"Where money issues meet IP rights". This weblog looks at financial issues for intellectual property rights: securitisation and collateral, IP valuation for acquisition and balance sheet purposes, tax and R&D breaks, film and product finance, calculating quantum of damages--anything that happens where IP meets money.
US Department of Treasury and US Department of Justice charge Iranians and Iranian research institute with theft of intellectual property from universities throughout the world. The press release from the US Department of Treasury names the Iranians. Specifically, the press release states:
Today’s action designates one Iranian entity and 10 Iranian nationals pursuant to E.O. 13694, as amended, which targets malicious cyber activities, including those related to the significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for private financial gain.
The Mabna Institute is an Iran-based company that engaged in the theft of personal identifiers and economic resources for private financial gain. The organization was founded in or about 2013 to assist Iranian universities and scientific and research organizations in obtaining access to non-Iranian scientific resources. The Mabna Institute also contracted with Iranian governmental and private entities to conduct hacking activities on its behalf.
The Mabna Institute conducted massive, coordinated cyber intrusions into computer systems belonging to at least approximately 144 United States-based universities, in addition to at least 176 universities located in 21 foreign countries: Australia, Canada, China, Denmark, Finland, Germany, Ireland, Israel, Italy, Japan, Malaysia, the Netherlands, Norway, Poland, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. The exfiltrated data and stolen login credentials acquired through these malicious cyber-enabled activities were used for the benefit of Iran’s Islamic Revolutionary Guard Corps (IRGC), and were also sold within Iran through at least two websites. The stolen login credentials belonging to university professors were used to directly access online university library systems.
Today, OFAC is also designating nine Iran-based individuals who were leaders, contractors, associates, hackers for hire, and affiliates of the Mabna Institute for engaging in malicious cyber-enabled activities related to the significant misappropriation of economic resources or personal identifiers for private financial gain.
According to a Reuters article, this type of action was relatively rare under the Obama Administration.
At last, American authorities are also beginning to do the right thing for owners of standard-essential patents. Under the previous administration of President Barack Obama, America’s agencies did the wrong thing by seriously undermining standard-essential patents in various ways. For example, this existentially threatened the independence of Qualcomm, which relies substantially on its patent-licensing business to fund long-term R&D including that in upcoming 5G mobile communications. Thankfully, President Donald Trump’s administration has recognised the important need to support, not undermine, the nation’s technology innovators, and uphold their patent rights, as enshrined in the US Constitution.
President Trump’s blocking of Broadcom’s attempted hostile acquisition of Qualcomm brought allegations of protectionism and some discontent among shareholders; but no such intervention would ever have been called for if Qualcomm’s licensing business model had not been so wantonly attacked at home and abroad by antitrust actions including large fines and by royalty payments being withheld by Apple. This all took significant toll on the firm’s stock price. US agencies and major companies from various nations were widely complicit in the onslaught. In the absence of all that skulduggery, Qualcomm’s stock price would never have been within Broadcom’s acquisition reach.
The presidential intervention prompted the writing of several business newspaper leaders on matters of industrial policy, national security and merger control in the IP-rich technology sector, including 5G communications. While the order was made ostensibly for reasons of national security, protectionism is pejoratively alleged. Either way, the legitimate concern was that the prospective change of ownership and control would curtail Qualcomm’s long-term R&D investments – from high levels of 20-25 percent of sales over many years – jeopardizing its technology leadership and strong position versus China including its national champion Huawei.
Even before President Trump's order, the US Treasury's Committee on Foreign Investment in the United States (CFIUS) had already expressed concerns about the transactionin a letter addressed to Broadcom and Qualcomm lawyers.
The Financial Times recognizes ‘Qualcomm is no ordinary company. In an era when mobile technology is ingrained in every kind of economic activity, it develops key intellectual property underlying wireless communication. All mobile networks are built on standards developed with Qualcomm’s leadership. In a sense, Qualcomm’s technology touches all the data on all mobile devices, everywhere. Most people may not know it, but the company is as ubiquitous as the air.’
However, Chinese competitors benefit from strong industrial policies, private or state ownership and government subsidies which enable them to be more patient and less risk averse about obtaining returns on R&D investments. As noted in IP Finance, with recent figures from the EPO, Huawei (China) is now the top patent applicant in Europe. Also with focus on mobile communications technologies, Qualcomm and Ericsson are in fifth and tenth positions respectively. Patent counts are only part of the story where patent quality is most important, but these numbers at least provide an indication of the desire and intent of the Chinese to surpass their western competitors in IP ownership.
