The effects on firm profits of the stock of intellectual property rights
Melbourne Institute Working Paper No. 04/05
Date: April 2005
The effects of innovation on firm performance is conventionally analysed using R&D or patent applications as measures for innovation capital and market value as the measure of firm performance. We argue that such studies fall short in three important respects. First, the proxies used for innovation capital are flows not stocks as the theory suggests. Secondly, while they are derived from the theory of intangible capital, their estimations ignore other important intangible capital such as organisational and marketing capital; and thirdly, by using market value, the studies heroically assume that stock markets work efficiently. In this paper, we develop a model of the effects of intangible capital, including, but not limiting to, innovation capital, on firm profits, using new measures for the former. Our results indicate that profits vary, ceteris paribus, according to the type of IP rights held by the firm, the age of the firm, the size of the firm, and the lifespan of the IP right.