Author: Dieter Ernst
Published: November 21, 2016
Efficient licensing of standard-essential patents (SEPs) is crucial for achieving a rapid and broad-based diffusion of innovation. Owners of large SEP portfolios (and their supporters) argue that the governance of SEPs works reasonably well and that patent holdup and other negative effects are “purely theoretical”. In reality however, the governance of SEPs remains highly inefficient.
Nobel prize laureate Jean Tirole as well as Carl Shapiro, Mark Lemley, Josh Lerner and many others have painstakingly documented that the licensing of SEPs is prone to market failures such as externalities (both positive and negative), information problems, market power and free-riding, which might hinder the realization of the economic and societal benefits of the affected standards. There is no doubt that SEP-related market imperfections continue to constrain standard implementers (both large and small) who are increasingly opposed to this form of “technology taxation”.
This paper addresses two unresolved issues. First, most of the existing SEP research has focused on advanced countries. It is time to address growing concerns in emerging and developing countries that SEP-related market failures may create added uncertainty for their companies, generating unpredictable and often quite significant costs and delaying market entry of their products. Second, such SEP-related market failures are even more important in a world where increasingly complex and diverse global corporate networks integrate dispersed production, engineering, product development and research across geographic borders. The paper seeks to extend the analysis of SEPs to include challenges that companies from an emerging economy face that when they are deeply integrated into these global networks of production (GPNs) and innovation (GINs).
The paper summarizes what we know about SEP-related market failures and their impacts on standard implementers, and highlight drivers and the hierarchical nature of GPNs and GINs, distinguishing network flagships and different layers of network suppliers. I will then discuss a new “gains from trade” doctrine for economic development, promoted by the OECD, the WTO, and the World Bank, which emphasizes the role of global network integration as “the 21st century’s fast lane to industrial development”. I will show that participation in these global corporate networks raises new challenges, especially for lower-tier suppliers, many of them based in emerging or developing countries. I will describe restrictions imposed by the new “gains from trade” doctrine on national innovation policies, especially with regard to patents and standards. These restrictions may well constrain the capacity of those companies to cope with the imperfect governance of SEPs.
It is on this basis that I will then sketch out a preliminary research agenda for exploring impacts that Chinese companies may face within GPNs or GINs. In the Conclusions, I will review suggested responses to some of these market failures, using illustrative examples from standard development organizations and competition policy.