Are Patents the Measure of Innovation?

Maybe not, since the number of patents filed by a company doesn't give a full picture of its creative prowess. But analyzing citations produces some interesting of patents filed by a company results

How do you measure a company's ability to innovate? One metric that might seem logical, given their traditional association with invention, would be patents—the number of them that a company holds.

But patents are a tough metric to use for innovation. Adding up the number of patent holdings, for a variety of reasons, can be a flawed way to get a good picture of a company's innovation prowess. While they're helpful indicators in some industries, such as chemicals or pharmaceuticals, they don't offer a broad enough assessment of the pioneering business processes or unconventional strategies in less product-focused industries, such as retail.

As the number of patents protecting incremental advances has proliferated—a trend which should slow following the Apr. 30 U.S. Supreme Court decision that raised the bar on obtaining patents—they have become even less of a benchmark for breakthroughs. At many high-tech companies, where innovation cycles move at sound-barrier speeds, patenting has become more of a defensive strategy than a way of cataloging creative output.

Limited Correlation

Some companies even focus on filing patent claims at the expense of real innovation. A surprising 2004 study found that companies with a large share of software patents actually reduced their spending on research and development relative to sales. "In some sense, it was a substitute," says James Bessen, a Boston University Law School professor who co-authored the study. "Organizations were putting more effort into getting patents, as opposed to actually performing base R&D."

Patent citations, or measuring the number of times a company's patents are referenced by other patents, are a better metric. A high number of mentions in other patents could mean that the innovation is valuable, and that there may be a market for licensing the patent to other companies, creating new revenue streams. That strategy is one that companies such as Procter & Gamble (PG) have aggressively pursued.

In addition, some studies also show a positive correlation between companies with high numbers of patent citations and a higher stock market value. As a result, in the last few years Wall Street has begun snapping up "patent-analytics" data provided by outfits like Chicago research firm the Patent Board, which tracks 50 different metrics to measure the quality of a company's intellectual property.

But patent citations aren't a perfect measure, either. The correlation between citations and stock market value is somewhat limited, says Bessen. And patent citations can be misleading, too. For instance, Nike's (NKE) most-cited patent over the last five years was for the design of the upper and lacing section of its Nike Shox TL IV sneaker. Yet footwear industry experts agree that the shoe's big innovation was its ultra-cushy sole.

Eye on Design

In fact, Patent & Trademark Office data show that about one-third of all patents with 20 or more citations are allowed by their owners to lapse, meaning they don't think they're worth the renewal fees. As for whether patent citations can capture innovation, Bessen says: "You're talking about a very rough indicator."

Still, running the numbers, which we did for all the companies on our list before opting not to use the results in our ranking, did yield an interesting finding. When the Boston Consulting Group calculated the number of citations on patents filed in the last five years by the companies on our list, they found an unexpected result. Even though technology patents, which protect functions, are far more common in number, the five most-cited patents for the top two companies on our list—Samsung Electronics and Nike (see, 4/24/06, "The Top 100 Most Innovative Companies Ranking")—were all "design" patents. Design patents only cover an item's look or form.

In fact, the single most-cited patent among all the companies on our list, a Motorola (MOT) patent that included a particular keypad layout, was a design patent, too. The prominence of design patents, especially among technology companies like Samsung or Motorola, may be further proof that business is recognizing the value of good design.

"There's no question that design innovation is getting more important in the tech sector," says Wendi Backler, the director of the IP Insight Center at the Boston Consulting Group. "We're seeing growth in both the number of design patents and the extent to which they're being cited."

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