A patentability requirement and industries targeted by R&D

We introduce into a Schumpeterian growth model an inventive step, which is a minimum innovation size required for patents, and thus a patentability requirement. We show that in order to satisfy an inventive step requirement, each R&D firm targets only industries in which the incumbentfs technology is sufficiently obsolete. This is because the technological gap between innovator and incumbent is larger in industries that use older technologies. Although strengthening an inventive step requirement reduces the number of industries targeted by R&D, it also increases the amount of R&D investment directed at the targeted industries. Consequently, introducing an inventive step has either a nonmonotonic or a negative effect on the aggregate flow of innovations, which has some empirical support. Furthermore, by deriving the endogenous long-run distribution of innovation size, we show that strengthening an inventive step reduces innovation size on average, which also has empirical support. This implies that even if the patent office only grants patents for superior innovations, compared with prior art references, this causes innovators to produce inferior-quality innovations on average.