INTELLECTUAL PROPERTY RIGHTS AND SMALL MEDIUM ENTERPRISES (SME’s)
Author- Vinod Kapoor, 4th year and Co-author- Priya Nagpal, 3rd year ,Pursuing B.B.A.LL.B (H) with Specialization in Corporate Law (University of Petroleum & Energy Studies (UPES), Dehradun)
The increasing advantage of the intangible assets as a source of value creation for the firms has made intellectual property rights more attractive. Where Small and medium sized (SME’S) account for 95% of the business population and also where it plays a significant role in the economy by contributing to the GDP by achieving sustainable national economic development, most governments have put an effort to establish the SME’S sector in their respective countries. Through this paper authors have made an effort to discuss the significance of the intellectual property for the SME’s and also the barriers which are the reasons for ineffective use of the IP system and which has the impact on ability to exploit the innovative capabilities. Also, through this paper authors have put forth many steps in the way of suggestions for encouraging more effective use and enforcement of IP system by entrepreneurs so that SME’s manage to incorporate IP within the broader framework.
Keywords: economy, intangible assets, Intellectual property, SME’s
1. MICRO & SMALL ENTERPRISES (MSES) SECTOR – AN INTRODUCTION:
The Micro & Small Enterprises (MSEs) Sector, continues to be a vibrant sector of the Indian economy. Approximately, there are about 12.8 million units (over 90 per cent of total industrial units) in the given sector employing nearly 31 million people. This sector contributes about 39 per cent of the total industrial production which accounts for approximately 33 per cent of the total exports. This sector has registered a higher growth rate than the rest of the industrial sector. There are more than 6500 products ranging from traditional to high-tech items, which are being manufactured by the small enterprises in India. After agriculture, MSEs sector provides maximum opportunities for self-employment and jobs in the country. The small enterprises sector holds good potential for further expansion and growth in the future. In fact, the employment potential of the sector is unmatched by other sectors of the economy. At present, the Small and Medium Enterprises (SMEs) in India are at a crossroad and there is a strong debate over the questions like what would be the future of these SMEs? How the SMEs can endure in the trade ring? What role the government should play in making these SMEs more competitive? How can the Intellectual property generate wealth in the business?
WTO has been created with the objective of creating Global trade which will give equal opportunities to the member countries. This means a level field for all members without any unfair protectionism or barriers of any kind such as entry barriers, tariff barriers etc. This also means respecting Intellectual property of other countries. No more copying or reverse engineering of other company’s research products. Thus the impacts of this will be-This will impact SMEs in three ways and the sheer survival of SMEs will depend on Tripod of (1) Cost (2) Quality and (3) Delivery.
While the government might be considerate to SMEs in terms of it’s policies, consumers do not differentiate between the “goods and services” of large companies or SMEs. Today customers want more and more for less and less. This will further lead to Intense Competition: More the players in the market, the fierce will be the competition, which means only the “fittest will survive”. The concept of intellectual property rights has gained importance in the recent years. Intellectual property is also seen as an important source of competitive advantage and a means for the creation of wealth. IPR are meant to encourage innovation. The accompanying legislation allows the society at large to reap all the benefits of the new knowledge that has been generated. It enables a society to evolve economically which results in higher livingstandards. The monopoly offered by these rights is a major incentive to work on new knowledge creation without any fear of unjust appropriation. Besides, the disclosure of knowledge leads to the expansion of the knowledge base. Moreover, it also deters duplication, thus promoting the generation of newer knowledge. Also, importantly, some time slot to commercially benefit from the new knowledge becomes available. If this regime didnot exist, no knowledge would have proprietary value.
1.1 Significance of Intellectual Property for Small and Medium Enterprises ( SMEs )
Small & Medium Enterprises are the pillars of the Indian manufacturing sector and have become significant in the stable monetary growth of India. There are more than lakhs of SME units in India with investment of above Rs. 1 lakh crore. The sector has recorded strong growth during the past fiscal years and contributes approx. 40 percent to industrial production and 6 percent to country’s GDP. Approximately 70 percent of the employment growth comes from the SMEs in the Asian region and they contribute towards 90% of industrial units in India and 40% of value addition in the manufacturing sector. In India they accounts for 90% of the industrial units in India1. As the name suggest these businesses are varied from small organization and trading concerns to large retail chains. According to the estimate, there are over 13 million SMEs in India providing employment to 42 million peoples.Due to these reasons it is vital for these companies to invest in their own IP. by adopting unique trademarks and brand names, every trader can create a strong recall value and a position for its product and/or service in the market.
