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Public companies may have different patenting priorities – but are they really less innovative?

A recently published paper by Shai Bernstein of Stanford University’s Graduate School of Business suggests that initial public offerings (IPOs) make technology companies less innovative. While the findings do show differences between publicly listed and privately owned companies in terms of patenting and inventor mobility, it may be the case that post-IPO corporations just have a different approach when it comes to innovation.

The study looks at 40,000 patents obtained by 1,500 US companies that either publicly floated, or abandoned plans to do so, between 1985 and 2003. Bernstein’s analysis considers patent grants alongside a number of other factors – including the number of times each patent is cited in subsequent applications – to try to determine any difference in the level of innovation between privately owned and publicly listed companies.

The research indicates that while there is no significant impact on the rate of obtaining patents after a company goes public, the supposed quality of the patents declines post-IPO due to a lower number of subsequent citations. On average, public companies saw a 40% decline in such citations five years after IPO. The findings also suggest that public companies are more likely to get the technology they need through corporate acquisitions than through internal R&D.

Patent grant and citation statistics are not, in and of themselves, sufficient measurements of innovation. Plenty of other factors come into play – and it is important to remember that such analysis cannot account for the unknown quantity of inventions that are not protected by patents. Furthermore, some public companies may focus their internal patent development activities on creating portfolios tuned for defence against threats of litigation, or for building potential revenue streams from licensing, rather than purely for protecting newly developed technologies.

And it should come as no surprise that public companies are more likely than their private counterparts to obtain rights to technologies through corporate acquisitions and patent purchases. More often than not, companies that are publicly traded have far more financial clout than those which are not. Therefore, they have more opportunity to buy innovation from outside the company and rapidly integrate it into their product and service offerings, meaning that their business objectives – and those of their shareholders – can be realised in a much more timely fashion.

The study suggests, then, that publicly listed companies are making use of the options they have to achieve their strategic aims. As well as helping to ensure that new products and services make it to market at the opportune time, buying or licensing in patents from external sources will secure companies freedom to operate as they try to enter new areas. After all, what is the use in spending time and money on internal innovation when the technology expected to arise out of that R&D already exists elsewhere? And if it does, then another party may well own patents that read on that technology – meaning that you might face an infringement lawsuit and see all of your R&D expenditure flushed down the drain.

While Bernstein’s study looks specifically at privately owned businesses that announced and later withdrew plans for IPO, the other side of this story requires a look at the wider group of all the private companies out there – including the millions of SMEs where many game-changing innovations occur. Those are the companies that larger, publicly traded corporations may find themselves needing to buy or license from to further their own goals. The IP system makes sure that those small private concerns can be properly compensated for the investment that they have made in R&D; and in turn, that compensation gives the start-ups, university spin-outs and individual inventors the resources they need to continue innovating.


Jack Ellis
IAM Magazine
15 January 2013

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IP management, Licensing, IA management, Patents, IP business, IP finance

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