The Changing Face of Innovation

By Sacha Wunsch Vincent, Senior Economic Officer, Economics & Statistics Division

Innovation is a central driver of economic growth and development and generator of better jobs. It enables firms to compete in the global marketplace and to find solutions to technological and economic challenges. Following the launch of the World Intellectual Property Report by WIPO in November 2011, WIPO Magazine is launching a new series to explore emerging innovation trends from an economic perspective. In this first article, the author explores the changing face of innovation and the evolving use of intellectual property (IP) in navigating the innovation landscape.

Figure 1:  R&D expenditure still comes mainly from
high-income countries

Worldwide R&D expenditure, by income group, in
2005 PPP Dollars, 1993 and 2009

Note: R&D data refer to gross domestic expenditure on R&D (GERD).
The high-income group includes 39 countries, and the middle- and
low-income group includes 40 countries. PPP (purchasing power
parity) are currency conversion rates that convert to a common
currency and equalize the purchasing power of different currencies.
(Source: WIPO estimates, based on data from UNESCO Institute for
Statistics, Eurostat and OECD, September 2011.)

Shifting geography of innovation

Throughout history, the face of innovation - the “who”, the “how” and the “what for” – has continuously changed. Understanding these changes is important to ensure a favorable policy environment.

Studies estimate that in high-income countries, innovation - the act of creating new products or processes - accounts for as much as 80 percent of economy-wide growth in productivity. At the firm level, those that innovate outperform their non-innovating peers and drive economic growth.

Data relating to research and development (R&D) and investment patterns offer some interesting insights into emerging innovation trends. Although high-income countries continue to dominate global spending on R&D, the technological gap between richer and poorer countries is narrowing and innovation is becoming increasingly international.

Between 1993 and 2009, global R&D expenditure almost doubled in real terms. Since this same period also saw marked growth of the global economy, the share of global gross domestic product (GDP) devoted to R&D increased more modestly – from 1.7 percent in 1993 to 1.9 percent in 2009.

R&D data also reveal that the ratio of GDP spending on R&D in high-income countries - around 2.5 percent - is more than double that of middle-income economies and accounts for some 70 percent of global R&D spending. It also shows that low- and middle-income economies increased their share of global R&D expenditure by 13 percent between 1993 and 2009. China accounts for more than 10
percent of this increase, making it the world’s second largest R&D spender in 2009, overtaking Japan for the first time.

R&D spending, however, is only part of the story. The innovation performance of economies depends on broader investment in knowledge, beyond formal R&D spending, including, in particular, investment in education and the introduction of new equipment.

Non-technological innovation – including organizational, marketing, design and logistical innovation – is also an important enhancer of productivity. The growing importance of knowledge as a source of value – and IP as a means of harnessing that value - is reflected by the rapid growth in investment by firms in intangible assets which in some countries is outpacing investment in tangible assets. Complementary research-based market valuations of firms in Standard & Poor’s 500 Index indicate that intangible assets account for around 80 percent of the average firm’s value.

Innovation becomes increasingly international

Greater mobility of students, highly-skilled workers and scientists has spurred the international exchange of knowledge. A sharp increase in the share of peer-reviewed science and engineering articles with international co-authorship, and a rising share of patents listing inventors from more than one country offers further evidence of this.

An increasing number of multinational enterprises (MNEs) are setting up R&D facilities in a variety of countries – with certain middle-income economies seeing particularly fast growth. Among the top 1,000 global R&D spenders a modest number of MNEs from middle-income economies, notably from China and India, now conduct R&D on a par with their counterparts in high-income countries. The growing economic clout of these countries is giving rise to so-called “frugal”, “reverse” or “trickle-up” innovation which emphasizes the development of products that meet the needs of consumers in these markets. While the economic ramifications of this emerging trend are as yet unclear, it is already influencing the IP management strategies of companies (eg "Pioneering Green Innovation an interview with General Electric").

Is innovation becoming more collaborative and open?

A much-discussed element of the new innovation paradigm is the increasingly collaborative nature of the innovation process. While some have emphasized that innovation is becoming increasingly “open”, assessing the true scale and importance of open innovation is challenging. For one, it is difficult to draw a clear distinction between open innovation strategies and long-standing collaborative partnerships. It is also difficult to trace the implementation of “open” innovation strategies within firms.

While there is some evidence of greater collaboration, including a growing tendency to co-patent internationally, and upward trends in R&D alliances in some sectors, it is clear that formalized collaboration is far from the norm.

Anecdotal examples of new approaches abound – notably, crowd-sourcing initiatives, prizes and competitions, and Internet platforms on which firms can post challenges. IP and open innovation are often complementary in these contexts in that open innovation platforms typically share similar rules on the assignment of IP and ownership of ideas generated. The IP is either taken over by the initiating firm as part of the prize money, or is subject to a licensing or other contractual arrangement.

