2.17 The economic benefits of the patent system are derived from its roles in promoting innovation, and encouraging investment, economic growth, knowledge sharing and the efficient use of resources. These aspects of the patent system are briefly discussed below.
2.18 Innovation benefits the community by creating new and improved goods and services that meet social needs. For example, innovations in medical research may produce new diagnostic tests or treatments, which improve community health.
2.19 Patents promote innovation through the grant of limited monopolies, as a reward to inventors for the time, effort and ingenuity invested in creating new products and processes. The potential for financial returns adds an incentive to the traditional rewards of scientific innovation, such as academic recognition and promotion within research institutions. Without the incentive provided by patents, private investors may be reluctant to invest, resulting in greater calls on government funding or a failure to develop and exploit new technology.
2.20 The role of patents as an incentive for innovation and investment in research was widely acknowledged in submissions, including by research and healthcare organisations. For example, the Children’s Cancer Institute Australia for Medical Research stated that the patent system is:
a cornerstone in driving innovation in medical research by enabling researchers to have protection of their intellectual property and the possibility of capitalizing on their inventions. The involvement of industry in this process is also well-established and important … Intellectual property protection has been, and will continue to be, an essential component of the innovation process that drives medical research.
2.21 Similarly, the Department of Human Services Victoria acknowledged that the patent system has served Australia well and ‘is essential to foster and encourage continuing innovation and research, which will lead to further enhancements in human health, including in the field of genetics’.
2.22 However, patents do not always reward innovation and research investment equitably. In most jurisdictions, including Australia, where two researchers independently create the same invention, only the first to apply for patent protection will be awarded a patent over the invention. This may discourage some researchers from embarking on a course of research that is already being pursued elsewhere, despite the possibility that they may do better or more efficient work.
Investment and economic growth
2.23 Possessing a patent may help a company to grow by capitalising on the market potential of its inventions. Small companies may use patents to attract financial backing. In addition, patents stimulate the growth of national industry because local companies that hold patents can attract overseas investment and develop products for export. Profits generated by patent exploitation can be invested in further research and development, which may stimulate commercial and industrial growth.
2.24 Patents also benefit Australian companies by providing a system for trading knowledge internationally through licence agreements. The grant of licences to international companies to exploit locally developed inventions provides returns to inventors and access to foreign markets. The grant of licences to Australian companies to manufacture inventions developed overseas can improve the skill and know-how within the Australian community.
2.25 However, patents may have adverse economic effects. Licence fees may drive up the price of goods and services that utilise the patented invention. There are also transaction costs associated with seeking the grant of a patent and enforcing patent rights. Fees must be paid before a patent application will be examined or granted, and to maintain patent rights once granted. Asserting patent rights, or challenging those of a competitor, may be costly and difficult for small and medium-sized enterprises because claims of infringement may need to be pursued through the courts.
2.26 Patents may also have adverse effects on the balance of payments, especially for countries like Australia, which are net importers of intellectual property. This is because expenditure on licence fees or royalties for the use of patents owned by foreign entities may exceed the income earned from the use, by foreign entities, of local inventions. Most Australian biotechnology patents are owned by foreign entities and Australian researchers generally pay licence fees to overseas companies to use these patented inventions in research. Chapters 16 and 18 discuss the Australian biotechnology industry and international patent ownership.
Resource use and knowledge sharing
2.27 Patents promote knowledge sharing by requiring the details of the patented invention to be placed in the public domain in return for the exclusive right to exploit the invention. In the absence of this exchange, inventors might protect the details of new inventions through secrecy. The disclosure requirements of the patent system are based on the idea that ‘scientific and technical openness benefits the progress of society more than do confidentiality and secrecy’.
2.28 By encouraging knowledge sharing, patents reduce the duplication of research effort and encourage researchers to build on existing inventions. Researchers may study a patented product and find ways to improve upon it. Access to patented inventions may also facilitate research that would not otherwise be possible. For example, access to a patented research tool may enable vital research into the causes of a genetic disorder and lead to the creation of a genetic test or treatment. This research may not have occurred if the tool had remained secret. Due to the cumulative nature of much genetic research, knowledge sharing may be particularly important in this context.
2.29 However, patents may also inhibit research by discouraging knowledge sharing prior to filing for patent protection. The results of new research may be withheld until an inventor is in a position to apply for a patent and the invention is sufficiently well developed to ensure that the patent will be granted.
 Children’s Cancer Institute Australia for Medical Research, Submission P13, 30 September 2003.
 Department of Human Services Victoria, Submission P111, 30 April 2004. See also Commonwealth Department of Health and Ageing, Submission P79, 16 April 2004.
 In contrast, in the United States, patents are granted to the first inventor rather than the first to file for a patent.
 See Ch 16.
 P Drahos, ‘Biotechnology Patents, Markets and Morality’ (1999) 21 European Intellectual Property Review 441, 445.
 A patent holder is required to pay an annual fee to maintain a patent: see Ch 5.
 Royal Society, Keeping Science Open: The Effects of Intellectual Property Policy on the Conduct of Science (2003), 13. See also L Andrews, ‘Genes and Patent Policy: Rethinking Intellectual Property Rights’ (2002) 3 Nature Reviews Genetics 803, 806. Processes for challenging and enforcing patent rights are discussed in Ch 9.
 D Nicol and J Nielsen, ‘The Australian Medical Biotechnology Industry and Access to Intellectual Property: Issues for Patent Law Development’ (2001) 23 Sydney Law Review 347, 362–363.
 J Goldstein and E Golod, ‘Human Gene Patents’ (2002) 77 Academic Medicine 1315, 1315.
 D Eliades, Submission P24, 30 September 2003; GlaxoSmithKline, Submission P33, 10 October 2003.
 D Dickson, ‘UK Clinical Geneticists Ask for Ban on the Patenting of Human Genes’ (1993) 366 Nature 391, 391. The disclosure of an invention may render patent protection unavailable: see Ch 5 and 6. Ch 14 considers issues relating to secrecy, publication and gene patenting.