Enhancing intellectual property management and appropriation by innovative SMEs

Enhancing intellectual property management and appropriation by innovative SMEs

This briefing paper is meant to inform policy-makers working to enhance the performance and thus positive economic impact of innovative small and medium enterprises (SMEs), in particular by supporting their effective intellectual property (IP) management.

The paper provides an overview of the various internal and external factors that may influence SMEs’ approaches to IP management, presents the main types of strategies they adopt to this effect, discusses how they might improve their IP management, and articulates a number of recommendations for policy-makers.

The analysis focuses on the protection of inventions and physical processes, drawing on academic literature covering a range of emerging and developed countries, and on interviews with business leaders from innovative SMEs in high technology sectors.

Innovation helps individual firms to maintain their competitive edge, contributing to expansion of capacity and also generating additional capital investments, productivity, technological advancement, employment, and growth (Stam & van Stel 2011). It is not enough for a firm to create something new and useful. The firm must also succeed in appropriating the value of its innovation (Teece 1986).

‘Appropriation’, a term that is widely used in literature on innovation, refers to the act of capturing the value of one’s ideas and investments in developing and bringing them to market. If a firm is unable to appropriate, or capture the value of, its intellectual property, competitors may imitate its offerings without significant investment. This could eliminate its competitive edge, together with the incentive to continue to engage in risky innovative ventures (Teece 1986).

The main objective of IP management strategies is appropriation. In addition to this goal, sound IP management can help innovative SMEs achieve a range of objectives, including securing investment, identifying and attracting potential partners or buyers, deriving value from collaborations, and managing litigation risks. SMEs tend to work to a significant degree with external partners, in order to fill gaps in their own resources and expertise and also because their niche expertise is attractive to established players. Collaboration carries the risk of knowledge leakage to rivals and thus requires judicious management of intellectual assets. Given their limited resources, innovative SMEs need to develop strategies that are resource-effective to protect and manage their IP.

SMEs’ qualities and challenges

In general, innovative SMEs exhibit a higher degree of flexibility than larger firms, which allows them to respond more nimbly to signals from the market (Revilla 2012; Thomä & Bizer 2013). In fact, being small and – generally – young businesses, they are relatively unhindered by the bureaucracy and inertia that may characterise larger firms, which can lead to slower information flows, less flexibility, and less creative thinking (Revilla 2012). Hence, SMEs may have an advantage in domains with rapid technological advancement and disruptive technologies. What is more, especially in earlier stages of research and development (R&D), innovative SMEs are often close to sources of technological knowledge such as universities or research centers (Audretsch & Vivarelli 1994; Rogers 2004). Thus they tend to do particularly well when innovation depends on being close to science (Revilla 2012).

In contrast, larger firms are better able to spread the cost of R&D over a more extensive and diversified sales base. They often have the resources, experience, and knowledge needed to successfully commercialise new offerings, which gives them an advantage where knowledge is cumulative (Revilla 2012). In addition, they are generally more sophisticated in protecting and managing their intellectual assets, in no small part due to experience and resources (Revilla 2012). Finally, they are less threatened by the impact of litigation, the cost of which can have a devastating impact on SMEs (Friesike 2011). While SMEs may be more nimble and, depending on the conditions, more innovative, larger firms enjoy a resource advantage.

Indeed, scarcity of resources, together with insufficient non-core expertise, is a key challenge for innovative SMEs. SMEs tend to lack not only physical assets but also a record of success and assets that banks can use as collateral (Rassenfosse 2012). New innovators often encounter early-stage financial stress, especially in places with inadequate venture capital (VC) systems, as they resort frequently to the more costly debt markets. Information asymmetries between entrepreneurs and investors, which result from the latter’s incapacity to adequately assess R&D projects, magnify these problems (Lerner & Hall 2011). Quality patents and a strong IP position can help innovative SMEs signal the value of their invention to the market in general and, specifically, to potential funders and partners (Pederzoli et al. 2011). However, SMEs are unlikely to invest in creating a strong IP position unless they are aware of the value of managing their intellectual assets and of the appropriate tools that can be deployed to this end.

In addition to lack of financial resources, SMEs may face a host of other – endogenous and exogenous – constraints, such as lack of scale, competition and market entry problems, poor infrastructure, and lack of distribution channels and marketing expertise (Lee et al. 2010; Diallo 2012; WIPO 2013). It has been suggested that international aid programs for SMEs be restructured to focus more on the provision of training for individual entrepreneurs, in addition to fostering ‘investment climate reforms’ that improve the overall environment for doing business (Page & Söderbom 2012). Targeted training, whether international, regional, or national, can help managers of innovative SMEs to address internal constraints and attract partners and investors, including through IP management. Training could also help them to obtain more value from their companies’ inventions and collaborations.

What is more, evidence increasingly points to the value of fostering SMEs’ participation in innovation networks and collaborative ventures. Partnership can enable a smaller firm to leverage its competitive advantages while filling gaps in expertise and resources, by working with small and large firms with complementary skills (Lee et al. 2010; Zeng et al. 2010). For larger firms, collaboration with innovative SMEs is useful, enabling them to gain access to new technologies and state-of-the-art engineering talent, and helping them to obtain technology advantages in their competitive environments (Alvarez & Barney 2001). Sound IP management strategies are important to the establishment of partnerships, and to ensuring they benefit all parties involved.