Visibility of Technology and Cumulative Innovation: Evidence from Trade Secrets Laws

Abstract

We use exogenous variation in the strength of trade secrets protection to show that a relative weakening of patents (compared to trade secrets) has a disproportionately negative effect on the disclosure of processesinventions that are not otherwise visible to society. We develop a structural model of initial and follow-on innovation to determine the effects of such a shift in disclosure on overall welfare in industries characterized by cumulative innovation. We find that while stronger trade secrets encourage investment in R&D, they may have negative effects on overall welfare -the result of a significant decline in follow-on innovation.

The Economic and Innovation Impacts of Trade Secrets

“…25% of respondents in work by Martinis et al (2013) believe that trade secrets owners would use secrets to raise barriers to entry in their markets via aggressive litigation and other behaviours towards competitors. There is also a delicate balance between trade secrecy that encourages investment in R&D, and that which limits knowledge spillovers (leakage) (Png, 2017a;Ganglmair & Reimers, 2019). Negative trade secrets create environments in which competitors waste R&D investments on research avenues known elsewhere to be failures.…”