Despite concerns that the pace of innovation has been slowing in recent decades, 2020 saw over 1,000 patents registered per day in the United States alone. Of course, many of these patents will be useless, but some will be hugely profitable novelties that signal a vital marketplace for ideas. Indeed, it’s believed that around 30% of all patents granted between 1994 and 2017 were sold at least once by 2020.
This highlights a robust secondary market for innovation, yet research from the Stanford Graduate School of Business suggests that this market is often overlooked when we think of innovation.
“Most of the research on innovation examines how something new gets produced, not how the idea itself moves about. But a lot of patents are sold and resold every year,” the researchers explain. “One company may develop an idea while another company purchases and commercializes it.”
The secondary market for innovation
The researchers examined the relationship between the various patent filings and the overall efficiency of the market for patents, which can often be extremely fractured and lacking in transparency.
The researchers pooled companies according to the similarity of the technologies they used. Within each group, they then looked at the annual reports each year for mentions of things like a new patent or a major technological breakthrough. They then tried to connect the mentions of each technology with the number of patent sales within the same technology group the following year.
The results show that there did indeed appear to be a link between mentioning a technology in annual reports and there being sales of patents in that innovation over the following year. Indeed, mentions were linked to a rise of around 13% in patent sales in a phenomenon the researchers liken to the property market.
“It’s a spillover story,” they explain. “Knowing what your neighbor sold their house for is a very useful price signal that tells you what your house might be worth. Similar information is provided in 10-Ks, where you can see how much your competitor or peer sold a patent for, presumably in a related area.”
Spillover markets
The authors believe that this information can help to boost the trade in patents by providing greater clarity to the market. The mentions in annual reports can provide valuable insight into the risks of any investment by showing, for instance, whether patents are attracting litigation.
The analysis then went deeper by examining whether 10-K disclosures actually help to make the patent market considerably more efficient. If this were so then you would expect fewer bad trades to occur, especially in tech classes where there is high levels of disclosure.
“And that’s basically what we find,” the researchers explain. “When trades take place where there is more disclosure, we also see that those patents are less likely to be resold in the future, which suggests that the initial trade or allocation is more efficient.”
While it’s less clear precisely what part of the 10-K disclosure is most valuable in terms of patent trading, the link does appear to be a fairly consistent one in terms of driving the valuable secondary market in patents.
“One of the justifications for forcing firms to disclose financials is that it creates these externalities that help others,” the researchers conclude. “For policymakers, it’s important to think about how far-reaching these influences are.”
