Despite their economic importance, and in particular their role in protecting returns from innovation, trade secrets are poorly studied and their relationship with patents is often misinterpreted. This study tries to shed light on the subject based on representative firm-level data from the Community Innovation Survey (CIS), covering almost 200,000 firms operating across manufacturing and service industries in Europe.
The main findings are as follow:
- 1. Innovating firms often use both patents and trade secrets to protect their innovations.
- 2. The use of trade secrets for protecting innovations is higher than the of use patents by most types of companies, in most economic sectors and in all Member States.
- 3. Both trade secrets and patents are likely to be used in companies with internal R&D, with high innovation expenditure and when the innovation is new to the market. Trade secrets are preferred in innovation new only to the firm.
- 4. Patents are more likely to be used (alone or in combination with trade secrets), when the innovative product is a physical good rather than a service.
- 5. Trade secrets (often without patents) are more likely to be used for process innovation and for innovations in services.
- 6. Trade secrets (alone or in combination with patents) are likely to be used for maintaining or increasing the competitiveness of innovations introduced by companies involved in open innovation practices such as research cooperation, especially with distant (non-European) partners.
- 7. There is a propensity to favour trade secrets over patents in markets with strong price competition. There is a propensity to use both trade secrets and patents in markets with strong quality competition. This is related to finding 5 above. Strong price competition is typical of commodity-type markets, where opportunities for product differentiation/innovation are scant, and margins may be enhanced with cost/process innovation.