How the Strength of Patents Influence Firm Strategies and Competition?

The TRIPs mandate that seeks to harmonize patent laws the world over has been heavily debated especially by developing countries on the basis that stronger patents are likely to increase market concentration and prices. Contrary to this notion, using the recently initiated patent reforms in India, we show that stronger patents can actually increase competition. Building on the literature on Markets for Technology (MFT) we build model that identifies conditions under which stronger patents can actually stimulate competition as opposed to retarding it. We show that stronger patents increase entry by firms that do not have the ability to produce proprietary technology because stronger patents facilitate entry by in-licensing. On the other hand for firms, that do not have complementary capability but can generate proprietary technology, stronger patents makes it more attractive to out-license rather than entering product markets. Assuming that multinationals have high technical capability and relatively low complementary capability and that domestic firms have low technical and high complementary capability, we hypothesize that stronger patents should facilitate licensing between multinationals and domestic firms, especially to those that are incapable of producing proprietary technology. Our empirical results bear out the intuition that on an average, patenting activity increases with stronger patents and by more for multinationals relative to domestic firms and also by more in disembodied industries relative to embodied markets. Also, as a consequence we show that licensing activity and competition increases with stronger patents and by more in disembodied industries while licensing activity increases with stronger patents and by more in disembodied industries.