Heads you Win Tails I lose: The Influence of Patent Strength on Downstream Entry

With a few exceptions, empirical work on how institutions influence entry is sparse. This paper studies how stronger patents influence entry into downstream product markets. We build on the prior literature that examines how patents influence competition, the conclusions of which are inconclusive. One stream of the literature suggests that stronger patents increase entry barriers and decreases entry into downstream markets. Another stream of the literature suggests that stronger patents create Markets For Technology, and consequently increases downstream entry. In this study, we show that the effect of patents on downstream entry varies by the nature of the industry based on whether technology in that industry can be licensed or sold in a disembodied form. Using recently enacted Indian patent reforms and a novel dataset based on Indian patents that spans 36 industries over 27 years, we show that strengthening patents in India increased the number of technology licensors, which subsequently increased downstream entry in disembodied industries whereas it decreased incumbent firms’ patenting activity and decreased downstream entry in embodied industries.