Figure 2: Patenting abroad is the main driver of
worldwide patenting growth

The Surge in Worldwide Patent Applications, PCT/WG/4/4. Study
prepared for the Patent Cooperation Treaty (PCT) Working Group.
Geneva: World Intellectual Property Organization. (Source: WIPO 2011)

IP ownership at the heart of business strategies

In recent years, as IP ownership has become more central to the strategies of innovating firms, IP policy has moved to the forefront of innovation policy.

New IP statistics released by WIPO in December 2011 point to a growing demand for patents, rising from 800,000 applications worldwide in the early 1980s to an estimation close to 2 million in 2010. Occurring in different waves, the increase was driven by Japan in the 1980s, joined by the United States (US), Europe and the Republic of Korea in the 1990s and, more recently, by China.

While there are many explanations for this rapid increase, some of which are country and industry specific, two key trends stand out, namely:

• Growing economic integration and a tendency for applicants to seek patent protection abroad. An analysis of worldwide patenting according to so-called first filings (the first time a patent is filed anywhere in the world) and subsequent filings of the same invention in additional countries) shows that the latter account for slightly more than one-half of that growth over the last 15 years; and
• Growth in underlying knowledge investment. A comparison of growth in the number of first filings with increases in real R&D expenditure shows that, for the world as a whole, the latter has grown faster than the former. This suggests that growth in patenting is rooted in underlying investment in knowledge. That said, patenting and R&D trends do vary markedly across countries and industries, with important implications for how firms innovate.

Demand for other IP rights has also seen marked growth. Trademark applications worldwide rose from 1 million per year in the mid-1980s to close to 3.7 million in 2010. Similarly, industrial design applications worldwide more than doubled from about 290,000 in 2000 to 650,000 in 2010.

Figure 3: International royalty and licensing payments
and receipts are growing
RLF payments and receipts, in US$ millions (left) and as a
percentage share of GDP (right), 1960-2009

Note: GDP data are from the World Bank.   (Source: WIPO
based on data in Athreye, S. & Yang, Y. (2011).  Disembodied
Knowledge Flows in the World Economy. Working Paper Series
of the Economics and Statistics Division. Geneva: World
Intellectual Property Organization.

IP-based knowledge markets on the rise

More frequent licensing of IP rights and the emergence of new technology market intermediaries - point to the rise of IP-based knowledge markets and an increase in IP trading in recent decades. In nominal terms, international royalty and licensing fee (RLF) receipts increased from US$2.8 billion in 1970 to US$27 billion in 1990, and to approximately US$180 billion in 2009 – outpacing growth in global GDP.

Technology market intermediaries have existed for many years, but new “market makers” such as IP clearinghouses, exchanges, auctions and brokerages are on the rise. Universities and public research organizations are also increasingly setting up technology transfer offices to leverage their IP.

The size and scope of IP-based trading, however, remains embryonic. Available data show that in most countries firms typically license less than 10 percent of their patents, with royalty and licensing fee receipts ranging from 1 to 3 percent of total revenue. While technology markets are small relative to company revenue or overall economic output, they increasingly shape how innovation takes place and therefore deserve careful attention.

New IP policies and practices

The changing innovation landscape is challenging long-standing business practices. Firms need to adapt to remain competitive. Beyond the increased use of knowledge markets and new IP intermediaries, firms and other organizations are also experimenting with new IP policies and practices. These include:

• Publication without patenting: Some firms opt to publish details about inventions they do not plan to patent. Defensive publishing of technical disclosures lifts the veil of secrecy on potentially important technologies and also prevents others from seeking patents on them (for example IP.com’s Prior Art Database).
• IP donations: Companies release a portion their IP portfolio to the public, companies or innovators. This can happen when the IP is not considered economically valuable to the donating company or if the invention requires further development that it is not willing to undertake. Such donations may also aim at triggering broader social benefits. In the WIPO Re.Search initiative, for instance, firms decided to make selected IP assets available to researchers to accelerate the development of therapies for neglected tropical diseases, malaria, and tuberculosis.
• Collaboration with universities: When dealing with universities, companies are increasingly creative in developing and applying their IP policies, seeking to both foster cooperation and ensure control (consider, for example, Philips’ partnerships with various university hospitals to develop health solutions.).
• Patent pools: A recent new wave of patent pools to tackle health, environmental and other social challenges is also proving beneficial to patent holders and society as a whole. Such arrangements enable the introduction of new technologies and promote the interoperability of different technologies. The Eco-Patent Commons, for instance, was set up by information technology firms to make environment-related patents available to the public.

While some innovation trends are well understood, others merit additional research. The face of innovation will surely continue to evolve in the coming years. Some trends are likely to continue, and others will come as a surprise. Continuous monitoring of the shifting sands of innovation, therefore, is a must for policy makers, entrepreneurs and researchers alike to ensure the on-going evolution of a favorable policy framework and the implementation of effective IP management strategies.