Earlier, only tangible assets were given great importance in the count of a business. However, at present, intangible assets, such as Intellectual Ventures (IV), Innovation and Technologies form an important part in value addition to a business, maybe even more than the tangible assets.
Intangible assets include-
• Patents and also utility models for Innovative products and processes;
• Copyright and related rights for cultural, artistic, literary works and for computer software;
• Trademarks for their distinctive signs,
• Industrial Design for creative designs, including textile designs;
• Topographies of the integrated circuits for microchips;
• Geographical Indication of goods of a given quality or reputation attributable to the geographical origin and
• Trade secrets for business secrets for commercial purpose.
There was a need for National IPR Programme for SME’s in India. Therefore a proposal was enacted to sustain the growth of the SME sector in India.
The IPR proposal is for enhancing the awareness about the Intellectual Property Rights (IPR) to enable SME to make it more competitive in the present g environment. The objective is to enhance the awareness about the Intellectual Property Rights (IPR) to enable SME to make right decisions about protecting their ideas and business strategies, effective utilization of IPR tools by SME for the technology up gradation and also enhancing competitiveness by providing access to technical facilities and expertise for the value addition to their business. This project is to be implemented with a total outlay of US$ 12.5 million over a period of five years. India ratified the agreement establishing the World Trade Organization [WTO] which contains agreement on Trade Related Aspects of Intellectual Proper rights [TRIPS] which came into force from 1st January 1995. It provides for minimum standards for the protection and enforcement on intellectual property rights in the member countries which are required to promote effective, adequate protection of IPR with a view to reducing distortions and also impediments to international trade. The obligations under the TRIPS agreements relates to provision of minimum standards of protection within the member countries. In India, Intellectual property rights play an important role in SME development and its protection. They should identify various prospects viz. how to best use an IP structure for own payback and profits. IP may support the SMEs in every part of business development and also competitive strategy which ranges from product development to product design, product marketing to service and from raising financial resources to export or mounting business abroad through IP assignments including franchising and licensing. SME can be used to identify various potential ways such as improvement in the market values and by improving competitiveness of SME by generating the income for SME through IP assignments of IP protected products. IP helps in enhancing the value of the company in the eyes of investors and financial institutions. The Government of India has taken several measures in the field of IPR, including amendments in patent laws and modernization of the IPR / Patent Offices, as a response to the globalization and also liberalization of the Indian economy. In a patent regime, Indian firms would have to look for new sources of growth in the future and productive R & D. Improving awareness on IPR amongst businesses, particularly MSMEs, means that they will be able to make informed decisions for protecting their ideas and business strategies. Effective utilization of IPR, particularly patents, has acquired great importance for technology up gradation and growth in the industry as well for becoming competitive in the globalized market. In a market driven global economy, it is necessary that knowledge driven industries in India should increasingly attempt to embrace a network of innovation and R & D by intensifying their collaboration with research institutes, universities and other counterparts. Such efforts need to be particularly supported and encouraged for the SMEs. India generally enjoys large assets of R&D personals and research facilities. While majority of the countries have by the way adopted strategy for implementing strong IPR protection for strengthening their industrial demands and trade Indian industries,particularly the small and medium enterprises are lagging behind in recognizing the indispensability of IPR and responding positively to the global changes in the IPR. Indian industries, especially the MSME, are not ready to come forward for adopting IPR as a business strategy and a means to enhance competitiveness and becoming an efficient player in the global market. It is observed that there is widespread lack of awareness about IPR as a means for creating a competitive edge in the trade and technology market and for value addition to the business. The Indian MSME sector needs more information, orientation and facilities for protecting their intellectual powers. It is essential that the MSME in India should show a positive approach towards creation, protection and management of IPR, so as to enable them to compete in the global market and achieve growth in business.
Barriers faced by SMEs in using the IP system
Studies reveal that SMEs have been facing number of hurdles in using the IP system. This is due to their limited knowledge if IP areas and laws, lack of precision about its significance to their business and its application, the system too being complex and expensive to use. Available studies and research on the use of the IP system by SMEs is mostly limited to making use of of patents.
