Elsevier

Research Policy

Volume 30, Issue 1, January 2001, Pages 143-157
Research Policy

Patent applications and subsequent changes of performance: evidence from time-series cross-section analyses on the firm level

https://doi.org/10.1016/S0048-7333(99)00098-0Get rights and content

Abstract

This article examines the relationship between patent applications and subsequent changes of company performance. Time-series cross-section data from 50 German machine tool manufacturers between 1984 and 1992 are used to perform panel analyses. It is shown that national patent applications lead to sales increases with a time-lag of 2 to 3 years after the priority year. European patent applications, which are of higher quality than national patent applications, have an even higher impact on sales increases with a lag of 3 years after the priority year. These results lend support to the use of patent data as an output indicator of R&D activities for business applications as well as empirical research.

Introduction

Following Schmookler's groundbreaking studies in the 1950s and 1960s, the status of patents in innovation processes has attracted much attention in empirical business research.1 The correlation between research and development (R&D), patents and various indicators of innovation success has been investigated empirically on various levels.2 According to Pavitt (1988), empirical studies using patents can be conducted on the level of countries, sectors of industry, technologies or firms (Pavitt, 1988). On the firm level in particular, the question of whether there is a correlation between patents and financial performance remains unresolved. Some empirical studies — recent ones, in particular — establish a positive correlation between a firm's patent situation and its competitive position, but the methodology used in these studies has certain limitations. Previous cross-section studies did not consider the possibility that patents might have a lagged effect on economic parameters, making conclusions about cause and effect impossible. The present paper aims to fill this research gap.

Beyond remedying this methodological shortcoming of existing empirical studies, proving a positive correlation between patents and economic performance parameters has further significant implications for both business practice and empirical research. The more patents reflect the economic results of R&D activities, the more meaningful they become as an output indicator of R&D activities (Griliches, 1990; Ernst, 1995). The information contained in patents has a particular advantage because patent data are easily accessible via databases, are not subject to the problems of imprecise definition and lack of comparability between firms that beset R&D data, and can be allocated directly to more detailed fields of analysis, e.g., fields of technology, products or inventors (Brockhoff, 1992; Ernst, 1998).

The paper is organised as follows: Section 2provides a summary of the current status of empirical research into the correlation between patents and corporate performance. We then derive the main hypotheses we want to test from the literature review. The data gathering process is outlined in Section 3. The data are analysed in Section 4. A few final remarks and some prospects for possible further research are presented in Section 5.

Section snippets

Patents in the innovation process

The innovation process, in a narrowly defined sense, describes activities and their results which lie between the conception of an idea and its introduction to the market. When the technical requirements of an idea are realised successfully through R&D, the result is an invention. One expression of technical success may be a patent application. Launching an invention on the market requires resources from other parts of the organisation, e.g., production and marketing. The successful

Data collection

In choosing our sample, we aimed to select a set of firms for which the parameters influencing their propensity to patent were more or less constant, to avoid systematic distortions in our empirical findings (Section 2.2). We controlled for country- and sector-specific influences on the propensity to patent by limiting the investigation to German firms only and by selecting a largely homogeneous group of companies from a specific sector of the mechanical engineering industry, i.e., the

Data assessment

In this section, two issues are investigated empirically: firstly, we test the influence of patent applications on corporate performance on the firm level. Secondly, we examine the correlation between patent applications and subsequent changes in economic performance indicators on the firm level. Panel analyses enable both goals to be pursued simultaneously, since the influence of patent applications on changes in economic performance indicators is analysed taking time-lags into consideration

Concluding remarks

The empirical findings have implications both for management practice and for empirical studies using patent data.

Two main conclusions for strategic corporate planning can be drawn from the empirical findings. These relate to the protective and informative function of patents. Firstly, the medium- to long-term impact of R&D projects, which have a significant lagged effect on corporate performance, is revealed. Patents are an effective instrument for protecting technological advantages in this

Acknowledgements

The author would like to thank the anonymous referees for their helpful comments.

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