The Economist identifies the ascendancy of China. ‘“DESIGNED by Apple in California. Assembled in China”.For the past decade the words embossed on the back of iPhones have served as shorthand for the technological bargain between the world’s two biggest economies: America supplies the brains and China the brawn.
Not any more. China’s world-class tech giants, Alibaba and Tencent, have market values of around $500bn, rivalling Facebook’s. China has the largest online-payments market. Its equipment is being exported across the world. It has the fastest supercomputer. It is building the world’s most lavish quantum-computing research centre. Its forthcoming satellite-navigation system will compete with America’s GPS by 2020.’
If a trade war is emerging in the technology sector, under the pretext of protecting national security it not the US that fired the first salvo.
Due to Chinese national security including the Great Firewall of China with censorship restrictions, the Internet’s over-the-top services markets have been balkanised in China. Chinese leaders Alibaba (e-commerce), Tencent (social networking), Baidu (79% of Chinese search) and others have preempted or displaced the global leaders such as Facebook and Google.
Competition for Qualcomm—in mobile communications chips and technology licensing— is in the most open of global of marketplaces where technology development and standardization is mainly undertaken by a few and then offered freely, but not gratis, for implementation and use by all comers. China has explicit industrial strategy for innovation and manufacture in this and other industrial sectors: it uses various measures including antitrust enforcement in support of that and to the advantage of Chinese companies. For example, it allegedly forces foreign companies to surrender their IP to obtain Chinese market access. According the Wall Street Journal, a White House official said that the harm to the US from this is $48 billion. In order to settle an antitrust dispute with the NDRC, Qualcomm paid a $975 million fine and reduced its patent-licensing charges in China.
The Trump administration is now threatening tariffs on $60 billion of imports and tighter restrictions on acquisitions and technology transfers. One objective is to stem the purported intellectual property theft.
The US and other western nations have lacked coherent industrial policy for the technology sector, while antitrust policy and enforcement has also been inconsistent and has undermined IP. It was high time to start doing something that would underpin America’s technology and IP leadership, rather that erode it as had occurred for SEPs under the previous administration with President Obama.
How to make America great again in SEPs
The need is to uphold patent rights everywhere rather than for national trade protectionism which will provoke harmful tit-for-tat retaliation.
As I have shown elsewhere, US tech titans including Alphabet, Apple, Facebook and Netflix have done very well for themselves, including strong revenue growth over the last few years, based on low-cost communications platforms providing exponential growth in data consumption. However, revenues for network operators, network equipment providers and patent licensors have been flat.
Notwithstanding the above, under the previous presidential administration, and against the interests of patent-rights holders:
The FTC issued a complaint against Qualcomm’s chip sales and licensing practices in the final hours of the Obama administration despite significant dissent.
The Department of Justice blessed, with a business review letter, patent-policy changes at IEEEin 2015 that put concerted pressure on all SEP holders to change the way patents are licensed and that make injunctions more difficult to obtain.
Patent licensing charges are allegedly harmful because these supposedly must be passed on to end consumers in higher device prices. However, the only American handset OEM is Apple. It prices its products at high levels the market will bear, resulting in stellar profit margins, rather than pricing based on its costs. While Apple stopped royalty payments to Qualcomm in the first quarter of 2017, according to Strategy Analytics, average iPhone prices rose 6.3 percent from $645 in 2016 to $686 in 2017.
IAM blogger, Richard Lloyd wrote: ‘If Trump really wants to protect Qualcomm’s long-term prospects perhaps he should get on the phone to Apple.’ The President should also ensure the FTC’s action against Qualcomm is withdrawn. That might similarly discourage other agencies around the world from diminishing the rights of SEP owners wherever they reside.
First, China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities. China also uses administrative review and licensing procedures to require or pressure technology transfer, which, inter alia, undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms.
Second, China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms. These restrictions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer. As a result, U.S. companies seeking to license technologies must do so on terms that unfairly favor Chinese recipients.
Third, China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.
Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies. These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.
It is hereby directed as follows:
Section 1. Tariffs. (a) The Trade Representative should take all appropriate action under section 301 of the Act (19 U.S.C. 2411) to address the acts, policies, and practices of China that are unreasonable or discriminatory and that burden or restrict U.S. commerce. The Trade Representative shall consider whether such action should include increased tariffs on goods from China.
