Purpose: This article offers a critical view of the impact of patents on economic activity.Design/methodology/approach: We develop two analytic innovation models. They help us to understand how the strength of the patent system affects 1) the industry profits 2) the social welfare.Findings: The strengthening of patent systems could cause a decline in the activities of imitation and, therefore, a decrease in competition, a reduction in the production and assimilation of new technologies and could create barriers to entry into technology-intensive sectors, increasing the costs of production. We will show that a lower strength patent system and an increase in the activities of imitation can i) increase the benefits to industry as a whole ii) lead to greater social surplus.Originality/value and social implications: Much of the literature on innovation has traditionally seen imitation processes as harmful to the development of new technologies, and detrimental to the welfare of consumers, producers and society at large. That is why policies aimed at strengthening the patent system and discouraging imitation processes are associated with improvements in social welfare, —fostering innovation, trade, foreign investment and technology transfer—. However, our findings should lead us to rethink how optimal innovation policy should be designed. The problems associated with restrictions on the free market involve costs that outweigh the social benefits that patents can provide. Market mechanisms can effectively reward innovators for being the first to bring a product into the market, without the need to grant a monopoly.
The Alignment of Innovation Policy and Social Welfare: Evidence from Pharmaceuticals