The value of patents lies not only in how well they fullfil their statutory purpose of allowing means of appropriation and incentive for inventors to pursue risky R&D, but also in how they facillitate market activities critical to innovation. Example: patents enable decentralized innovation where small firms can specialize and compete with larger vertically integrated firms; and serve as exchange mechanisms in industries where the complexity of innovation demands technological diffusion via cross-licensing.

A recent paper by scholars from Rutgers and Katholieke Univ Leuven in Belgium considers the effect of patents on firms' decision making, and argues that patents help firms sustain R&D spending in times of uncertainty, compared to non-patenting firms. Andrew Toole and Dirk Czarnitzki, Patent Protection, Market Uncertainty, and R&D Investment (September 2006). Berkeley Center for Law and Technology Scholarship. The paper contributes to patent literature the insight that patents can have settling effect in high risk industries, which may support their task to incent innovating activity.

The authors take a "real options theory" approach to studying patents and R&D. Under this theory, uncertainty from revenue volatility and market activity can reduce R&D spending. However patents may help overcome uncertainty by protecting against misappropriation by competitors, thereby incenting firms to continue R&D investments.

The study finds:

...greater uncertainty about market revenues reduces investment in ...capital ...Firms can avoid large losses by waiting for new information about market conditions and forgoing investment ... This would lower current R&D investment. Alternatively, a patent may protect the firm from market uncertainties ... This reduces ...firm’s sensitivity to market uncertainty... and leads to greater ...R&D investment. ..

...revenue volatility significantly reduces R&D investment by non-patenting firms whereas firms with patent protection have no significant response. This suggests that patent protection, acting through the real options mechanism, diminishes the patenting firm’s sensitivity to market uncertainties and stimulates R&D investment. ..

Our ...estimate suggests (under the real options theory)...patent protection generates about 20% of the total private returns to R&D investment for (sample) firms. .. to our knowledge, this “real options mechanism” has not been examined in the patent literature but it may prove to be a fruitful approach to understanding the impact of the patent system on investment and innovation.

The paper raises an interesting point. Software patent opponents often do not address the value of patents outside their statutory economic justification. This oversight implies that patents can only be important for one reason- incenting R&D. However, once innovators gain patent protection, patents give them many more advantages than simply safeguarding appropriation. Software patent critics should consider in their equation the full range of functional values provided by patents, such as inducing R&D even in times of uncertainty as this paper suggests, when they study the net effect of software patents on the industry.