Using Patent Portfolio to Effectively Manage Technical Assets: The

Mechanism of Patent Portfolio to Influence Firm Performance

Xiukun Bian

1,2

, Suli Zheng

1,2

and Sijia Lu

1,2

School of Economics and Management, China Jiliang University, China

Key Laboratory of Quality Infrastructure Efficacy Research, AQSIQ, Beijing

Keywords: Technical assets; Patent portfolio; Firm performance; Technological opportunity.

Abstract: Patent portfolio analysis can be a useful approach to understand technological capabilities. However, little

attention has been given to elaborate the mechanism of patent portfolio to firm performance. This paper

does an empirical study about how patent portfolio size, patent portfolio diversity and technical scope

contribute to firm performance based on panel data of 99 Chinese companies from 2013 to 2017. We

incorporate technological opportunity as moderator. Our result indicates that patent portfolio with larger

size and broader technical scope can have a positive effect on firm performance, but a more diverse patent

portfolio can have a negative effect on firm performance. Technological opportunity has a positive effect on

the relationship between technical scope and firm performance; however technological opportunity has a

negative effect on the relationship between patent portfolio size, patent portfolio diversity and firm

performance.

1 INTRODUCTION

The influence of patent strategy on the

competitiveness of knowledge-intensive firms has

been a focus of IPR management. As the patenting

environment becomes more puzzling, patent

portfolio grows to be the basic analysis unit for the

formulation and implementation of patent strategy

(Parchomovsky and Wagner, 2005). The

characteristics and compositions of patent portfolio

can influence firm performance (Ceccagnoli, 2009),

but the mechanism behind this phenomenon has not

yet been elaborated. Therefore, it is of great

theoretical and practical significance to make out

how patent portfolio influence firm performance.

Parchomovsky and Wagner (2005) have

presented a systematic introduction to the concept of

patent portfolio as well as its compositions. Then

many scholars have explored this subject from

different perspectives (Ernst, 1998).The knowledge-

based view of the firm stresses that patent portfolio

reflects the absorptive capability of knowledge, and

influences the effects of knowledge diffusion within

the firm (Zhang et al., 2007). The resource-based

view demonstrates that patent portfolio enables the

enterprise to acquire complementary resources and

exert a beneficial influence on the enterprise's

financing ability, alliance ability, and eventually, on

enterprise performance. Levitas et al.(2009) and

Grimpe et al.(2015) have conducted empirical

studies showing that patent portfolio within the

enterprise may deliver a positive signal to market.

Luo (2017) demonstrated that well-managed patent

portfolio bolsters bargaining power of enterprises

and gives enterprises an advantage in patent

litigation (Arts et al., 2009).

Liu and Li introduced the concept of patent

portfolio around 2004, and scholars covered its

compositions in greater detail later. Recently, Guo

and Chen applied the two-dimensional analysis

proposed by Narin and Ernst to measure the effect of

patent portfolio in automotive on the improvement

of technological innovation ability (Liao, 2014).

Kang explored new ways to assess the value of

patent portfolio. Generally speaking, patent portfolio

has long been the focus for the west scholars, while

the empirical studies are far from enough in China.

Based on prior work, we can see some

deficiencies of present literature about patent

portfolio. Firstly, although some scholars have

Bian, X., Zheng, S. and Lu, S.

Using Patent Portfolio to Effectively Manage Technical Assets: The Mechanism of Patent Portfolio to Inﬂuence Firm Performance.

DOI: 10.5220/0008099302570263

In Proceedings of the International Conference on Advances in Computer Technology, Information Science and Communications (CTISC 2019), pages 257-263

ISBN: 978-989-758-357-5

257

founded that patent portfolio diversity negatively

influence firm performance based on data of foreign

companies, there have been few empirical studies

using the data of Chinese firms and other

characteristics are ignored. Secondly, the mechanism

of how patent portfolio impacts on enterprise

performance has never been scrutinized. This paper

empirically analyzes how patent portfolio influence

enterprise performance by using patent data from 99

Chinese firms belonging to the manufacturing

industry of electronic and telecommunications

equipment (MIEEE blow). We introduce the

technological opportunity as the moderator variable

and build a theoretical model to illustrate how patent

portfolio size, patent portfolio diversity and

technical scope act on enterprise performance.

