The Competitive Advantage of Weak Patents

Does U.S. patent law increase the competitiveness of U.S. firms in global markets? This Article argues that, contrary to the beliefs of many U.S. lawmakers, U.S. patent law currently undermines the ability of U.S. firms to compete in global markets because strong U.S. patent rights actually weaken an overlooked but critical determinant of U.S. competitiveness: rivalry among U.S. firms. Intense domestic rivalry drives firms relentlessly to improve, spawns related and supporting domestic industries, and encourages the domestic development of advanced factors of production, like specialized labor forces. U.S. patents restrict rivalry among foreign firms less because U.S. patents have little extraterritorial effect. Moreover, due to legal and economic differences between the United States and other countries, foreign patents do not equilibrate competitive conditions abroad. Consequently, for U.S. firms to benefit from the same competitive environment as foreign firms, U.S. patents should be weakened. Such changes, however, also threaten to reduce U.S. competitiveness because U.S. patents promote the development of new inventions that help U.S. firms compete in global markets. This Article thus exposes a deep tension in U.S. economic policy. Unfortunately, lawmakers have failed to recognize this tradeoff and, as a result, have adopted excessively strong patent protections that undermine U.S. competitiveness. This Article addresses this problem by proposing balanced reforms that will selectively weaken U.S. patent protection to increase U.S. competitive advantage.

That is from a new paper by William Hubbard (December 2012). 

A simple graph for all of the above is here (if the link does not work, please try this one).