Do intellectual property rights stimulate or threaten innovation

The Chinese are often derided for counterfeiting everything in sight, but the reality is very different. As I write this in Beijing, I’m leafing through a Chinese comic book designed to teach seven-year olds about intellectual property. In today’s China, most children are taught the importance of IP and how it works as soon as they enter primary school. Since the early 1980s, the Chinese government has been intent on creating an economy in which IP plays a fundamental role. As former Premier Wen Jiabao often said, “competition in the future is competition in IP”.

The scientists, engineers and economists who are prominent in the Chinese government share a visceral understanding that modern economies rest on IP as a primary stimulant of innovation. Europe and to a lesser extent the U.S. are both in danger of failing to understand just how important the IP system has been in creating the world we live in, and how essential it remains as a driver of our economic and physical wellbeing.

History shows how IP has helped create today’s world. Take James Watt, inventor of the steam engine. Of course, he was not the inventor of the steam engine – there had been many before him, ranging from Hero of Alexandria to Newcomen in Britain – but Watt invented the first economically viable steam engine. And even though he invented and patented it, he couldn’t make it work. His first backer, John Roebuck, was bankrupted because of all the money he poured into Watt’s unworkable engine. It was the “angel” investor Matthew Boulton who persuaded Watt to extend his patent life from 14 to 30 years through Act of Parliament. Only then was Boulton prepared to fund the invention that, technically “perfected” three years later, soon initiated the steam age. Few people know the central role that Watt’s patent played in triggering the Industrial Revolution.

Fast forward 100 years to Thomas Edison – the holder of so many patents and inventor of the light bulb. Of course, he didn’t really invent the light bulb – there had been many light bulbs before him. He invented the first light bulb with an acceptable life. He began to electrify Manhattan, but his generating system was steady, or direct, current (DC) and this meant that electricity had to be generated, transmitted and used at low voltage. As any electrical engineer will tell you, this was extremely inefficient, with very high losses. The inevitable result was that he had to build a power station every kilometre or so, as well as using unsustainable amounts of copper to distribute the power. If taken to its logical conclusion, it would have been an environmental disaster.

Enter George Westinghouse, inventor and patentee of the railway air brake, which had transformed the safety of trains. He spotted Nikola Tesla, the Serbian physicist and inventor who had invented (and patented) the idea of an oscillating current – what he called “polyphase” current and what today we call alternating current (AC). When the polyphase current was fed into what we now know as a transformer, it could increase the voltage for very efficient transmission, and then reduce it again for domestic use. Today we would call Westinghouse an “open innovator”, looking for innovation inside and outside his own group. In short order, he bought Tesla’s patent, employed him and then scoured the world for complementary technologies and patents so that he could develop a complete AC system of generators, transformers and motors. This was very expensive, so despite his wealth he ran out of money. But using his portfolio of patents as collateral, he raised finance in Pittsburgh, Boston and New York to complete the work.

Edison hated this. He could see the threat that Westinghouse posed to his own investment in DC systems and set about attacking him. Hypocritically forgetting his own huge patent portfolio, he went public with the views that “there are too many patents (i.e. Westinghouse’s)” and “patents are getting in the way of proper investment”. New York legislators were at that time looking for a “more humane” way of executing criminals, so Edison both directly and covertly promoted the electric chair, describing AC as the “Executioner’s Current” to try and dissuade people from adopting AC as the current of choice. Dirty tricks indeed.

The turning point was the 1893 World’s Fair in Chicago, where Westinghouse won the competition to electrify it. Edison’s comments about “too many patents” and “getting in the way” still echo today. But it is clear that the electrical revolution started when it did because of Westinghouse’s patent portfolio underpinning funding and development of the AC technology. It could then compete with the entrenched status quo. Today’s assertions that there are too many patents – for example in the smartphone area – don’t bear examination when you see the intense competition in that area, the rapid pace of change in the market, the relentless innovation and the huge expenditure in R&D on next generation phone technology by companies like Samsung. It is worth nothing that Samsung only thought it worth spending large sums on R&D from 1990 – the year after South Korea enacted its full and strong patent law.

