This cartoon-based presentation deals with the role of patents in the financing of innovation. It is composed of two parts: - It first explains the issues associated with the financing of innovation, and focuses on information asymmetry and moral hazard; - It then explains how patents can help financing innovation, either by increasing internal capital or by lowering the cost of external capital.

2. Gaétan de Rassenfosse @gderasse
École polytechnique fédérale de Lausanne

3. The Problem of Financing Innovation

4. Yes. There is a financing problem.
Investment in research and development (R&D) is not the typical investment…

5. … because of asymmetric information…
(the innovator knows more about the project than the provider of funds)
Providers of funds are not well able to distinguish good projects from bad projects.

6. … and because of moral hazard.
(the goal of the innovator conflicts with that of the provider of funds)
The innovator reaps the reward of success.

7. … and because of moral hazard.
(the goal of the innovator conflicts with that of the provider of funds)
But the provider of funds bears the cost of failure. Hence s/he is more risk averse.

8. It follows that the cost of external capital is particularly high for R&D projects.
As a result, internal capital is the preferred source of investment for R&D activities.

9. The problem of R&D financing is particularly acute for small firms.
Among other things because they have limited internal capital.

10. How Patents can Help
Finance Innovation

11. 1a. Increase internal capital by increasing profits from commercial exploitation.
A patent is a monopoly right.

12. 1b. Increase internal capital by licensing out the technology.
To firms in other geographic or product markets, or even to competitors!

13. 1c. Increase internal capital by selling the patent.
Especially if the technology is not core to the business.

14. 2a. Lower the cost of external capital by reducing information asymmetry.
Patents act as a signal of quality to the provider of funds.

15. 2b. Lower the cost of external capital by reducing moral hazard.
Patents can be offered as collateral to increase the salvage value of the company.

16. But Innovators Need
More Than a Patent

17. A patent is not a silver bullet.
Other factors play a more (?) important role...

18. A patent is not a silver bullet.
A brilliant idea.

19. A patent is not a silver bullet.
A team of high-quality individuals.

20. A patent is not a silver bullet.
Good business and execution plans.

21. Thank you
This presentation and others are available at
www.slideshare.net/gderasse