Compulsory Licensing and Innovation - Historical Evidence from German Patents after WWI
64 Pages Posted: 30 Mar 2014 Last revised: 24 Sep 2016
Date Written: September 23, 2016
Compulsory licensing allows governments to license patented inventions without the consent of patent owners. Intended to mitigate the potential welfare losses from enforcing foreign-owned patents, many developing countries use this policy to improve access to drugs that are covered by foreign-owned patents. The effects of compulsory licensing on access to new drugs, however, are theoretically ambiguous: Compulsory licensing may encourage innovation by increasing competition or discourage innovation by reducing expected returns to R&D. Empirical evidence is rare, primarily because contemporary settings offer little exogenous variation in compulsory licensing. We address this empirical challenge by exploiting an event of compulsory licensing as a result of World War I when the US Trading with the Enemy Act made all German-owned patents available for licensing to US firms. Firm-level data on German patents indicate that compulsory licensing was associated with a 30 percent increase in invention by German firms whose inventions were licensed.
Keywords: Innovation, patents, compulsory licensing, TRIPS, intellectual property, economic history
JEL Classification: O3, O34, O38, N3
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