Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Instructor’s Manual
CHAPTER 9
Protecting Innovation
SYNOPSIS OF CHAPTER
A firm’s ability to generate rents from innovation is a function of the ease with which
competitors can copy the innovation. This factor makes the choice to protect the innovation and
the choice of the protection mechanism an important part of the overall strategy. There are four
primary mechanisms used to protect innovations in most countries: patents, trademarks,
copyrights, and trade secrets. International agreements have simplified the process of applying
for and receiving protection in more than one country. Trade secrets can be a useful means of
protection when patent and copyright protection are not applicable. The effectiveness of these
legal mechanisms varies from one industry to another and one item to another.
Choosing whether to aggressively protect an innovation or to disseminate it freely varies with the
nature of the innovation and the industry. The choice and ability to protect a technology
generates greater rents, and enables the firm to maintain architectural control of the development
and compatibility with other goods. On the other hand, openly disseminating technology can
encourage its widespread adoption by consumers and encourage the development of
complementary goods. Choosing to treat a technology in an open manner is an important
consideration when the firm is unable to produce in quantities sufficient to meet demand or
demand for the item is affected by the availability of complementary goods.
TEACHING OBJECTIVES
1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
1. Develop an understanding of the mechanisms a firm has available to protect an
innovative technology, the means by which the mechanisms can be put into effect and
their limitations.
2. Provide a basis for evaluating the type of protection mechanism to use and the extent to
which the protections should be applied. To determine where on the continuum between
wholly proprietary and wholly open the firm the firm should place its technology.
LECTURE OUTLINE
Overview
a. Whether and how to protect technological innovation is an important aspect of a firm’s
technological innovation strategy (keeping in mind dispensing the technology freely may be the
most advantageous decision).
b. There is a range of protection mechanisms available, each with its advantages and
disadvantages.
c. Protection moves along a continuum ranging from wholly proprietary to wholly open.
d. Identify the factors a firm should consider when formulating a protection strategy.
2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
II. Appropriability
a. Appropriability is the degree to which firm is able to capture rents from its innovation
and is a function of how easily competitors can imitate the innovation (i.e. whether the
underlying knowledge is tacit or socially complex) and the strength of the chosen
protective mechanism.
Patents, Trademarks and Copyrights
b. Patents, trademarks and copyrights all protect intellectual property. Patents apply to
inventions, trademarks to words or symbols intended to distinguish the source of a good,
and copyrights protect original artistic or literary work.
c. Patents are a property right granted by a government to exclude others from producing,
using, or selling the invention in country the patent in which the patent is issued, for a limited
time. There are three types of patents:
i. Utility Patents protect a new and useful process, machine, manufactured item, or
combination of materials.
ii. Design Patents protect new, original and ornamental design for a manufactured
item.
iii. Plant Patents protect the invention or discovery and asexual reproduction of any
distinct and new variety of plant.
d. The three tests that must be passed before patent approval is granted are 1) usefulness, 2)
novelty and 3) obviousness (i.e. must not be obvious).
e. Not subject to patents are the following―the discovery of scientific principles
pertaining to natural laws, substitution of one material for another, changing the size of
3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
an existing device, making something more portable, substituting equivalent elements,
altering the shape of an item, and printed materials.
f. The process of applying for a patent requires the submission of drawings and/or
explanation of use and a description of the manufacture and differentiating element.
Submission of materials is followed by a review by a patent examiner and a publication
period that gives others the right to challenge the patent. If all tests are passed and the
request is unchallenged the patent is granted. The U.S. patent fee schedule is shown in
Figure 9.2.