In a survey conducted by the Institute of Roland Berger Forschungs for the European Patent Office (EPO) for the use of patent by the production industries (excluding micro-enterprises and enterprises in the handicraft sector), results showed that one out of every three companies are likely to be patent applicants as they involved in R&D activities, but only one in six really apply for patents (EPO, 1994). SMEs generally do not apply for IP Protection the core reason being the capital and time required for filing applications, though some SMEs also stated the ineffectiveness and improper functioning of the patent system. It was concluded that there is a major information discrepancy among SMEs on the patent system, which results in small number of applicants filing for patent, and large number of barriers faced due to inefficient and noncooperation of government towards helping entities.
The capital required for patenting is generally considered as one of the major issues for SMEs.In budgeting the expenditure relating to the acquiring of IP rights, companies not only have to cover application fees, publication cost and maintenance charge but also the costs with respect to legal advice and translation costs entity intends to go for protection abroad.
Apart from the costs, there are other prevailing elements including application process that may act as a deterrent for SMEs to hunt for IP protection, including timely process for grant of a patent or to obtain a trademark. The increase in number of application for IP protection has resulted in backlog of earlier registration and more time is required for the registration process. There may be a possibility that licenses or partners or exploitation of invention may take place due to delay and uncertainty in granting IP protection to SMEs.
The use of secrecy as a means to suitable innovation, companies may be dependent on legislation on trade secrets and unfair market competition that prevails and to protect market information. WTO/ TRIPS Agreement also recognize trade secrets included in IP. However SMEs are unaware how to protect their trade secrets and up to what limit the protection is offered by specific country on trade secrets. SMEs avoid administrative expense and procedures involving patent protection and do not take sufficient measure to safeguard confidential information to protect trade secret. In order to provide protection to trade secret, there is a need to prove the information is secret, it is of commercial value and the true holder of the information has taken all measures to keep it secret or confidential by way of confidentiality agreements, non-disclosure agreements.
Enforcement of IP rights is another difficulty for SMEs. There should be distinctiveness in the first place that the firms may face a problem in monitoring IP protection.. In the European Union, it was argued that in 49% of sampled firms, are under fear of patent-defence litigation which affects investments in generating inventions.In the States, more of a problem for small enterprises the enforcement of IP rights is than for large firms; as the patents owned by small entities are more often infringed than those by large firms, the small firms less often enter in to litigation. (Koen, 1992).
The barriers are much broader and more efficient use of IP systems is many. Firstly, lack of awareness of the system reduces the opportunity offered by IP laws and SMEs are unable to avail those, including not just patents but also utility models, trademarks, industrial designs, trade secrets, patent databases, copyright and other IP rights. Lacking in IP management skills within SMEs reducing their capability to avail benefits from the system and, therefore, discourages and stops its future use. Secondly, limited access to the experts and technical member in the field providing legal advice in the IP system complicates and reduces the probability of success in the application procedure for registration and granting of IP rights. Well-organized IP management requires a series of skills starting from the legal to the scientific, expertise and technical and the commercial which SMEs do not possess. Truly, such expertise is lacking in many SME institutions; which also includes some SME consultants and business advisors in the private segment. Thirdly, high costs and capital, not only for acquiring and maintaining IP rights but also for monitoring and controlling IP rights are an further future barrier, chiefly for firms that are working in various geographically dispersed markets and areas.
Some of the key hurdles are:
- In India many SMEs export raw materials to large companies in various parts of the world including the developed nations too, but are not able to comprehend the importance of IPR in the business sector to protect and preserve their ideas and innovation of their product and services as they are mainly focused on production of goods, making profits and operation of raw material. If these SMEs possess knowledge on IPR, they should definitely go for IP protection and protect their product and create an asset out of which revenue could be generated
- In India most of the SMEs are running their business without having adequate technical knowledge on their product and services and they produce it without relating to of IPR issues and profits. They are not concerned the value their business could create had they have a protection in IP
- Business Intelligence is upgrading the data into useful information & the meaningful information into knowledge. It may be one of the big problems faced by SMEs to think about their business strategy. It enables the business entities to take business decisions, equipped with possible benefits and impacts it has. SMEs should implement each and every means to have efficient and decision making process on time. Due to lacks in dealing the business with adequate knowledge, experience, and intelligence it drowns this sector. They do not survey the market neither take help of any expertise resulting in downfall of business.