2 LITERATURE AND

CONCEPTUAL DEVELOPMENT

2.1 Patent Portfolio and Firm

Performance

Patent portfolio theory explains the phenomenon

of “the patent paradox” (Parchomovsky and

Wagner, 2005). The concept of patent portfolio is

derived from technology portfolio (Ernst, 1998).

Parchomovsky and Wagner (2005) provided a

definitional basis of distinct-but-related patents.

The Patent Corporation Treaty (PCT) interprets

the patent portfolio as a collection of patents

owned by a single entity and the patents may be

related or unrelated. Based on the prior work

(Ernst, 1998; Lin et al., 2006), this paper focuses

on the patent portfolio at the firm level, and

defines the patent portfolio of year i as the

aggregation of patents applied by the enterprise

from year i-4 to year i-1. A well-designed Patent

portfolio can be process-oriented, problem-

oriented or product-oriented. Such patent

portfolios pay attention to the whole efficacy, and

the patents within the portfolio may be

complementary or alternative so as to form the

superiority in the intense market competition. The

patents applied for have increased progressively

as enterprises grow, and we call this

“organically accumulated patent portfolio”. The

industrial characteristics and the market

competition structures may decide the critical

quantity. The organically accumulated patent

portfolio can’t provide effective protection due to

the weak correlation among patents, and it is

easier to be imitated or even outstripped by

competitors.

The quantity of individual component patents

involved indicates the size of patent portfolio

(PPS below). Researches pointed out that all the

benefits of a patent portfolio are broadly

proportional to the size (Parchomovsky and

Wagner, 2005). Some advantages generated by a

greater amount of patents will be sketched below.

Firstly, larger numbers of patents can enhance the

overall technological value of the portfolio. High-

value patents grow increasingly difficult to obtain

and more patents may makes up for the quality

defect. Patent portfolio is more valuable than the

simple sum of individual patents. Secondly, more

patents with adjacent claims may expand the

scope of protection and enhance its defensive

capability. Complementary patents for the core

patent can bolsters bargaining power of

enterprises (Luo et al., 2017). Steensma suggested

that a well-crafted patent portfolio is more likely

to prevent competitors so as to gain a quasi

monopolistic position in market. Thirdly, more

patents contribute to attract external resources.

Turanay et al. (2016) conducted an empirical

study showing that investors regard the patent

application activity in knowledge-intensive

industry as positive signal of technical superiority,

which will heighten the stock price and market

value. Levitas and Mcfadyen (2009) also

demonstrated that positive signal of patenting can

stabilize shareholders’ confidence, improve

financing capacity and reduce the cost of holding

excessive liquidity during R&D activities. Based

on these analyses, the following hypothesis is

proposed:

H1a The patent portfolio size is positively

related to firm performance.

A well-crafted patent portfolio should seek a

balance between size and diversity. Turanay

measured patent portfolio diversity (PPD below)

as the distribution of patents across different

categories of technology (Turanay et al., 2016).

Patent portfolio is a constructed array of related-

but-distinct individual patents. Diversity may

show the complex relationship among these

patents. Some technical characteristics leading to

lower diversity of patent portfolio will be

sketched below. Technologies will be compatible

when the latter technology is

from changes to former critique. Secondly, it is

easier to expand from one technology field to

another if different technology fields are adjacent

to each other. In other words, the knowledge base

between the adjacent technology fields is similar.

Patent portfolios with lower diversity are usually

accompanied by overlapping authority. The

capability based view of firm strategy suggests

that firms should concentrate on technology fields

CTISC 2019 - International Conference on Advances in Computer Technology, Information Science and Communications

258

they can do best. Patent portfolios with higher

diversity usually incorporate discrete patents.

These technologies are less correlated and

enterprises may implement diversified strategies.

The distribution of patents for Chinese enterprises

is extremely uneven and only a few giant

corporations own a large number of patents. Lin

et al. (2006) stated that enterprises without

massive technical stock should focus on the core

technology field so as to generate synergies.

Grimpe and Hussinger (2015) also demonstrated

that highly correlated or overlapped patents can

generate more value. Based on these analyses, the

following hypothesis is proposed:

H1b The patent portfolio diversity is

negatively related to firm performance.

