Private Value of European Patents

Yi Deng∗
November 10, 2003

Abstract
This paper analyzes the initial filing and the subsequent renewal
decisions of the international patent applicants. Specifically I use as
data input a comprehensive patent documentation collected from the
EUropean Patent Office (EPO) that was unprecedented in its level of
disaggregation by various characteristics such as nationality of inven-
tor, type of technology and designated country of patent protection,
as well as the prolonged time period it covers. The nonparametic test
results reveal that all of these characteristics have significant influence
on the renewal pattern, and that the nationality of inventor as well
as the technological classification has significant influence on the ap-
plication pattern of European patents. I also formulate a structural
model and analyze the initial filing and designation decisions faced by
the EPO patent applicants, and find that the model is able to capture
the distinctively different filing patterns across different nationality
groups and technological classifications groups reasonably well.
JEL Classification: C12, C13, C33, D23, K11, L15

∗
Special thanks go to Jean Lanjouw, Ariel Pakes and Steven Berry for their insightful
suggestions and comments. I am much obliged to the OECD for allowing me to access the
patent data. Financial support from Yale University Dissertation Fellowship is gratefully
acknowledged. Email: ydeng@smu.edu. Address correspondence to: Yi Deng, Department
of Economics, Southern Methodist University, Dallas, TX 75275, USA.
1 Introduction
Patent data have long been used as an indicator of the output of innovative
processes. While simple patent counts are publicly available and easily ob-
tained, the private and social value of innovations protected by patents varies
widely, making patent counts too noisy an indicator of innovative output in
many cases. In finding good measures of the value of patents, it is essential
to observe that patenting is an optimizing process. The value of holding a
patent lies in the monopolistic rights that a patent grants the patentee of
making, using or selling an invention, whereas to obtain and maintain patent
protection, the inventor has to pay the cost of filing the patent application as
well as the renewal fee. That is to say, the inventor makes a binary decision
of whether to file a patent application by comparing the private value of the
patent which may be known only to him and the application cost which is
publicly observable. Similarly, he decides whether to keep a patent in force
by comparing its private value known to him and the renewal fee, and drops
the patent when the cost of renewal exceeds the value of the patent. There-
fore, if we observe the length of time that a patent has been kept in force,
together with the renewal fee schedule, we may be able to learn quite a lot
about the private value of the patent.
The international patent system offers even richer information for the
analysis of patent value. The value of holding a patent does not stay the
same across countries, because of many possible reasons. For one thing,
different countries provide different market sizes for the innovation. For
another, the scope of protection a patent obtains may vary across countries
due to different judicial and technological backgrounds. By decomposing the
patent value into components that are common across countries and those
that vary by country, both systematically and stochastically, we will be able
to look at the contribution of different country’s institutional regime to the
private value of patents.
Besides information on the number of years a patent is renewed and
the combination of countries in which patent protection is sought, there are
other useful information contained in a patent document that allows further
exploration of factors affecting the value of a patent. For example, data
on the technological area that a patent falls into, and the nationality of its
owner, make it possible for us to study whether systematic differences exist in
the mean value of innovations protected by different groups of patents, or in
other words, which technology groups or countries benefit disproportionately

1
from the patent system.
Previous research proposed many patent-characteristic weighted measures
of innovation quality, with the weights being years of renewal (Pakes, 1986;
Schankerman and Pakes, 1986), the number of countries in which the patent
is applied for (Putnam, 1996) and patent citations (Trajtenberg, 1990; Hall,
Jaffe and Trajtenberg, 2001). Pakes and Schankerman (1984) construct a
deterministic model where the return to patent protection decay determin-
istically at an fixed rate, and the patentee has to pay an increasing renewal
fee to keep the patent in force. Pakes (1986) extends the model to allow
the patentee to be uncertain about the sequence of future returns. Lan-
jouw (1998) estimates a dynamic stochastic discrete choice model of renewal
decisions taking into account the fact that patentees not only have to pay
renewal fees to keep the patents in force, but also have to pay legal expenses
in order to prosecute infringement. Putnam (1996) first attempts to uti-
lize international patent application data in studying the private value of
patents, where he models the inventor’s decision on whether to file a patent
application in multiple candidate countries. While the above studies rely
on assumed functional forms of the distributions for initial returns, Pakes
and Simpson (1989) develop non-parametric tests that do not rely on strong
functional form assumptions to test whether the returns to patent protection
for different groups of patents are significantly different.
This paper analyzes the initial filing and the subsequent renewal deci-
sions of the international patent applicants. Specifically I use as data input
a comprehensive patent documentation collected from the European Patent
Office (EPO)1 that was unprecedented in its level of disaggregation by var-
ious characteristics such as nationality of inventor, type of technology and
designated country of patent protection, as well as the prolonged time period
it covers. This documentation enables me to exploit the details of patent data
to assess the quality of innovation around its birth. The nonparametric test
results reveal that all of these characteristics have significant influence on
the renewal pattern, and that the nationality of inventor as well as the tech-
nological classification has significant influence on the application pattern
of European patents. I also formulate a structural model and analyze the
initial filing and designation decisions faced by the EPO patent applicants,
1
I thank Ariel Pakes and Jean Lanjouw for kindly allowing me to use this dataset. The
original source of the dataset is the EPO databases, and the data assembly is funded by
the OECD.

2
and find that the model is able to capture the distinctively different filing
patterns across different nationality groups and technological classifications
groups very well.
The rest of the paper is organized as follows. Section 2 starts with an
overview of the data, then it performs a sequence of non-parametric tests
on whether the patent application pattern as well as the patent renewal
pattern are related to different patent characteristics, such as the number
of countries in which the patent is applied for and which country these are,
nationality of inventor, type of technology and date of patent application,
etc. Section 3 formulates a static structural model to analyze the optimal
patent application decision under the regime of EPO. Section 4 summarizes
the estimation results and compares the model implications with the filing
and designation patterns revealed by the nonparametric analyses in section
2. Section 5 concludes.

2 Non-parametric Studies on the EPO Patent

Applications and Renewals
2.1 Background of the EPO
The European Patent Office (EPO) provides patent protection in up to 18
European countries with a single patent application and a single grant pro-
cedure. The inventor pays filing and search fees to the EPO, and designation
fees for each of the contracting countries he chooses to seek patent protection
in. The designation fees must be paid within twelve months after filing the
application, which means the inventor has up to one year to decide in which
countries it is profitable for him to obtain the patent. It takes on average
just over three years for a patent to be granted. Once a European patent is
granted, it gives the holder the same rights as a national patent in the des-
ignated contracting countries, and it is valid for 20 years from filing. Patent
holders pay renewal fees to national patent offices at rates fixed by individual
countries.
The EPO entered into force in 1977 with seven member countries, and
received the first European patent application on June 1, 1978. Over the
years more member countries joined and the number of European patent ap-

3
plications grew quickly. Today the EPO has 18 European member countries2 ,
and over 760,000 patent applications had been filed by the end of 1997. The
EPO provides a cost-effective and time-efficient way of applying for patent
protection in multiple countries.
The estimations carried out in this paper use disaggregated data com-
prising renewal information in the EPO member countries for a population
of patents submitted for the approval of EPO during 1978-1997. For each
patent which was no longer in force in 1997 in a given country the data
contain the date the patent expired in that country. The data include all
the 761,540 patents that sought protection in EPO during 1978-1997. The
data also include application fees and costs associated with granting, and
also annual renewal fees charged by the EPO and national patent offices. In
this section a sequence of non-parametric tests on the filing decisions as well
as the renewal decisions are presented.

2.2 Filing Decisions

2.2.1 Summary Statistics
The data set records the application and grant dates, nationality of the appli-
cants, technological classifications (International Patent Classification codes
or IPC codes) as well as the designation countries of each application. In
order to avoid repetitive counting where a patent application has more than
one nationalities or multiple IPC codes, I only include those patent applica-
tion with single nationality and single IPC code in the sample selected for
the analysis on filing decisions in this section (the analysis on renewals in
this section, however, uses a different sample). This procedure reduces the
sample size from 761,540 to 616,536, and this sample is also the one used in
the structural model formulated and estimated in section 3 and 4.
In order to study whether the application pattern is related to the nation-
ality of the applicants, I categorize the patent applications into five groups
according to the applicants’ nationalities: DE (Germany), US (the United
2
The seven countries constituting the first members of the EPO are: Belgium (BE),
Switzerland (CH), Germany (DE), France (FR), the United Kingdom (GB), Luxembourg
(LU) and the Netherlands (NL). Sweden (SE) and Italy (IT) become EPO contracting
states in 1978, and Austria (AT) in 1979. Liechtenstein (LI) joined in 1980, Greece (GR)
and Spain (ES) in 1986, Denmark (DK) in 1990, Ireland (IE), Monaco (MC) and Portugal
(PT) in 1992, and finally Finland (FI) in 1996.

