The Economic Meaning of Patent Citations:

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The Economic Meaning of Patent Citations:

Value and Organizational Form in Patenting Start
-
ups

Oral Examination

(Ph.D. in Business Administration)


Edward J. Egan

Monday May 9
th
, 2011

Research Question



What is the economic meaning

of patent citations?

Approach


Use the
property right
and
informational

aspects of patents to
advance theories

about
what a
relationship between patents
could
mean



Test the predictions
these theories make about
the
value of successful start
-
ups
that own
patents, and their
choice of organizational
form

Why Successful Start
-
ups?


Patents should matter to these firms and these
should be ‘important’ patents



If the
relationships between patents don’t have
economic meaning here
, they
probably don’t
anywhere



We have a good measure of the long
-
term value
of these firms, and the outcome of an
organizational form choice as to how value is
best realized.

What is a Patent?


A property right


A right to exclude and to a monopoly, but not a right to use



Information


A complete, useful, novel and non
-
obvious application of
knowledge



Useful facts from the literature:


Patents are
used only 50%
of the time
(1)


The
average value

of a 1957 patent was
$0.5m
in 1988
prices
(1)


Patents
cost an average of $25,000
each to acquire
(2)




(1)
Reported in
Griliches

(1998)

(2)
According to
Lemley

(2001)

Patent Characteristics


Citations



Who adds citations?



On an average patent,

65% of citations are added by the
examiner
(4)


For 40% of patents, all citations are added by the examiner
(4)



What do citations mean?



35%
of cited patents are
complements
(5)


3%
of cited patents are
substitutes
(5)


What about the other 64%?

(4)
Data on who assigned citations is available from the USPTO for patents filed after 2000.
Alcacer

&
Gittelman

(2006) report these results.

(2)
From survey data presented in
Harhoff
, Scherer &
Vopel

(2003)

An Example: Citations Received


Common claim in the literature:

More citations a patent received

=> the patent is of greater value



Evidence that this is true:



Harhoff

et al. (1999)


Survey Data


Hall et al. (2001)


Weak evidence from Manufacturing Firms


Indirect evidence:
Trajtenberg

(1990),
Bessen

(2008)


Contradicting evidence:
Sampat

&
Ziedonis

(2004), Hall et al.
(2007)


Still on open question: Moser (2011).

Property Rights Example


Patents as
complementary inputs


The more citations received: the greater the rents accumulated



Patents as
substitute outputs


The more citations received: the lower the rents accumulated


Mixes

of complements and substitutes


Possibly no prediction at all


Some Results on Firm Value


An additional patent
increases firm value
by 2%, or about
$340,000.



Citation measures do
not predict value
above and beyond
patents themselves.
The number of
citations received
does not matter.



Broader patents are
not more valuable



Jointly assigned
patents are not more
valuable

The

dependent

variable

is

the

natural

log

of

firm

value
.

The

coefficients

are

estimated

using

Ordinary

Least

Squares

regressions

with

a

Huber
-
White

sandwich

adjustment

to

correct

for

heteroskedasticity
.

All

columns

estimate

results

using

the

full

sample
.

Column 1

Column 2

Column 3

Column 4

Column 5

Log No. of Patents

0.207***
(0.026)

0.208***
(0.026)

0.240***
(0.036)

0.218***
(0.027)

0.212***
(0.027)

Log Avg. No. Claims Made

-
0.012

(0.044)

Multiple Corporate
Assignees





-
0.119

(0.078)





Log Avg. Citations Made

-
0.067

(0.043)

Zero Citations Made
Indicator







0.140

(0.160)



Log Avg. Citations Recd.

0.004

(0.034)

Zero Citations Recd.
Indicator









0.289

(0.212)

Avg. (Exit Year
-

Patent
Year)

0.002

(0.007)

0.001

(0.007)

0.002

(0.007)

-
0.006

(0.008)

0.002

(0.007)

Acquisition Indicator

-
1.010***
(0.063)

-
1.010***
(0.063)

-
1.011***
(0.063)

-
1.012***
(0.063)

-
1.008***
(0.063)

Exit Year Fixed Effects

yes

yes

yes

yes

yes

Industry Fixed Effects

yes

yes

yes

yes

yes

State Fixed Effects

yes

yes

yes

yes

yes

Sub Cat. Fixed Effects

yes

yes

yes

yes

yes

Constant

2.767***
(0.798)

2.794***
(0.799)

2.779***
(0.791)

2.872***
(0.791)

2.750***
(0.809)

R
-
Squared

0.315001

0.3150364

0.3160135

0.3168166

0.315889

No. Observations

1709

1709

1709

1709

1709

Standard errors are reported in parentheses. ***, **, and * indicate significance at the p=0.01, p=0.05 and p=0.1 levels resp
ect
ively.

Next Steps


Consider
in
-
term

vs.
out
-
of
-
term

citation effects



Consider
self
-
citation

effects



Robustness checks

on firm values



Report results for:



VC backed firms only


Firms with a
single patent only


Firms in specific industries:
IT
,
Biotech
,
Semiconductor
, etc.
(This may shed light on the
importance of IP strength)


A Research Agenda


Try to understand the
nature of citations
and
code them


Read patent filings myself


Consider building Natural Language Processing
software to read filings and code the relationship
between them (e.g. complement, substitute, etc.)



Consider developing
network based theories
of patent citations


This could provide a holistic approach


This might capture aspects of the landscape that are
important