Does knowledge tradeability make secrecy more attractive than patents? An analysis of IPR strategies and licensing

Despite considerable protections provided by the patent system, a surprisingly small number of firms use patents. This study focuses on examining empirically Henry and Ponce (2011)’s theoretical finding that firms’ preference of secrecy over patents rise with knowledge tradeability using the Innovation in Australian Business survey data. Besides, other determinants of firms’ choices of patenting versus secrecy are explored. We constructed a trivariate probit model to correct for the endogeneity of the key explanatory dummy variable in the basic bivariate probit model of patents and secrecy. As robustness check, we attempted to correct for the potential sample selection bias caused by using only the innovator subsample. Our key findings are that firms engaged in knowledge trading or those among the largest R&D investors, are more likely to use secrecy than patents. Other findings are consistent with the existing literature, which are large or manufacturing firms and those involving R&D joint-ventures are more likely to use patents, while firms obtaining information from internal and non-market sources are more inclined to use secrecy.