4
States), JP (Japan), EPO (all the 18 EPO contracting states except Ger-
many), and OTH (the rest of the world)3 . Table 2.1 reports the composition
percentage of these five nationality groups in the whole sample in different
time periods as well as the approval percentage within each group. The first
four groups (DE, US, JP and EPO) constitute more than 95% of the sam-
ple, and the EPO group is the largest, having approximately 30% of the all
616,536 applications. The US group is the second largest group, consisting
of about 28% of the whole sample. Patent applications from Germany and
Japan account for about 21% and 18% of the sample, respectively. The grant
rate does not differ significantly across DE, JP and EPO groups: it varies
from 51% to 57%. The US group has relatively lower approval rate, at about
42%, and the approval rate of the OTH group is the lowest, at about 35%.
One thing worth noting is that the approval rates during 1992 to 1997 are
significantly lower than the corresponding rates in 1978-1985 and 1986-1991.
This is because the period for the EPO to examine the patent applications
and to make the approval decisions is in many cases over three years. There-
fore many of the applications submitted by the end of the sample period are
still waiting for the final grant decisions. See Figure 2.1 for the cumulative
distribution of the length of waiting period for the EPO applications.
Table 2.1: Percentage of Nationality Groups in the EPO Patent
Applications and Approvals During 1978-1997
1978 to 1985 (%) 1986 to 1991 (%) 1992 to 1997 (%) 1978 to 1997 (%)
Nationa Applica Grant Applica Grant Applica Grant Applica Grant
-lity -tion rate -tion rate -tion rate -tion rate
DE 23.20 73.13 20.93 68.85 20.13 30.41 21.22 57.44
US 27.79 62.68 27.05 54.66 28.81 13.27 27.84 41.88
JP 12.91 84.95 19.41 73.51 19.14 16.75 17.92 54.02
EPO 32.76 66.96 29.25 62.80 27.99 23.93 29.68 51.31
OTH 3.35 49.64 3.36 44.24 3.34 14.54 3.35 35.38
Total 152,075 104,843 252,159 159,666 212,302 43,376 616,536 307,885

Note: Table 2.1 reports the composition percentage of five nationality groups
in the whole sample during different time periods as well as the patent grant
percentage within each group.

3
Note that the total number of the EPO member countries is growing over the years.
As EPO grows, the number of countries in OTH shrinks.

5
 Figure 2.1a: Cumulative Distribution of the Length of Waiting
Period for the EPO Application Approval: 1978 - 1997

1.2

0.8

0.6 Cumulative Frequency

0.4

0.2

0
s

s
ar

ar

ar

ar

ar

ar

ar

ar

ar
ye

ye

ye

ye

ye

ye

ye

ye

ye
1

Note: During 1978-1997, less than 20% of the EPO grant decisions were made within
3 years since the initial filing. By the fourth year, however, over 50% of the EPO grant
decisions had been made, and over 99% of the grant decisions were made within 9 years
since the initial filing. The mean waiting period is 4.17 years, and the median is 3.93 years.
Figure 2.1b: Cumulative Distribution of the Length of Waiting
Period for the EPO Application Approval: 1978 - 1991

1.2

0.8

0.6 Cumulative Frequency

0.4

0.2

0
s

s
ar

ar

ar

ar

ar

ar

ar

ar

ar
ye

ye

ye

ye

ye

ye

ye

ye

ye
1

Note: During 1978-1991, less than 20% of the EPO grant decisions were made within
3 years since the initial filing. By the fourth year, 47% of the EPO grant decisions had
been made, and over 99% of the grant decisions were made within 9 years since the initial
filing. The mean waiting period is 4.27 years, and the median is 4.18 years.

6
 Figure 2.2 shows the number of countries a typical patent applicant desig-
nates across different nationalities. The top panel displays the number of the
“Big Four” countries (Germany, France, England and Italy) a typical appli-
cant designates in different nationality groups, and the lower panel displays
the number of the other EPO contracting states, as well as the number of all
of the 18 EPO contracting states a typical applicant designates in different
nationality groups.
The top panel of Figure 2.2 indicates that patent applicants with different
nationalities do not differ too much in deciding whether to designate their
patents in the “Big Four” countries, especially in Germany, France and the
U.K. Almost every nationality group has a frequency as high as 90% to 95%
in designating their patent applications in these three countries. The desig-
nation rates in Italy are substantially lower than that in Germany, France
and the U.K. across all nationality groups, with Japanese applicants having
the lowest designation rate of 40.80% in Italy.
The lower panel of Figure 2.2 shows that the number of EPO contracting
states other than the “Big Four” an average applicant designates significantly
differs across different nationality groups. The OTH group has the highest
designation frequency, reaching 5.18 in the non-“Big Four” countries and 8.70
in all of the 18 EPO contracting states. The Japanese applicants tend to
designate much fewer non-“Big Four” countries than applicants with other
nationalities: on average they only designate 1.39 out of all the non-“Big
Four” countries, and as a result the number of all 18 EPO contracting states
that a typical Japanese applicant designates is the lowest, which is only 4.62
on average, compared with 9.01 in OTH, 8.46 in EPO, 8.00 in DE and 7.41
in US groups.
Gauging the intrinsic value of patents (i.e., the value of the EPO protec-
tion that the patentees expect to receive, which is known to the patentees
themselves but unknown to econometricians) by simply counting the number
of the designated countries can sometimes be misleading. For one thing, the
size of the economy matters. The revenues a patentee expects to gather from
a large economy would be higher than the revenues gathered from a small
economy, therefore the difference in the number of designated countries does
not accurately reflect the difference in the intrinsic values of the patents. Note
that the size of the economy in the 18 EPO contracting states differs very
significantly: the 1997 nominal GDP in the largest economy within the EPO
contracting states, Germany, is 3784.20 billion Deutsche Marks, while it is
approximately 1.36 billion Deutsche Marks in the smallest economy, Monaco

7
(1 Deutsche Mark = 0.57 US Dollar by the end of 1997). Choosing not to
designate the patent in countries like Monaco does not necessarily imply that
the intrinsic value of such a patent would be significantly smaller than those
designated in Monaco, given the designation decisions everywhere else being
the same. As can be seen later, such consideration is especially important
when examining the Japanese patent applicants’ decision-making. Column 1
of Table 2.2 gives the average of real GDP in all 18 EPO contracting states
during 1978 to 1997.
Table 2.2: Summary Characteristics of EPO Contracting States
Real GDP (billions of Minimal Initial Returns r 1
1997 Deutsche Marks) (1997 Deutsche Marks)
Germany 2,822.17 1,046.95
France 2,123.75 1,263.16
U.K. 1,708.32 1,093.58
Italy 1,683.92 608.20
Spain 747.85 782.95
Netherlands 521.53 2,127.14
Switzerland 388.36 605.94
Sweden 377.78 1,000.98
Belgium 353.60 333.59
Austria 280.84 765.85
Denmark 236.24 1,757.84
Finland 193.91 1,011.96
Greece 144.79 1,012.75
Portugal 111.74 426.29
Ireland 79.54 1,031.96
Luxembourg 18.50 192.98
Liechtenstein 1.73 606.94
Monaco 1.14 334.73
Note: Column 1 of Table 2.2 gives the average of real GDP in all 18 EPO contracting
states during 1978 to 1997. From the top to bottom the countries are in descending order
of their average real GDP. Column 2 of Table 2.2 displays the minimal level of initial
returns, r1 , required by an applicant in these countries in order to cover the fixed cost of
filing and the renewal fees that he must pay along the way. 1 Deutsche Mark = 0.57 US
Dollar by the end of 1997.

8
 Figure 2.2: Number of Countries a Typical Patent Applicant
Chooses to Designate Across Different Nationalities

1.2

0.8 Germany
France
0.6
United Kingdom
0.4 Italy

0.2

0
DE US JP EPO OTH

10
9
8
7
6 Non-"Big Four" EPO
Countries
5
All EPO Countries
4
3
2
1
0
DE US JP EPO OTH

Note: Figure 2.2 shows the number of countries a typical patent applicant designates
across different nationalities. The top panel displays the number of the “Big Four” coun-
tries (Germany, France, the U.K. and Italy) a typical applicant with different nationalities
designates, and the lower panel displays the number of the other EPO contracting states,
as well as the number of all of the 18 EPO contracting states a typical applicant with
different nationalities designates.

9
 Another factor that is important in the applicants’ designation consid-
eration is the cost of filing in specific countries and the cost of keeping the
patent alive, namely, the designation fees and other fixed fees as well as the
renewal fees during the patent’s life. The Net Present Value (NPV) of such
fixed fees and renewal fees is the lower bound of the intrinsic value of the
patent in the countries that the applicant chooses to designate, and the upper
bound of the intrinsic value of the patent in the countries that the applicant
chooses not to designate. Therefore, incorporating the information from the
fee schedule in individual countries help estimate more accurately the value
of the patent.
To illustrate the effects of the fixed costs of filing and the renewal fees,
I present in column 2 of Table 2.2 the minimal level of initial returns, r 1 ,
required by an applicant in the 18 EPO contracting countries in order to
cover the fixed cost of filing and the renewal fees that she must pay along
the way, given an assumed annual depreciation in returns of 15%, and an
assumed annual real discount rate of 4%4 .
Figure 2.3 displays the relative magnitude of the intrinsic value of an
average patent application filed by applicants with different nationalities.
The figures in the first series are calculated by weighing the number of the
designated countries with the average real GDP of those countries during
1978 to 1997. The figures in the second series are obtained by using the
minimal initial returns required to cover the fixed and renewal fees in those
countries as weights. In both series the figures are normalized by setting the
value of the average Japanese patent equal to 1. The graph provides two
alternative measures of the intrinsic value of a typical patent application, in
addition to simply counting the number of countries the typical applicant
designates. It can be seen that the intrinsic values of the patents differ
significantly among different nationality groups, and the JP group has the
lowest intrinsic value.
In addition to the nationality origins, which industry the invention be-
longs to may also influence the value of the patent as well as the applicant’s
designation decision. To examine this factor in detail, I categorize the whole
4
The annual depreciation rate and the discount rate are taken from the structural model
estimates in Section 3 and 4. These numbers are also very similar to the ones reported
by Pakes (1986) and Schankerman and Pakes (1986). The minimal initial return r1 is
computed as the net present value of the designation and the renewal costs over a minimal
number of years for the patentee to gather enough patent protection revenues to cover the
designation costs. See equation (5) in Section 3 for a formal definition.

