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8/7/2019 User Innovation Patents - An analysis of Patent Porftolios and Theoritical Approach to the motives of Vertical Integra
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TABLE OF CONTENTS
1. INTRODUCTION 3
2. ANALYSIS OF PATENT PORTFOLIOS 3
2.1 DATA & METHOD USED 3
2.2 INDUSTRY LEVEL 3
2.3 FIRM LEVEL 6
2.4 SEMICONDUCTORS- USER INNOVATIONS AND FIRMS
RELATED R&D EFFORTS
8
3. THEORETICAL VIEW OF VERTICAL INTEGRATION 12
4. CONCLUSIONS 14
5. REFERENCES 15
6. APPENDIXES 16
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INTRODUCTION
This paper analyses the patent portfolios of the companies from different industries and seeks
to provide a theoretical explanation to the reasons of Vertical Integration implementations. In
the first part of the paper, a quantitative analysis of patent portfolios in terms of varieties in
patenting activities and trends, with a special attention to Microelectronics class of
technology, together with the comparative analysis of industries and R&D activities are set
forth. Second part of the paper rather discusses the findings of the quantitative analysis within
a theoretical framework of the motives of vertical integration.
1 Patent portfolio analysis and Comparative analysis of industries
Data and method used for the quantitative analysis
For the quantitative analysis on which this paper based was extracted from the work of Hall et
al.(2001) Database includes the patent portfolios of 15 firms from 3 different industries,
namely Computer Equipment, Telecommunications and Electronics Equipment, and it covers
the years of 1984-2000. Originally, in order to sort the technological classes, OST-30
classification is used in the database. For simplicity and clarity, these 30 classes sorted further
into 6 for this paper according to technological distances map which is supplied in the work of Hinze et al. (1997) These classes are as follows; 1-Electronics 2-Biological&Medical 3-
Chemicals 4- Mechanicals 5-Others. Detailed listings of the classes can be found in the
appendix 1.a
Industry Level
In patent portfolio analysis, we focused on some certain main points such as the composition
of the portfolios and changes over time, similarities differences, importance of
semiconductors and industrial comparisons in patenting activities.
As a starting point, the compositions of the portfolios are viewed. In computer equipment
industry, it is found that the majority of the patents (%85,4) belong to main technological
class which is Electronics class (class 1) and the rest is distributed as following; % 6
Mechanicals(class4), % 4,6 Chemicals (class 3), % 2,2 Biological(class 2), % 1,6 Others(class
5). If the shares are further sorted into two titles as main and other patents, it is seen that %15
of the patent portfolio is composed of the patents which are not directly related to technology
of the industry. When the other two industries composition is viewed too, similar results are
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obtained as well(see appendix I.b) For this finding, we generated three possible explanations;
(i) Companies patent as a user of these other classes because they are somehow related to
their products and their production processes due to the complex nature of the products (ii) the
companies decide to diversify in other sectors as a result of their related R&D activities the
other classes patents are registered (iii) these patents occur randomly as a consequence of
main technology focused R&D efforts.
Abovementioned composition of patent portfolios exhibits the majority of the main
technology class (class 1) and occurs to be base of the further questions about the distribution
of the components and their change over time. Unlikely to the compositions, industries, as
expected intuitively, show certain differences in these terms.
Exhibit 1- Main technology class (Class 1) patents and change over years
As it is observed in the Exhibit 1, industries main class components differ from each other in
terms of quantity and ranking. Nevertheless, they show some similarities; in all 3 industries
total patent numbers are on an increasing trend and after a period a component or components
start to increase significantly more than the others. This increase, obviously, sourced by R&Dfocus on specific technology classes.
Exhibit 2- Portions of the components in Computer Eq. industry by year and Herfindahl Index
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Exhibit 2 shows that in computer equipment industry some components weight increase over
time (e.g. IT, Semiconductors) with the concentration (HERF) while some decrease (e.g.
Electrical Engineering, control technology). Therefore, throughout the industry some
technologies lose importance due to some possible reasons such as the maturity of the
technology (marginal benefit is relatively low for each investment in R&D of specific
technology) on the other hand, some of them gain importance, which may be due to strategic
importance for the products, such as semiconductors. For the other two industries; same
pattern is observed for Electronics equipment industry with some changes (i.e. increasing
telecommunications weight) and in telecommunications industry same story but with different
roles of the actors. Hence, it is concluded that technologies roles are different in diverse
industries and they are exposed to changes over time.
Firm Level
With regard to firm level, each firms main technology portfolio (Class 1) is compared to
industry which was taken as a benchmark. The motive to do this comparison is to understand
the diversity in firms patenting activities in same industry and the underlying reasons behind.
