Organizational size and invention: an examination of U.S. patentees.

EXECUTIVE SUMMARY

This article explores the question of whether size is a help or hindrance to successful invention. Though a much-studied question in early work on innovation, the topic has lost attention as the financial and organizational realities of bringing products to market have dominated recent scholarship. This study provides information on the current mix of inventors in the United States, specifically in terms of organizational size. Though not focused on innovation, per se, the results do provide interesting insights on who inventors are and, perhaps, for whom the patent system should be administered.

INTRODUCTION

One of the longstanding questions in the study of innovation concerns the size of participants. Are innovators large or small? Is innovation success more likely in a large or small organization? Answering the question is difficult because measuring innovation has always been problematic. Invention is sometimes used as a proxy, but invention is not identical to innovation. The key step of commercialization, in particular, is not necessarily associated with invention. But invention is reflected in data such as patent counts, which are readily available for study. While patents are not a perfect substitute even for invention since many inventions are not patented and the value of patents vary substantially (many are worth very little) (Kuznets, Sanders in Nelson, 1962), still, patent counts have some value as an indicator for invention and, by extension, for innovation and are worthy of study as long as we keep in mind the limitations (Griliches, 1990; Basberg, 1987; Soete, 1987).

As one aspect of this approach, size of patentees has been an issue of some interest. At one time, up to 80 percent of U.S. patents were filed by individuals, and a number of studies of "heroic" individual inventors became part of the U.S. economic folklore (Jewkes, Sawers & Stillerman, 1958). By the early 1980's, however, the individual inventor was losing ground to organizations in the patenting figures, falling as low as 23 percent of total domestic U.S. patents in 1983 (National Science Board, 1993). After an uptick in the 1990s, the percentage appears to again be declining (National Science Board, 2000).

Does the individual inventor or the small entity matter anymore? To judge by interest in the innovation literature, large entities are presumed to have substantial advantages in an increasingly complex technological world. Moreover, given the contemporary emphasis on rapid commercialization, even successful small inventors are judged to have slim prospects regarding commercialization of the innovation: that further step of successfully launching and defending new products.

This presumption toward ever-larger innovative entities is mirrored in public policy debates on issues such as the nature of the patent system. In designing such systems, meant to stimulate invention and disseminate inventive ideas by protecting patentees from competitive copies, it is extremely important to ask for whom is the system designed? With the decline of individual inventors, the debate has acquired an implicit assumption that the vast majority of domestic participants are large, for-profit, multinational firms. Given their lobbying power, most proposed changes in patent law in the last decade have favored this presumed majority. Indeed, Bruce Lehman, then commissioner of the United States Patent & Trademark Office (USPTO) and pushing some of these changes to the patent system, referred to independent inventors as "'weekend hobbyists' and on 'the lunatic fringe'" and "called his critics amorphous phantoms with no large identifiable constituency. In contrast, he said his allies are 'a virtual who's who of technology in this country.'" (Ho, 1998). The National Science Foundation (1998: 7-20) notes that "[i]n 1998, 79 percent of U.S. owned patents were owned by corporations ... This percentage has increased gradually over the years."

Changes to the patent law to reflect new realities will be made in ignorance, however, if we do not have full information on what the new realities really are. There are indications that many of the thriving small high-technology firms that drive the U.S. economy are interested in gaining patents to protect their intellectual properly assets (Ho, 1998). The United States Patent & Trademark Office (USPTO) breaks out its information by foreign vs. domestic patents and individual vs. organizational ("assigned") patents, but does not report the finer distinctions that would establish how much large or small firms participate in the patenting process. This article attaches some empirical data to the argument by examining the makeup of the organizational patentees, showing the distribution of patentees by size. It turns out not to be true that most domestic patentees are large, multinational U.S. firms. In designing and administering legal systems to serve business, it is important to assess who the businesses are. These results on the character of the patentee pool perform that assessment and suggest important implications as to what entities the patent system should be structured to serve.

BACKGROUND

As early as Schumpeter (1942), scholars questioned whether the size of the innovator mattered in developing and introducing successful new products. Schumpeter's creative destruction presumed that innovative new firms constantly come along to challenge and eliminate tired, old firms. Since that time, however, the discussion has gained more depth and suggested that both large and small entities have advantages in the innovation process. On the one hand, certain economies of scale in research and development, manufacturing, and marketing of new product ideas (i.e. taking an idea from concept to commercialization) are obvious and favor larger entities. On the other hand, the bureaucracy found in such entities can be inimitable to creativity, discouraging "out-of-the-box" new ideas in the first place.

