms exhibit relatively many patents per dollar of formal R&D which Griliches (1990, p. 1676) interprets as “…small firms are likely to be doing relatively more informal R&D while reporting less of it and hence providing the appearance of more patents per R&D dollar”. There is a discrepancy between what constitutes innovation and what constitutes patents. Not all inventions are patentable and the inventions that actually are patented differ tremendously in quality. An economist wishes to isolate the patents that actually are economically significant. Patents have been found to be a good proxy for innovative output or indexes of inventive activity in the literature (see e.g. Griliches 1990; Lerner et al. 2008).

  2. 2.

    Aghion et al. (2008) show that firms classified as credit constrained have a pro-cyclical R&D share out of total investment, whereas non-constrained firms have a counter-cyclical share. Thus, the non-constrained firms can innovate in recessions and increase their competitiveness.

  3. 3.

    Geroski and Walters (1995, p. 918) make a similar point.

  4. 4.

    Using a different perspective to Kortum and Lerner (2000), Haeussler et al. (2009) focus on firms seeking VC. They document the economic importance of patents as signaling instruments attracting VC financing for younger firms. However, some works find that firms with higher R&D intensity, more patents and lower share of tangible assets report more problems in accessing external finance. See for instance Westhead and Storey (1997), Freel (1997) for UK, Giudici and Paleari for Italy (2000).

  5. 5.

    The nature of our data enables us to draw inference from a more representative sample of firms. Griliches (1990) shows that U.S. studies on patents analyze publicly traded corporations, which is a highly disproportionate sample of firms. The firms in Bound et al.’s (1982) empirical study on R&D and patents have more than 1,000 employees. Compared to census data of all U.S. firms, only 4.6 % of the firms in the U.S. during the same time period had more than 1,000 employees.

  6. 6.

    The patent application number is the 2007 number from WIPO divided by the most recent population figure for each country, which is approximately 301 million for the U.S. and 9 million for Sweden.

  7. 7.

    Http://www.CNNMoney.com (December 11, 2009: 6:08 AM ET) cites an executive of a major software company: “The overall company reduced spending, and patent filings are a very controllable expense. We might have filed four patents, but we filed three and made sure they were strategically significant”.

  8. 8.

    The results are robust to considering alternative cut-offs around ten employees.

  9. 9.

    Technological change tends to be skill-biased and changes the relative labor demand in favor of highly skilled and educated workers (e.g. Berman et al. 1998; Machin and Van Reenen 1998).

  10. 10.

    We are unable to control for the effect of persistence in innovation as suggested in Blundell et al. (1995) since we do not have reliable measures of R&D or pre-sample history of the patent variable. Human capital is further useful since many small firms do not report official R&D expenditure.

  11. 11.

    There are, however, caveats with the cash-flow sensitivity approach The approach of dividing a sample into sub-groups on the basis of different access to finance, and then testing the sensitivity of investment to cash-flow, has encountered criticism, most notably in Kaplan and Zingales (1997). However, Bond et al. (2003a, p. 154) argue that it “remains the case in the (Kaplan and Zingales) model that a firm facing no financial constraint… would display no excess sensitivity to cash-flow”, and in this case the Kaplan and Zingales critique does not apply.

  12. 12.

    These estimation results are not presented due to space constraints, but they are available upon request.

  13. 13.

    The following sectors are considered high technology: Manufacture of basic pharmaceutical (SIC 24410), pharmaceutical preparations (24420), office machinery (30010), computers and other information processing equipment (30020), insulated wire and cable (31300), electronic valves and tubes and other electronic components (32100), television and radio transmitters and apparatus for line telephony and line telegraphy (32200), television and radio receivers, sound or video recording or reproducing apparatus and associated goods (32300), medical and surgical equipment and orthopedic appliances except artificial teeth, dentures etc., (33101), instruments and appliances for measuring, checking, testing, navigating and other purposes, except industrial process control equipment (33200) and industrial process control equipment (33300) (source: Statistics Sweden).

  14. 14.

    Examples of papers adapting this methodology are Bates et al. (2009) and Baum et al. (2009).

  15. 15.

    We estimate this specification with within estimation firm-specific effects. Since we are only interested in comparing the two groups, we argue that potential endogeneity and simultaneity biases affect both groups of firms similarly.

  16. 16.

    Svensson (2007) analyzes small firms and individuals and their access to external finance and the commercialization of their patents. He shows that the larger share of external funding from governmental programs the lower the probability of patents being commercialized, indicating the agency problems associated with non-private financial support.

  17. 17.

    Hall and Ziedonis (2001) and Hall (2005) document the explosion of patents since the beginning of the 1980s. U.S. sources also document how the vast number of patent applications has become a serious public policy problem because patent offices are capacity constrained (see for instance National Research Council 2004).

  18. 18.

    Both Black and Gilson (1998) and Groh et al. (2010) point to a deep equity market being instrumental in achieving a vibrant venture capital market.

  19. 19.

    See Hall et al. (2007) for recent evidence of the market valuation of patents.

  20. 20.

    Based on an index (scale 0–90) of the comprehensiveness of corporate annual reports, referred to as accounting standards on scale, Sweden scores the highest of 83. For instance the U.S. has an index value of 71 and the second highest accounting standards are found in the UK with 78 (Levine 1999, pp. 14–15).

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Authors and Affiliations

  1. The Institute for Financial Research, SIFR, Drottninggatan 89, 113 60, Stockholm, Sweden

    Gustav Martinsson

  2. Centre of Excellence for Science and Innovation Studies, Royal Institute of technology, 100 44, Stockholm, Sweden

    Hans Lööf

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  1. Gustav Martinsson
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  2. Hans Lööf
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Correspondence to Gustav Martinsson .

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Editors and Affiliations

  1. , Lehrstuhl für Innovationsökonomik, University of Hohenheim, Wollgrasweg 23, Stuttgart, 70593, Germany

    Andreas Pyka

  2. , Department of Business and Management, Aalborg University, Fibigerstraede 16, Aalborg East, 9220, Denmark

    Esben Sloth Andersen

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Martinsson, G., Lööf, H. (2013). Financial Factors and Patents. In: Pyka, A., Andersen, E. (eds) Long Term Economic Development. Economic Complexity and Evolution. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-35125-9_17

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