Solution to SMEs with government assistance and other measures
In the past, there has been an increase in the significance of IP rights which has begun to change the nation, state and local levels in IPR for knowledge-based industry. In numerous countries, there has been a move in the hub of national IPOs. While the customary functions of IPOs is examination of product, registration and granting IP rights that are limited to patents, trademarks and industrial designs. IPOs are increasing their field of work and providing services which are aimed to have an access to, and reaping the benefit from, the IP system by various users of the IP system, including researchers, entrepreneurs and SMEs
Some hurdles can be resolved by-:
ü Awareness programs on IPR- In this altering global market the issues of IPR are one of the key concerns that is felt by the SMEs. It is of the view that different aspects of IP require more understanding and conceptual knowledge. SMEs by registering their products in intellectual property can boost their competitiveness in different areas.
SMEs can come up in the market if initiatives are taken to organize campaigns and spread awareness about use and advantages of IP. The motive of these programs is to present an overview of IPR issues with in depth details on patents, trade mark, copyrights, industrial design and geographical indications.
ü Technological Information Service- The SMEs are not an expert to have knowledge about the complex knowledge of IP. There should be committees and session or offices that provide technical information on IP rights so that SMEs are able to handle the rights with ease
ü Setting up of Intellectual Property Advisory Cell: SMEs are not big enough firms to avail the advantages arising out of IP rights. Most of the SMEs do not have enough assets to make use of IP resources but no doubt have vast ideas and thoughts to convert them into IP rights. Starting of IP Advisory Cells will answer many issues and this will help in increasing and developing the data-base of SME which have noteworthy role in updating the IP system. It will also help SMEs in developing to go for International patents
ü Specialized expert training on IPR provided to entrepreneurs/ officers, members of industry associations: To generate consciousness on IPR concerning patents, trademark, copy right, industrial designs, trade secrets and geographical indications, it is proposed to higher end and small end training programs for the benefit of SMEs manufacturers and producers, members of industries having IP application, experts involved in R&D activities, Government bodies connected with the implementation of IPR and scholars of the management and engineering institutions and other fields connected to IPR. The basic motive is to train people in the area of IPR who act as an assistance to their bodies and help IP generate more profits and reach new heights.
ü Monitory benefits on grant of patent: An incentive is given as a financial assistance is considered to be best source of encouragement to SME development. Government should come up with more financial assistance schemes to promote SME in filling patent whether the IP process is domestic or foreign owned.
ü Providing adequate and in depth information, direction and facilities for protecting their IP can also help SMEs in coming up and dealing with the Patents
ü Interaction with International Organizations: In many developed countries, the exploitation of IP is lawfully protected by way of IPRs. The areas of protection and visibility could be dealt at a worldwide level with help of global network economy. Initiatives of awareness, protection and measures of harmonization could be initiated by providing help in fields of Science & Technology (S&T) in between various nations.
Steps required to be initiated
Petty patent legislation: Legislatures need to ponder over and allow legislation, the approval of petty patents to protect incremental innovations. Such small innovations are of great significance since they help to encourage smaller invention and innovative new ideas and steps leading to bigger inventions. The local industry would be more benefitted by these incidental patents. It can aid these small entities and businesses by allowing IPR that are comparatively cost efficient, quicker, easier to obtain with a short span of commercial use. Such a policy has been taken up by many developed and developing countries.
Legal support:IP kiosks can search the possibility of aiding pro bono support from the legal firms, wherever required. Assistance from intellectualproperty lawyers can be provided and meetings can be fixed for consultancy purposes.The services experts can be made accessible through these kiosks to furnish to specific requirements.
Valuation of IPR:Exercises to add to expertise in and enhance understanding the conceptual issues relating to the evaluation of intangibles assets, and intellectual property specifically, requires be undertaken. In this world of globalization, the systems of calculating that are present in typical industrial and organizations set up will require undergoing a numerous change. Consequently, the financial incentive systems and consultancy services in present will have to be revamped.
IP audit:An IP audit can be called for which own IP assets. A system to categorizethe types of intellectual property; identify those intellectual properties, create a method for the valuation of these IPs; keep a check onthe intellectual properties of competitors; and calculate the life of each of the intellectual properties, the remaining time period as well as the maintenance charge payable and renewal fess in coming years all these are covered under IP audit. Such audit processes are required to enable organizations to efficiently and effectively plan and administer their intellectual property rights. If due care in not taken to protect IP for coming years, the capital and labour invested in acquiring these IP will become futile.
Insurance:Insurance agencies for intellectual property should provide compensation for both offensive and defensivesituations. These should cover insurance for loss and compensation and insurance to guard the insured against any infringement claims by an IP holder. The insurance would cover trademarks, copyrights, design rights and computer software, apart from patents. These mechanisms would give confidence SMEs to go for IPR protection systems.
