General purpose and focused invention, market value, and productivity

Abstract

We study returns to general purpose and focused invention at the firm level for a panel of manufacturing firms in the U.S. for the period 1976-1995, by studying their relationships with market value and Total Factor Productivity. We construct stocks of patents that lie at the two relevant tails of the distribution of the generality index (Trajtenberg et al., 1997; Henderson et al, 1998) to measure general purpose and focused invention at the firm level. In line with expectations, there is a market value premium to focused invention, and a productivity premium to general purpose invention. Estimates for the value of focus indicate that moving a single patent from the upper tail of the generality distribution to the lower tail would increase market value by .24×q million 1992 dollars on average, where q is Tobin’s q. The firm with the average general patent stock would gain 6.7×q million in market value if all its patents at the highest quartile of the generality distribution were moved to the lowest. In terms of the value of general purposeness, moving all its focused patents to the general category increases Total Factor Productivity by 2.3% to 2.8%, and five-year productivity growth by 3.9% to 5.2%, for the average firm. A potential implication is that corporate basic research is associated with significant long-term benefits in terms of productivity growth.