Can Piracy Increase Innovation? The Software Industry’s Response to Online File Sharing

Abstract

We analyze the impact of digital piracy on innovation in the software industry by focusing on a natural experiment stemming from the development and release of advanced file-sharing tools in the early 2000's. Using difference-in-differences estimators comparing consumer-focused and enterprise-focused software firms, we find that the introduction of disruptive file-sharing technology led to an increase in subsequent R&D spending, copyrights, trademarks, and patents for large, incumbent software firms. We also evaluate the rate of new product introductions using survival analysis methods and find that software firms decreased their rate of new product releases following the rise in digital piracy. Our findings suggest that weakened intellectual property protection resulting from piracy can sometimes increase the rate of corporate innovation: firms seek to introduce new products that are superior to those available through piracy, but this innovation may reach the public at a slower pace.

Keywords: illegal markets, piracy, innovation, product release, R&D

JEL Classification: O32, O33, O34, D23