A company's stable of intellectual property (IP) rights can arguably be viewed as a barometer of how innovative a business is – and it seems a lot of economic activity is currently associated with IP intensive industries.
Recent studies to determine the economic impact of IP intensive industries in US and European markets suggest that businesses have been transforming and restructuring to make IP rights their primary on-book assets. By providing monopoly-style access to local and overseas markets, which is especially important in highly competitive industries, IP rights are hot property.
Local manufacturers should be aware of the business significance of IP rights internationally and, if not already, should be taking steps to review their IP rights (IPR) portfolios and strategies.
The rise of intangibles
Intellectual property rights are traditionally referred to as "intangible" assets, as in many cases, they lack the real and tangible characteristics of a fixed asset. These include a huge range of things; brand names, industrial designs, proprietary production processes, trade secrets, confidential information, patents, apps, trade marks, copyright material such as artwork, computer programs, database rights and so on.
Current research shows that over the last few decades, the centre of corporate wealth has been shifting from tangible, physical assets and capital, to "intangible" or knowledge-based capital.
Charting this shift, a comparison of Standard & Poors 500 companies shows that in 1978, the asset distribution of corporations was 95% tangible assets and 5% intangible assets. In 2010, however, this distribution had been turned on its head, with 20% tangible assets compared to 80% intangible assets1.
While an 80/20 mix of intangible versus tangible assets may not be appropriate for all businesses, a regular IP review might assist a business to follow and manage a similar asset shift by identifying potential areas where investment can be made to capture or establish new IP for the business and generate increased economic activity.
A study by the United States Government2 estimated that in 2010, $5.06 trillion was added to the US economy by IP-intensive industries. This is equivalent to 34.8% of US GDP, and 27.1 million jobs, or 18.8% of all employment.
And in October last year, the European Patent Office (EPO) and the Office of Harmonization for the Internal Market (OHIM) released World Intellectual Property Review results that showed about 40 percent of the EU’s total economic activity (€4.7 trillion annually) and 35 percent of all employment in the EU (some 77 million jobs) is generated by intellectual property rights (IPR)-intensive industries, which include engineering, computers and pharmaceuticals.
The study also found that about 90 percent of the EU’s trade with the rest of the world is accounted for by IPR-intensive industries.
'IPR-intensive industries' are defined as those that are innovating and commercialising IP. They either register more IPRs per employee than other industries, or IP rights are an intrinsic characteristic of the industry’s activity.
Global economic activity is also shifting from West to East, with investment in research and development (R&D) and IP rights filing activities in Asia pushing our neighbours well ahead. China and Japan are now the second and third largest investors in R&D (after the US). And last year, for the first time ever, the Chinese patent office received more new applications than the United States Patent and Trade Marks Office.
To remain competitive, Australian industries and manufacturing need to be able to generate company value outside a traditional fixed asset type business structure. Integrating an IP strategy into the business can increase local market share and open more secure options for international markets.
Intellectual Property as a financing mechanism
Intangible assets can have enormous value - Microsoft recently purchased Nokia's mobile phone business, and a suite of IP rights, for $7.2 billion; and Apple was awarded $1 billion in damages against Samsung in the US for infringement of IP rights. But value doesn't have to come through buying and selling, or contentious Court action.
IP rights can be used to generate regular income through sales or licensing. Consider the revenue generated from the Cochlear Implant or the ladder and access systems produced by Hedweld Engineering Pty Ltd. Or other forms of IP rights such as the broadcast rights of major sporting events or the sale of a proprietary product, such as the Dyson vacuum cleaner or a pharmaceutical. Pfizer has made tens of billions of dollars from Viagra.
Securing local and international markets
Several mechanisms can assist companies locally, while developments in China and a new Global Patent Prosecution Highway program are good news internationally.
Whether it's the reputation of the brand, or a new design for a time-saving piece of factory machinery, if intangible assets are valuable to a business they can be incorporated into the financial framework of a business. Indeed, valuation of IP rights is now a regular function of major accounting practices.
Government funding, grants and R&D tax incentives are all available to assist Australian businesses to foster and develop their knowledge-based capital, both locally and overseas.
In China, once a safe haven for infringers and counterfeiters, an overhaul of the IPR enforcement system, and an increasingly affluent population – a major consumer market in itself – means that China is now emerging as an important destination for protecting intellectual property.
The scale of China’s current commitment to IP enforcement is significant. Special IP divisions and panels have been established throughout China's court structure, from the Supreme People's Court through People’s High Courts and in about 70 intermediate People’s Courts.
Many foreign companies have already started to engage the Chinese IP system, yet interestingly, foreign companies only represent about 60% of the plaintiffs in reported infringement cases. The other 40% are Chinese; demonstrating significant adoption of the IPR enforcement regime locally as well.
Global Patent Prosecution Highway
In January this year, filing patent applications internationally to secure IP rights got easier. The Global Patent Prosecution Highway (GPPH) agreement was signed by 13 countries from Asia to the US, the UK and Europe.
It replaces a pilot program started in 2008 that provided a bilateral mechanism for accelerating patent examination between Australia and the US. Under the pilot program, an applicant receiving a positive ruling from either one of the participating national patent offices could request that the other participating office fast track the examination of the corresponding application.
The GPPH provides patent applicants with an opportunity to streamline examination, and thereby minimize the costs associated with protracted international patent prosecution. The program should be considered as part of a global filing strategy, particularly where commercial imperatives exist for securing early patent grant.
In line with international trends, companies should be investing more in development, innovation and IP to remain competitive and viable. Although not a definitive measure in its own right, the more IP intensive an industry is, the more likely it is to be trading internationally.