From a theoretical perspective, the analysis never did come to a consensus on the relationship between firm size and inventive output (see literature reviews by Kamien & Schwartz (1975) and Dosi (1988)). Although a number of pieces of the analysis were well-accepted (e.g. a time-cost tradeoff in development that favored larger entities if speed-to-market was important (Scherer, 1965)), almost all were conditioned on the nature of the industry in which the innovation was taking place. Thus, the conclusions were often not universal, but applied only to a given set of circumstances.

As indicated by the publication dates on the seminal sources, however, interest began to wane in the past two decades as observers noted that more and more important innovations were coming out of corporate laboratories such as Xerox's PARC facility and Bell laboratories. As technology got ever more complex and fast-moving, and mass commercialization ever more difficult, there was a clear change in the terms of the debate. Individual inventors were rarely studied or discussed (though there were some exceptions, Acs & Audretsch (1988), Amesse, et al. (1991), Sirilli (1987), Tether & Thwaites (1997)). Small and medium-sized entities didn't receive much attention either, especially in the U.S. Scholarly work moved on to managing the process within larger innovators (Griffin, 1997; Montoya-Weiss & Calantone, 1994; Urban & Hauser, 1993; Cooper, 1990; Roberts, 1988; Cooper & Kleinschmidt, 1986; Van de Ven, 1986). The point was essentially to increase the efficiency of new product development, as well as the success rate, in large firms with multiple innovation initiatives.

Attention was also focused more on how to instill entrepreneurial creativity in bureaucratic organizations, opening up the field to organizational behavior considerations (Woodman, Sawyer & Griffin, 1993; Amabile, 1988; Kanter, 1988). Presumably, if large entities could copy the creativity and entrepreneurship of individual inventors, they would have the advantages of both size and imaginative thinking. Consequently, with the decline in the numbers of individual inventors in the United States and elsewhere (National Science Board, 2000) and the increase in interest in better managing the innovation process, the small entity inventor came to be a footnote in most of the scholarly literature.

One important exception to this general trend was found in the more macro level work of Nelson (1993) and others concerning National Innovation Systems (NIS). These types of studies took a national, macroenvironmental perspective, looking at innovation inputs and outputs of nations rather than individual firms. Differences such as amount and quality of innovation output and the size of innovators were often cited in such work. And because of differences seen in output amongst the nations, the environment within which innovation takes place was examined in more detail: both structural factors such as patent systems, government support of R&D, government procurement, antitrust law, etc. and nonstructural factors such as economic culture. The implications were important from two points of view. From the public policy perspective, NIS studies asked whether the innovation environment be constructed so as to encourage more output or a different kind of output (e.g. pioneering innovation) by a nation's innovation community. Secondly, for individual firms, the key question became how could innovation be pursued most effectively in a given innovation environment? Further, what pieces of that environment really mattered, so that interested participants could essentially gain the biggest lobbying bang for the buck when seeking changes in that environment? Was more R&D support from government particularly important or a patent system that fiercely protected inventions? Was antitrust attitude a critical variable or was it more important to have an economic culture receptive to entrepreneurs?

One interesting piece of this work was the pronounced difference between major trading nations that one would expect to be fairly similar. The United States and Japan, in particular, have been the subject of a number of analyses that paint them as opposite points of an NIS spectrum of industrialized nations with similar inputs but decidedly different outputs, at least in terms of types of innovations (Mowery & Teece, 1993; Mowery, 1992; Nelson, 1990a; 1990b; Rosenberg & Steinmueller, 1988). Generally, Japan's system is seen as more cooperative, with less risk-taking and more incremental innovations. The U.S. system is portrayed as being more entrepreneurial, with greater risk-taking and more pioneering innovations. Exceptions exist in both countries, of course, but the data are fairly convincing. Additionally, even though the percentage of individual inventors in the U.S. declined through 1983, that percentage remains substantially above the number of other nations, especially Japan (Erickson, 1996; National Science Board, 1993). Part of that may simply be cultural, as an aspect of national character, but part may also be due to structural influences, such as a patent system, which have evolved to fit these individual national characteristics.

