Research on Markets for Inventions and Implications for R&D Allocation Strategies

In the last 20 years the traditional tenet that the entire innovation process, from idea generation to commercialisation, is performed within the organisational boundaries of single firms has been challenged by the phenomenon of markets for inventions: the trade of knowledge "disembodied" from individuals, organisations, and products. Typical examples of transactions in these markets are patents' sales or technology licensing agreements where the developer of the technology grants another party the right to use said technology in a product.

This article brings together various streams of research in this area over the last 20 years and discusses their major assumptions and limitations, providing a comprehensive framework for understanding the phenomenon of markets for inventions, and identifying promising paths for future research. In this research markets for inventions are compared with the other recent phenomenon of open innovation and open source.

This research also emphasises some interesting implications that the existence of markets for inventions generates for innovative firms. First, technology has historically played a key role in determining firms' sustained success, because it has commonly been one factor not available on the market. Thus, the development of technology markets might reduce the role played by technology in determining a firm's competitive advantage.

Second, from the perspective of technology buyers, a natural consequence of markets for inventions is that they provide firms with more technologies from which to choose, as the scale of a market is inevitably larger than that of a single firm. Hence, it becomes crucial for firms to invest in their capability to evaluate technologies.

Furthermore, in the face of a higher supply of technologies to choose from, a key question concerns the allocation of firms' resources across different technologies. Is it better for a firm to invest a small amount of resources in different technological paths and experiment with multiple technologies? Or is it better to commit to a few sets of technology and invest a substantial amount of resources in it, to increase the probability that such bets prove successful?

This research suggests that to answer this questions firms should examine the nature of the uncertainty they face - and in particular, the extent to which such uncertainty can be reduced by firms' actions- and the structure of the returns from investment in each technology. This research was published in the Academy of Management Annals. The complete research paper can be downloaded from the Taylor & Francis Group website.