Schumpeterian growth theory and the patent puzzle

Empirical analyses find that strengthened patent rights in many developed countries are associated with increases in patenting, but not with substantial increases in innovation or productivity. This so-called patent puzzle poses a challenge to traditional Schumpeterian growth theory, in which the anticipation of monopoly profits protected by patents is a central determinant of private incentives to innovate. In this chapter, we review recent advancements in Schumpeterian growth theory that reconcile theoretical predictions with the observed patent puzzle. We highlight approaches that incorporate the deliberate actions taken by incumbent firms to protect their profitable market position and deter competitor entry. This includes incumbent patenting strategy, patent litigation, and expenditures on political lobbying. We use Schumpeterian theory to explore how changes to patent policy influence such strategic actions by incumbents and how this interaction may undermine the policy’s original intent. We discuss the implications of these results for patent policy and future research.