(b) To advance the purposes of subsection (a) of this section, the Trade Representative shall publish a proposed list of products and any intended tariff increases within 15 days of the date of this memorandum. After a period of notice and comment in accordance with section 304(b) of the Act (19 U.S.C. 2414(b)), and after consultation with appropriate agencies and committees, the Trade Representative shall, as appropriate and consistent with law, publish a final list of products and tariff increases, if any, and implement any such tariffs.
Sec. 2. WTO Dispute Settlement. (a) The Trade Representative shall, as appropriate and consistent with law, pursue dispute settlement in the World Trade Organization (WTO) to address China’s discriminatory licensing practices. Where appropriate and consistent with law, the Trade Representative should pursue this action in cooperation with other WTO members to address China’s unfair trade practices.
(b) Within 60 days of the date of this memorandum, the Trade Representative shall report to me his progress under subsection (a) of this section.
Sec. 3. Investment Restrictions. (a) The Secretary of the Treasury (Secretary), in consultation with other senior executive branch officials the Secretary deems appropriate, shall propose executive branch action, as appropriate and consistent with law, and using any available statutory authority, to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.
(b) Within 60 days of the date of this memorandum, the Secretary shall report to me his progress under subsection (a) of this section.
News agencies are reporting that tariffs will be assessed on around $50 billion of Chinese imports, here and here. CNN reports that the U.S. companies that stand to lose in a U.S./China trade war include Intel, 3M, Boeing, Apple and others. However, there is the question of how much those companies are losing because of intellectual property theft that may be supporting competitors based on stolen intellectual property in markets outside of China.
According to Fox News, the Trump Administration will soon take and propose action against intellectual property theft by China. Notably, the Fox News article focuses on the entertainment industry and movies. White House Director of Trade and Manufacturing, Peter Navarro, is quoted as stating: “We are going to move forward with some recommendations for the president. And I tell you what, there’s nobody who is going to oppose that in this country.”
In the article, Horizon Investments Chief Global Strategist Greg Valliere states “he expects the Trump administration to “hit them hard” with anti-China tariffs on imports that include Chinese investments and visas for students who want to study in the U.S.” The article notes that the EU is “on board.”
The EPO has released its annual report for 2017 patenting activity. Notably, patenting and patent filings are trending up at 3.9% and 4.4% respectively. In the electrical engineering field, patenting is up in the audio visual space by 10.6% and semiconductors by 13.5%. In instruments, patenting is up in optics by 15.6% and analysis of biological materials by 12.5%. In chemistry, biotechnology is up 14.5%, but micro-structural and nanotechnology is down by 12.6%. Interestingly, US nationals as first inventor lead patent applications in the EPO with a 26% share. The EU member state inventors as a whole have more nationals as first inventor (47% total). However, Germany, the leader in the EU, has a 15% share. Japan has 13%, and China has 5%. The top three technical fields in patent applications are 1) medical technology; 2) digital communication; and 3) computer technology. The top ten applicant companies are: 1) Huawei (China); 2) Siemens (EU); 3) LG (Korea); 4) Samsung (Korea); 5) Qualcomm (US); 6) Royal Phillips (EU); 7) United Technologies (US); 8) Intel (US); 9) Robert Bosch (EU); and 10) Ericsson (EU). Sixty-nine percent of the total applicants are large entities. Twenty-four percent are SMEs/individual inventors. Seven percent were universities/public research. Interestingly, SMEs/individual inventors share is down from 28% in 2016. Universities/public research is up 1 percentage point from 2016.
Our friends at Oxfirst are hosting another interesting webinar on March 14, 2018 at 15.00 BST and 16.00 CET. The webinar is titled, “Are Important Innovations Rewarded? Evidence from Pharmaceutical Markets.” The presenter is Professor Margaret Kyle.
Here is a description of the presentation:
This research focuses on the relationship between therapeutic value and different measures of market rewards (the number of patents, price, market share, and total revenues) of a new treatment. Using an assessment of therapeutic value provided by the French Haute Authorité de Santé (HAS), I find a weak relationship between most measures of rewards and this assessment of therapeutic value, suggesting that the returns to developing a “me-too” product are not very different from developing treatments with greater therapeutic effects. One interpretation is that the HAS score is a poor assessment of therapeutic value, in which case the use of similar health technology assessments by governments and other payers should be re-examined. Alternatively, if the HAS score is informative, the results suggest countries are spending too much on less innovative products, and that a re-balancing of innovation incentives may be worth considering if therapeutic value is highly related to social welfare.
