Conducting research and developing new products such as new medicines and drugs is extremely expensive. Firms are often unwilling to undertake these expenses unless they know that they can receive a patent for the product that results from the research.
The patent is critical because it grants the firm an exclusive right to sell the new product for a limited time. During the life of the patent, the firm is the sole provider of the product and can charge higher prices, which allow it to recoup the costs of research and development. The price is higher than it otherwise would be, but without the higher price the product never would have existed.
The higher price only exists for the life of the patent, then prices for the product decline as other firms start producing generic versions.
The above is a brief version of the economic argument for why the government grants patents for new medicines and other products. And until the Bayh-Dole Act of 1980, colleges and universities, which do not market products but nevertheless conduct a significant amount of useful research, struggled to obtain patents for federally funded projects, leaving drug companies leery of developing associated products.
For example, even after the university discovers a promising new type of drug with its research, pharmaceutical companies often need to invest millions of dollars to translate university research into a commercially viable drug. The company has to do numerous rounds of testing to receive FDA approval.
Firms are often reluctant to incur these costs unless the firm is sure that it has the exclusive right to sell the new drug. If it does not have such a right, then other firms could quickly imitate the drug, and the company that spent millions on clinical testing and FDA approval would lose money.
Prior to the Bayh-Dole Act of 1980, it was very difficult for universities to receive patents based upon the results of federally financed research because each federal agency had its own set of rules and regulations to follow. There were approximately 20 sets of rules that universities needed to follow. The proponents of the Bayh-Dole Act argued that this constituted a significant regulatory burden for universities. As a result, universities were not seeking patents and firms were not exploiting the results of federally financed research.
The Bayh-Dole Act greatly simplified the procedure that universities had to follow to obtain patents on federally financed research. Now there is just one set of rules for universities to follow, and the universities could even grant exclusive licenses to corporations. If a university discovers a promising new drug, then it could receive a patent and grant an exclusive license to a pharmaceutical company. That company could then spend money on the clinical trials and FDA approval knowing that it would have an exclusive right for the life of the university’s patent to sell the new drug. With no other firm selling the drug, the company could charge a high enough price to recoup the development costs.
Or so the supporters of the Bayh-Dole Act argued.
Critics have argued that the act distorts the mission of universities from advancing basic knowledge freely available to everyone to pursuing research that has more immediate benefits for corporations. This has led researchers to be much less open about the research they are conducting. For example, universities tell researchers to file for a patent prior to presenting their results at conferences or publishing a paper. University researchers often have to research formal agreements before sharing resources.
Critics say all of this has shifted universities away from their traditional emphasis on basic research that benefits a wide number of areas but with no immediate commercial application and toward more applied research with very little benefit for other areas but with substantial commercial applications. If the critics are correct, then the Bayh-Dole Act dramatically altered the research culture at universities. The act may also have sped up the rate at which inventions flow from universities to the commercial sphere, but have reduced the speed with which the scientific frontier expands.
It is very difficult to find evidence on the changes in the culture at universities. However, we do have evidence on the quality of university patents and the resources that universities devote to research.
David Mowery, Bhaven Sampat and Arvids Ziedonis have shown that the quality of university patents has not declined since the passage of the Bayh-Dole Act. Despite the concerns of the critics, universities are doing just as much to advance the scientific frontier as they were before the passage of the act. This is not a great surprise since figures 1 and 2 show that the trend in university funding and performance of basic research did not change dramatically after the act.
If anything, the rate of performed basic research accelerated during the 1980s.
This is not to say that the Bayh-Dole Act worked perfectly or that there have not been significant and substantial changes in the research culture at universities. These changes have occurred and are a cost. However, the claim that the Bayh-Dole Act has caused the quality of academic research to decline is not supported by the evidence.
Matt Rafferty is a professor of economics at Quinnipiac University. His recent research examines how government policy, CEO compensation and corporate governance influence research and development expenditures.