The role of patents and licenses in securing external finance for innovation

Financing constraints have been discussed as a major obstacle to innovation. Small and medium-sized enterprises and start-ups are particularly concerned by such impediments. Venture capital has emerged as a partial solution in some countries, but is only available for start-up firms with major growth potential. Recently, new intermediaries have attempted to provide external finance to innovative firms based on the firms’ patent portfolios. Patents have been used as collateral or as assets assembled in patent funds seeking to commercialize the patent rights. Patent auctions are indicative of a nascent market for patented technology. This paper presents an overview on the role of patents and licenses, both in the classical sense and as instruments for financing innovation. It also discusses implications of these developments for public policy and the design of patent systems.