Here is Professor Kyle’s biography:
Prof. Margaret Kyle (MINES ParisTech and CEPR) currently holds the Chair in Intellectual Property and Markets for Technology at MINES ParisTech. Her research concerns innovation, productivity and competition. She has a number of papers examining R&D productivity in the pharmaceutical industry, specifically the role of geographic and academic spillovers; the firm-specific and policy determinants of the diffusion of new products; generic competition; and the use of markets for technology. Recent work examines the effect of trade and IP policies on the level, location and direction of R&D investment and competition. She also works on issues of innovation and access to therapies in developing countries. Her papers have been published in various journals of economics, strategy, and health policy, including the RAND Journal of Economics, Journal of Public Economics,Review of Economics and Statistics, Journal of Public Economics,Journal of Law and Economics, Antitrust Law Journal, Management Science, and Health Affairs.
Margaret holds a PhD in economics from the Massachusetts Institute of Technology and is an associate editor of the International Journal of Industrial Organization. She previously held positions at Carnegie Mellon University, Duke University, London Business School, and the Toulouse School of Economics, and is a visiting professor at the Kellogg School of Management, Northwestern University. She has also been a visiting scholar at the Center for the Study of Innovation and Productivity at the Federal Reserve Bank of San Francisco and at the University of Hong Kong.
Registration is available, here. Space is limited and you must register with a professional email address.
Makan Delrahim, the leader of the Antitrust Division of the U.S. Department of Justice of the Trump Administration, has made several interesting comments concerning patents and the antitrust interface. In a recent post on the Patently Obvious Blog, Professor Dennis Crouch discusses some debate concerning Mr. Delrahim’s positions as to when patent holders may create antitrust issues: “[Delrahim] explained that the DOJ’s historic approach has been a “one-sided focus on the hold-up issue” in ways that create a “serious threat to the innovative process.”” Professor Crouch includes links to documents concerning Delrahim’s positions as well as some responses.
In the intellectual property area, we each have licensing guidelines; DG Competition’s guidelines were revised in 2014; ours just last year. Both sets of guidelines highlight the benefits of robust IP protection, the importance of innovation incentives, and the risk that certain hardcore conduct poses to competition.
Intellectual property rights and innovation are topics I have cared about for a long time. Intellectual property rights are enshrined in the U.S. Constitution, and I believe that strong protection of these rights drives innovation incentives, which in turn drive a successful economy.
A deep-seated concern for protecting incentives to innovate underlies many of the changes in U.S. antitrust law over the past several decades, and it is no coincidence that we have enjoyed a period of staggering innovation over that time. But in an ever-evolving marketplace, success is not a static outcome. We must continue to think critically about how best to calibrate our enforcement decisions to promote competition and innovation.
As you may know from what I have said publicly, a particular concern of mine is how we use antitrust enforcement in the context of standard setting. In particular, I worry that we have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies. We continue to better our understanding of this important field.
The dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining. And that bargaining process works best when standard setting bodies respect the intellectual property rights of technology innovators, including the very important right to exclude. To the extent a patent holder violates its commitments to a standard setting organization, remedies under contract law, rather than antitrust remedies, are more appropriate to address licensees’ concerns.
I am aware that there may be some distance between my position and that of some of my European counterparts. If that is the case, however, we can look to our long history of effective and productive collaboration for guidance about how to proceed. I will make every effort to work with our counterparts at DG Competition to narrow any gap between Brussels and Washington in this area. We must maintain our close dialogue on the cutting-edge issues—innovation, intellectual property rights, and digital markets—that will occupy much of our time in the future. Innovators and consumers in both of our unions deserve nothing less.
Mr. Delrahim also discussed the purpose of antitrust or competition law, and digital markets:
We also continue to work to narrow the differences between us on policy and substance. Mr. Kolasky’s speech identified a “sharp divergence” between the EU approach and “the central tenet of US antitrust policy – that the antitrust laws protect competition, not competitors.” But since those remarks, European Commissioners have again and again affirmed their commitment to the consumer welfare standard. Starting with then-Commissioner Mario Monti and continuing with Commissioners Neelie Kroes, Joaquin Almunia, and on to Commissioner Margrethe Vestager today, Commissioners have expressed their commitment to the same consumer welfare standard that guides U.S. competition enforcement. As Commissioner Vestager has stated, “we don’t always do things the same way. But I think our goals are very similar: We want to protect competition and consumers.”