10
sample into five technology groups, according to their International Patent
Classification (IPC) codes: they are drugs and health, chemicals, electronics,
mechanical, and others5 . Table 2.3 reports the composition percentage of
these five technology groups in the whole sample in different time periods as
well as the grant rates within each group. It shows that “electronics” is the
largest group, consisting of about 35% of the whole sample. “Mechanical“ is
the second largest group, accounting for about 32% of the sample. “Drugs
and health” has the least number of patent applications among these five
groups, with 17,390 patent applications during 1978 to 1997 out of the total
sample of 616,536 patent applications. The approval rates across different
technology groups are not very far apart, ranging from 62% to 75% during
1978 to 1985, from 60% to 67% during 1986 to 1991, and from 44% to 54%
during the whole sample period from 1978 to 1997.
Figure 2.3: The Value of an Average Patent Application Across
Different Nationalities

2
1.8
1.6
1.4
1.2 weighted by real GDP
1
weighted by minimal
0.8 initial returns
0.6
0.4
0.2
0
DE US JP EPO OTH

5
The “drug and health” category includes the following sub-IPC groups: medical or vet-
erinary science; hygiene (IPC code A61) and preservation of bodies of humans or animals
or plants or parts thereof; biocides; pest repellants or attractants; plant growth regula-
tors (IPC code A01N). The “chemical” category includes the following sub-IPC groups:
life-saving; fire-fighting (IPC code A62); paper; chemical; and textiles. The “electronic”
category includes instruments and electricity. The “mechanical” category includes shaping;
printing; transporting; metallurgy; building; drilling and mining; pumps; engineering; and
lighting and heating. The “other” category includes agriculture (except A01N); foodstuffs;
personal/domestic; health and amusement (except A61); separating/mixing; weapons and
blasting; and nucleonics.

11
 Table 2.3: Percentage of Technology Groups in the EPO Patent
Applications and Approvals During 1978-1997
1978 to 1985 (%) 1986 to 1991 (%) 1992 to 1997 (%) 1978 to 1997 (%)
Industry Applica Grant Applica Grant Applica Grant Applica Grant
-tion Rate -tion Rate -tion Rate -tion Rate
Drugs and Health 2.06 66.16 2.95 59.92 3.21 15.66 2.82 43.70
Chemical 19.71 75.68 17.92 63.02 15.33 21.56 17.54 53.88
Electronic 31.80 70.42 35.15 61.26 37.78 14.27 35.23 45.95
Mechanical 34.15 66.34 31.22 67.22 30.86 28.08 31.82 53.91
Other 12.28 62.00 12.76 60.64 12.61 20.01 12.59 46.95
Total 152,075 104,843 252,159 159,666 121,302 43,376 616,536 307,885
Note: Table 2.3 reports the composition percentage of five technology groups in the
whole sample during different time periods as well as the patent grant percentage within
each group.

Figure 2.4 shows the number of countries a typical patent applicant des-
ignates across different technology groups. Again, the top panel displays the
number of the “Big Four” countries (Germany, France, the U.K. and Italy)
a typical applicant designates in different technology groups, and the lower
panel displays the number of the other EPO contracting states, as well as the
number of all of the 18 EPO contracting states a typical applicant designates
in different technology groups.
The top panel of Figure 2.4 indicates that patent applicants from differ-
ent industries have a similar pattern in deciding whether to designate their
patents in Germany, France and the U.K. On average almost every technol-
ogy group has a frequency of around or more than 95% in designating their
patent applications in Germany. “Drugs and health” and “chemical” also
have high designation rates in France and U.K., of above 95%, while the des-
ignation rates in these two countries are around or lower than 90% among
the other three technology groups. The designation rates in Italy among the
five groups differ significantly, ranging from the highest of 90% in “drugs and
health” to the lowest of 57% in “electronics”.
Figure 2.4: Number of Countries a Typical Patent Applicant
Chooses to Designate Across Different Technology Groups

12
 1.2

0.8 Germany
France
0.6
Great Britain
0.4 Italy
0.2

0
th

er
l
cs
ica

ca
al

th
ni

ni
em
He

O
tro

ha
Ch

ec
&

ec
El
s

M
ug
Dr

14
12
10 Non-"Big Four" EPO
8 Countries
6 All EPO Countries
4
2
0
th

er
l
cs
ica

ca
al

th
ni

ni
em
He

O
tro

ha
Ch

ec
&

ec
El
s

M
ug
Dr

Note: Figure 2.4 reports the number of countries a typical patent applicant designates
across different technology groups. The top panel displays the number of the “Big Four”
countries (Germany, France, the U.K. and Italy) a typical applicant designates, and the
lower panel displays the number of the other EPO contracting states, as well as the number
of all of the 18 EPO contracting states a typical applicant designates.
The lower panel of Figure 2.4 gives the number of the EPO contract-
ing states other than the “Big Four” as well as the number of all 18 EPO
contracting states that an average applicant designates when he makes the
initial patent application to the EPO. The graph shows distinctive dispar-
ity among the designation patterns of the five technology groups. A typical
patent application from “drugs and health” designates 7.65 non-“Big Four”

13
states, while the average is 4.62 for “chemical”, 2.70 for “electronic”, 4.03
for “mechanical”, and 5.18 for “other”. Among all the 18 EPO contracting
states, a typical patent applicant from “drugs and health” has the highest
number of designated countries: 11.44, and the average is 8.27 for “chemi-
cals”, 6.07 for “electronic”, 7.51 for “mechanical”, and 8.69 for “other”. The
numbers of designated countries by an average patent applicant are quite
different across the technology groups.
Figure 2.5 displays the relative magnitude of the intrinsic value of an
average patent application filed by an average applicant from different tech-
nology groups, calculated by weighing the number of designated countries
with the average real GDP of those countries during 1978 to 1997, and by
using the minimal initial returns required to cover the fixed and renewal fees
in those countries as weights, respectively. The figures are normalized by
setting the average value of the patent applications from the electronics in-
dustry equal to 1. Both series show that on average the patent applications
from the “electronic” group have the lowest intrinsic values when submitted
to the EPO. The patent applications from the “drugs and health” group have
the highest average intrinsic value, which is about 26% higher than that of
“electronic” when using the real GDP as weights. Such a disparity is even
more significant when the minimal initial returns are used as weights: the
average intrinsic value of the patent applications in the “drugs and health” is
72% higher than that in the “electronic”. Combined with the results shown
in Figure 2.4, this indicates that the patent application from different tech-
nology groups have distinctively different designation patterns and possibly
different intrinsic values in the applicants’ mind.
Figure 2.5: The Value of an Average Patent Application Across
Different Technology Groups

14
 2
1.8
1.6
1.4 weighted by real GDP
1.2
1 weighted by minimal
0.8 initial returns
0.6
0.4
0.2
0

er
l
th

ca
ica

ni

th
al

ni
tro
em
He

O
ha
ec
Ch

ec
&

El
s

M
ug
Dr

Note: Figure 2.5 displays the relative magnitude of the intrinsic value of an average
patent application filed by the applicant across different technology groups. The figure are
normalized by setting the value of patent applications from the “electronic” group equal
to 1.

2.2.2 χ2 Tests
Next I perform a set of non-parametric tests in order to more accurately de-
tect whether different nationalities or technology classifications significantly
affect the designation pattern of patents. In these tests as well as later analy-
ses, I use the concept of “families”, meaning groups of patents sharing the
same characteristics, such as their nationality, the technology groups they be-
long to, and so on. Different definitions of a “family” will be used depending
on the needs to address particular aspects of the patents.
I perform χ2 tests in order to see whether there are different designation
patterns across different types of families. The χ2 statistics test the following
hypothesis:

H0 : dj,k = dj , j = 1, 2, ..., 18
where dj,k is family k’s designation probability in the EPO contracting state j.
Family k is defined as a set of patent applications having the same nationality,
belonging to the same technology group, and were submitt4ed in the same
year to the EPO. In testing whether the difference in nationality generates

15
different designation pattern, I perform the following procedure to control
for the discrepancies in technological classification or application year: I
compare the designation frequencies across families that only differ in the
applicants’ nationalities, i.e., families sharing the same IPC codes and the
same application year but having different geographic origins. Similarly, in
testing whether the difference in technology classification implies different
designation pattern, I compare the designation frequencies across families
that only differ in technological classification, i.e., families sharing the same
nationality and the same application year but having different IPC codes.
The χ2 statistic on testing the significance of nationality (PAC, or patent
application country) is constructed as follows:

1000
X XJ X5
NCOMP NO,P AC (DCOMP NO,P AC,j − DCOMP NO,j )2
COMP NO=1 j=1 P AC=1
DCOMP NO,j

where COMPNO (abbreviation for “composition number”) is an index that

covers all the features of a family except for the nationality. NCOMP NO,P AC
denotes the number of patent applications in family (COM P NO, P AC), and
DCOMP NO,P AC,j is the frequency of patent applications designated in country
j in such a family. DCOMP NO,j is the weighted average of DCOMP NO,P AC,j
across all five nationality groups. The χ2 statistic on testing IPC is con-
structed in a similar way. Table 2.4 reports the χ2 statistics in testing these
two hypotheses.

