The Value of Intellectual Property
Intellectual property plays a paramount role in this continuously expanding sector. Nearly 90% of growth in the United States can be attributed to intangible assets, and much of that number is derived from the value of intellectual property involved (Shapiro and Hassett, 2005). The growth in the intangible sector is strongly correlated with the number of patent and trademark filings (Shapiro and Hassett, 2005). Further, the research and development sectors are dependent on strong intellectual property protections for their continued existence (Putnam, 2008).
Intellectual property, or works and inventions that are the result of creativity and original thinking to which the author holds ownership rights, has three main forms: patents, trademarks and copyrights. There are substantial advantages to registration and use of each of those tools for large and small businesses alike. This article will provide a comprehensive overview of the benefits that intellectual property can bring to your business, as well as merits of registration.
What kind of role does intellectual property play in the global economy?
Intellectual property is a driver for innovation and growth, and is extremely important to most economies of OECD countries and beyond. In Canada, as of 2008, innovative property amounted to over 31% of all intangible wealth in Canada (Baldwin, Gu and MacDonald, 2012). The figure is even more staggering in the United States and European Union at 33% and 39% respectively (Global Intellectual Property Center, 2012; European Patent Office and the Office for Harmonization in the Internal Market, 2013). Intellectual property in the United States, as of the mid-2000s, amounted to $5.8 trillion, more than the GDP of any other sovereign state at the time (Global Intellectual Property Center, 2012).
In the United States, intellectual property-intensive industries account for over one third of the total GDP (Global Intellectual Property Center, 2012). Further, intellectual property comprises approximately 70% of business equity and almost three quarters of exports in the United States; in Europe, the figure is even higher with almost 90% of exports being intellectual property-intensive goods (Global Intellectual Property Center, 2012; European Patent Office and the Office for Harmonization in the Internal Market, 2013).
On a firm level, the importance of intellectual property is even more pronounced. The value of intellectual property exceeds 65% for Fortune 500 companies, and exceeds 90% for certain technology-based companies within the list (Wilson, 2010). The rate of acquiring intellectual protections for the most innovative companies in Canada (world-first innovation) is over 90% (Putnam, 2008). Such numbers can be even higher for small or fledging businesses without a large developed operation.
Intellectual property also drives job creation. Jobs in intellectual property-intensive industries grow faster than the national average in North America, and pay at a premium compared to similar positions in other industries (European Patent Office and the Office for Harmonization in the Internal Market, 2013). Further, companies that own intellectual property tend to, on average, employ more workers than companies operating in comparable industries that do not own intellectual property assets (Schautschick and Greenhalgh, 2013). As such, investing in intellectual property creates a social benefit as well as individual gains.
Benefits of intellectual property for business
Although 90% of large businesses in the United States own at least one form of intellectual property, that number is significantly lower for small businesses at 30% (Shapiro and Hassett, 2005). A common misconception is that small businesses don't have intangible assets of sufficient value to necessitate intellectual property protections. However, this is simply not true: 67% of businesses in the United States own assets that are potentially eligible for intellectual property protections that they are failing to exploit, valued at up to $1 trillion (Idris, 2003).
Registering your intangible asset for intellectual property protections confers significant advantages regardless of firm size. The primary motivation of firms when obtaining intellectual property is not for litigation purposes, but to enable transactions of their intangible assets through the proprietary rights registration provides (Idris, 2003). The legal validation of ownership can enable licensing and assignment of patents and trademarks. Further, being able to claim ownership allows innovators to receive royalty rates on their works.
Investing in intellectual property registration early on in your business may also provide you with a larger degree of institutional support. 57% of incubators consider intellectual property ownership an important or very important factor for selection of tenants (Burrone and Jaiya, 2004). When seeking investments, IP may prove to be an even larger advantage: firms and even countries that capitalize on IP rights see a larger degree of investment (Shapiro and Hassett, 2005).
Intellectual property may also contribute to the survival chances and longevity of your firm. Firms that applied for intellectual protection had a significantly lower chance of exiting the market within five years than their counterparts that did not invest in intellectual property protections (Schautschick and Greenhalgh, 2013). Specifically, firms that had at least one trademark registration had a 16% lower chance of exit and firms with at least one patent registration a 14% lower chance of exit, all other variables equal (Schautschick and Greenhalgh, 2013). An innovative environment that has protections for creativity increases firms' chances of thriving and flourishing.
