By Chris Borges
Intellectual Property (IP) rights, such as patents, copyrights, and trade secrets, are more than legal instruments; they are vital drivers of innovation and critical components of U.S. economic and national security strategies. This connection was evident to the U.S. founders, who enshrined IP protections in the U.S. Constitution to promote ingenuity. Likewise, President Lincoln recognized that the patent system “added the fuel of interest to the fire of genius.”
In a time where technological progress is expected and innovation taken for granted, the critical role of IP in fostering that innovation and maintaining a technological edge is often overlooked. Discussions on how to spur technological progress and maintain economic competitiveness frequently discount the role of strong IP protections in shaping incentives, securing investments, and enabling breakthroughs. Without a clear understanding of these connections, efforts to foster innovation risk missing a crucial piece of the equation.
To inform the debate, it is critical to closely examine the mechanisms through which IP rights stimulate creativity, facilitate investment, support small businesses, and, ultimately, promote innovation.
IP Rights are Property Rights
At the most fundamental level, secure IP rights provide a stable and predictable framework that actors in the innovation ecosystem can utilize to make decisions. Property rights for physical goods and spaces are widely considered as essential to the functioning of market economies. Buyers and sellers cannot transact if rights over the property in question are unclear. Would you buy a house if the seller could not also hand over the deed?
IP rights similarly transform inventions, artistic works, and other ideas into discrete economic assets that enable commercial transactions. This greatly increases market efficiency by providing economic actors with the security they need to collaborate and appropriately value their innovation. Indeed, a 2021 estimate placed the value of all U.S. patents at just under $3 trillion. By allowing the market to value innovation as an economic good, IP rights incentivize further innovation.
Further, numerous U.S. businesses rely on IP as their primary assets and depend on secure IP rights to survive. Though these firms do not necessarily produce consumer-facing end products, they are nonetheless vital components of critical and emerging technology value chains. Several U.S. advanced communications firms, for instance, invest heavily in research and development (R&D) to develop new interoperable technologies such as 5G, Wi-Fi, and Bluetooth, then leverage the IP system to license their innovations to other firms who integrate them into their products for commercialization. Without secure IP rights, these upstream R&D-focused firms could not safely license their innovations, undermining their viability as businesses, as well as their vital contributions to the sophisticated technologies we have come to rely on.
IP Rights Enable Risk-Taking and Investment
Innovation is inherently risky, time-consuming, and capital-intensive. Developing new ideas and bringing them to market requires significant investment, especially in critical and emerging technology fields. Bringing a new drug to market can cost several billion dollars, while the cost of training a frontier artificial intelligence (AI) model doubles every year. Yet success is far from guaranteed—more than 75 percent of startups fail, while less than 14 percent of drugs pass clinical trials and are approved for use.
Strong and secure IP rights play a pivotal role in enabling inventors, entrepreneurs, and investors to take on these massive and risky undertakings by providing clear ownership rights to their work. Absent such rights, it would be extremely unlikely for investors and firms to allocate large amounts of capital to fund projects with a high risk of failure, as success would inevitably be met with free riding by competitors. Why take the risks if someone else can simply steal your success? Secure IP rights are essential for promoting investment in innovation, as they enable innovators to recoup their investments should they succeed and, ideally, fund further innovation.
The role of IP rights in driving investment is compounded today as the center of gravity of U.S. R&D funding continues to move away from government. While public funding once played a central role in R&D, the private sector has now become the primary investor in innovation. In the early 1980s, public and private contributions to U.S. R&D were roughly equal, but by 2021, private sector investment accounted for 75 percent of total U.S. R&D spending. Meanwhile, federal R&D funding continues to decline, with a 2.7 percent cut in FY2024, including an 11.3 percent reduction in non-defense R&D spending.
Put simply, in the twenty-first century, the vast majority of R&D in the United States that drives innovation in critical and emerging technologies is funded by the private sector. Secure IP rights are the foundation that keeps these investments flowing.
IP Rights Empower Small Economic Actors
A fundamental component of any healthy innovation ecosystem are small actors such as startups, small and medium-sized enterprises, and individual inventors. These actors account for over 40 percent of U.S. economic activity and create two-thirds of new jobs. They take risks that established companies cannot, driving innovation, technological change, and economic growth. Indeed, many of the most impactful companies today were once startups.
Strong and secure IP rights are essential for these small economic actors to continue flourishing. Large firms often have several ways to secure competitive advantages in technology. They can fund their own R&D, quickly scale up development, and monetize their products in adjacent markets.
Small firms, in contrast, typically lack the resources necessary to quickly develop their ideas into large-scale marketable products. They often require external financing to support R&D and must engage other companies to manufacture and market their ideas.