Fabry and Ernst used the number of IPC

classes in patent applications to represent the

technical scope of the patent portfolio. Technical

scope focuses on getting a number of core

technologies in the core technology field. In the

case that the patent portfolio diversity is

determined, broader technical scope can provide

more sufficient protection for products. The

protection of mature technology strengthens the

existing technical capacity of the enterprise, and

the protection of undeveloped technology is

beneficial for enterprises to acquire the first-

mover advantage. Grimpe and Hussinger (2015)

believe that the first-mover advantage generated

by the patent portfolio can guarantee the freedom

of research and development and help

to extracting as much value as possible. Based

on these analyses, the following hypothesis is

proposed:

H1c The technical scope of the patent

portfolio is positively related to firm performance.

2.2 The Moderating Effect of

Technological Opportunity

Klevorick et al. (1995) demonstrated that

“technological opportunity” (TO below) refers to

differences in the set of possibilities for

technological advance that exist within technologies

and industries at different points in time. Patel and

Pavitt (1997) analyzed firm-specific differences in

technological opportunity from two perspectives: the

annual applications in patent class i and the

distribution of the annual patent application of the

enterprise. We try to understand how enterprises

seize technological opportunities from two

perspectives. Firstly, the enterprise pursues the

development opportunities of the whole industry and

applies for more patents as this industry develops

rapidly. Secondly, based on the understanding and

expectation of technology development,

enterprises implementing the offensive strategy start

market arrangements in advance so as to gain more

personal opportunities. In any case, enterprises will

have a larger patent portfolio size but higher

uncertainty may accompany with this process,

because they are more likely to outpace or misjudge

market trends in reacting to the crisis. Manufacturers

in the vertical value chain increasingly rely on the

organizations in upstream enterprises, which in turn

makes it more difficult for downstream enterprises

to access high-value patents. Therefore they apply

for more low-value patents and we call this as

“passive technological opportunity”. Passive

technological opportunity indicates the downstream

enterprises gradually lose control of the advanced

technologies, which may impede their profitability.

Based on the above analysis, the following

hypothesis is proposed:

H2a Technological opportunity negatively

moderates the relationship between patent portfolio

size and firm performance.

Based on the analysis above, the technological

opportunities that enterprises may fight for include

two types: the development opportunities of the

whole industry and the opportunities of individuals.

From the perspective of dynamic capabilities, the

individual firms experience technical evolvement

during development. All companies face equal

industry opportunities but different individual

opportunities. Due to the high uncertainty of R&D

activities, enterprises may involve different technical

fields or low-correlation technical categories within

the same technical field when accessing

technological opportunities, which will increase

patent portfolio diversity gradually. Involving in

different technical fields helps to capture potential

opportunities. Enterprises getting more various

opportunities sometimes have to scatter

limited resources in different business, which may

make coordination even more difficult and raise

the cost of knowledge transfer. Based on the

capability view, dispersed resource may fail

companies to form the lasting competitiveness,

which will result in more sunk costs. Based

on these analyses, the following hypothesis is

proposed:

H2b Technological opportunity negatively

moderates the relationship between patent portfolio

diversity and firm performance.

The more technological opportunities, the faster

the industry develops and the more dramatically

technologies change, and enterprises broaden

technical scope to adjust to such changes. Getting

Using Patent Portfolio to Effectively Manage Technical Assets: The Mechanism of Patent Portfolio to Inﬂuence Firm Performance

259

more individual opportunities contributes to the

comprehension of existing or potential technologies,

which leads to broader technical scope involved in

business. Also, more opportunities contribute to

capturing complementary resources and improving

competitiveness. What we should emphasize here is

that technological opportunity may generates

positive moderating effect between technical scope

and firm performance yet negative moderating effect

between patent portfolio diversity and firm

performance. It is not a contradiction. Wagner

demonstrated that the primary role of patent

portfolio diversity is to avoid risks such as technical

risks, market risks and legal risks. Surely patent

portfolio diversity also helps to obtain

complementary resources, but only if the risks are

successfully avoided can complementary resources

create more benefits. The investment of subsequent

R&D resources may transform into sunk costs when

diversity-oriented strategy fails to avoid risks. While

technical scope focuses on further strengthen

property so as to gain competitive advantage. Based

on these analyses, the following hypothesis is

proposed:

H2c Technological opportunity positively

moderates the relationship between the technical

scope of patent portfolio and firm performance.

3 RESEARCH DESIGN

3.1 Sample Firms and Data

Based on standard classification of industries i-n

china, this paper selects 121 enterprises belonging to

MIEEE listed in Shanghai or Shenzhen. We finally

confirm 99 enterprises with valid data after

excluding ST shares, *ST shares or enterprises

without patents. Patent data and documents in this

paper comes from incoPat database which has

collected more than 100 million patents from 112

countries or regions and updates the data four times

a week.