Ideation exercises:Creative ideas that can be captured and converted into practical technology, even in backward rural areas. Mechanisms to tap such creative ideas include: the Technopreneur Promotion Programme, conducted by the Department of Science & Technology, Government of India, which extends monitory support to SMEs for converting their innovative ideas into useful inventions; and the National Innovation Foundation, which aims the investors to develop at grassroots level.
License exchanges:A process that should be incorporated to aid organizations and institutions which are IPR holders to leverage these assets is an IPR exchange. A license exchange is designed to assist organizations, especially SMEs, to access information and to team up with the right institutions and partners more effectively. The licenses if granted to small and medium sized firms can convert the IPR in to more profits as they have the potential and capacity to work on similar areas.
Patent pools:A patent pool is a contract of agreement entered by two or more patent owners to grant license one or more of their patents to one another or third parties. Thus it is process to compile the IPR is so demanded by the situation depending on the parties and further transferring it to parties. Government in some countries has come up with such policies for public good. Such systems include the creation of collective IP rights of entities, mandatory licensing of patents, filing fees, creating and managing patent pools, buying key enabling-technology patents and putting them in the public domain, and even creating mergers of IP rights between firms.
Safeguarding secrecy:The practice of unintentionallyor silentlydisclosing critical technology-related information is quite common at times where the applicant applies for application it is possible the vital secrets may be disclosed. Thus non-disclosure and secrecy agreements entered are prevalent measures, so as to prohibit the leaking of information provided in confidence and trust.
It has become difficult for the legislators to frame policies in regard to the innovation and the knowledge possessed by the SMEs. The most crucial theme that remains for the SMEs is that how to link the knowledge they possess with the innovation so as to derive maximum benefits by creating a new product and making high profits out of such research being conducted by the small innovative companies. The answer to such failure of the SMEs itself lies in the Intellectual Property Rights out of which new inventions can be made and such assets can be exploited. It has therefore become a great need for the upcoming new entities to manage the IP system and have in depth and up to date knowledge of the IP systems and convert their assets into profit making tools.
Currently in the present era it has become extremely significant for the new knowledge based industries especially in the area of agriculture, biotechnology, software and technology to manage such IP tools and convert their grey areas into profits and serve the need and demands of the customers. They face a number of obstacles that they are not able to cover thus lagging behind in the market and having small share in the market. Evidences have shown that many SMEs in the developed countries and including the new technology based firms are not able to handle their IP system in an effective and efficient manner and have little knowledge about their areas. They are facing hurdles which include high capital, very little legal knowledge, business and technical support strategy is also lacking in such entities.
Efforts have been put up by the SMEs to specifically manage the current challenges and hurdles faced by such entities and have come up with the option of hiring new experts and starting with R&D sector of their own. However it is also shown that a more sincere effort and dedication is required from all SMEs to ensure IP system is effectively working. In meeting such demands, it should not only solely focus on knowledge possessed by the firms but also on the IP management cycle and how to exploit IP rights and convert their assets into profit making tools and also valuation of such IP rights and enforcement of IP rights.
The recommendation suggested by the authors after a detailed analysis of the chapter is that SMEs need to be innovative and hire creative minds that could access information whether directly or indirectly and can keep an eye on the internal and external environment of the company. They also require minds which are research intensive who could access every bit of the information. They require strong networking strategies who could reach the core of the information.
The lack of appropriate networking strategies which is a barrier faced by SMEs which could access information and avail opportunities, and also their level of intelligence, the knowledge they possess and their innovativeness and innovative mode. If there are firms in which “one-size-fits-all” such employees under one roof it could benefit the firms making higher profit ratio by exploiting their resources.
For majority of the SMEs who are employing or recruiting mainly non-technological and non-inventive minds and promoting self involvement and making their own innovation are closely related to the policies of the firms to match the objectives. The government also needs to focus on the on the early stages at the root level at the stage of network formation and operation, to correct the error and imperfections so as to avail more benefits and opportunities and make the firms aware of their techniques. They should also advise on recruiting the partners who are best suited to their firms in the respective fields. Once the networks start working and smoothens the business then the government should mainly focus that they remain open to new participants to minimize the risk of technological shutdown and does not disturb the market.
The government should more actively focus on the approach of:
ü Promoting collective and simultaneous working of SMEs and be involved in the research and development so that more innovations could come up.
ü More participation of SMEs in the private-public partnerships so that they have a better image in the society and have a better goodwill.
ü Close the gaps of global innovation network.
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