In this part, two industries are examined, Computer and Telecommunication respectively, due
to limitations on allocated space. In computer equipment industry, it is observed that three
major patent-holders, as in order, IBM, Toshiba and Fujitsu show similarities in terms of
ranking and trend of patent classes while Sony and Seiko, who have fewer patents, act quite
different than the industry benchmark.
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Exhibit 3- Computer Industry Total Patent Portfolio vs. IBM
Exhibit 3 shows that the IBM main technology class portfolio is very similar to the industry.
Also when the same portfolio analysis made to Toshiba and Fujitsu, which is the second
major patent-holder, similar results, with the exception of increase in semiconductors of
Fujitsu, are obtained as well (appendix I.c). However, Sony and Seiko manifest differences
with industry benchmark.
Exhibit 4- Sony and Seiko Main Technology Patents
The three companies IBM, Toshiba and Fujitsu, which show general similarities in their main
technology patents, also mainly focuses on certain products to offer to the marketplace i.e.
Servers, storage, telecommunications & network, microelectronics while Sony gives more
importance to consumer electronics such as audio & video devices and Seiko is, in fact, a
watchmaker entered to computer equipment industry by offering electronic components such
as wrist-watches, electronic dictionaries etc Therefore these similarities and differences in
portfolios can be explained by the claiming that firms pursue different opportunities which
require diverse focuses on technologies in terms of R&D, in the same industry. Moreover, itcan be asserted that Porters (1980) Strategic group concept may explain the superiority in
patent numbers of these three similar firms; firms within the same strategic group implement
similar strategies, behave similarly to the problems faced and recognize mutual dependence,
thus, since being more innovative depends on their innovation strategies, IBM, Toshiba and
Fujitsu implements similar high risk innovation strategies to produce innovations (Wilson R.
et al 1980)
Analysis in Telecommunications industry exhibits results that partially support the
aforementioned reasoning. The word partially is used because the 4 firms, data on LG covers
only 5 years which is not sufficient for an analysis, in database show all different results in
main technology class patents, hence, a group cannot be determined but still different
opportunities different strategies claim is supported. Nevertheless, the variety in
telecommunication industry analysis helped us deepen our reasoning about the differences by
adding an evolutionary theory view. Heterogeneity of technological capabilities of firms
which are due to different accumulation of technological knowledge may explain these
different patent portfolios that are the outcomes of R&D activities. Moreover, product
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spectrums of the all companies differ from each other in some degree; i.e. Motorola serves the
market with optical networking and video distribution beside mobile phone while Samsung
telecommunication provides broadband and home solutions.
Exhibit 5 Motorola vs. Samsung
Semiconductors- User innovations and Firms related R&D efforts
Microelectronics is by itself an industry and technology that supplies to user industries such
as computers and telecommunications. However, the major part of the innovations in this field
is made by these users, not suppliers. A step further, as this paper discusses, these users-
innovators patent a lot in semiconductors and these patents constitute an important part of the
portfolios.(Exhibit 2) These phenomenon can be very well explained with Von Hippels
(1988) functional sources of innovation concept; expectations of innovation-related
profits must differ significantly between firms holding different functional relationships to a
given innovation opportunity. Therefore, in semiconductor field users foresee higher benefits
from innovating by themselves. Moreover, these users, generally, not only innovate but also
enter into manufacturing process, in other words, they vertically integrate of which theoreticalreasons we discuss in the second part of the paper.
It is a common knowledge in the innovation literature that in early 80s a patent explosion
phenomenon occurred and since that time companies keep patenting more each year. From
the database, it is extracted that in all 3 industries semiconductor patents increase as well as
the total number of patents. At this point, in order to grasp the importance of semiconductors,
a growth rate comparison between semiconductors and total patents is made. The result
illustrates that mostly the semiconductors growth rate was over the total number of patents
and even in some years there are significant differences in favor of semiconductors.(appendix
iii) Therefore it can be concluded that the semiconductors gain importance as a component in
industries that are under the analysis of this paper.
In order to explore the behaviors of firms in semiconductor field, firm &industry correlations
of patent number and correlations of portfolio weight are calculated. Outcome of these
calculations sustain our reasoning that explain the differences and similarities of firms in
patenting activities.
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Exhibit 6- Correlations between firms and industry in terms of amount and weight Computer
As it can be recalled, in computer industry 3 firms were showing similarities and they were
defined in the same strategic group. Correlations draw a similar picture; the three firms are
highly correlated both in number and weight while the others are not consistent with the
industry.
Since the abovementioned reasoning was based on also telecommunication industry firms,
their behavior is controlled as well and the result was in the way that it was expected. Each
firm is different in their nature and the behaviors are diverse too as can be seen in Exhibit 7.
