The Economic Impact of Patents in Canada

Surprisingly, it seems that technology are not significantly contributing to economic growth in the short run, as the research study “What is the impact of technology shocks on the fluctuation of the Economy?” reveals. On the contrary, they appear to be detrimental to the economy’s performance.

Most studies on the subject used total factor productivity (TFP) as a proxy for technology shocks, namely the change in the output that cannot be explained by the change in the quantity of input used, such as workforce or physical capital. Researchers Nicolas Vincent, Nathan Bedock and Pierre-Olivier Lachance, on the other hand, decided to turn to patent data from 1978 to 2007 to measure these shocks.

While the majority of the literature noted that technology shocks had a positive impact on the economy, results at the Centre for Productivity and Prosperity found the opposite.

They show that unexpected technology shocks encourage companies to invest in new technologies as they consider higher returns in the future. The increasing demand for credit, since more liquidity is required, however, leads to a rise in the interest rates. Consumption and residential investments are in turns penalized by these rates and cause the GDP to decline. Therefore, technology shocks create an eviction effect on residential investment in the short run, which has a negative impact on the economy.

These discrepancies, nevertheless, could be related to the fact that both measures represent the implementation of a new technology at different moments in time. The total factor productivity stands for technology when it is already well implemented in the economy. On the other hand, patents need additional investments before generating any result.

On balance, a new technology can have a negative impact on the GDP in the short run even if it were to prove beneficial in the long run by raising standards of living.