The bottom line is, intellectual property registration can help you capitalize on intangible assets that you are likely to already have within your operation, and bring with it a number of other benefits.
What type of intellectual property is best for me?
Although many advantages to owning intellectual property extend to both patents and trademarks, some empirical benefits that have been observed are specific to a particular type of IP. While patents tend to provide the widest level of protection, or the most exclusivity to ownership, they also tend to be the most short-lived (Putnam, 2008). Trademarks, on the other hand, are considered to be incremental innovation, as they are expanding and strengthening an already existing brand, and tend to positively contribute to continued firm growth (Millot, 2009). Copyrights provide the narrowest level of protection – usually only for cases where a specific work is explicitly reproduced – but tend to have the longest lifespan (Putnam, 2008).
If you think that a patent grant is best equipped to serve the needs for your business, there are several advantages exclusive to patent owners. A competitive environment increases the survival chances of new firms, making them less likely to exit the industry upon the filing of a patent registration (Schautschick and Greenhalgh, 2013). Further, patents may be an excellent option for inventors that do not plan to actively produce and market their invention: transfers of patents through licensing or assignment actually extend the lifespan of a patent, and are likely to result in profit from royalty rates (Graham, Marco and Myers, 2015).
A trademark registration also confers substantial benefits to your business. A 2013 study on the empirical effects of trademarks has shown that applying for a trademark, on average, extends the lifespan of a firm by 6.6 years; applying for a renewal of that trademark further increases the chances of a firm's longevity compared to similar businesses within the industry (Schautschick and Greenhalgh, 2013). There is further a significant positive correlation between trademark filings and firm productivity, which, in turn, results in a positive uptick in profitability (Çela, 2015). Firms that register for trademarks, especially those with larger portfolios, are more likely to attract investors, and have a higher value assigned by potential investors compared to similar firms (Sandner and Block, 2011).
Further, a 2009 study focused on evaluating the financial impact of trademarks on firm branding found that "on average, each additional brand association trademark is associated with $7.8 million of future cash flows, a .05% increase in future ROA, and a .3% increase in the future stock returns of a firm. In addition, the findings confirm that by improving consumers' awareness of brands, firms enhance the future cash flows generated by brand associations (Krasnikov, Mischa and Orozco, 2009). Thus, trademarks are proven to increase the value of brands and support ongoing marketing efforts to differentiate a brand name to consumers.
It is important to remember that patent and trademark protections should not necessarily be mutually exclusive in your operations. Empirical studies on intellectual property have found that firms that used both patents and trademarks as part of their intellectual property rights strategy have been more successful than firms that invested in just one of the protections (Schautschick and Greenhalgh, 2013). Further, it becomes cheaper to obtain additional intellectual property measures and bundle them together once a firm has begun developing an IP strategy (Schautschick and Greenhalgh, 2013).
Does registering make a difference?
Because of the cost and time commitment associated with intellectual property registration, many business owners, particularly those conducting small operations or just beginning a business, wonder if a registration is worth it. It is sometimes hard to see the difference between a well-protected confidential invention and a registered patent, or between a brand that is starting to accumulate some goodwill locally and a registered trademark.
Although some advantages of intellectual property are available to the innovator without registration, there are several problems that can arise. First, registration is usually a prerequisite for any investment into or transfer of the asset (Wilson, 2010). Without legal proof of ownership, it is hard to assign an appropriate value for the intellectual property in question, or to meaningfully collect royalties. A lack of legal ownership further leaves the assets vulnerable to replication by competitors, or even legal disputes if another individual files for registration.
Ownership of the intangible assets that underlie a business is also a necessary condition for many of the tools available to fledging entrepreneurs, including investment opportunities and industry supports (Burrone and Jaiya, 2004). It is also likely to increase the overall value of the firm in question.
Finally, although trade secrets and unregistered trademarks do have a degree of protection, it is significantly more fragile than that available to registered assets and generally depends on a lack of concurrent innovation. If at any point a similar innovation is brought to the market by another entity, both individuals will likely lose the right to secure intellectual property rights to it.
