Do innovative firms rely on big secrets? An analysis of IP protection strategies with the CIS 4 survey

Innovative companies have a variety of instruments at their disposal to protect themselves from imitators, and this paper investigates the determinants of the protection choices with a focus on highly innovative respondents. While the patent system's aim is that firms apply to patent their innovations, especially the most important ones, theoretical results in the existing literature suggest that large innovations will rather be protected by secrecy because of the legal uncertainty surrounding intellectual property rights. In line with the predictions of their model, our probit analysis conducted using data from the Community Innovation Survey 4 shows that, in the intermediate goods industry, small innovations are patented while secrecy is used to protect large ones. For very innovative small firms, the share of innovative sales in total sales has a negative effect on patent application. These findings support the view that many innovative firms regard patent filing as no more secure than secrecy, which therefore limits the diffusion of knowledge.