Table 2.4: χ2 Statistics in Testing the Significance of Nationality

and Technological Classification in Designation Decision-making
on PAC (nationality) code on IPC (technology) code
2
χ statistic 42,415 (3,492) 159,080 (3,760)
p-value <0.001 <0.001
Note: Table 2.4 reports the χ2 statistics in testing the significance of nationality and
technological classification in patent applications’ designation decision making. Numbers
in the parentheses are the degrees of freedom.

The χ2 (3, 492) statistic for testing the significance of nationality is 42,415,
and the χ2 (3, 760) statistic for testing the significance of technological clas-
sification is 159,080, both rejecting the null hypotheses at any conventional

16
significance level. In other words, the nationality of the patent applicants and
the technological classification of the inventions have significant influence on
the designation pattern when the patent applicants file the application with
the EPO.

2.3 Renewal Pattern

2.3.1 Summary Statistics
For all the analyses carried out in this section on the renewal pattern of the
EPO patents, I only look at a sample of patents with the common charac-
teristic that each and every of them designated Germany for protection. See
Table 2.5 through 2.9 for a summary of the characteristics of this sample.
As in the last subsection, I classify the patents into five broader technol-
ogy groups according to their IPC codes: “drugs and health”, “chemical”,
“electronic”, “mechanical” and “other”. Table 2.5 shows that patents in
“electronic” and “mechanical” groups constitute highest proportions of the
sample, followed by “chemical” and “other” groups. “Drugs and health”
patents constitute only 6% of the sample.
Table 2.5: Number of Granted Patents by Technological Classi-
fication
Drugs and Health Chemical Electronic Mechanical Other Total
19,550 79,108 98,618 95,418 44,059 336,753
I use PAC (patent application country) to represent the nationality of
the owner of the patent. Again patents are grouped into one of the fol-
lowing five categories according to its nationality: DE (Germany), US (the
United States), JP (Japan), EPO (the rest of EPO member countries ex-
cept Germany), and OTH (the rest of the world). Table 2.6 shows that U.S.
patentees possess about 30% of the granted patents in our sample, followed
by patentees from Germany, Japan, other EPO countries and the rest of the
world.
Table 2.6: Number of Granted Patents by Nationality
DE US JP EPO OTH Total
87,661 101,887 79,677 57,027 10,501 336,753
To investigate the correlation between the patentees’ designation deci-
sions and their renewal decisions, I further categorize the patents in the

17
renewal sample according to their designation choices. At first I use five
dummy variables “GB”, “FR”, “IT ”, “JP” and “US ” to capture whether
the patent sought protection in the following five countries: the U.K., France,
Italy, Japan and the U.S., respectively. I also define another variable “EPO”
which takes on value of 0 through 4, indicating the number of EPO con-
tracting countries other than the “Big Four” countries (Germany, the U.K.,
France and Italy) that the patent sought protection in, where 0 represents
the number of such countries being zero, 1 one, 2 between 2 and 4, 3 between
5 and 9, and 4 above 9. Similarly, “NON ” is a variable taking on values of
0 through 4, indicating the number of countries from the “rest of the world”
(other than EPO countries as well as Japan and the U.S.) that the patent
sought protection in, where 0 represents the number of such countries being
zero, 1 one, 2 between 2 and 4, 3 between 5 and 9, and 4 above 9. Table
2.7 shows that over 30% of granted patents sought protection in 5 to 9 non-
“Big Four” EPO countries, about 26% designated 2 to 4 of such countries for
protection, and another 21% designated none. Only less than 7% designated
more than 10 of such countries. In Table 2.8, an even higher concentra-
tion can be seen around lower number of non-EPO, non-Japan and non-US
countries where a granted patent sought protection: over 53% of the patents
sought protection in none of such countries; only around 1.5% designated 5
to 9 of such countries for protection and about 0.05% designated more than
10.
Table 2.7: Number of Granted Patents by EPO
EPO0 EPO1 EPO2 EPO3 EPO4 Total
70,450 47,429 89,080 108,308 21,486 336,753
Note: EPO0 through EPO4 denote that the number of EPO countries apart from
Germany, the United Kingdom, France and Italy where a patent sought protection is: 0,
1, 2-4, 5-9, ≥ 10, respectively.

Table 2.8: Number of Granted Patents by NON

NON0 NON1 NON2 NON3 NON4 Total
181,311 79,638 70,504 5,127 173 336,753
Note: NON0 through NON4 denote that the number of non-EPO, non-Japan and
non-US countries where a patent sought protection is: 0, 1, 2-4, 5-9, ≥ 10, respectively.

At the time dimension, I define a variable “cohort”, which characterizes

the year in which the patentee files the application with the EPO. Patents

18
from the same cohort have the same year of application. I use “COHGRP”
which groups the cohorts into 5 categories: 1979-1981, 1982-1984, 1985-1987,
1988-1990 and 1991-1993. Data on later cohorts are severely truncated and
not included in most of the study. For later analysis, “COHGRP” is some-
times expanded as “COH ”, which has values 1 through 15 representing single
cohorts. As Table 2.9 shows, the number of granted patents steadily increases
with later cohorts. For cohorts 1991-1993, there might be a considerable
amount of patents still in the granting procedure and that may be the reason
why we see a decline in the number of granted patents.Table 2.9: Number

of Granted Patents by COH

1979 1980 1981 1982 1983 1984 1985 1986
7,327 11,288 14,729 17,273 18,999 22,076 24,237 25,905
1987 1988 1989 1990 1991 1992 1993 Total
27,024 30,330 32,043 35,022 30,062 24,814 15,624 336,753

2.3.2 Constructing the Renewal Rates and the Mortality Rates

I calculate the “age” of a patent as the time between the date is submitted to
the EPO for an application of patent protection and the date when it lapses
in Germany. This lapse may be due to a natural expiration by the end of
the 20th year in which the patent is protected by law, or it may be because
the patent is never granted (for now we do not consider the latter case as we
do analysis only with the granted patents). Most of the patent has an age of
above three years (since once the patentee pays the application fee and the
patent is put under the search and granting procedure, it obtains three years
of protection), and all are less than 20 years of age (because 20 years is the
maximal age by law, and in the case of an extension of expiration date,6 it
6
According to the European Patent Convention, Article 63: (1) The term of the Eu-
ropean patent shall be 20 years as from the date of filing of the application. (2) Nothing
in the preceding paragraph shall limit the right of a Contracting State to extend the term
of a European patent or to grant corresponding protection which follows immediately on
expiry of the term of the patent, under the same conditions as those applying to national
patents: (a) in order to take account of a state of war or similar emergency conditions
affecting that State; (b) if the subject-matter of the European patent is a product or a
process of manufacturing a product or a use of a product which has to undergo an admin-
istrative authorisation procedure required by law before it can be put on the market in
that State.

19
is because our data is truncated at the year of 1997). Note out dataset is
truncated at December 31, 1997. I count the number of granted patents for
each type of family, which is used as denominator in calculating the renewal
rate. In the numerator goes the number of patents which have continued to
pay for renewal in Germany in a family at a given age. The mortality rate
at each age is the change in renewal rate.
Another thing worth noting is the possibility of repetitive counting, i.e.,
a patent can be assigned to more than one family because it belongs to two
or more technology groups, or has two or more nationalities. The nationality
problem is taken care of by deleting patents with multiple PAC’s. Such
patents do not exceed 4.5% of the population of the patents we study. The
repetitive counting in IPC still exists in the following tests I perform, but it
turns out it does not affect the test results. This will be explained further in
the following section.

2.3.3 χ2 Tests
I perform χ2 tests in order to see whether there are different renewal patterns
across different types of families. Here a family is defined as a group of patents
with the same values in all of the ten variables defined above, i.e., “GB”,
“FR”, “IT ”, “JP”, “US ”, “IPC ”, “PAC ”, “COH ”, “EPO” and “NON ”.
The χ2 statistics test the following hypothesis:

H0 : π i = π 0 , i = 1, 2, ..., I
where π is a vector of mortality rates of patents at all ages, i could denote
different PAC ’s, IPC ’s, COH ’s, EPO’s or NON ’s. I is the total number of
such categorized families, and π is a unknown constant. An example of the
χ2 statistic on PAC is constructed as follows:

2000
X 15
X 5
X K
X
NCOMP NO,COH,P AC
COMP NO=1 COH=1 P AC=1 AGE=1
(MCOMP NO,COH,P AC,AGE − M COMP NO,COH,AGE )2
×
M COMP NO,COH,AGE

where COMPNO is an index that covers all the features of a family ex-
cept COH and PAC, and NCOMP NO,COH,P AC denotes the number of granted

20
patents in family (COMPNO, COH, PAC, AGE ) for all AGE ’s. MCOMP NO,COH,P AC,AGE
is the mortality rate in family (COMPNO, COH, PAC, AGE ) and M is the
weighted average of M across all five PAC ’s sharing the same COMPNO,
COH and AGE. K is the maximal age a patent could reach and is a function
of cohort.
Note that because the statistics calculated only has a χ2 distribution
asymptotically, to ensure its validity, the number of granted patents in each
family has to be restricted as above 100, which ensures the average number
of drop-out patents in each age exceeds 5. Only 82,346 families remain after
this restriction is applied out of 336,753 families in total.
Table 2.10 report the χ2 statistics for tests on PAC, IPC, EPO and NON.
It turns out that the null hypothesis is rejected for each and every charac-
teristic at any conventional significance level. In other words, all these char-
acteristics have a significant relationship with the patent renewal pattern.
Since with the repetitive counting in IPC it would be harder to reject the
null hypothesis, and the fact that it was rejected anyway implied that we
should reject the null when there is no repetitive counting of IPC. In this
sense, the repetitive counting of IPC does not affect the test results.