Exhibit 7- Correlations between firms and industry in terms of amount and weight Telecom
From the database also data of the assignees of the patents is extracted and sale/R&D ratios of
the companies are calculated. The purpose of doing this is to obtain a better view of the R&D
activities of the firms in terms of productivity and relationships between firms and their focus
whether more on products or research. The assignee analysis showed that the firms have
diverse portfolio of patent assignees of which some from are outside and some from are inside
of the industry. In computer equipment industry, collaboration between the firms is observed
except Sony which collaborates with an electronics industry firm NEC. Especially, IBM and
Toshiba patent assignee analysis indicates certain collaboration between these two firms.
After conducting a research to explain this collaboration, it is found that the firms create
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special alliances that support each others R&D activities and facilitate sharing of
technological knowledge. However, in telecommunication industry it is found that
collaboration is not as high as in computer industry. All the industry, except Motorola,
produces almost all semiconductor patents by themselves. Motorola also shows the same
pattern until 95 when they entered into an alliance with AMD. It occurs to us that the
observed differences in telecommunications industry and similarities in computer industry are
sourced by also collaboration and sharing. In telecommunication industry, from the view of
evolutionary approach, it can be claimed that firms develop firm-specific competences, due to
heterogeneity in capabilities, which nurtures the differences among the firms on the other
hand collaboration in R&D contributes to similarities of the computer industry firms.
. In order to gain an insight about the motives of R&D in firms regarding the semiconductors,
direct semiconductor sales / patent number ratios are computed for the year of 1996 from the
annual reports of the companies. This year was chosen because it is recent regarding our
database and the broadest information we could find was about this year.
Exhibit 8- Semiconductor sales / semiconductors patent ratios in each industry
From the calculated ratios, it can be induced whether a firm makes more research than
creating products. Obviously sales numbers depend on many other factors such as price,
product performance, reputation of seller etc and also patents may be registered due tostrategic reasons. Nonetheless, these ratios can be used to obtain a rough idea about the issue.
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For example, IBM, which is the leader in patenting activities almost every year, has very low
sales amount when compared to patents held in portfolio while Toshiba has almost 4 times of
IBM sales with a similar amount of new patents in the same year. Therefore, it may be
asserted that IBM focuses more on research to exploit the knowledge where the
semiconductors are as components rather than creating new semiconductor products to
market. Another approach to the ratios may be considering them as outcomes of the nature of
the research, basic or applied, carried out in firms R&D labs. For electronics industry the
ratios are as expected since the microelectronics is considered as a subdivision of electronics,
thus, they may be more inclined to market semiconductor products. In telecommunication
industry, surprisingly, calculated ratios are quite high. We believe that a further examination,
which is out of the scope of this paper, of industrial dynamics and firm strategies, may explain
the reasons behind this issue.
Summing up all semiconductor patent amounts, its weight in portfolios and special alliances,
it can be claimed that these firms are vertically integrated at least in terms of R&D activities.
Furthermore, from the information collected about the companies, we figured out that the
majority of the firms under our analysis are vertically integrated also in manufacturing level.
In the second part of the paper, we discuss the reasons to vertically integrate theoretically.
2 Theoretical View of Vertical Integration
Before getting understanding of vertical integration issue, we had better to mention
about the corporate strategies. According to evolutionary theory, firms core aim is not to
maximize their profits but to seek for profit. In this perspective, firms take action in any
market they operate just to gain competitive advantages to make profit efficiently. All these
actions taken by firms build up their corporate strategies. As firms are structured by plenty of
sub-divisions they have various strategies both for the structure of the industry they operate or
for the sub divisions for which they seek for advantages. Thus, firms adopt different systems
for their R&D activities which they invoke for their innovation and technical change policies.
Contractual and integrated research methods are commonly economized within
industries for their R&D activities. In contravention of the fact that they do have some
disadvantages and advantages in itself, one should be cognizant of the perspicacity that each
method has to be discussed in view of the structure of technical change and aim of innovation
which are dealt by firms entirely. These all lead us to the importance of core competences and
capabilities of firms.
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Capabilities which are mainly determined by routines of firms stand for their strengths in
which they are specialized. So, lacking of some capabilities in any activity of a firm may be
compensated outside of the firm. By doing so, firm finds itself in contractual activities in
which have difficulties for parties of the contract. Specification, disclosure and lock-in
problems are the main issues parties have to deal with. As what firm needs to procure by
outsourcing may need important specifications, designation of these specifications to the
procurer can be both time consuming and costly. Similarly, necessity of sharing out some tacit
knowledge and trade secrets may extend undesired advantages to rivals as by doing a contract,
you have to disclosure some important knowledge just to provide better understanding for the
outside procurer. Lastly, lock-in is a big potential problem for both parties in the contract.