Barriers to acquiring intellectual property: myth vs. fact
Although innovators often consider applying for intellectual property protections, many are deterred by perceived barriers to registration. The most common barriers to patent registration for Canadian inventors, as reported by the Standing Committee on Industry, Science and Technology are "large wait times for examination, high costs to patent infringement litigation, inability to file provisional patents, lack of awareness about registration options, ineffective structure of CIPO database" (Sweet, 2013).
These issues, however, are easily resolved. Examination can be accelerated through several means: if the technology in question is a green technology, through a patent prosecution highway program, via a request for an accelerated examination and payment of an additional fee, or through voluntary amendment to reduce the number of examiner's reports or office actions. Thus, long wait times should not be a barrier to obtaining a patent.
Although patent infringement litigation can indeed be quite costly, it is by no means the only reason as to why a patent should be obtained. Many patent owners will never find themselves in a situation where they will have to enforce their exclusive rights; however, if you are looking to outsource your product or are unable to create your own operation to make and sell your invention, a right of ownership might be necessary for transfer and investment.
While Canada does not have a provisional patent system corresponding to that in the United States, there is an approximation, an incomplete application filing, that can be used by inventors if they do not wish to begin with a United States provisional patent application. Either process also allows you to claim a filing date and supplement or amend your application at a later time. Insofar as filing options and conducting a patent search, a patent lawyer or trademark agent or trademark lawyer or trademark agent well versed in the field of intellectual property law will be able to help you navigate the system to avoid complications that may arise for both patent and trademark filings.
A common myth regarding trademark registrations is that an incorporated business name, or registered domain name, is enough to protect your brand. Neither of those, however, confer legal exclusivity in terms of trademark law. Absent substantial unregistered or common law use which allows you to accrue rights in some jurisdictions, the only way to become the legal owner of trademark assets related to your brand is through a trademark registration.
A trademark registration will also allow you to leverage the assets your firm accumulated and improve their marketability, as well as emphasize their importance to everyone involved in your operation in any capacity.
Establishing the value of your intellectual property
Many of the reasons for acquiring intellectual property involve considerations of its value. An accurate estimate of the value of registered intellectual property assets can be helpful in business operations, such as through serving as collateral for securitization. It can be a catalyst for increased investment and can streamline financial processes within the company. However, the actual process of obtaining a value of intangible assets can often be complex.
Methods of valuation are divided into two distinct categories: quantitative and qualitative (Lagrost, Martin, Dubois and Quazzotti, 2010). Quantitative valuation relies on measurable data or numerical information to produce an estimate of the value of your asset(s) (Lagrost, Martin, Dubois and Quazzotti, 2010). The estimate is rooted in monetary value which is based on a number of sample metrics, and does not consider non-monetary objectives. Qualitative methods of valuation, on the other hand, attempt to provide a non-monetary estimate of the value of intellectual property by rating it on the basis of its strategic impact, brand loyalty held by consumers, its impact on the company's future growth, and other intangible metrics that do not rely solely on numbers (Lagrost, Martin, Dubois and Quazzotti, 2010).
Both of the categories have several methods within them, which differ on the metrics they assess and the final result that is produced. However, quantitative and qualitative valuation should not be treated as mutually exclusive (Lagrost, Martin, Dubois and Quazzotti, 2010). Depending on the goal that you are pursuing for which the valuation is necessary, you may need to employ both methods to provide a complete picture.
When selecting a valuation method, the purpose, target audience and long-term objectives need to be considered to arrive at the best method(s) for your business. Please refer to our guide on the selection of a valuation method for further information.
Looking to the future: the growing dominance of intellectual property
Based on current academic and business projections, the proportion of GDP in developed countries that is based on the knowledge economy and the intangible assets is set to continue growing. The manufacturing sector, and other parts of the economy dependent on traditional labour inputs, are relatively stagnant. As such, the proportion of the economy that will be dependent on intellectual property is very likely to continue increasing in the coming years.
Further, in a time when consumer goods are extremely abundant, North American markets are very competitive. A product that is simply functional is no longer enough to gain the attention of a customer; innovation, brand recognition and creativity are all tools that an entrepreneur needs to use in order to create product differentiation. Intellectual property is fundamental to the effective usage of these tools.
Although a patent or trademark registration is an investment that may seem costly and cumbersome in the beginning of a business, it is paramount to continued success, and is likely to maintain in importance for the years and decades to come.
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