Question

I am in this electrical engineering project course in which an assignment is asking me this and I cannot make heads or tails of what it means by this...

Discuss the tradeoffs involved between using patents and trade secrets to protect intellectual property.

Please be as descriptive as possible,

THANKS

Answer 1

When protecting innovations through patents, firms face a trade-off between disclosing information and obtaining a temporary monopoly for commercializing their inventions. Since disclosing information may help competitors to develop competing innovations based on a similar technological approach, firms may opt to keep their inventions secret. Theoretical studies show that the choice between patenting and secrecy depends on a variety of factors, including the strength of the protection instrument, the nature of the innovation, the ease of imitation, as well as market structure, firm capabilities, and competitor strategies.

While many theoretical studies treat patenting and secrecy as substitutes for one another, firm data suggest that both protection methods are used simultaneously. This is not surprising if the two methods are employed for different innovations. But firms may also choose to use both strategies for a single innovation by protecting some elements of a technology through patents and keeping others secret. For example, if innovations involve both codified and tacit knowledge, firms may patent the codified knowledge and keep the tacit knowledge secret. Firms may also combine patenting and secrecy in a way that enables them to keep the codified part of an invention secret while maintaining the option of later patenting the invention.

Strength of intellectual property law

An obvious determinant of the use of patenting and secrecy as protection methods is the effectiveness of patent and trade secrets legislation. Strong legislation – which means that firms can effectively prosecute infringement of their innovations – usually encourages firms to rely on legal protection. When comparing patent and trade secrets law, the former has a much narrower scope, as only inventions with an industrial application potential can be patented, whereas trade secrets can be applied to a much broader array of intellectual assets. There are hence many more opportunities to use trade secrets than patents. The theoretical and empirical literature has paid little attention to this fact, as it mostly treats the two protection methods as similarly applicable. Secrecy is preferred only if innovators can be quite sure that they are the sole innovators. Longer patent life implies a higher propensity to patent for first inventors, while prior user rights would foster innovation in highly competitive markets. The role of patent law as an incentive to use patenting becomes more complex in the case of innovations that are subject to patent thickets and if licensing is a strategic option. Theoretical models suggest that patenting is relatively more attractive than secrecy in such situations.

Strong patent protection will result in a decrease in the R&D investment of firms. In contrast, if firms compete over a single innovation, strong patent protection will result in an increase in R&D investment. In the case of licensing, and when the propensity of patenting is small, strengthening patent protection can decrease the incentive for firms to innovate.

The findings from the literature on the strength of IP law suggest that the use of patents and trade secrets will increase with the relative strength of the respective legislation, albeit depending on the technological and competitive environment of the firm.

The more frequent method of combining trade secrets and patents in order to protect the new-to-market innovations of single innovators translates into higher sales with this type of innovation when compared to other protection strategies. While single innovators with new-to-market innovations are also more likely only to use patents but not secrecy as protection strategy, this strategy leads to higher sales only in the short run, while a combined strategy seems to produce a longer-lasting increase in innovation output.

When comparing the determinants for the choice of either secrecy or patenting as a protection strategy, we find rather few differences. Both secrecy and patenting tend to play a more important role as the level of innovation increases, where patent protection is stronger and if technological uncertainty is high. A main difference relates to process innovators who are less likely to use patenting. While both protection methods trigger innovation output (compared to innovators using neither of the two instruments), secrecy is more effective with respect to obtaining higher cost reductions from process innovation, while patenting is more effective for new-to-market innovations.

I hope you got the answer and would help you in project.