We only focus on patents for invention or utility.

We finally get the data of patent portfolio from 2013

to 2017 for each firm. The data of firm performance

in this paper is derived from the Wind database.

3.2 Independent Variables

We choose to use a 4-year time window to

reasonably reflect the actual attributes of the patent

portfolio. The quantity of individual component

patents involved indicates the size of patent portfolio

(Parchomovsky and Wagner, 2005), and the formula

for this index is:







PPS

;

i=focal firm; n

= number of patents owned by focal

firm i.

We measure patent portfolio diversity or the

degree to which a firm built a diversified repertoire

of patent portfolio in the technological categories

defined by the International Patent Treaty. Turanay

et al. (2016) used the inverse of non-biased

Herfindahl Index (HHI) by Hall to measure PPD,

and the formula for Turanay’s index is:

















1-*

HHIN

PPD

















HHI

;

Where, i=focal firm; k=patent classes; Nik =

number of patents in class k by focal firm i; and Ni =

total number of patents in all classes by focal firm i.

The value of patent portfolio diversities ranges

between 0 and 1, and a bigger value indicates higher

diversity.

Fabry and Ernst used the number of IPC classes

in patent applications to represent the technical

scope of the patent portfolio.

3.3 Dependent Variables

Previous literature identified three categories of firm

performance: innovation performance, market

performance and financial performance. Lin selected

return on assets (ROAs) as a measure for firm

performance (Ceccagnoli, 2009; Lin et al., 2006).

ROA indicates the entity’s capacity to build value.

Besides, we choose revenue of major activities

(RMAs) to measure the current state of operation.

3.4 Moderator Variable

Klevorick et al. (1995) demonstrated that

technological opportunity refers to differences in the

set of possibilities for technological advance that

exist within technologies and industries at different

points in time. The formula for Turanay’s index is:













jit

patents

i=focal firm; Patentjt-1=number of patents in class j

applied for by all entities in year t-1; Pjit-1=the

percentage of patents in class j applied for by firm i

in year t-1. The bigger value of patent portfolio

CTISC 2019 - International Conference on Advances in Computer Technology, Information Science and Communications

260

diversity indicates that the firm may catch more

technological opportunities in the process of

development.

3.5 Control Variables

Based on the prior art, we use the natural logarithm

of the number of employees (lnem blow) as a control

variable for firm size effects and use Stata 15.0 to set

the dummy variable for company nature effects. At

the same time enterprise age is also a control

variable in this study.

4 RESULTS

We adopted hierarchical regression analysis methods

for analyzing such panel data by using Stata 15.0

software and centralized the independent variables

and moderator variables. All four Models are highly

significant (p-value < 0.001 for each Model)

as shown in the TABLE 1.

Model 1A and Model 1B include RMA as

dependent variable, and Model 2A and Model 2B

include ROA as dependent variable. RMA and ROA

represent measures of short-term firm performance.

However, Model A does not consider the interaction

effects between patent portfolio size, patent portfolio

diversity, technical scope, and technological

opportunity. Models with interaction terms

strengthen the explanatory power according to the

adjusted R

values. These three attributes have

different impacts on RMA and ROA as shown in

Models 1A and 2A, because RMA indicates a

truer picture of an enterprise’s short-term condition,

while ROA represents its capability to

create high value. Patent portfolio size and technical

scope generate significant positive effect on RMA,

but not for ROA. The coefficient of technical scope

in Model 2B is 0.0230 when considering the

interaction effects, which is positive and significant.

Those results suggest that patent portfolio size and

technical scope positively impact on firm

performance. Thus, hypothesis 1a and hypothesis 1c

are true. However, larger patent portfolio size does

Table 1. Regression models for patent portfolio and firm performance measures.

