User Innovation Patents - An analysis of Patent Porftolios and Theoritical Approach to the motives...

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

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