Small businesses are accounting for a smaller fraction of new technology creation than they used to, at least according data from the U.S. Patent and Trademark Office (USPTO). That trend has many policy makers and pundits concerned that our innovation system is handicapping small business.
While that explanation is possible, I think a more basic story accounts for the trend. Small business is a shrinking fraction of the U.S. economy.
What’s Behind the Decline in Patents Granted to Small Entities?
Let’s start with the facts. As the figure below shows, the share of patents awarded to small entities declined from 25.9 percent in 2001 to 19.0 percent in 2015. While the pace of the decline has moderated in recent years, the size of this decrease remains substantial. Small entities account for a much diminished slice of technology creation than they once did.
Some observers have argued that this decline reflects growing obstacles to small business innovation. The cost of patenting has risen in recent years, this school of thought argues, making it more difficult financially-constrained small businesses to pursue patent protection for their technological innovations. The USPTO has become less likely to grant patent applications in recent years, coming down particularly harshly on small businesses, research shows. A slowdown in the processing of patent applications makes it more difficult for small businesses to use the patent system to protect their products and services against imitation by competitors since patents are being awarded too slowly to be of much value to them. Finally, patent infringement lawsuits have become more common and costly to prosecute, making it more difficult for small businesses to enforce their patent rights in court.
While the obstacles-to-small-business-innovation argument for the decline in the small business share of patents is certainly plausible, I believe that a simpler explanation is more likely. Small business’s share of patents has declined simply because small business’s share of the economy has fallen.
Much data shows that small business accounts for a smaller slice of the private sector now than it did in the 1980s, 1990s, and 2000s. Consider a few statistics. Between 1998 and 2011, small business’s share of U.S. private sector payrolls declined from 48.6 percent to 42.0 percent. The share of the labor force employed in small companies fell from 54.5 percent in 1988 to 48.4 percent in 2013. In 1998, small businesses accounted for 50.5 percent of private sector GDP, but in 2011 they contributed less than 45 percent.
Policy makers should certainly investigate the causes for the decline in small business’s contribution to U.S. inventiveness. But I think they will find it is proportion to what has happened to small business in general.
Invention Team Photo via Shutterstock
That’s sad. It discourages innovation in small businesses. We must not forget that the greatest innovations started small and these should be recognized.
Even if a small business finally gets a patent issued any large company that decides it wants to use the technology without paying royalties can now do so. All they have to do is file an IPR, Inter Partes Review, with the USPTO against the patent to get it invalidated. For a small company to defend itself against an IPR is extremely expensive and can take up to 2 years. In the end there is an 80-90% chance that their patent will be invalidated by a USPTO review board and there is no appeals process. For the large company to file an IPR it costs them only about $100,000.
There is also a company called Unified Patents that will file an IPR on behalf of one of its members to help their member steal technology.
You can thank companies like Google and Apple for creating this IPR process 7 years ago and getting included in the America Invents Act.
Lack of attention and corresponding federal policy at the highest levels of our government also play into this. Congress largely ignores real self employment/small business engagement and starves the Small Business Administration for funding. SBA during this past 15 years has focused on “gazelles” and little more. States and Counties and Cities compete with subsidies to steal each others bigger, more established businesses and in the Federal Contracting marketplace a recognized strategy (by big business and some start up entrepreneurs) is to buy emerging small businesses that have a niche corner with DOD (70% of the federal contract market), and other agencies. Meanwhile SBIR/STTR nationally maintains less staff then a co-ed softball team. Open and free markets are increasingly closed off to many entrepreneurs in this system.
Small business innovation is tied directly to access of capital for new ideas. Since most small businesses are capitalized by the owners equity in real estate, the real estate bubble dried up the most commonly available sources of capitalization. Since innovation is inherently a high risk venture, obtaining finance for it requires the debt be secured with a multiple of asset/debt ratio far above what is needed for typical loans. Combined with a deep recessionand slow recovery small businesses are funding survival not innovation. We need to get back to easy financing for risk taking to occur.
Perhaps the recommendations of VC’s who want the firms to scale up and ibtain better market share and obtain velocity. As stated patent trolls could be usurping smaller firms in the court system as well. Also, perhaps there aren’t many real unicorns growing n gaining market share. I hope we can focus on leadership like Elon Musk who are building better mouse traps instead of another social hub. Real tangible products are best.