Consequently, substantial study has also focused on the individual national institutions. The patent system has received particular interest (Kotabe, 1992; Helfgott, 1990). Initially, the patent system has a substantial theoretical background as to what it is designed to do and what variations (breadth of protection, length of protection, etc.) might best generate the desired results (Ordover, 1991; Scotchmer & Green, 1990; Plant, 1934). Secondly, its statutes are well-defined and differences in both law and administration are fairly clear.

How important is a patent system to innovation in a particular country? Opinion is mixed. One landmark work, the "Yale study" established that respondents from a large number of corporations in a variety of industries thought patents relatively unimportant compared to protection choices such as trade secrecy and moving quickly down the learning curve (Levin, et al., 1988). Alternatively, more macro evidence on behavior in patent systems suggests that participants do respond when changes occur. The United States, for example, saw a major strengthening of the enforcement of its patent system in the early eighties (Kastriner, 1991; Shapiro, 1990) with the establishment of a specialized appeals court to hear scientifically complex patent cases. The change corresponds almost exactly to the reversal of a long trend of declining patent applications overall and declining participation by independent inventors, suggesting that the stronger protection provided by the court had a significant impact. A similar relationship was seen between an extension of the Italian patent system to cover pharmaceuticals and a dramatic change in investment flows into the industry (vs. unchanged industries such as chemicals) (Stamm, 1991).

All in all, the data are inconclusive enough to suggest that further study of the relationship between inventors and patent systems is warranted. Does a patent system, all by itself, change inventive behavior? Probably not, but as a consistent, supporting piece of an overall NIS, it seems as though it could play an important part. Are patents needed and/or preferred by all inventors? Definitely not, but some industries (e.g. pharmaceuticals, biotechnology) certainly see extensive use and some categories of inventors (smaller entities) may have a preference for them as well. One weakness of the Yale Study was that its sample contained only firms with 500 employees or more. Individuals or small firms, without the capacity to keep a trade secret (from large suppliers or large distributors) or move quickly down the learning curve, may find that a defensible patent is the key to keeping proprietary rights to a technology and gaining funding to commercialize it.

With this idea in mind, the following study was conducted. It has a very simple concept, though the implications are important from a public policy perspective. The objective was to determine the breakdown of U.S. domestic patentees by size. As noted earlier, changes may be afoot in the patent statutes (through TRIPS and the WTO), and issues such as who uses the system, followed by further study concerning their reaction to changes, should be important components of the debate. This study directly addresses the question of who current users really are.

METHODOLOGY

A sample of 1997 patent recipients was drawn by cataloguing all domestic patentees listed in the May 27, 1997 Official Gazette of the US. Patent & Trademark Office. The Gazette is published weekly, denoting all inventions granted a patent by the USPTO in that week. The inventor, the organization to which the patent is assigned (if applicable), and a short description of the invention are all provided in the publication. The total from this volume of the Gazette was 1309 domestic recipients, roughly 2 percent of the 50,000+ domestic patent recipients in 1997. The timing of patent grants (and, thus, their publication in the Gazette) is not systematized in any way, so the procedure essentially provided a random sample of domestic patentees. When a patent was assigned to a U.S. subsidiary of a foreign corporation, the assignee was treated as a domestic firm (though the foreign parent was considered when size of the organization was determined).

When a patent is granted, an individual or group of individuals receives the patent. With individual inventors, this is the end of things. When inventors are employed by an organization, however, the patent will be assigned to the employer by the individual(s). Thus, the lack of an assignee in the patent grant listing makes it very easy to identify individual inventors vs. those in larger entities, probably one reason why this figure is tracked by USPTO. This sample included 248 individual inventors with unassigned patents.

The remaining patents were catalogued by assignee. To measure size, common financial standards such as market capitalization and sales were considered, but dismissed as being flawed for this particular study for a couple of reasons. Initially, in high technology areas, relatively small companies by other measures may have massive market capitalizations because of technological promise, particularly during the tech boom that was starting in the mid-1990's. Alternatively, companies with good prospects and with a sizable number of employees may have very low sales and profits at early stages of their development. Further, on a more practical basis, categorizing the assignees by any means other than number of employees would make comparisons with independent inventors (by definition, employment = 1) and non-profit inventors (government, universities, non-profit organizations) very difficult. As the final results show, these groups form a significant piece of the inventor universe (25 percent), so exclusion should be avoided, if possible.

