Abstract:
New Zealand politicians, policy-makers, and scientists have been talking for the last several years about the importance of innovation and how New Zealand needs to have an “innovation economy”. While this is a laudable goal, many ideas about how to achieve higher levels of support for innovation seem to be based on comparisons (e.g. what makes Singapore successful) rather than going back to the basic underpinnings. This is where the Marsden-funded work of two theoretical economists from the University of Otago and Massey University, Drs Steffen Lippert and Simona Fabrizi, comes into play. Theoretical economics may seem like an unlikely discipline from which to approach technological innovation but their work has provoked widespread interest nationally and internationally, from both an academic audience and various non-academic bodies such as the Commerce Commision. Drs Lippert and Fabrizi were interested in the increasingly important role that venture capital plays in the innovation process. Specifically, they were interested in studying the incentives of venture capitalists to provide funding to financially constrained entrepreneurs, and looking at how these incentives are affected by the design of the intellectual property system. Their end goal was to determine the optimal intellectual property system, and provide sound policy recommendations aimed at fostering innovation. They, together with their collaborators Associate Professor Pehr-Johan Norback and Professor Lars Persson, developed a model of venture capitalists’ behaviour. This model was based on three key features that encapsulate the way in which venture capitalists specialise in selecting and supporting high-potential entrepreneurial ventures with the long-run aim of selling them at high proceeds. An important part of the model is information acquisition and signalling – how do entrepreneurs get the information that allows them to judge whether a venture is worth investing in, and how do they then signal to already-established companies that this venture is worth buying? It is in this latter signalling stage that the intellectual property system plays a key role. Venture capitalists use patents to signal the value of an innovation to prospective buyers. Their model showed that a tightening of patenting requirements by the patent offices (such as increasing the thresholds for judging novelty, non-obviousness and usefulness) increases the pool of early-stage (unpatented) ideas. Venture capitalists are better at judging these early stage ideas than companies already in an area, and can invest in them. It also decreases the number and breadth of patented claims needed to separate highly valuable innovations from less valuable ones, meaning that the venture capitalist can use a good quality patent as a signal to buyers. What this all translates to is: tightening of patent requirements would make venture capitalists more likely to back entrepreneurs and increase entrepreneurial incentives to innovate. This is a concrete policy recommendation based on theory that is attracting much attention. As another part of the ongoing outcomes of this project, Drs Lippert and Fabrizi have, together with Professor Hodaka Morita from the University of New South Wales, also established a New Zealand based Research Network for Applied and Theoretical Economics. The intent of this network is to promote further research Zealand with significant real-world relevance and implications.