The America Invents Act – do stronger patent systems encourage university innovation?

Innovation has played a major role in the economic development in the United States in the last century, with universities producing more than half of the basic research. Patent systems are one of the governmental interventions used to incentivize innovation, but the literature remains inconclusive with regards to their efficiency especially when applied to higher education institutions. Few empirical resources have been devoted to investigating the relationship between patent laws and university innovation and this article is a pioneer in this aspect. It uses a recent development in American patent law, the Leahy-Smith America Invents Act, to investigate the central question: what is the impact of the AIA on university innovation? The Higher Education Research and Development survey provides numbers on research and development expenditures which I use as a proxy for innovation. Data retrieved from the US Patent and Trademark Office allows me to use the number of patents granted to each American university as a measure of exposure to the policy. The more patents an institution owns, the more it is affected by a patent reform. Combined with university and time fixed effects this methodology allows me to find that on average a 1% increase in exposure to the AIA has increased R&D expenditures of universities by 1.64%. I also find homogeneity in the effects implying that large universities benefit from this policy six times more than their smaller counterparts so that this policy increased inequality between universities. The US seems to be positioned on the left-hand side of the inverted U-shaped relationship between innovation and patent strength, suggesting there are more opportunities for policy makers to increase innovation through patent reforms. Those findings imply patent reforms for universities have the benefit of increasing innovation at the expense of increased inequality in terms of R&D spending.