Fast forward another hundred years. In the late 1990s, during my years as its chief executive, BTG was the world’s largest technology transfer company, patenting and licensing the best of British university inventions to bring them to market. BTG created half the world’s antibiotic market through licensing the cephalosporins. The synthetic pyrethroids were the first relatively benign insecticides, with our licencees taking about one third of the global market. Our portfolio of MRI patents was of no interest to the then-dominant scanner companies such as EMI, which had created CAT scanning. Instead, the patent portfolio was an incentive for four companies not in the scanning business to invest in developing MRI scanners and trying to make them cheap enough to become a standard hospital diagnostic tool. The rest is history: MRI has saved millions of lives, and its inventor Sir Peter Mansfield was awarded the Nobel Prize. The little-known corollary to the story is that we later had to sue some quite reputable scanner manufacturers for patent infringement. Once the technology had been proven, they decided that MRI was an interesting market after all and started to make MRI machines without having first taken a licence from BTG. Some complained loudly but we ultimately licensed every manufacturer. In my view, they had no right to free-ride on the investments and risks taken by the four pioneer companies.

My 19 years at BTG taught me a lot about invention, innovation and IP. The first is that most inventions are not successful, and don’t lead to successful innovations reaching the marketplace. Even at BTG, where rigorous reviews accepted only those inventions with high commercial potential, about half were commercialised and perhaps a tenth were truly successful. Development is expensive, and the success rate low. Innovation is a high cost, high risk business. It makes no sense to invest heavily in innovation if anyone is free to copy those few results which happen to be successful. Strong IP is central to funding the innovation process.

Thirty years ago, about 80% of corporate value rested on physical assets. Today, according to McKinsey and others, 70-80% of corporate values rest on intellectual assets, of which IP forms a substantial part. So I am also surprised how many senior corporate managers still do not have the basic IP literacy to understand the IP on which their own company is based. Many don’t know the right questions to ask their IP professionals (who themselves are often not business trained or even business aware). I know of many corporate IP disasters that could and should have been avoided.

At Harvard Business School, I was taught basic accounting. Not because I was about to become an accountant, but because you need to understand the language and structure of accounting if you are to understand finance and its role in business. So it should be with IP; business schools should, but generally do not, teach the basics of IP to all of their MBAs. Tsinghua Business School in Beijing has been the first to teach a course on Innovation, IP and Corporate Strategy. Basic IP education also needs to reach further. At BTG, I lost count of the number of university inventors who publically disclosed their inventions “so that everyone could use them for free”. They didn’t understand that by doing so, their ideas couldn’t be patented, and that they had probably destroyed any chance of their being developed into beneficial products.

There are some IP problems peculiar to the US. Many poor patents have been granted by the US Patent Office, compounded by an expensive and somewhat unpredictable litigation system. But despite this, the US remains committed to a strong IP framework to support innovators large and small. It remains the centre of entrepreneurial companies of all shapes and sizes. Compare this with Europe, where an apparent commitment to stimulating innovation is often neutered by a deep political and economic distrust of IP rights. The creation of a single EU patent and a Unified Patent Court may change this, but fundamentally we need to stop talking the system down and concentrate instead on tackling the few situations where there has been abuse of IP rights.

IP unequivocally stimulates innovation. If we believe that Europe’s economic future will be based on innovations then it is vital that they are supported by a strong system of IP rights. The current system has served Europe’s innovators and consumers well for almost 250 years and, while it has developed and evolved, it has kept the same basic principles. We must not weaken it now because some loud voices are criticising a few problems in the U.S. We should focus on using the IP system to underpin funding for Europe’s innovations. For example, it should implement the recommendations of the recent EU Intellectual Property Valuation Report. And, fundamentally, we must broaden and deepen education at all levels about IP, what it is, what it does and how it is used. The Chinese are doing it – we should copy them.