Show Figure 9.2
g. Patent law around the world differs and protections are not reciprocal. Some of the
key differences are:
i. Outside the US, publication about the invention before applying for the patent
will bar the right to a patent. In the US, inventors have a 1year grace period
within which they can publish before applying for the patent.
ii. Many countries have a “working requirement” requiring the invention be
manufactured in the country within a certain time period (often 3 years) after the
patent is granted.
iii. Of several international treaties related to patent laws around the world, the two
most significant are the Paris Convention for the Protection of Industrial
Property (eliminates any differences in patent rights afforded a citizen versus a
foreign national, establishes the right of “priority”, eliminates barriers to patenting
inventions previously revealed by public disclosure) and the Patent Cooperation
4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
Treaty (single application valid in all countries and the inventor has 2 ½ years to
file in other signatory countries).
h. Inventors and firms may monetize patents through a range of different patent strategies.
1. Patent strategies may include blocking others from selling the product so that the firm can
be the sole provider, licensing the technology to others, or selling the patent rights to
another firm that can better utilize the technology.
2. Firms may also seek patents just to limit the options of competitors, or to earn
revenues through aggressive patent lawsuits. These actions are sometimes referred
to as "patent trolling."
3. In industries with complex technologies such as computers, software, and
telecommunications, a dense web of overlapping patents known as "patent
thickets" can make it very difficult for firms to compete without falling prey to
patent suits by other firms in that technology domain. This can seriously stifle
innovation. Firms thus sometimes buy bundles of patents to create war chests that
they hope will deter the patent attacks of others.
i. Trademarks and Service Marks protect a word, phrase, symbol, design or other
indicator (perceived through the five senses) used to distinguish the source of goods from
one party from the goods of another and also prevent the use of similar marks that may be
confusing to the consumer. A service mark distinguishes the provider of a service instead of
a product. These marks do not expire as long as they are in use. Rights to marks are
established in the legitimate use (i.e., the trademark does not have to be registered) though
registration offers some advantages.
j. Trademark Protection Around the World varies as does patent protection. Residents
and citizens of countries participating in the World Intellectual Property Organization
5
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
benefit from a System of International Registration of Marks that is governed by two
treaties: the Madrid Agreement and the Madrid Protocol.
k. Copyrights protect works of authorship (fixed in a tangible form of expression) for a
period of 70 years in the U.S. These works include literary, dramatic, musical, artistic and
certain intellectual works. A copyright is established by legitimate use of the work and
provides the exclusive rights to reproduce the work, prepare derivative works, distribute
copies by sale or other transfer of ownership, by rental, lease, or lending, perform the work
publicly (including digital audio transmission) and display the material publicly. Copyrights
provide for the “fair use” of the material for purposes such as criticism, comment, news
reporting, teaching, scholarship or research.
l. Copyright Protection Around the World. There is no international copyright law that
protects an individual’s works throughout the world. There are, however, a number of
international treaties that extend reciprocal copyright protection amongst signatories. The Berne
Union for the Protection of Literary and Artistic Property is among the most important.
Trade Secrets
m. Trade secrets consist of information that belongs to a business but is generally unknown
to others that confer a distinct advantage in the form of economic rents for as long as it
remains valuable and private. An advantage of classifying proprietary information as a trade
secret is they need not meet the stringent requirements of patent law and a broader class
of assets and activities can be protected.
n. The Uniform Trade Secret Act attempts to establish a consistency between trade secret
laws amongst the U.S. states. To be subject to the Uniform Trade Secret Act, information
must meet three criteria:
6
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
i. The information must not be generally known or readily ascertainable through
legitimate means.
ii. The information must have economic importance contingent upon its secrecy
iii. The trade secret holder must exercise reasonable measures to protect the
secrecy of the information
o. For information meeting the above criteria, the Uniform Trade Secret Act prevents
others from copying, using or otherwise benefiting from the secret without the owner’s
approval if they are bound by a duty of confidentiality, they have signed a non-disclosure
agreement, they acquire the secret through improper means such as theft or bribery, they
acquire the information from someone unauthorized to disclose it, they learn the
information in error, but have reason to believe it is a protected trade secret.