Table 2.10: χ2 Statistics

On PAC On IPC On EPO On NON
2
χ Statistics 13,931.60 (2,156) 8,358.57 (2,028) 8,221.72 (893) 6,992.94 (2,177)
p-value <0.001 <0.001 <0.001 <0.001

Note: Table 2.10 reports the χ2 statistics in testing the significance of PAC, IPC, EPO,
and NON in patent applicants’ renewal decision-making. Numbers in the parentheses are
teh degrees of freedom.

2.3.4 Stochastic Dominance Tests

I perform the stochastic dominance tests to see whether the patent renewal
rate of a certain family at each age is significantly higher than that of another
family. If this is the case, the distribution of the value of the patents in the
first family is better than, or in other words, stochastically dominates that
of the second. For now the test is a simple comparison across a certain
characteristic without controlling for other characteristics. The stochastic

21
dominance test uses the following statistics to test

H0 : pi (a) = pj (a), versus

H1 : pi (a) > pj (a)

where pi (a) and pj (a) are the mean renewal rates of family i and j at age a,
i and j could denote different PAC ’s, IPC ’s, EPO’s, NON ’s or COH ’s. I
construct the following statistics:
pi (a) − pj (a)
p
pi (1 − pi )/Ni (a) + pj (1 − pj )/Nj (a)
where Ni (a) and Ni (a) are the number of granted patents at a certain age a in
family i and j, respectively. This statistic has a standard normal distribution
asymptotically under the null hypothesis when Ni and Nj are large enough.
This test is performed for every characteristic, pairwise and at each age. The
results are reported in Table A1 to A5 in the Appendix. Also see Figure 2.6
through 2.10 for a rough look at the difference of renewal patterns.
Among five nationality groups, Figure 2.6 shows that patents originated
from Japan have a higher renewal rate at all ages than any other countries.
Patents originated from OTH group have the lowest renewal rate at almost
all ages, and then follows patents originated from EPO group. For patents
originated from Germany, the average renewal rate is lower than that of
US-originated patents except at age 3 and the end ages.
Figure 2.7 reveals that among five technology groups, patents of drug and
health have the lowest renewal rate at almost all ages. Electronics patents
have the highest renewal rate at almost all ages. Patents of chemical have a
higher renewal rate than the mechanical patents except at age 14 and 15.
From Figure 2.8 it seems that patents that sought protection in more EPO
countries does not often have a higher renewal rate. Remember from EPO1
to EPO5 the number of countries in which the patentees sought protection
in increases. EPO1 patents have a higher renewal rate at age 4 through 11
than EPO2 patents, but this is reversed after age 13. EPO 1 patents also
have a higher renewal rate at almost all ages than EPO3, EPO4 and EPO5
patents. The renewal rate of EPO2 patents is higher than that of EPO3,
EPO4 and EPO5 at almost all ages. For EPO3 patents, the renewal rate
is higher than that of EPO4 patents except at age 6 to 9 and age 19, and
is lower than that of EPO5 patents except at the end ages. EPO4 patents
have a lower renewal rate than EPO5 patents except at ages 7 and 8.

22
 For patents in NON5 family, the sample is too small for the test to reveal
anything meaningful. For the rest of the tests concerning NON, Figure 2.9
reveals that the renewal rate of NON4 is the highest at almost all ages, and
then follows NON3, NON1 and NON2.
For the test concerning cohorts, the data are first merged to have 5 co-
hort groups and the weighted average renewal rate for each COHGRP is
calculated. The tests are run on different COHGRP’s. From Figure 2.10
there is hardly a general pattern here which tells us whether the renewal
rates are higher with earlier or later cohorts. Rather the renewal rates are
somewhat intertwined. For COHGRP1, the renewal rate is higher than that
of COHGRP2 except at age 11 and 12, and is higher than that of COHGRP3
except at age 10. It is lower than that of COHGRP4 except at age 3 and 4,
and higher than that of COHGRP5 at age 3 and 4. COHGRP2 patents have
a higher renewal rate than COHGRP3 except at ages 3 to 6 and age 11, and
than COHGRP4 except at age 8. It is higher than that of COHGRP5 at all
ages. COHGRP3 patents have a higher renewal rate than that of COHGRP4
and COHGRP5 at almost all ages. Finally COHGRP4 patents have a higher
renewal rate than that of COHGRP5.
The above χ2 tests and stochastic dominance tests were first proposed
in the 1989 study of Pakes and Simpson on patent renewal data in Norway
between 1962 and 1987 and in Finland between 1969 and 1987. They found
significant differences in patent renewal curves by nationality of the patentee,
by industry, and by cohorts in both two countries. In their findings, patents
with Japanese patentees hae a renewal curve that dominates the others, fol-
lowed by the U.S. patentees and the European patentees (in Norway, however,
the French renewal curve dominates the U.S. renewal curve). Their analysis
of the industry differences in the patent renewal pattern is not directly com-
parable to my study of the technology differences since the definitions of their
industry groups and my technology groups are not the same. It is nonethe-
less informative to learn that if using a less accurate but broader notion of
industries, their results show that generally a chemical patent will typically
be more valuable than a mechanical one, followed by electronics, and other
low-tech patents. On the other hand, my results reflects the drastic change
in the electronics industry with the coming of the computer era – electronics
patents have since dominated any other industry in the distribution of the
value as revealed by the more up-to-date data. Finally, Pakes and Simpson
(1989) found that in Norway where there was a decline in the number of
patents (either applied or granted) during the period of their study, there

23
was a shift of the distribution of patent values towards the higher end, and
in Finland where there was a slight increase in the number of patents (either
applied or granted), there was no evidence of the renewal curve shifting out
over time.
It is worth noting that, although the designation and the renewal decisions
are examined separately in the above section, there are some very interest-
ing patterns when the two decisions are jointly examined. For instance, on
average patent applications originating from Japan have the lowest number
of designated countries, as shown in Figure 2.1, but they have the highest
renewal rates in Germany through their whole life. On the other hand, the
typical patent applicants from drug and health group choose to designate
11.44 countries, which is the highest among all technology groups, yet they
have the lowest renewal rates for their granted patents. These discrepan-
cies may be closely associated with specific institutional, cultural or legal
characteristics of the home countries of the applicants or the industries.

24
3 A Structural Model on EPO Patent Appli-
cant’s Joint Filing Decisions
The basic decision problem faced by a representative inventor in this model
is to decide whether to file a patent application on invention i, i = 1, 2, ..., I,
in the European Patent Office (EPO), and if so, whether to designate the
EPO contracting country j, j = 1, 2, ..., J, at the time of filing, in order to
keep alive the option of transferring the EPO patent into a national patent
in such countries once the EPO patent application has been granted. Pakes
and Schankerman (1984) analyze the patent applicants’ initial filing decision-
making under a single patent protection regime. Putnam (1997) formulates
a structural model and studies the initial filing problem faced by an inter-
national patent applicant. The model developed in this section follows their
work, and in particular adopts a basic framework similar to Putnam (1997).
However, in Putnam (1997) the representative applicant makes the filing de-
cisions in different countries separately and independently, while the initial
filing and designation problem faced by a typical EPO patent applicant in
this model is more complicated, since he has to decide whether to pay the
lump sum of the EPO patent application fees while considering the individ-
ual designation problems at the same time. In addition, other institutional
factors also complicate the initial filing and designation problems faced by
the EPO patent applicants. For instance, when the patent is granted and
transferred to the national patent offices that the patent-holder designated,
he has to pay another lump sum of transfer costs. This brings an additional
option problem to the model, since the patent-holder can choose not to exer-
cise the transfer option by not paying the “strike price” (transfer costs). As
one can imagine, this adds additional complexity to the following structural
model.
I assume the inventor knows the intrinsic value of the EPO patent pro-
tection that his invention will enjoy over the patent’s lifetime, once his ap-
plication is approved. Therefore, he decides whether to file an initial patent
application with the EPO as well as which EPO contracting countries to des-
ignate by calculating the associated net present value of the future benefits,
given a known fixed cost of filing CEP O,1 in the EPO, a designation fee Cj,1
for each country where he intends to protect the invention, and a belief that
the invention is “patentable” (i.e., the probability of being approved by the
EPO, probgr , is greater than zero but less than one). He expects to wait for