By transforming their ideas into property that can be assigned and protected, IP rights allow small businesses to both attract investment and form commercial partnerships with other firms with the assurance that their ideas will not be stolen. For this reason, inventors, entrepreneurs, and startups repeatedly emphasize the importance of secure IP rights as a critical path to market entry, growth, and fair participation. Research bears this out: The approval of a startup’s first patent can increase its employment growth over the next five years by 36 percent, creating quality jobs for American workers.
U.S. history further underscores the importance of strong IP rights for small economic actors. The late 1930s through the 1970s, for instance, was marked by relatively weak IP protections in the United States, as U.S. courts were reluctant to enforce patents in a period of strict antitrust enforcement. During this span, both small innovators and the U.S. innovation ecosystem overall suffered. R&D activity became concentrated in the research labs of large corporations and was principally funded by the government, as investors were hesitant to contribute funds to R&D projects without secure rights over the results of their work. Though innovation did not come to a complete halt, this era of weak patent protection coincided with a noticeable decline in U.S. innovation performance.
It was only when patent protections were strengthened in the 1980s through reforms like the Bayh-Dole Act and the establishment of the U.S. Court of Appeals for the Federal Circuit that U.S. innovation rebounded. Rather than protecting incumbents, strong IP rights spurred the entry of new R&D-focused firms into high-tech industries like biopharmaceuticals and semiconductors. Private capital flowed into startups, fueling competition, fostering partnerships with larger firms, and reinvigorating the U.S. innovation ecosystem. Indeed, one scholar of economic history described the patent system as the “democratization of invention,” because it empowers inventors from all backgrounds—not just the wealthy and powerful—to invent and protect their ideas.
Conversely, weakened and unstable IP rights disproportionately hurt small economic actors. They increase the barriers to attracting investment and make small firms more susceptible to attacks and theft by larger, better-resourced firms that can quickly scale up production and afford scores of lawyers. Without a robust ecosystem of small economic actors, the entire U.S. innovation ecosystem suffers, undermining U.S. economic and national security.
IP Rights Facilitate Downstream Innovation
Downstream innovation refers to the process by which new inventions or technologies serve as the foundation for subsequent innovations, often leading to the development of entirely new industries, markets, and applications. GPS technology, for example, spurred the creation of navigation systems, ride-sharing platforms, and precision agriculture, among other new technologies, while the invention of the transistor in the mid-twentieth century laid the groundwork for the semiconductor industry, which, in turn, makes modern computing possible—including the AI revolution.
Secure IP rights are an essential catalyst for downstream innovation, as they promote the open exchange of technical information. To receive a patent, for instance, an applicant must disclose the technical details of their invention, thus making this information available to the public. This is a key function of patents: In exchange for patent rights, the inventor describes the invention in clear terms, thereby accelerating innovation by allowing others to learn from this information and build on it. (Indeed, the word “patent” stems from the Latin patere, which means “be open.”) Without secure IP protections, inventors might resort to secrecy, which would hinder the diffusion of ideas and slow technological progress.
Critically, IP rights also play a key role in facilitating the collaborative and non-linear nature of innovation. Standards development is an important example of this. Technical standards are sets of specifications, guidelines, or protocols that are widely accepted within a particular industry or field of technology. These standards are rarely made by a single firm. Instead, they are typically developed by industry consensus and can include contributions from hundreds of firms. The 5G standard, for instance, encompasses over 25,000 distinct patents owned by various companies. For a standard like this to succeed, owners of patents necessary to implement the standard—standard essential patents (SEPs)—must have confidence in their rights over their work. Without that security, why undertake the cost and risk needed to invent new technologies and contribute them to the standard?
In other words, secure, stable, and predictable IP rights lay the foundation necessary for the development of sophisticated technical standards. This secure foundation affords IP owners the assurances needed to cooperate in the development and implementation of standardized technologies and provides the incentives to make those technologies broadly available. Without secure IP rights, IP owners would be less likely to cooperate for fear of having their innovation stolen or dramatically devalued, greatly undercutting innovation and harming consumers everywhere. Think about how different life would be if phones from different manufacturers could not call each other, or if each device required a different power outlet.
Conclusion
Secure, stable, and predictable IP rights are a cornerstone of the U.S. innovation ecosystem. They build confidence for investors, empower smaller actors, and catalyze downstream discoveries—ensuring that creative breakthroughs can emerge from any corner and expand into entirely new industries. By aligning incentives and safeguarding ideas, IP protections help the United States maintain its technological leadership and reinforce the very foundations of its economic and national security.
Chris Borges is a program manager and associate fellow with the Economics Program and Scholl Chair for International Business at the Center for Strategic and International Studies in Washington, D.C.
This piece was originally published on April 17th with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, D.C.
