Does pro-patent policy spur innovation? A case of software industry in Japan

In Japan, the software patent system has been reformed and now software has become a patentable subject matter. In this paper, this pro-patent shift on software is surveyed and its impact on software innovation is analyzed. Before the 1990's, inventions related to software could not be patented by themselves, but they could be applied when combined with hardware related inventions. Therefore, integrated electronics firms used to be the major software patent applicants. However, during the period from the late 1990's to the early 2000's, when software patent reforms were introduced, innovative activities (measuring patent applications) by independent software development firms began. We use the datasets linking IIP patent database (individual patent datasets by using JPO's publication data) and firm level data from the Survey on Selected Services (software part) by the Japanese Ministry of Economy Trade and Industry. Based on the panel datasets for roughly 6000 firms from 1993 to 2007, we found that patent system reforms in the late 1990's have significant impacts on software firm's patenting activities. It is also found that R&D intensive firms increases its patent application more and a relative importance of large software house, typically a primary contractor at the top of the multi-layered industrial structure, is fading in patenting activities.