25
t1 years before his application is finally approved or denied by the EPO7 . If
the patent application is approved, then starting from the beginning of the
following year, it is transferred to the national patent offices in individual
countries that the inventor designates when the initial application is filed
with the EPO. The patentee then confronts a fixed amount of cost Cj,tt +1 (of
transferring an EPO patent into a national patent) in individual countries
as well as in each year thereafter a sequence of renewal fee in each country,
Tj
{cj,t }t=t 1 +1
, cj,t ≥ 0, {cj,t } non-decreasing, where Tj is the maximal permis-
sible patent lifetime in the jth country, which in most cases is 20 years. All
kinds of fees are due at the beginning of the period, and the revenues of being
protected are gathered by the end of the period.
Under national and international law codes, once the inventor stops pay-
ing the renewal fee, he cannot reactive a patent afterwards. Bounded by this
constraint, the inventor tries to
·t ¸
M ax. P J P 1
t−1
{ 1ij1 (P ) β (βrijt − cj,t ) − Cj,1
P j=1 t=1

P
J Tj
P
+probgr E{ 1ij,t1+1 (P )[ 1ijt (P )β t−1 (βrijt − cj,t ) − β t1 Cj,t1 +1 ]}
j=1 t=t1 +1
−CEP O1 , 0} (1)

where β ∈ (0, 1) is the inventor’s subjective discount factor. cj,t = 0 for t ≤ t1

since no renewal fee is due to the patent offices in individual countries before
the patent is granted by the EPO in period t1 . 1ijt (P ) denotes the inventor
i’s designation and the renewal policy in country j in period t. Specifically,
1ij1 (P ) = 1 implies that the country j is designated at the time of the initial
filing. 1ij,t1 +1 (P ) = 1 indicates that the patent-holder i decides to pay the
lump-sum transfer costs Cj,t1 +1 in country j, and 1ijt (P ) = 1, t > t1 + 1
indicates that the patent-holder decides to pay the renewal fees cjt to the
national patent office in country j at the beginning of period t. probgr is the
probability of a patent being granted by the EPO8 , and rijt is the return to
patent i in country j during period t. Therefore, the first term in the bracket
7
The patent applicant is assumed to form an expectation of the length of waiting period
before the grant decision is made by the EPO, which is denoted as t1 here, by calculating
the sample mean of the waiting time (grant date minus application date) from the data,
which is approximately 4 years.
8
In the following section, probgr is estimated as the overall grant ratio of the patent
applications during 1978 to 1992.

26
is the discounted value of the EPO protection in the designated countries that
the applicant enjoys before the grant decision is made9 , and the second term
denotes the expected net present value of the EPO protection thereafter.
Following Pakes and Schankerman (1984), I assume that the applicant is
fully informed about the value of the patent protection of his invention as
of the date of initial filing. Specifically, I assume that the evolution of the
revenue rijt is as follows:

rijt = δ t−1 rij1 (2)

where δ ∈ (0, 1) is a parameter to be estimated.
I start the analysis by first examining the patentee i’s renewal decision
making after period t1 , given that his patent application has been approved
and transferred to country j. Since the return rijt is non-increasing and the
renewal fee cjt is non-decreasing in time t, there exists a unique t∗ij such that
for any t ≤ t∗ij , rijt ≥ cjt , and for any t > t∗ij , rijt < cjt . Therefore, it is
advicible for the patentee i to renew the patent in each period before t∗ij to
gather the positive net returns, and let the patent lapse after t∗ij . In other
words, the optimal renewal rule for him is:

1ijt (P ) = 1 if f. βδ t−1 rij1 − cjt ≥ 0, t > t1 (3)

and this maximizes the net present value (NPV) of his patent in country j
after t1 .
For period t = t1 + 1, the inventor has to decide whether it is worthwhile
to pay the lump-sum transfer costs Cj,t1 +1 . The patentee will pay the costs
and transfer patent i to country j if and only if
Tj
P
1ijt (P )β t−(t1 +1) (βδt−1 rij1 − cj,t ) − Cj,t1 +1 ≥ 0 (4)
t=t1 +1

9
The degree of protection that the invention enjoys before the final grant/rejection de-
cision is made differs among different countries. In some of the cases the damages resulted
from the infringments during the examination period are only due once the application
is finally granted, i.e. patent applicants may not expect to receive a full protection in
these countries. On the other hand, filing with the EPO and being examined for a patent
grant may also hinder arbitrary abuse of the invention without the inventor’s consent,
therefore makes the infringment less likely. For simplicity here I assume that the inventor
enjoys the full protection from the EPO during the examination period, regardless of the
final grant/rejection decision, although a detailed infringment and litigation analysis is
certainly more desirable.

27
 Define

Tj
P
min
rj = {r| 1ijt (P )β t−(t1 +1) (βδ t−1 rij1 − cj,t ) ≥ Cj,t1 +1 } (5)
r t=t1 +1

to be the minimal initial return that produces a nonnegative net present

value of transferring an EPO patent into a national patent in country j after
the EPO approval. Then the probability of the patent being transferred to
country j, conditional on its approval at the EPO and designation in country
j, is

Tj
P
Pr[1ij,t1 +1 (P ) = 1] = Pr{ 1ijt (P )β t−(t1 +1) (βδ t−1 rij1 − cj,t ) ≥ Cj,t1 +1 }
t=t1 +1
= Pr[rij1 ≥ rj ] (6)

max .
Accordingly I denote Tj∗ = {t|βδ t−1 rj − cjt ≥ 0} as the maximal
t
lifetime under renewal rule (3) for a patent with such a threshold initial
return rj .
When making the initial filing, the applicant will pay the designation fee
Cj,1 for country j if and only if
P
t1
β t δ t−1 rij1 + probgr 1ijt1 +1 (P )β t1
t=1

Tj∗
P
{ 1ijt (P )β t−(t1 +1) (βδ t−1 rij1 − cj,t ) − Cj,t1 +1 } − Cj,1 ≥ 0 (7)
t=t1 +1
PTj∗
where { t=t 1 (P )β t−(t1 +1) (βδ t−1 rij1 − cj,t ) − Cj,t1 +1 } is the net present
1 +1 ijt
value of the patent protection in country j in period t1 + 1 if the patentee
decides to transfer the patent in that country.
Finally, the initial EPO filing decision rule can be summarized as follows:

1i,EP O,1 (P ) = 1 if f.
P
J P
t1 P
J
[1ij1 (P ) β t δ t−1 rij1 − Cj,1 ] + probgr 1ij1 (P )1ijt1 +1 (P )
j=1 t=1 j=1

28
 Tj
P
[ 1ijt (P )β t−1 (βδ t−1 rij1 − cj,t ) − β t1 Cj,t1 +1 ] ≥ CEP O,1 (8)
t=t1 +1

Now that the patent applicant’s filing and designation problems have been
described, I start to lay out the structural model. I assume rij1 takes the
following functional form:

rij1 = exp(αi + υ log(GDPj ) + bXi + εij ) (9)

That is, I assume rij1 is determined by a common (across different country
j’s) factor αi , a list of patent-specific characteristics Xi , the real GDP of the
country j, and a random component εij . In the following estimations, Xi
is a vector describing the nationality and the technological classifications of
the patent application i. It may also include other institutional and market
factors exogenous to the inventor, which may influence the quality of the
invention or the return to the patentee10 . υ log(GDPj ) is included in equation
(9) in order to incorporate the market size of the patent in the designated
country into consideration. Note that

rij1 ∝ exp(υ log(GDPj ) = (GDPj )υ

This implies that the magnitude of υ is an indicator of the return to scale of

the economy, i.e., if υ > 1, the returns to patent i would more than double
once the size of the economy doubles, and vice versa. Finally I assume that
αi and εij are normally distributed and are independent with each other, and
that the characteristics of each patent application, Xi , are also independent
with the realization of the idiosyncratic component εij :

(i) αi ˜ N(µα , σ 2α )
(ii) εij ˜ N(µj , σ 2ε ), i.i.d., across country j’s.

(iii) E(αi εij ) = 0

(iv) E(Xi εij ) = 0 (10)

10
One possible candidate could be the amount of exports from the inventor’s home
country to country j, so as to analyze how the value of patent protection depends on the
trade intensity between countries, as PUtnam (1997) has studied.