III. The Effectiveness and Use of Protection Mechanisms
a. Protection mechanisms their effectiveness are industry specific. Where patents offer little
protection, the firm may choose to rely on trade secrets, but the effectiveness of trade secrets
also varies with the type of technology and the industry.
i. In 1980 IBM was anxious to pursue a share of what they perceived would be a
valuable personal computer market. Although IBM used off the shelf
components, they felt confident their product would not be easily duplicated
because the computer code used to link the hardware to the software (BIOS) was
protected by copyright. The weakness in their thinking was that the written lines
of code were protected, but the functions the code produced were not.
Through a very carefully engineered process to circumvent the law Compaq
deconstructed the code and had engineers write their own code to duplicate the
7
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
functions. The result was that Compaq was able to produce and sell a record
number of IBM-compatible computers without infringing on IBM’s copyright.
b. There are some situations where a company might decide they are better served by
disseminating technological secrets in order to establish their technology as the dominant
design. The downside of this strategy is that the firm may lose the opportunity to capture
monopoly rents and may not be able to regain control of the technology in the future.
Liberal diffusion of the technology can also result in the fragmentation of the technology
platform and the “standard” may cease to exist.
c. Wholly Proprietary Systems versus Open Systems
i. Wholly proprietary systems are based on company-owned technology protected
by patents or some other means. The technology is generally not compatible
with other manufacturers’ products and the developer is usually able to
appropriate rents from the technology. Customers may resist adopting these
technologies because of their higher costs and lack of compatibility with other
products.
ii. Wholly open systems are not protected and may be based on freely distributed
technology, are quickly commoditized and offer little opportunity to
appropriate rents.
iii. Most technologies are offered somewhere between wholly open and wholly
proprietary and are protected by a range of control mechanisms. This range is
exhibited by the control continuum exhibited in Figure 9.3.
Show Figure 9.3
8
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
1. Video game consoles are an example of technology controlled at the wholly
proprietary end of the continuum. On the other hand, rights to produce
games for the consoles are usually licensed to third party developers in
order to generate a profusion of games.
2. Licensing policies for Microsoft’s Windows are more open in that
Microsoft retains all rights to augment the software, but licenses
complementary goods providers in order to promote the development of
such products and licenses equipment manufacturers to distribute the
software with their hardware.
3. Sun’s “Community Source” policy for Java moves a bit further in the
direction of wholly open. While Sun allows developers to augment the
source code and does not collect a licensing fee, all changes to the code
require approval by the “Java Community Process”, managed by Sun.
This allows Sun to disseminate the technology while maintaining control
over the integrity of the core platform.
d. Advantages of Protection include great rent appropriability, giving developers greater
incentives to invest in technological development, promotion and distribution.
i. A sponsor of proprietary technology may offer the technology at an especially
competitive price, advertise aggressively or subsidize the production of
complementary goods in order to promote the technology and secure its
position as the single producer of the standard.
ii. Another advantage of protecting a technology is to retain architectural control
(i.e. meaning the ability to determine the structure and operation of the technology
9
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
Instructor’s Manual
and its compatibility with other goods and services). This is an especially
important feature of control when the manufacture and sale of complementary
technologies are a key part of the firm’s strategy.
e. Advantages of Diffusion
i. Diffusion encourages rapid adoption, resulting in a large installed base and a
strong market for complementary goods.
ii. Open technologies may also benefit from the additional development efforts of
other parties without additional cost to the original developer.
f. The following factors should be considered when deciding whether and to what degree
a firm should protect its innovation:
i. Production and marketing capabilities, and capital–if unable to produce or
market the technology (and complementary goods) at sufficient volume or quality,
protecting the technology may hinder its adoption.
ii. Industry opposition against sole source technology–other industry members
may jointly be able to exert enough pressure so that a firm will offer the
technology with fewer restrictions.
iii. Resources for internal development–a firm lacking in sufficient resources to
invest in the technology’s functionality and ongoing improvements may not be
able to compete in the market.
iv. Control over fragmentation–is important when standardization and
compatibility are important.
v. Incentives for architectural control–are especially high when the firm is a
significant producer of complementary products.
10
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education
