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Patents – protection or monopoly?

AUTHOR: Lachlan Colquhoun   DATE: 12.04.06   ISSUE 1, 2006

Professor Murmann, who joined AGSM this year from Kellogg School of Management in the US, is the author of 'Knowledge and Competitive Advantage: The Coevolution of Firms, Technology and National Institutions' which tracks the synthetic dye industry from 1857 to 1914 in Germany, Great Britain, the United States, France and Switzerland.

"This shows that government policies, whether intended or unintended, have a dramatic effect on how strong an industry will be in international competition."

Illustration: Gregory Baldwin

While at Kellogg, research based on his book won Professor Murmann the 2004 Reiter Best Paper Award at the school and the 2004 award of the International Joseph Schumpeter Society.

Professor Murmann was also recently named as the co-recipient of the Kapp Prize of the European Association for Evolutionary Political Economy.

Professor Murmann's book was the culmination of nine years’ research, during which he says he performed the role of “industrial archaeologist,” combing through trade directories, exhibitions and looking at the development of chemistry departments at universities in the studied countries.

His work showed that while Great Britain and France were the standout leaders in the dye industry in the first part of the research period, their patent laws created monopolies which stifled competition.

Germany, in contrast to Britain and the U.S. had strong chemical research in its universities and was without a patent law until 1877. This created good technical knowledge, an open market and strong competition, which meant that when the British and French patents ran out, the Germans were – to the surprise of almost everyone – able to then dominate the industry.

Companies have to think very carefully about where they are going to locate in the world, because being located in a region which produces more knowledge for a particular branch of science might be hugely important for succeeding on a global scale. “Everybody predicted that Great Britain was going to dominate this industry for decades because it had the raw materials and the biggest markets, so it seemed a simple case of British firms having a home advantage they would use to dominate the world market – but it didn’t work out that way,” Professor Murmann says.

The British and French patent laws gave their companies a nice monopoly profit for the duration of the patent, but at the same time it didn’t make them very competitive because they could hide behind these artificial monopoly profits while in Germany – and also in Switzerland – companies could freely enter the market.

“And because they had gone through vigorous competition these German and Swiss companies were more competitive than the traditional monopolies when the patents ran out.”

"My own view is that the default public policy should be that you don't have any patents anywhere."

Photo: Professor Peter Murmann

Another important factor in the rise of the German dye industry was the strength of German chemistry in that country’s university system, and how that was utilised by industry.

While this may have initially been unconscious at the public policy level, it was quickly recognised by industrialists and government as a crucial source of Germany’s competitive advantage, with industry lobbying the government for more funding.

“Once the industry was in existence the Germans were able to convince the government to spend more, and so they built state of the art laboratories in Bonn, Munich and Berlin in the 1860s,” says Professor Murmann.

Professor Murmann says while in 1862 Britain had 50 percent and France 40 percent of the world market, by 1870 German firms had grown to take a 50 percent world market share.

Many of the lessons of the synthetic dye industry are relevant to the bio-technology industry today, and also to packaged software. The dye industry, says Professor Murmann, is highly relevant as an area of study because it was the “first science-based industry where an invention made in a laboratory was quickly transformed into a commercial product.”

“The lesson we can draw is that companies have to think very carefully about where they are going to locate in the world, because being located in a region which produces more knowledge for a particular branch of science might be hugely important for succeeding on a global scale,” says Professor Murmann.

Companies have to think very carefully about where they are going to locate in the world.

“Being close to good universities, as sources of knowledge and capability is very important, as are differences in public institutions like patent laws.”

“Why are the Americans dominating packaged software today? Well its because the Pentagon invested a lot of money into building up the computer science industry in the United States so again its a lesson for the high tech and engineering fields,” says Professor Murmann.

He also sees parallels between the rise of India and China as manufacturing powers and the softer patent laws in those countries. “Its clearly not in the interest of the industrialised countries to have strong patents, and this is what we are seeing in China – and they are resisting strong patent law for the right reasons,” says Professor Murmann.

The research has led Professor Murmann to a re-evaluation of patent laws, and to think about the ideal balance between protecting intellectual property, and promoting competition to create strong national industries.

“Yes, in some industries you want to give patents because if you don’t provide patents the companies would not make investments and they would not do the innovation,” he says.

Being located in a region which produces more knowledge for a particular branch of science might be hugely important for succeeding on a global scale.

But in many industries that is not the case at all, and in fact patents stifle the speed of development.

“My own view is that the default public policy should be that you don’t have any patents anywhere, and then if one can make the case in a particular industry or product that if you don’t have a patent then you don’t get innovation then you might grant patents as a special exception.”

Professor Murmann is continuing his research, in collaboration with a student in India and another in Japan.

He has also begun a new project, looking at the development of the global pulp and paper industry over the last 200 years.

With Australia a player in these markets, the results of that research should be highly relevant and a significant contribution to understanding industrial development in this country.

Cambridge University Press has just issued a paperback version of Professor Murmann’s book on the synthetic dye industry. More information on the book can be found on his website at http://professor-murmann.net/