29
 Employing the decomposition given in (9), conditioning on αi , GDPj , Xi
and 1ij1 (P ) = 1, the probability of transferring the patent i in country j in
period t1 + 1, as given by (6), is

Pr[1ijt1 +1 (P ) = 1|αi , GDPj , Xi , 1ij1 (P ) = 1]

PTj∗
Cj,t1 +1 + t=t 1 +1
β t−(t1+ 1) cj,t
= Pr{εij ≥ log( PTj∗ ) − (αi + +bXi + υ log(GDPj ))
t−t1 t−1
t=t1 +1 β δ
|αi , GDPj , Xi , 1ij1 (P ) = 1

= Pr{εij ≥ log(rj ) − (αi + bXi + υ log(GDPj ))|αi , GDPj , Xi , 1ij1 (P ) = 1}

αi + bXi + υ log(GDPj ) − log(rj )
= Φ( ) (11)
σε
where Φ(·) is the standard normal c.d.f., and rj is defined in equa-
tion (5).
Deciding whether to pay the designation fee Cj1 at the beginning of pe-
riod 1 is more complicated. There are two possible cases: first, even if the
patent applicant chooses not to pay the transfer costs Cj,t1 +1 and not transfer
the patent in country j in period t1 + 1, he may still be willing to pay the
designation fee Cj1 and obtain the EPO patent protection in country j while
waiting for EPO approval – if by doing so the present value of the patent
protection inPcountry j during the first t1 periods is greater than the desig-
t1 t t−1
nation fee: t=1 β δ rij1 ≥ Cj,1 . Therefore, the probability of paying the
designation fee for country j at the beginning of period 1 but not transferring
the patent in period t1 + 1 is:

Pr{[1ij1 (P ) = 1] ∩ [1ij,t1 +1 (P ) = 0]|αi , GDPj , Xi }

P
t1
= Pr{[ β t δ t−1 rij1 ≥ Cj,1 ] ∩ [rij1 ≤ rj ]|αi , GDPj , Xi }
t=1
1 − βδ
= Pr{[rij1 ≥ Cj,1 ] ∩ [rij1 ≤ r j ]|αi , GDPj , Xi }
β(1 − β t1 δ t1 )
1 − βδ
= Pr{[εij ≥ log( Cj,1 ) − (αi + bXi + υ log(GDPj ))]
β(1 − β t1 δ t1 )

30
 ∩[εij ≤ log(rj ) − (αi + bXi + υ log(GDPj ))]|αi , GDPj , Xi }
= Pr{[εij ≥ k1,j − (αi + bXi + υ log(GDPj ))]
∩[εij ≤ log(rj )−(αi +bXi +υ log(GDPj ))]|αi , GDPj , Xi
(12)
1−βδ
where k1,j = log( β(1−β t1 t1 Cj,1 ).
δ )
The second possibility is the one in which the patentee chooses to pay
both the designation fee Cj,1 in period 1 as well as the lump-sum transfer
costs Cj,t1 +1 in period t1 + 1. In this case, the net present value of the patent
protection in country j, after discounting the transfer costs as well as the
renewal fees {cjt }, must be no less than the designation fee Cj,1 :

Pr{[1ij1 (P ) = 1]∩[1ij,t1 +1 (P ) = 1]|αi , GDPj , Xi }

Tj
P
= Pr{[ 1ijt (P )[β t−1 (βδ t−1 rij1 − cj,t )] − β t1 Cj,t1 +1 ] ≥ Cj,1 ] ∩ [rij1 ≥ r j ]|αi , GDPj , Xi }
t=1
Tj∗
P
t1 P Tj
P
t t−1
= Pr{[ βδ rij1 + β t δt−1 (rij1 − rj ) + 1ijt (P )β t δ t−1 rij1 ≥ Cj,1 ]
t=1 t=t1 +1 t=Tj∗ +1

∩[rij1 ≥ r j ]|αi , GDPj , Xi }

= Pr{[εij ≥ k2,j −(αi +bXi +υ log(GDPj ))]
∩[εij ≥ log(rj ) − (αi + bXi + υ log(GDPj ))]|αi , GDPj , Xi } (13)
where k2,j is such that rij1 = exp(k2,j ) solves the following function:

Tj ∗
P
t1 P Tj
P
t t−1
βδ rij1 + β t δ t−1 (rij1 − rj ) + 1ijt (P )β t δ t−1 rij1 = Cj,1 (14)
t=1 t=t1 +1 t=Tj∗ +1

Therefore, the probability of the patent applicant i paying a designation fee

Cj1 is:

Pr{1ij1 (P ) = 1|αi , GDPj , Xi }

= Pr{[1ij1 (P ) = 1] ∩ [1ij,t1 +1 (P ) = 1]|αi , GDPj , Xi }

31
 + Pr{[1ij1 (P ) = 1] ∩ [1ij,t1 +1 (P ) = 0]|αi , GDPj , Xi }
= Pr{[εij ≥ k1,j − (αi + bXi + υ log(GDPj ))]
∩[εij ≤ log(rj ) − (αi + bXi + υ log(GDPj ))]|αi , GDPj , Xi }
+ Pr{[εij ≥ k2,j − (αi + bXi + υ log(GDPj ))]
∩[εij ≥ log(rj ) − (αi + bXi + υ log(GDPj ))]|αi , GDPj , Xi }
(15)
Note that from (12) and (14) I have k2,j ≤ k1,j . Thus,

Pr{1ij1 (P ) = 1|αi , GDPj , Xi }

= Pr{[εij ≥ k1,j − (αi + bXi + υ log(GDPj ))]

∩[εij ≤ log(r j ) − (αi + bXi + υ log(GDPj ))]|αi , GDPj , Xi }
+ Pr{[εij ≥ k2,j − (αi + bXi + υ log(GDPj ))]
∩[εij ≥ log(rj ) − (αi + bXi + υ log(GDPj ))]|αi , GDPj , Xi }
= Pr{εij ≥ median[k1,j , k2,j , log(r j )] − (αi + bXi + υ log(GDPj ))
|αi , GDPj , Xi } (16)
and the probability of not paying the designation fee Cj,1 is

Pr{1ij1 (P ) = 0|αi , GDPj , Xi } = 1−Pr{1ij1 (P ) = 1|αi , GDPj , Xi }

= Pr{εij ≤ median[k1,j , k2,j , log(rj )]−(αi +bXi +υ log(GDPj ))|αi , GDPj , Xi }

(17)
Similarly, the probability of making the initial filing with the EPO can
also be computed, as implied by (8). However, an invention is included in
our data set only if the inventor has filed such an application with the EPO.
Therefore, our sample is truncated in the sense that only the patent applica-
tions having positive expected value ex ante are observed. Accordingly the
following estimation is based on such a conditional likelihood.
For an individual invention i, the contribution to the conditional likeli-
hood is
Z ∞ J
Y
Li (yi, θ|1i,EP O,1 (P ) = 1) = gj (αi , θ)φ(αi )dαi (18)
−∞ j=1

32
where yi denotes the designation decisions of patent application i in period
1 in all of the EPO countracting countries. θ = (β, δ, µα , σ α , υ, σ ε , b)0 are the
parameters to be estimated. φ(αi ) is the p.d.f. of the normally distributed
variable αi , and

gj (αi , θ) = {Pr[1ij1 (P ) = 1]|αi , GDPj , Xi }1ij1 (P )

×{Pr[1ij1 (P ) = 0]|αi , GDPj , Xi }[1−1ij1 (P )] (19)

The conditional log likelihood is:
I
X
LLH(θ|y, GDPj , Xi ) = log(Li (yi, θ))
i=1

I
X Z ∞ J
Y
= log( gj (αi , θ)φ(αi )dαi ) (20)
i=1 −∞ j=1

where y = (y1 , y2 , ..., yI ), I is the sample size, and the maximum likelihood
estimation would yield b θMLE = arg max LLH(θ|y).

4 Estimations Results of the Structural Model

The conditional log-likelihood function (20) is maximized to obtain the max-
imum likelihood estimates of the parameter θ. Hermite-Gaussian quadrature
was adopted to numerically integrate gj (αi , θ)φ(αi ) over αi in computing the
conditional likelihood Li (yi, θ). A quasi-Newton optimization algorithm is
used to find the maximal point over the dimensional space of the parameter
θ.
The parameter estimates are reported in the top panel of Table 4.1, and
the estimates of the coefficient b are presented in the lower panel. The coeffi-
cients bP AC for the OTH group and bIP C for the “other” group are nomalized
to zero.
The point estimate of the annual real discount rate of β is 0.9630. The
point estimate of δ is 0.8519, which implies an annual depreciation rate of
14.8%. Both parameters are precisely estimated, and the size of the point
estimates falls within the possible range of these parameters reported by
Pakes (1986) and Schankerman and Pakes (1986).

33
 The mean and the standard deviation of the constant term αi , are esti-
mated as 4.0816 and 1.4367, respectively. The point estimate of the standard
deviation of the idiosyncratic component εij is 2.2379. The degree of return
to scale υ is estimated as 0.5230, and the standard error of the estimate is
0.0461. This strongly implies that the intrinsic value of a patent application
in a country increases as the size of the economy of that country increases,
but by a less rate. In Putnam (1997), a constant return to scale is implicitly
assumed by setting the value of υ equal to one. This ad hoc assumption in
his study may have resulted in misspecification and biased estimation of his
model.

Table 4.1: MLE Estimation Results for the Parameters of the

Structural Model
β δ µα σα υ σε
0.9630 0.8519 4.0816 1.4367 0.5230 2.2379
(0.0014) (0.0080) (0.3220) (0.3160) (0.0461) (0.1258)

MLE Estimation Results for the Coefficient b’s

bP1 AC -0.2523 bIP
1
C
0.6744
(Germany) (0.0895) (Drug & Health) (0.1849)
bP2 AC -0.1351 bIP
2
C
-0.0861
(U.S.) (0.0711) (Chemical) (0.0190)
P AC IP C
b3 -0.4800 b3 -0.3896
(Japan) (0.0362) (Electronics) (0.0626)
P AC IP C
b4 0.0292 b4 -0.1816
(EPO) (0.0372) (Mechanical) (0.0182)
Note: Table 4.1 displays the MLE results for the structural model. The standard
errors are reported in the parentheses.