As a result, assignees were classified by size, with size defined by employment levels. The 1996/1997 employment level of each was identified and cross-checked from a variety of possible sources, including traditional references such as Standard & Poor's Register (Standard & Poor's Corporation, 1997) and Ward's Directory (Gale Research, Inc., 1997), as well as electronic databases such as OCLC and SearchBank. Assignees of 129 patents (123 different organizations) could not be identified (or were identified but did not have employment numbers available) by any of the means.

DATA AND DISCUSSION

The data are presented in Table 1, with the 129 unidentified patents eliminated from the tabulations. The categories reflect number of employees and are not of equal size, though they do reflect fairly clear distinctions between very small (2-100 employees) to very large (>50,000 employees) entities. Companies are counted for each patent received. In the sample, for example, IBM employees received 49 patents, so IBM is represented 49 times in the 323 total counts in the >50,000 category. Rather than compare number of organizations in each category, which seemed heavily biased against the large entities, number of patents in each group was used.

In analyzing the results, several directions could be taken in terms of what we define as small and large. The Small Business Administration generally defines any business with less than 500 employees as "small." For the purposes of this discussion, it seems useful to be even more conservative in what we call small, and so consider the categories "Independent" and "2-100" as small entities; "101-1,000" and "1,001-10,000" as midsize entities; and "10,001-50,000" and ">50,000" as large entities.

When denominated in this fashion, it is immediately apparent that large entities are the dominant group, with about 43 percent of total patent grants. The dominance is not, however, at the level we might expect. Midsize entities have a respectable 23 percent of the total and small entities weigh in with over 27 percent (the nonprofit sector makes up the remaining 6.5 percent). It is not surprising that large entities have the largest percentage of grants, but the fact that they hold less than 50 percent of total grants suggests that they are not the only (or even predominant) source of invention in the domestic economy.

Moreover, if we add the unidentified patentees back into the mix, as in Table 2, the percentage going to large entities drops even further. Although eliminated in the original calculations, inclusion of these patentees is not unreasonable. Firms, for whom the full name and location are known, that cannot be easily identified from the sources noted above are highly unlikely to be of any great size. A few were listed in one of the sources, but no employee count was provided, and a few existed for such a short period of time that they had no hard figures before exiting the market (e.g. Blade Software), so not all were totally anonymous, just not quantifiable. But regardless of whether their assignation here was because of a total lack of information or simply missing pieces, very few, if any, are likely to be large enough to fall into the larger categories.

With the revised figures, and "unidentified" broken out as a separate category, the large entity patentees hold less than 40 percent of total grants in this sample. The other categories decline as well, of course, but the primary question is the level of dominance by large entity innovators. Moreover, recall that patents by the same firm are counted individually in these totals. Although a few of the smaller patentees have multiple grants, the large entity categories have numerous instances of multiple grants to the same firm. Indeed, the 508 total grants to the two top categories were made to only 167 separate entities (which is still slightly exaggerated since subsidiaries of corporations such as United Technologies (Pratt & Whitney, Sikorski, Carrier, Otis) are broken out individually).

No formal hypothesis is proven or disproven here. As noted, the literature hardly even notes the presence of small and medium entities anymore, so there isn't enough backing to formulate a hypothesis supported by scholarship. But reading from the public policy discussions' implicit assumptions that large entities are a substantial majority (say, 67 percent) or even slight majority (51 percent), the numbers would yield a failure to accept either statement as a formal hypothesis. Thus, these results have some interesting implications. Large entity innovators do have a plurality of patent grants, but are not the dominant force to the extent that might be inferred from their weight in the scholarly literature or in the public policy debates. Midsize firms, small firms, and even individual inventors are still quite well-represented in the patenting statistics. More academic attention to the efficiency of invention and then innovation in such entities could be enlightening and useful. Further, more concern for how changes in the National Innovation System, including patenting procedures, will impact this majority of patentees is probably warranted. Large entities are important, but they are not the only concerned participants in this process. Public policy should address the needs of this broader range of stakeholders.

