By Paul Jensen and Elizabeth Webster
In March this year, the Government asked the Productivity Commission to conduct a wide-ranging review of public support for science and innovation. Public research institutions – primarily the universities and CSIRO – receive a large share of the Government’s $5 billion investment in R&D. Such institutions are supposed to promote the diffusion of knowledge they create. At the same time, however, they are under increasing pressure to generate revenue from their output through the creation of intellectual property (IP) rights. This opens up the possibility of entering the murky world of legal dispute resolution since IP owners must actively enforce their rights in order to curb the unauthorized use of their technology. The cost of such litigation may eventually run into tens of millions of dollars. Patents have little economic value if other firms do not believe their owner will enforce them.
But the potential legal quagmire is only one aspect of a much bigger problem. To understand this, we need to (briefly) review the economics of innovation. Economists have known for a long time that the creation of knowledge cannot be efficiently provided by the free market. If left to its own devices, the market will under-invest in knowledge creation since, once created, knowledge is easy for others to use (in economists parlance, it is “non-excludable”) and it is therefore hard for the original inventor to recoup their costs. There are number of possible solutions to this market failure problem: government research grants, prizes, and patents to name a few.
Patents solve the under-investment problem by giving firms the legal right to prevent others from using the discovery. This then enables the inventing firm to charge a price that allows them to recover the costs of discovery. Unlike property rights over tangible property, however, patent owners must actively enforce their rights – police aren’t proactive in their search for theft of IP. Patents also entail costs upon the broader society – primarily, by charging a monopoly price, they also price some consumers out of market. In this way, patents represent a classic double-edged sword: while they provide an incentive to innovate, they also inhibit the use of knowledge created by the innovation.
In cases where the cost to society of using existing knowledge is very low, the best form of incentive is public grant since it places no artificial barrier to the efficient use of that piece of knowledge. That is why governments have historically eschewed public sector patents in favour research grants. Under this system, academics can use other people’s ideas freely, provided due acknowledgement is made. And, even if a particular research tool was patented, public research institutions can use the tool in their laboratory without fear of recrimination by the patent owner.
However, recent trends in Australia mimic those in the US which encourage and reward public sector institutions who patent – and commercialise – their discoveries. If carried through, this policy change will see the disappearance of the open world of scientific exchange and communication – the classic hallmark of universities – in favour of secrecy and the privatisation of ideas. Where previously universities and other public research organisations were rewarded and recognised for encouraging the dissemination of the latest ideas and empirical findings, they are now discouraged from disclosing these ideas.
Why has this happened? One of the most commonly-stated reasons relates to the technology transfer problem. Central to this argument is that many important inventions have been left on university shelves because businesses interested in commercializing university technology weren’t able to guarantee their subsequent investments wouldn’t be expropriated by others without the existence of a patent. However, the foundations for this argument are unclear since the historic use of public sector ideas has not been seriously documented nor is there evidence that patenting is the preferred way to enhance better use. Part of the problem is that the vast majority of knowledge transfer from universities is informal and leaves no paper trail. Furthermore, the costs of using patents – in terms of the loss of free and open exchange between scientists, the need to negotiate and contract with multiple patent owners before research can begin, as well as the legal costs – are rarely considered.
So, what is the best way forward? The first step is the acknowledgment that the current mix of patents and public grants may be a case of conflicting incentives and double dipping. On top of this, a serious evaluation of the forms and magnitude of knowledge diffusion from public sector research institutions should be undertaken. Hopefully, these are just the sort of issues that the Productivity Commission’s review will uncover.
Paul Jensen and Elizabeth Webster
Melbourne Institute of Applied Economic and Social Research and
Intellectual Property Research Institute of Australia
University of Melbourne
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