This is not to say that we have overcome all of the differences between us. We still do have differences, but we talk about them regularly and respectfully, so that we can understand what motivates them.
For example, we have not yet closed the gap in the area of unilateral conduct. European competition law still imposes a “special duty” on dominant market players, while we in the U.S. do not believe any such duty exists.
With respect to unilateral conduct, we have particular concerns in digital markets. We continue to advocate for an evidence-based approach based on existing theories, which are sufficiently flexible to apply to new forms of doing business in the digital economy. Where there is no demonstrable harm to competition and consumers, we are reluctant to impose special duties on digital platforms, out of our concern that special duties might stifle the very innovation that has created dynamic competition for the benefit of consumers.
But the benefit of our close relationship with DG Competition is that we can and do talk about these differences, making progress along the way. For example, in the ICN’s Unilateral Conduct Working Group, we spent significant time working together to develop an Analytical Framework for Unilateral Conduct. Even though we have different views on how dominant players should be treated, we nevertheless reached agreement on a fairly significant policy document.
The White House Council of Economic Advisers recently released a report titled, “Reforming Biopharmaceutical Pricing at Home and Abroad.” [Report] The Report points to basically two problems: 1) overpricing in the United States; and 2) underpaying outside the United States. The Report states:
U.S. patients and taxpayers alike have mainly financed the returns on R&D investments to innovators. Unlike other developed countries with single payer systems, which nearly all impose some sort of price controls on pharmaceuticals, the U.S. drug market is less financed by the public sector and more open to private market forces. In a free market, prices of products reflect their value as opposed to prices in government-controlled markets, which reflect political tradeoffs. CEA estimates that because of the American market system, more than 70 percent of OECD patented pharmaceutical profits come from sales to U.S. patients even though the United States only represents 34 percent of OECD GDP at Purchasing Power Parity (OECD 2016). Thus, innovators across the world rely heavily on Americans paying market prices to underwrite the returns on investments into products that improve their health because governments abroad use their monopsony power to set prices below market-levels. The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area. In addition, prices paid by Americans for many drugs are too high, particularly so when paid for in government programs. This is the result of poorly designed reimbursement policies and regulations that inhibit price competition, and it is therefore a poor use of taxpayer money.
The Report further notes that, “The U.S. market makes up 46 percent of OECD sales of brand name innovative drugs, funds about 44 percent of world medical R&D, invests 75 percent of global medical venture capital, and holds the intellectual property rights for most new medicines (BMI 2017; Moses et al. 2015; TEC 2017). Furthermore, publicly funded medical research in the United States has produced two-thirds of the top-cited medical articles in 2009, underlying the university research that often leads to medical breakthroughs (Moses et al. 2015).”
The Report points to issues regarding Medicaid, including opportunity for pharmaceutical companies to game and artificially raise prices. The Report further provides suggestions concerning Medicare as well as the Pharmacy Benefit Manager Market. Notably, the Report fails to address biosimilars in very much detail, but notes that there may be two more years before final regulations concerning interchangeability are issued. This delay is raised as a potential reason why interchangeability approval may be slow.
This Report could drive the Trump Administration's approach to dealing with the high cost of health care.
In a pair of interesting software-related cases, the U.S. Court of Appeals for the Federal Circuit appears to push back on one of the supposed goals of the U.S. Supreme Court’s Alice v. CLS Bank International decision. In Alice, the U.S. Supreme Court clarified and restated the Mayo Collaborative Services v. Prometheus decision’s test concerning patent eligible subject matter. In doing so, the Supreme Court started a new era of U.S. patent law which made patent eligible subject matter a very important inquiry with respect to the patentability of inventions, particulary those in the software space—although Alice’s impact is felt in other technological areas. Since Alice issued, the U.S. Court of Appeals for the Federal Circuit has clarified the Alice test and notably provided guidance to patent lawyers on how to “avoid” or “comply” with Alice.