The coefficient estimates for the nationality dummy variables are pre-
sented in the second column of the lower panel of Table 4.1. The standard
errors are reported in the parentheses. The t statistics indicate that all esti-
mates are significantly different from zero, except for the one for EPO group.
The dummy variable for the EPO group has the highest coefficient esti-
mate of 0.0292. This implies that, other things being equal, the inventions
from this group tend to have a higher deterministic value than patent appli-
cations from the U.S., Germany and Japan, although whether their values are

34
higher than those of the OTH group is not quite clear because the estimate
is not significantly different from zero.
The inventions from the OTH group, whose owners are from countries
other than the U.S., Japan and the 18 EPO contracting states, tend to
have an intrinsic value that is lower than that of the applications from the
EPO group, but higher than that of the applications with other nationalities.
The nationality dummy variable of Japan has the lowest coefficient estimate
among all the nationality dummy variables, -0.4800. This reveals that the
inventions from Japan usually have lower intrinsic value than inventions from
other countries when the applicants file the initial application and make the
designation decisions.
Column 3 to 8 of Table 4.2 display the estimation-implied initial returns
of an average invention from the five nationality groups in each of the 18 EPO
contracting countries, averaged over different technological classifications as
well as across the whole sample period. The second column of Table 4.2 is
identical to column 3 of Table 2.2, which shows the minimal initial returns
required by an applicant in each of the 18 EPO contracting countries to cover
the fixed cost of filing and the renewal fees that he must pay. By comparing
this column with the initial returns implied by the structural model estimates,
it can be seen that the model estimation implies that typically a patent
application originating from Germany or the United States would designate 7
countries, while it is 5 for applications from Japan, 9 for applications from the
EPO contracting countries except for Germany and 8 for applications from
the rest of the world. Noticeably Germany, France, the United Kingdom
and Italy are designated by the average applicants from every nationality
group. These designation patterns are very similar to the ones revealed by
the primitive nonparametric study, as shown in Figure 2.2 and discussed in
section 2.
Figure 4.1 displays the amount of value of the EPO protection that a
typical patent applicant expects to obtain during the first year after the
application is filed, calculated by summing up for each nationality group the
model-implied initial returns from the designated countries, as shown in Table
4.2. Patent applications from Japan enjoy the lowest EPO protection benefits
during hte first year after filing, with the average amount of 5,469.67 Deutsche
Marks. The patent applicants from the EPO group have the highest value
of protection during the first year, on average reaching 11,621.71 Deutsche
Marks. Comparing Figure 4.1 with Figure 2.3, we can see they display very
similar patterns.

35
 The coefficient estimates for the dummy variables of the technological
classifications are presented in the fourth column of the lower panel of Table
4.1. The standard errors are reported in the parentheses. The t tests indicate
that all estimates are significantly different from zero.
The dummy variable for drugs and health industry has the highest coef-
ficient estimate of 0.6744. This implies that, other things being equal, the
inventions from this group tend to have a higher deterministic value than
patent applications from the other industries. The inventions in the IPC5
group, which refers to all the industries other than drugs and health, chem-
ical, electronics and mechanical, tend to have an intrinsic value lower than
that of drugs and health industry but higher than that of chemical, elec-
tronics and mechanical groups. The inventions from the electronics group
have the lowest coefficient estimate among all the nationality dummy vari-
ables, which is -0.3896. This reveals that the average inventions from this
group have lower intrinsic value than inventions from other groups when the
applicants file the initial application and make the designation decisions.
Column 3 to 7 of Table 4.3 displays the estimation-implied initial returns
of a typical invention from the five IPC groups in each of the 18 EPO con-
tracting countries, averaged over different nationalities of the applicants as
well as across the whole sample period. The second column of Table 4.3 is
identical to column 3 of Table 2.2. Comparing this column with the initial
returns implied by the structural model estimates, it can be seen that the
model estimation implies that typically a patent application from the drugs
and health group would designate 12 countries, while it is 7 for applications
from chemical and mechanical groups, 6 for applications from electronics, and
8 for applications from the “other” group. Noticeably the “Big Four” coun-
tries (Germany, France, the United Kingdom, and Italy) as well as Belgium
and Spain are designated by the average applications from every technolog-
ical group. These designation patterns are similar to the ones revealed by
the primitive nonparametric study, as shown in Figure 2.4 and discussed
in section 2.Table 4.3: Model Implications on the Initial Returns:

Different Technology Groups

36
 Minimal r 1 Model-implied Initial Returns (1997 DE Marks)
Patent Applications from
Drugs & Chemical Electro- Mecha- Other
Health nics nical
Germany 1,046.95 4,754.02 2,222.18 1,640.48 2,019.78 2,421.99
France 1,263.16 4,097.15 1,915.14 1,413.82 1,740.71 2,087.34
U.K. 1,093.58 3,656.21 1,709.03 1,261,66 1,553.37 1,862.70
Italy 608.20 3,628.89 1,696.26 1,252.23 1,541.76 1,848.78
Spain 782.95 2,373.61 1,109.50 819.07 1,008.45 1,209.26
Netherlands 2,127.14 1,965.83 918.89 678.36 835.20 1,001.52
Switzerland 605.94 1,684.91 787.58 581.41 715.85 858.40
Sweden 1,000.98 1,660.74 776.28 573.07 705.58 846.08
Belgium 333.59 1,604.27 749.89 553.59 681.59 817.31
Austria 765.85 1,422.17 664.77 490.75 604.22 724.54
Denmark 1,757.84 1,299.22 607.30 448.32 551.98 661.90
Finland 1,011.96 1,171.72 547.70 404.33 497.81 596.95
Greece 1,012.75 1,005.70 470.09 347.04 427.28 512.36
Portugal 426.29 878.23 410.51 303.05 373.12 447.42
Ireland 1,031.96 735.24 343.67 253.71 312.37 374.58
Luxembourg 192.98 342.83 160.25 118.30 145.65 174.66
Liechtenstein 606.94 99.03 46.29 34.17 42.08 50.46
Monaco 334.73 79.61 37.21 27.47 33.82 40.56

Note: Table 4.3 displays the estimation-implied initial return of an average invention
from the five technology groups in each of the 18 EPO contracting countries. The second
column is from Table 2.2, and it shows the minimal initial return required by an applicant
in each of the 18 EPO contracting countries to cover the fixed cost of filing and the
subsequent renewal fees. All monetary values are in units of 1997 Deutsche Marks.

Figure 4.2 displays the amount of value of the EPO protection that an
average patent applicant expects to obtain during the first year after the ap-
plication is filed, calculated by summing up for each IPC group the model-
implied initial returns from the designated countries, as shown in Table 4.3.
Patent applications from electronics group enjoy the lowest EPO protection
benefits, with the average amount of 6,940.85 Deutsche Marks. Patent appli-
cants from the drugs and health group have the highest value of protection
during the first year, on average reaching 27,274.75 Deutsche Marks. Com-
paring Figure 4.2 and Figure 2.5, it can be seen that they display very similar

37
patterns.

Figure 4.2: Value of EPO Protection for an Average Patent

Application in the First Year After Filing: Different Technology
Groups

30000

25000

20000

15000

10000

5000

0
Durgs & Health Chemical Electronics Mechanical Others

Note: Figure 4.2 displays the amount of value of EPO protection that an average
patent applicant in each technology group expects to obtain during the first year after the
application is filed. The values are in units of 1997 Deutsche Marks.

Putnam (1997) estimates his structural model by setting the annual de-
preciation rate (1 − δ) at the level of 15%, which is taken from the mid-range
reported by Pakes (1986) and Schankerman and Pakes (1986). My estima-
tion results show that such an assumption is quite reasonable. On the other
hand, as discussed above, Putnam (1997)’s assumption of a constant return
to scale (υ = 1) is rejected by my estimation at any conventional signifi-
cance level. Therefore I suggest that future studies should be careful on this
point and may need to introduce a flexible return to scale in the structural
specification of the patent value, like what is done in Section 3.
Putnam (1997) examines the influences of the R&D intensity and the
trade volumes among countries on the patent values. While the analysis
in this paper primarily focuses on how the nationalities and technological
classifications affect patent applicants’ designation decisions, we also realize
that other factors, including R&D intensity and the trade volumes, may also

38
affect the patent applicants’ decision making. And these will be added in
future research.

5 Concluding Remarks
In this paper I analyze the initial filing and the subsequent renewal deci-
sions of the EPO patent applicants and patent-holders. I perform a sequence
of non-parametric tests, and find that the patent application patterns as
well as the patent renewal patterns are significantly different across differ-
ent characteristics of the inventions such as nationality of the applicant and
technological classification of the inventions.
I also formulate a structural model and analyze the initial joint filing
decisions faced by the EPO patent applicants. The model aims to quantify
how distinctively different characteristics of the inventions render in different
designation decisions, and the model implications are similar to the patterns
revealed by the non-parametric study. Interestingly, the model estimation
indicates that the value of the patent protection in a country increases as
the size of economy of that country increases, but apparently at a pace of
decreasing return to scale.
This structural model is among the first steps in revealing the interna-
tional patent applicants’ joint filing decision making. Many interesting and
potentially important factors are to be added to the model and included in
the scope of future research, for example, the trade balances between the in-
ventor’s home country and the possible designation countries, or other legal
and institutional factors in these countries. On the other hand, the initial
designation decisions are often intertwined with the subsequent renewal de-
cisions. This emphasizes the importance of building up a dynamic stochastic
filing-renewal model that jointly examines the filing and renewal decisions
faced by the patent applicants. A stochastic learning process about the pri-
vate value of the patent could be incorporated to capture the patent holders’
information updating and used to examine their period-by-period renewal
decision making. These will be the topics for future research.

39
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41