Does Compulsory Licensing Discourage Invention?: Evidence from German Patents after World War I

Basic models indicate that weakening intellectual property rights discourages invention by reducing inventors’ ability to recoup investments in research and development. But weaker intellectual property rights can also encourage cumulative (or follow-on) invention by enabling future inventors to build on patented ideas. A key mechanism to weaken intellectual property rights is compulsory licensing, which allows developing country governments to license foreign-owned patents to local firms without the consent of foreign patent owners. Consistent with theoretical predictions about the link between competition and innovation, we find that the observed increase in patenting was strongest for fields in which preexisting levels of competition were low. These results suggest that compulsory licensing may be particularly effective in promoting invention by increasing the threat of competition in fields with low preexisting levels of competition.

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