1 When the Giants ’ Shoulders are Crowded : Fragmented Rights and Patent Strategies in Semiconductors

Firms in many high technology industries utilize and build on the innovations of others, often in the face of short product life cycles. Not surprisingly, the legal “rules of the game” governing intellectual property rights (such as patents) play a pivotal role in shaping this process of cumulative innovation by, among other things, affecting how the initial rights to technologies are allocated and the ability of property owners to exclude others from using their technologies. Recent theoretical papers have asserted that IPrelated “hold up” is especially problematic in the face of widely dispersed, or fragmented, markets for intellectual property, potentially leading firms to under-invest in R&D or to acquire the assets under dispute. This paper presents a simple framework with which to examine how these two dimensions of the firm’s contracting problem interact in ways that also shape the patenting strategies of firms. By examining the patenting behavior of 72 dedicated US semiconductor firms during 1980-94 and identifying some of the organizational “shoulders” on which each firm’s inventions stand, I find that the patenting strategies of firms in this industry are influenced by the combined risk of “hold up” and the degree to which rights to a firm’s technological inputs are widely dispersed among external parties. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in technologically complex physical assets while foregoing some of the costs and delays associated with ex ante contracting over intellectual property.