1. Ignoring a vital asset

Ignoring a vital asset

Manifold benefits of IP protection and valuation are largely under-appreciated in India...

Published: December 5, 2014 1:22 AM

The micro, small and medium enterprises (MSMEs), which rely heavily on in-house R&D, complex designs and artistic work, create a range of intellectual property (IP) assets, like product patents, trademarks, copyrights and industrial designs. Use of these IP assets is critical to the survival of most MSMEs in the segments of textiles, toys, publishing, music, biotechnology and retail, to name a few.

For example, in the US, by the commerce department report (2012), employer firms with less than 20 staff make up for 71% of software publishers, 92% in the motion picture and video industries, 58% in the pharmaceutical and medicine manufacturing industry, 94% music publishers, 96% sound recording industries, and 84% of book publishers.

In India, despite the predominance of the MSME sector in the economy, the value of IP is often not much appreciated and its potential to provide future profit opportunities is widely underestimated. Because of this, MSMEs often miss opportunities to maximise the potential return on their investment in innovation. They often fail to grasp that IP would protect their products/services from copying, and help them create a strong brand identity, obtain financing, increase commercial value of business and, most importantly, gain revenue through licensing, franchising or other IP transactions.

Indian MSMEs are at a particular disadvantage, as they lack the knowledge, expertise, or resources to manage their IP and prevent the theft of their ideas and products. Some find it difficult even to identify and describe their IP assets. Further, many do not apply for IP protection due to high capital requirements. For acquisition of patent rights, businesses not only have to cover application fees, publication cost and maintenance change but also the costs of legal advice and translation costs. In addition, the patent process is also long drawn and complex.

According to the Indian Patent Office, ministry of commerce and industry, during 2010-11, around 39,400 patent applications were filed, of which more than 80% came from large MNCs. Against this, China received 526,000 invention patent applications in 2011, with 80% of which filed by MSMEs. China has surpassed the US and Japan to become the leading patent filer in the world.

Even where an MSME put in place measures to protect its IP, it may be at a substantial disadvantage in enforcing them. In contrast large firms are capable enough to protect their IP or challenge the IP of MSMEs and have greater competence in designing and defending their patent positions.

Many Indian MSMEs still rely on informal methods of IP protection, such as complexity of design and the secrecy of innovation or trade secrets.

Most traditional MSMEs prefer keep their know-how secret. Despite the fact that IP is frequently bought and sold, there is a high degree of scepticism among Indian SMEs over IP valuations. Valuation is important in the event of a sale, merger or acquisition. It will show a ‘true and fair view’, which may assist MSMEs in many ways, like in raising finance, enhancing reputation, fair allocation of contribution, risk and rewards and to prove loss, financial reporting and damage in litigation (forensic accounting). Thanks to their negligence of IP valuation, MSMEs are often unable to enforce their rights or defend an unjustified claim against them.

This situation calls for strong policy intervention and support programmes that help fully exploit the innovative and creative capacity of MSMEs. At the policy front, there is a need to introduce ‘awareness and training programmes’ to help the MSMEs make informed decisions about protecting their ideas, using their intellectual property right (IPR) tools for technology up-gradation and enhancing competitiveness, providing access to technical facilities and providing value addition to their business. The government should also increase its efficiency in application vetting and approval, by optimising the processes and hiring more examiners. To disseminate information about consultancy, IP policies and affairs, setting up an information or service centre would be highly helpful. Also, the government should closely work with various accounting associations and bodies to explore ways to standardise the valuation methods to get accurate and reliable IP values.

By ND Vohra
The author is professor at Ramjas College, University of Delhi.
Prof. Sumanjeet also contributed to the article

Tags: MSME
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