Patentsand Creative Destruction
Howpatents speeds up the process of creative destruction
Creativedestruction refers to a situation whereby the new products arecontinually innovated replacing the old ones which are outdated. Inmost companies, creative destruction leads to the expansive growth inproduction, which, in turn, leads to an effect on the fundamentalmacroeconomic performance of the firm (Sengupta, 2014). In normalconditions, patents ensure that there is the development of the newtechnologies that will be widely used in the business to innovate newproducts. The company that owns the patent has the authority toprevent other firms in the industry from using their invention. Suchcompanies are free to use, sell, make, or import the infringingarticles that their patent allows. The patents make the knowledgeregarding a given property to appear scarce while in reality it isfound in abundance. This will lead to a form of monopoly where theoriginator of that particular patent will enjoy all the benefits thataccrue to that knowledge. In the presence of the monopoly powers, thedegree of competition is highly reduced, and the patent owner canmake much more money compared to the circumstances where there wascompetition in the market. Therefore, there is an increased incentiveto the patent holder companies to create and produce more productsthat they deal with in the industry. Because the unique informationis part of the intellectual properties, there is that lack ofincentives necessary for the creation. A patent creates an artificialscarcity because it is part of the social innovation and in return,the need for the incentive will be created. Patents, therefore, speedup the process of creative destruction considering the company owningthat particular information (Glezos, 2014).
Howpatents slow down the process of creative destruction
Apartfrom the owner company, patents are likely to slow down the processof creative destruction considering other companies in the industry.The patents are restrictive practice to the process of creativedestruction because they grant the owner company some certainties andstability over the intellectual property thereby restricting otherenterprises that have an interest in the same property. The originalcompany will be responsible for the amount of innovation to beintroduced to the market instead of letting that firm compete withother businesses that have an interest in the property. Theutilization of the added innovation will be suboptimal because thereis no competition in the market as the owner company has all thepatents and it is not subjected to any competitive pressures. In aworld of innovation, this practice is not constructive because itwill hold back the innovation development. This kind of monopoly willslow down several innovations from the existing and upcomingcompanies interested in that particular product. This is an adverseeffect on the process of technical innovation as most companies mayfind the acquisition of patents the best way to control the marketsthereby hindering any means of development. For instance, James Wattsrefused to give the patents of his steam engine and instructed thatall the companies that wanted to either construct or sell engines topass through him. This condition by Watts prolonged the period inwhich England could have achieved an extensive railway system(Glezos, 2014).
Onthe others side, the patents are legally structured in a way thatmakes entry impossible because defending such costs will discriminatethe new entrants to the markets especially if they are small andweaker entrepreneurs. The stronger companies are likely to benefit atthe expense of the smaller ones. In this part, therefore, the patentsinhibit the innovation of new products instead of encouraging. Theinhibition slows down the process of creative innovation in therespective industry.
Howdifferences in manufacturing costs affect the removal of patents
Themanufacturing industries encounter some expenses in the course oftheir operations and acquisition of the patent rights. The mostcommon production costs include the research and development costswhich must be appropriated properly so or else it may lead to theunder-investment in the course of the technological development.However, through patents, the problem of under-investment could betaken care of if the costs are appropriated throughout the term ofthe patent so that the returns could be disclosed. The removal of thepatents may affect the company in the sense that the research anddevelopment costs may have been either recovered or not. In case thepatents should be removed, its duration should be considered beforesuch a decision is made. According to Nicholas (2013), “Longpatents allow inventors time to recover their research anddevelopment costs while narrowness keeps open the possibility ofpositive competitive pressures from the development of substituteinventions”.
Ifthe gestation period of a given invention that a company is investingin is long, the R & D costs may be low because the short patentterm is very effective. The company will have gained within thisshorter patent term in case the patents are removed. On the otherside, removal of patents will enable the other emerging firms to rushto replace the inventors thereby causing duplication of the researchbefore the investment costs are covered fully. According to Simpson,Toman, and Ayres (2012) “Such a process of creative destruction mayimpose a social cost since the innovator does not internalize thecost it imposes on the other firms”.
Glezos,S. (2010). CreativeDestruction versus Restrictive Practices: Deleuze, Schupmpeter andCapitalism’s Uneasy Relationship with Technical Innovation,Retrieved from http://www.ctheory.net/articles.aspx?id=648on May 6, 2016.
Nicholas,T. (2013). ArePatents Creative or Destructive? Harvard Business School,Retrieved fromhttp://www.people.hbs.edu/tnicholas/PAT_paper_revised.pdf on May 6,2016.
Sengupta,J. (2014). Theoryof innovation: A new paradigm of growth.Springer Publishers.
Simpson,R. D., Toman, M.A & Ayres, R. U. (2012). Scarcityand Growth Revisited: Natural Resources and the Environment in theNew Millennium.Routledge Publishers.