CONCLUSIONS

For some purposes, these results need to be used with care. As noted earlier, a number of alternatives to the patent system are available for protecting inventions, especially for inventors with existing scale and experience. Further, we have long recognized that patents are not a perfect indicator of invention, let alone innovation--patents have varying degrees of value, many critical inventions are not patented, a lot of patenting activity is industry-dependent, etc. Thus, as a guide to whether small and midsize entity participants are as innovative or more innovative than large entity participants, this research is anything but conclusive. Its results only extend to invention, and to that only as shedding light on a single, imperfect measure of invention. Future research might do similar categorizations with other invention measures (patent citations, expert opinion, etc.). Large entity players, in particular, are quite likely to have a lot more innovations that exist beyond the inventions protected by the patent system. They simply don't need the protection and so resist patent systems and their publication requirements.

Alternatively, in terms of establishing who uses the patent system and its protection mechanisms, these results are quite important. Theoretically, we have always known that small and midsize entities are far more likely to use the patent system, chiefly because they do not always have the scale advantages and alternatives (keeping trade secrets, getting to market first) available to larger rivals. The fact that smaller organizations still use the patent system and do gain a substantial percentage of grants is confirmed.

This conclusion is important for two reasons. Initially, from a managerial perspective, it is important to recognize from where your future competition might be coming. Bill Gates made some headlines in the 1998/1999 antitrust proceedings by declaring that the biggest threat to Microsoft is likely to be a kid somewhere in a garage. Christensen's (1997) book on disruptive technologies made much the same case. Both small and midsize inventors are still out there, they make up a majority of patentees, and new threats can, indeed, come from out of the blue. Individual inventors may have declined from their dominant position at the turn of the century, but they are still inventing and patenting, as are small and midsize entities that are often ignored in standard invention studies.

Secondly, from a public policy perspective, the concerns of the groups that use and need the U.S. patent system should be recognized before wholesale changes are made to better harmonize it with international practice. Any review of various attempts to change the system (generally to better harmonize with the practice of other large trading nations) reveals substantial participation by larger firms and opposition by organizations representing smaller entities and individual inventors (The Advisory Commission on Patent Law Reform, 1992; Hearings, 1968; Joint Hearings, 1992). Indeed, just a quick read through the membership of the Advisory Commission on Patent Law Reform makes its recommendations geared to large, multinational firms quite predictable. This is not to imply that there is anything nefarious going on. There is little doubt that better harmonization of international patent laws would make life much easier for the multinationals that patent in numerous locations, and they are simply representing their interests. But the participation of small and midsize entities is pronounced and fairly unique to the U.S. system. Harmonization makes filing foreign patents easier, but only 30 percent of domestic patentees, by at least one estimate, file offshore (Banner, 1991), and such concerns are most important to the large entities. Before changing the system for the benefit of this vocal minority, the impact of a new system on the majority of patentees needs to be considered. Again, we need more study on these small and midsize entities that are more prevalent than we might think in patenting and invention.

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G. Scott Erickson (gerickson@ithaca.edu) is Associate Professor of Marketing and International Business, School of Business. Ithaca College, Smiddy Hall, Ithaca. NY 14850.

TABLE 1
Size Distribution of Patentees by Employment

                            Percentage
                               of
Size            Number of     Total          Category
(Employees)      Patents     Patents        Percentage

>50,000            333        27.98%      Large entities

10,001-50,000      185        15.55%          43.53%

1,001-10,000       150        12.61%     Mid-size entities

101-1,000          123        10.34%          22.95%

2-100              75          6.30%      Small entities

Independent        248        20.84%          27.14%
inventors

University         49          4.12%        Non-profits

Non-Profit         10          0.84%           6.49%

Government         17          1.43%

Total             1190          100%           100%

TABLE 2
Size Distribution of Patentees by Employment (with Unidentified)

                 Number     Percentage
Size               of        of Total        Category
(Employees)      Patents     Patents        Percentage

>50,000            333        25.25%      Large entities

10,001-50,000      185        14.03%          39.28%

1,001-10,000       150        11.37%     Mid-size entities

101-1,000          123         9.33%          20.70%

2-100              75          5.69%      Small entities

Independent        248        18.80%          24.49%
inventors

Unidentified       129         9.78%       Unidentified
                                               9.78%
University         49          3.71%

Non-Profit         10          0.73%        Non-Profits

Government         17          1.30%           5.74%

Total             1309          100%           100%