Bright ideas needed to harness creativity

By Paul Jensen and Elizabeth Webster

The Australian Financial Review
10 August 2006, p. 63

Doubtful ownership of intellectual property stifles innovation, argue Paul Jensen and Elizabeth Webster.

The Government announced in March that it has asked the Productivity Commission to conduct a wide-ranging review of public support for science and innovation. Public research institutions primarily the universities and CSIRO receive a large share of the Governments $5billion investment in science and innovation, and such institutions are supposed to promote the diffusion of knowledge they create. At the same time, however, they are under increasing pressure to generate revenue from their output through the creation of intellectual property (IP) rights.

This opens up the possibility of entering the murky world of legal dispute resolution, since IP owners must actively enforce their rights in order to curb the unauthorised use of their technology.

Economists generally agree that the creation of knowledge cannot be efficiently provided by the free market. If left to its own devices, the market will underinvest in knowledge creation since, once created, knowledge is easy for others to use and it is hard for the original inventors to recoup their costs. There are number of possible solutions to this market failure problem: government research grants, prizes and patents to name a few.

Patents solve the underinvestment problem by giving companies the legal right to prevent others from using the discovery. This enables the inventing copmany to charge a price that allows them to recover the costs of discovery. Unlike property rights over tangible property, however, patent owners must actively enforce their rights police arent proactive in their search for theft of IP. Patents also entail costs upon the broader society by charging a monopoly price, they push some consumers out of market. In this way, patents represent a classic double-edged sword while they provide an incentive to innovate they also inhibit the use of knowledge created by the innovation. In cases where the cost to society of using existing knowledge is low, the best form of incentive is public grant, because it places no artificial barrier to the efficient use of that piece of knowledge. That is why governments have eschewed public sector patents in favour of research grants. Under this system, academics can use other peoples ideas freely, provided due acknowledgement was made. And, even if a particular research tool was patented, public research institutions could use the tool in their laboratory without fear of recrimination by the patent owner.

However, recent trends in Australia mimic those in the United States that encourage and reward public sector institutions that patent and commercialise their discoveries. If carried through, this policy change will see the disappearance of the open world of scientific exchange and communication in favour of secrecy and the privatisation of ideas. Where previously universities and other public research organisations were rewarded and recognised for encouraging the dissemination of the latest ideas and empirical findings, they are now discouraged from disclosing them.

One of the most commonly stated explanations for this relates to the technology-transfer problem. Central to this argument is that many important inventions have been left on university shelves because businesses were unable to guarantee their investments would not be expropriated by others without the existence of a patent. However, the foundations for this argument are unclear, since the historic use of public sector ideas has not been seriously documented nor is there evidence that patenting is the preferred way to enhance better use. Part of the problem is that the vast majority of knowledge transfer from universities is informal and leaves no paper trail. Furthermore, the costs of using patents in terms of the loss of free and open exchange between scientists, the need to negotiate and contract with multiple patent owners before research can begin, as well as the legal costs are rarely considered.

So, what is the best way forward? The first step is the acknowledgment that the current mix of patents and public grants may be a case of conflicting incentives and double dipping. On top of this, a serious evaluation of the forms and magnitude of knowledge diffusion from public-sector research institutions should be undertaken. Hopefully, these are just the sort of issues that the Productivity Commissions review will uncover.

Paul Jensen is a senior research fellow and Elizabeth Webster is a principal research fellow at the Melbourne Institute of Applied Economic and Social Research. This is based on a work to appear in a forthcoming edition of Australian R&D Review.