Venture Capital, Patenting, and Usefulness of Innovations

48 Pages Posted: 19 May 2011

See all articles by Simona Fabrizi

Simona Fabrizi

Massey University

Steffen Lippert

University of Auckland - Department of Economics

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Date Written: May 2011

Abstract

We analyze incentives to develop entrepreneurial ideas for venture capitalists (VCs) and incumbent firms. If VCs are sufficiently better at judging an idea's value and if it is sufficiently more costly to patent low than high value ideas, VCs acquire valuable ideas, develop them beyond the level incumbents would have chosen, and use patents to signal their companies' high value to acquirers prior to exiting. This increases the VC-backed companies' patenting intensity and long-run performance, but also inflates their acquisition prices, and lowers their acquirers' overall profits. Patent law usefulness clauses would reduce such excessive, signaling-driven investment and patenting intensity.

Keywords: innovation, patent law, patenting intensity, preemptive vs late acquisition strategies, signaling, usefulness requirement, venture capital

JEL Classification: C70, D21, D82, G24, L26, M13, O31, O34

Suggested Citation

Fabrizi, Simona and Lippert, Steffen and Norbäck, Pehr-Johan and Persson, Lars, Venture Capital, Patenting, and Usefulness of Innovations (May 2011). CEPR Discussion Paper No. DP8392, Available at SSRN: https://ssrn.com/abstract=1846295

Simona Fabrizi (Contact Author)

Massey University ( email )

Auckland
New Zealand
+64 9 414 0800 Ext 9335 (Phone)
+64 9 441 8177 (Fax)

HOME PAGE: http://www.massey.ac.nz/~sfabrizi

Steffen Lippert

University of Auckland - Department of Economics ( email )

Auckland
New Zealand

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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