Model 1A Model 1B Model 2A Model 2B

RMA ROA

PPS

0.0688**

(2.98)

0.180***

(5.48)

-0.000288

(-1.61)

-0.000333

(-1.29)

PPD

-3.665+

(-1.94)

-3.245

(-1.57)

-0.0439**

(-3.00)

-0.0610***

(-3.76)

7.393***

(6.19)

5.777***

(4.27)

0.0146

(1.58)

0.0230*

(2.17)

1.045

(1.36)

0.120

(0.15)

0.0183**

(3.08)

0.0134*

(2.06)

age

-34.20***

(-4.10)

-31.83***

(-3.87)

-0.462***

(-7.16)

-0.478***

(-7.39)

lnem

561.0***

(12.07)

553.6***

(12.05)

-0.939**

(-2.61)

-0.913*

(-2.53)

TO * PPS

-0.00457***

(-4.65)

0.000000298

(0.04)

TO * PPD

-0.0239

(-0.82)

-0.000410+

(-1.79)

TO * TS

0.103***

(4.05)

-0.000137

(-0.69)

_cons

-3713.5***

(-7.22)

-3676.7***

(-7.23)

21.01***

(5.28)

21.09***

(5.27)

Adj R^2 0.6447 0.6583 0.2111 0.2171

F-value 74.18*** 63.17*** 11.8*** 9.95***

N 485 485 485 485

t statistics in parentheses; + p<0.1 * p<0.05 ** p<0.01 *** p<0.001

Using Patent Portfolio to Effectively Manage Technical Assets: The Mechanism of Patent Portfolio to Inﬂuence Firm Performance

261

not mean a greater ability to create higher value.

Enterprises should pays attention to the quality of

patents. The coefficients of patent portfolio diversity

in Models 1A and 2A are -3.665(t - value = -1.94)

and -0.0439(t - value = -3.00), respectively, both of

which are significant. Those results support

hypothesis 1c and indicate that more diversified

technologies can’t form the superiority in the intense

market competition.

The coefficients of technological opportunity in

Model 1B and Model 2B are 0.120 and 0.0134

respectively, only the latter is significant, which

indicates that catching technological opportunities

may help to create high value by leveraging the

existing asset base. The coefficients of

enterprise age in Model A2 and Model B2 are -31.83

and -0.478 respectively and both are significant,

which indicates that enterprises in MIEEE may get

undesirable performance with age. Perhaps the old

companies with rigid system and institutions lead

to lower administrative efficiency. The coefficients

of lnem in Model A2 and Model B2 are 553.6 and -

0.913 and both are significant. The former is

positive while the latter is negative, which indicates

that more employees can create more revenue but

may reduce the ability to create high value.

The coefficient of the interaction term TO*PPS

is negative and significant in Model 1B; however it

is almost equal to 0 in Model 2B. This results

support hypothesis 2a, which means that Chinese

enterprises in MIEEE might have caught a number

of passive technological opportunities but missed the

high-value patents. The coefficients of the

interaction term TO*PPD are negative and

significant in Model 1B and in Model 2B, though

only the latter is significant. This result indicates that

more technological opportunities are accompanied

by higher uncertainty, and a mass of R&D resources

may turn out to be the sunk costs when technological

opportunities lure into the wrong direction. The

coefficient of the interaction term TO*TS is positive

and significant in Model 1B; however it is

almost equal to 0 in Model 2B. This results support

hypothesis 2c, which means that enterprises should

patent more in the core technology field.

The empirical results of this paper indicate that

patent portfolio size has positive impacts on firm

performance; however, large blocks of non-core

patents can’t create high value. Patent portfolio

diversity has negative impacts on firm performance,

and diversified technical strategies accompany with

high risks. The technical scope of the patent

portfolio positively affect firm performance, thus,

enterprises should concentrate its limited R&D

resources on a specific technology and even within

the core technology field so as to strengthen the

property.

5 CONCLUSIONS AND

IMPLICATION

Passive technological opportunity will negatively

moderate the relationship between patent portfolio

size and firm performance. Enterprises should

cultivate independent R&D capacity in order to

possess advanced technologies. Technological

opportunity will negatively moderate the

relationship between patent portfolio diversity and

firm performance. Thus, enterprises may need to

develop the ability to accurately identify the

valuable opportunities. Technological opportunity

positively moderates the relationship between the

technical scope of patent portfolio and firm

performance. Enterprises had better broaden

technical scope within the core technology field.

This study notes some limitations in

investigating the mechanism of patent portfolio to

firm performance. We neglected the small and

medium enterprises; however they are an important

part of the market. We didn’t measure other

attributes of the patent portfolio such as its total

value due to the availability of the related data. This

paper lays the groundwork for future research on

patent portfolio and firm performance.

ACKNOWLEDGEMENTS

The authors gratefully acknowledge the support for

this research from the National Natural Science

Foundation Item (71572187) and National Natural

Science Foundation of China under Grant

(71601172).

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