Patents to Products: Product Innovation and Firm Dynamics

David Argente, Salomé Baslandze, Douglas Hanley, and Sara Moreira
Working Paper 2020-4
April 2020

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Abstract: We study the relationship between patents and actual product innovation in the market, and how this relationship varies with firms’ market share. We use textual analysis to create a new data set that links patents to products of firms in the consumer goods sector. We find that patent filings are positively associated with subsequent product innovation by firms, but at least half of product innovation and growth comes from firms that never patent. We also find that market leaders use patents differently from followers. Market leaders have lower product innovation rates, though they rely on patents more. Patents of market leaders relate to higher future sales above and beyond their effect on product innovation, and these patents are associated with declining product introduction on the part of competitors, which is consistent with the notion that market leaders use their patents to limit competition. We then use a model to analyze the firms' patenting and product innovation decisions. We show that the private value of a patent is particularly high for large firms as patents protect large market shares of existing products.

JEL classification: O3, O4

Key words: product innovation, patents, creative destruction, growth, productivity, patent value link

The authors are grateful to Antonin Bergeaud, Pete Klenow, and Jesse Perla for very helpful discussions. They also thank Ufuk Akcigit, Fernando Alvarez, Toni Braun, Benjamin F. Jones, Claudio Michelacci, Juan Rubio-Ramirez, and numerous seminar and conference participants at Harvard Business School, the University of Austin, Chicago Fed, Atlanta Fed, Bank of Portugal, EIEF, EPFL, Northwestern, Rochester, the University of Lugano, and the University of Milan. They also thank participants in the CEPR Symposium, NBER SI Innovation, NBER SI Economic Growth, NBER Productivity Group, SED (Mexico), and Midwest Macro. Researcher(s)' own analyses were calculated (or derived) based in part on data from The Nielsen Company (US) LLC and marketing databases provided through the Nielsen data sets at the Kilts Center for Marketing Data Center at the University of Chicago Booth School of Business. The conclusions drawn from the Nielsen data are those of the researcher(s) and do not reflect the views of Nielsen. Nielsen is not responsible for, had no role in, and was not involved in analyzing and preparing the results reported herein. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to: David Argente, Department of Economics, Pennsylvania State University, 606 Kern Building, University Park, PA 16801,; Salomé Baslandze, Research Department, Federal Reserve Bank of Atlanta and CEPR, 1000 Peachtree Street NE, Atlanta, GA 30309-4470,; Douglas Hanley, Department of Economics, University of Pittsburgh, 4510 W. Posvar Hall, 230 S. Bouquet Street, Pittsburgh, PA 15260,; or Sara Moreira, Kellogg School of Management, Northwestern University, 2211 Campus Drive, Evanston, IL 60208,

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