Supplier side which demands procurement shares so many knowledge and make a effort for
transferring experiences to another side thus it requires serious sacrifices if she intends tochange her outside sources. Likewise procurer is obliged to do specific changes entirely based
on the contact holder so that she faces lock-in danger that there is a big obstacle in front
limiting to focus another business except the one she admits to maintain. As we mentioned
before, firms apply contractual modes when they have lack of some competencies which are
fundamental for an innovation that firm desires to make. Because of all the problems
mentioned above, firms usually apply contractual mode for non-vital technological changes
and one-shot innovation which is not required to integrate just for once.
If the innovation and technological advances requires systematic work and the knowledge
that the firm need is hard to codify, firms are tend to control all the stages of their value chain
activities. As firms may integrate in one value chain activity like R&D, also they may choose
to integrate various value chain activities at the same time, like marketing, distribution,
manufacturing vertical integrated firms are better to reduce transaction costs that they are
object of. As transaction costs are cost of locating, negotiating, and enforcing a contract,
vertical integrated firms may do most of activities within their own boundaries so that they
limit those transaction costs they strive.
That is another story about flexibility of firms. As we mentioned above about lock-in
problems, firms which are based on outsources may be stuck in a specific pat(path
dependency) however vertical integration gives chance to control power on all the value
chain so that they may set down various types of strategies depend on changing environment.
Adam Smith believed that workers would become more alert to improvements as they
concentrated on performing fewer activities. By analogy, vertically specialized firms would
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also be expected to be more adept than integrated firms at isolating and solving problems
(Robertson, Langlois, 1994).
Vertical integration potentially offers many different advantages. Some of the most
substantial benefits are as follows:1. Reduces transportation costs if common ownership results in closer geographic proximity
2. Improves supply chain coordination.
3. Provides more opportunity to differentiate by means of increased ownership over inputs.
4. Captures upstream and downstream profit margins.
5. Gains access to downstream distribution channels that otherwise would be inaccessible
(Clinton,Manna,Marco, 2008).
Additionally, one of the important advantages of vertical integration is ease of diffusion.Vertical integrated firms have all the sources to diffuse and designate the direction of ne
technology easier than the ones working based on stand-alone labs. It is because if firms have
all the complementarities and capabilities to improve the innovation regarding to aim of
market can become decision maker on the market they operate. Commercialization of the
innovation is speed up by integration therefore firms get return of investment rapidly to re-
innovate.
On the other hand, vertically integrated monopolist may find difficulties to change his allcapabilities fixed into new technologies as it has invested and specialized in old one deeply.
They facilitate great investment on old technologies so that they never prefer to be the first to
commercialize the new technology unless they are threaten by competitors.
But as we all know from the evolutionary theory of economy, firms cannot innovate in
isolation so even vertically integration requires close contact with the market just to
implement all the competences needed. By doing so, vertically integrated firms even cannot
abandon doing contacts with procurers.
As patents are regarded as touchstones of the innovation activities, a firm may choose to
integrate in patentability activities by providing complementary ones outsourced. From this
point of view, we can clearly claim that vertical integration of firms in technology field does
not lead them isolation, contrarily it specifies the specialization degree of firms. Meaning,
patents required for technological progress are selected by firms depending on their priority so
that in an industry one see often mixed business models for patenting activities.
Conclusion
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Quantitative analysis that was conducted for this paper points a changing balance of
technologies used in industries; some lose their importance while some gain such as
semiconductors. Also we figured out that there are differences in the strategies in terms of
R&D activities between and within the industries and we bring an explanation to the situation
by introducing a perspective that is a combination of evolutionary theory and strategic
grouping concepts. After evaluating the results obtained from the assignees of patents analysis
we concluded that firms are already integrated their R&D to semiconductors which is as
nature a component supplied from market and it is found out that the majority of the firms
under the analysis are vertically integrated in the manufacturing of the semiconductors as
well. Moreover, having known that firms manufacture semiconductors, a ratio analysis of
semiconductor sales / patent applications which may indicate further differences of R&D
activities in terms of the nature of the research made of firms and industries conducted.Furthermore, we discussed the motives to be vertically integrated regarding the economic
behavior theories such as transaction cost approach.
REFERENCES
Malerba F. (1985), The semiconductor business: the economics of rapid growth and decline ,
University of Wisconsin Press, 1985
Hippel E. von (1988), Sources of Innovation , Oxford University Press,1988
Porter M. (1980), Competitive Strategy , Free Press, New York, 1980
Wilson R., Ashton P., Egan T (1980), Innovation, Competition and Government Policy in the
Semiconductor Industry , Lexington, Mass; D.C, 1980
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I.b)
APPENDIX II
APPENDIX III