The waste-watchers

Bernard Sadow’s Eureka moment came in 1970 as he went through customs at San Juan Airport in Puerto Rico. En route home from a family vacation, he was struggling with two large suitcases when he noticed an airport employee effortlessly wheeling a heavy load on a cart. Back home, Sadow began experimenting, and soon he held the first successful patent on wheeled suitcases.

Connecting the dots this way is a common form of innovation. One study of all the patents ever registered by the U.S. Patent and Trademark Office found that 40% are “recombinative”: they combine two or more existing technologies and configure them in a new way.

It sounds simple enough: combine old inventions to produce a new one. But research shows that innovation is happening so quickly that society is losing its ability to manage that innovation capably.

Intangible assets

In their book Restarting the Future, British scholars Jonathan Haskel and Stian Westlake argue that the intangible economy has replaced the one that dominated the industrial age. “The economy is no longer the physical stuff, like parts and machinery, and is more about things that we can't touch and feel, like research and development, brands, artistic originality,” Westlake explains.

The authors say much of the global economy’s lackluster performance in recent decades is due to the inability of institutions to keep up with the changing nature of innovation and growth. In the UK, for example, where the first patent was granted as long ago as 1449, intellectual property law provides comparatively little protection for software. Given the importance of code in the modern economy, this is problematic enough. But when ethics and privacy activists demand that AI be made more transparent and that its algorithms be open to scrutiny, legal protections become critical for software makers.

Then there is the issue of patent trolls who buy intellectual property (IP) to extract rent from those who want the IP for commercial use. While some research suggests that trolls can be useful intermediaries between inventors and larger organizations, the prevailing image is perhaps typified by the convicted fraudster Martin Shkreli, who achieved notoriety for buying the IP of certain drugs, then raising their prices by more than 5,000 percent.

Diminishing returns
Of the 2.1 million patents active today, about 95% are estimated to remain unlicensed and uncommercialized. Given the vast sums spent by companies on R&D each year, that's a tremendous waste.

Indeed, research from Stanford found that organizations employ about 20 times as many people in their R&D departments today as they did in the 1930s, and that over the past few decades roughly $5 trillion has been spent on R&D in the U.S. alone. Yet the returns have not stacked up. Indeed, Forrester Research found that American firms are currently spending $1 trillion per year on IP assets that are not being used to their fullest potential.

A gummed-up system
Part of the problem is that many organizations lack a clear understanding of the patents they have, and how those patents fit with their strategic goals.

Platforms such as Quirky and Marblar were set up to help firms to reclaim some of the sunk costs of corporate R&D. The platforms allowed companies to put unused IP into the marketplace for innovators to build on, with the rewards of any subsequent commercialization shared by both parties.

Unfortunately, neither platform was successful. In 2014 Nigel Swycher and a partner launched Cipher, a company that uses AI and machine learning to manage data related to IP ownership. Swycher says previous platforms failed because patents are complex.

"The first thing to consider is the value of intellectual property, and the second thing is the ability to trade in intellectual property, and the two are not always the same thing," Swycher explains. "Perhaps the best analogy is the human heart. If we think about how much our own heart is worth to us, it's a great deal, but when we think about its worth on the secondhand market, it's often that of a slab of meat."

While some patents can be valuable in isolation, technologies such as the smartphone have hundreds of thousands of patents related to them. This explains why Google spent $12.5 billion to buy Motorola and its 20,000 mobile patents. Only in the aggregate were those patents valuable.

Small companies are playing catch-up
Technology's complexity creates its own problems, including the risk that its benefits will be unequally distributed. For instance, research by the World Economic Forum finds that many small and mid-sized enterprises (SMEs) want to adopt digital technology more aggressively, but face barriers that include financial constraints, a lack of skilled labor, and insufficient support from senior leadership. This is consistent with other studies showing that the use of AI and other technologies could help SMEs cope with the disruptions caused by Covid, but that very few businesses are actually using those technologies.

“Technology's complexity creates its own problems.
Bigger organizations benefit not only from having the means to make huge investments into R&D, but from other intangible factors such as the strength of their brand, the robustness of their supply chains, and the skills of their workforce. Such elements give bigger companies a competitive edge, and create barriers that help keep potential rivals at bay.

A brighter future?
Some believe that recombinative innovation could be enhanced through greater disclosure and transparency. For example, privacy and ethics advocates are recommending that “explainability” be made a central part of AI systems. But if companies are legally required to make their AI completely transparent, then the IP of those companies will receive weaker protection, and rivals could reverse engineer their algorithms.

In the years ahead, intellectual property will change in ways that may come as a shock. The Kremlin, for example, has announced that Russian companies no longer have to compensate IP owners from Western countries that are “unfriendly” to Russia. And the Covid pandemic has sparked conversations about the need to waive patent protection on life-saving vaccines.

It’s said that meaningful change requires a burning platform. The last few years have served up plenty of those. Yet it remains to be seen whether this will result in the kinds of changes necessary to make the modern economy a fairer and more satisfying place.