Importantly, one of the purported benefits of Alice was to allow for the early dismissal of claims based on patent eligible subject matter. An alleged infringer could conceivably quickly raise patent eligible subject matter and get a claim dismissed on either a 12(b)(6) motion for failure to state a claim or a motion for summary judgment. In additional push-back to Alice, the Federal Circuit in Berkheimer v. HP (February 8, 2018) has recently held that even after claim construction a motion for summary judgment on patent eligible subject matter may be improper because of genuine issues of material fact. While this is standard law concerning motions for summary judgment, the case provides a blueprint for how genuine issues of material fact can be created with patent eligible subject matter. Because of this possibility of creating that genuine issue of material fact, patentees will have additional settlement leverage to realistically threaten a case through trial—a costly endeavor. What will the effect of this case be on Alice’s attempt to curb so-called patent troll litigation?
In another recent case, the Federal Circuit in Aatrix Software v. Green Shades Software (February 14, 2018) remanded a case because the district court did not allow the patentee to amend its complaint to survive a 12(b)(6) motion on claim construction. While the Federal Circuit was careful to note that a complaint can be dismissed on a 12(b)(6) motion to dismiss, this case cautions district court judges to carefully consider motions to amend complaints.
It will be interesting to see if the Federal Circuit’s decisions about the procedural challenge of patents based on patent eligible subject matter in the courts will have an impact on the analysis in the pending Oil States case before the U.S. Supreme Court.
In a fascinating article titled, Who Becomes an Inventor in America? The Importance of Exposure toInnovation, economists Alexander M. Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen, argue that exposing children to innovation may be more likely to lead to innovation than financial incentives such as reducing tax rates. The authors provocatively ask whether we are “losing Einsteins.”
Dywer Gunn’s explanation of the article appears in The NBER’s Digest and states:
Children who grow up in particularly innovative geographic areas, or who are exposed to inventors via family connections, are more likely to become inventors.
American inventors are disproportionately likely to be white men who grew up in financially successful families. In Who Becomes an Inventor in America? The Importance of Exposure to Innovation (NBER Working Paper No. 24062), Alexander M. Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen find that children from families in the top 1 percent of the income distribution are 10 times more likely to become inventors than those from families in the bottom 50 percent, and that over 80 percent of 40-year-old inventors are male.
The study examines three possible explanations for the demographic disparities: differences in genetic ability, differences in career preferences, and differences in the financial or human capital constraints faced by different demographic groups.
The researchers find that neither innate ability nor financial constraints fully explains the disparities. Using data from the New York City public schools, they find that while third grade math test scores are predictive of the probability of securing a patent as a young adult, test score differences explain "less than one-third of the gap in innovation between children from high- vs. low-income families." Among students who score well on third grade math tests, students from low-income families are significantly less likely to become inventors than their wealthier peers. While the explanatory power of test scores grows over time, the researchers estimate that only 5.7 percent of the demographic gap in who becomes an inventor can be explained by differences in ability at birth. And they find financial constraints faced during childhood likewise do not explain the gap, as students from low- and high-income families who attend colleges with large numbers of inventors become inventors at similar rates.
Instead, the researchers point to a powerful causal exposure effect. Using nationwide data on where an individual grew up and patent awards in early adulthood, they find that children who grow up in particularly innovative geographic areas, or who are exposed to inventors via family connections, are more likely to become inventors. This finding applies even among technology categories. Among people living in Boston, those who grew up in Silicon Valley are especially likely to patent in computers, while those who grew up in Minneapolis — which has many medical device manufacturers — are especially likely to patent in medical devices. Moreover, children whose parents hold patents in a particular subclass, such as amplifiers, are more likely to obtain a patent in that same subclass than in another. There is also a strong gender-specific exposure effect: women are more likely to patent in a technology class if they were exposed as children to female inventors who held patents in that same type of technology.
The researchers estimate that if young girls were exposed to female inventors at the same rate as young boys are currently exposed to male inventors, the gender gap in invention rates would be halved. More broadly, if women, minorities, and children from low-income families were to invent at the same rate as white men from high-income (top 20 percent) families, the rate of innovation in America would quadruple.
I wonder if other countries have started offering innovation classes to children at a young age. In the United States, there has been quite a bit of innovation in the primary and secondary school systems for several reasons, including the growing popularity of home schooling and charter schools as alternatives to the public school system. I do know that there are field specific charter schools in California. For example, there is one in Sacramento that is focused on the arts, relatively broadly defined. There is also one focused on law. And, even our public school system in Sacramento has a School of Engineering and Sciences. [Hat Tip to Professor Paul Caron's TaxProf Blog.]
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