05 June 2018

The Australian Government is Asking SMEs How They Manage and Exploit Their Intellectual Capital (Mostly, They Don’t)

Intellectual capital light bulbThe Australian Government’s Department of Industry, Innovation and Science (DIIS) has launched a consultation ‘to better understand the needs of innovative Small and Medium Enterprises (SMEs) in managing and exploiting their intellectual capital’.  If my experience is anything to go by, the first challenge will be finding Australian SMEs with an understanding of what intellectual capital is, let alone how to manage and exploit it in any systematic way.  Fortunately, DIIS has provided its own definition of the term: ‘by intellectual capital we mean things like ideas, know-how, branding, data, trade secrets and copyright and also registered intellectual property (IP) rights such as patents, trade marks, designs and plant breeder’s rights.’

While potentially patentable inventions may form only a small part of a company’s intellectual capital – and there are, of course, many businesses that are not at all involved in the generation of new technology – patent filings are nonetheless widely seen as one indication of innovative activity within the national economy.  Additionally, applying for IP protection is a clear signal that a business has some awareness of its intellectual capital, even if only informally.  In the case of a patent filing, someone has at least identified the existence of an invention, and made a conscious decision that it is of sufficient value to warrant protection.  I recently wrote about Australia’s poor performance in patent filings, which I attribute to a generally negative mind-set, arising from a combination of ignorance, aversion, and lack of appreciation of the value of patents (and other forms of IP).  Relatively low rates of patent filing might therefore be a reflection of an absence of awareness, processes, and strategies for actively managing and exploiting intellectual capital within the vast majority of Australian businesses.

According to a 2016 report published by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), there were over 2.1 million businesses operating in Australia in 2015.  Just 0.2% of these (around 3,700) were classified as large businesses, employing over 200 people.  A further 2.4% (just under 51,000) were medium-sized enterprises, employing between 20 and 199 people.  The majority of businesses smaller than this – 60.6%, or just over two million – are non-employing sole traders (like me).  As I demonstrate in this article, however, even on the most generous interpretation of the available data, less than 0.3% of SMEs and sole traders filed any kind of Australian patent application in 2015.  On average, SMEs filed around 1.5 applications each (if they filed at all), while the typical individual applicant filed only a single application.  By comparison, just over 5% of large firms filed patent applications in Australia, and on average these firms filed over five applications each.

I fear, therefore, that DIIS will not receive too many responses to its consultation, and those businesses that do respond are unlikely to represent a broad cross-section of Australian SMEs.  Businesses for which intellectual capital is barely on the radar are unlikely to become aware of the consultation, or take the time to respond to questions set out in the Submission Guide, such as: ‘What does “intellectual capital” mean to you?’; ‘What role does it play in your business strategy?’; ‘How does your business exploit its intellectual capital?’; ‘Can you tell us about any successes or failures?’; ‘Do you seek advice on how to manage and exploit your intellectual capital?’; and ‘If not, why not?’.

For those SMEs, and other stakeholders, with an interest in the fate of Australia’s innovation patent system, this consultation provides a further opportunity to make their views known.  When provisions to abolish the innovation patent were recently dropped from legislation introduced to Parliament, IP Australia announced that the Government had ‘decided to undertake further industry consultation targeted at better understanding the needs of innovative SMEs before the phase out of the innovation patent occurs’.  The Submission Guide does not expressly mention the innovation patent, however the consultation is explicitly linked to the Productivity Commission’s inquiry into Australia’s IP arrangements, noting that the Government is ‘committed to continue to further explore the overall needs of Australian SMEs in relation to exploiting their intellectual capital, and securing, utilising and enforcing their IP rights.’  Filing numbers presented in this article show that, for whatever reasons, SMEs have made increasing use of the innovation patent system over time.

While the consultation is primarily directed to SMEs, the Submission Guide also appears to envisage that submissions may be received from ‘professional organisations providing service or advice to SMEs.’

How Many Patent Applications Do Australian SMEs File?

To get a sense of the level of patent filing activity specifically by SMEs, I used data from the 2017 Intellectual Property Government Open Data (IPGOD) release.  (While some 2018 data was recently released, the first stage does not include business size information, which is expected in a second stage in July.)  In particular, I looked at annual filing numbers from 2002 (the first full year of operation of the innovation patent system) to 2016 (the last year covered by the 2017 IPGOD data).  Note that all of the data presented below relates to filings by Australian resident applicants only – applications made by foreign applicants are not included.

The chart below shows the number of Australian provisional applications filed each year by Australian applicants (total number, number filed by SMEs, and number filed by individuals).  While the total number of provisional filings has declined since 2002, most of this drop has been due to a reduction in the number of applications filed by individuals.  I do not necessarily regard this as a bad thing – many of these applications are made outside the context of any viable business plan, are self-filed and/or of low quality, and (as the standard patent filing numbers shown later bear out) most do not result in any further applications that may result in granted patent rights.  What is more concerning, however, is the lack of any growth in filings by SMEs across the 15 years covered by the chart.
Provisional filing numbers
A corresponding chart (below) of the annual numbers of innovation patent filings shows quite different trends.  Here, it is the number of applications filed by individuals that remains fairly static, while the number of filings by SMEs more than doubled between 2002 and 2016.  It appears that while individuals have been consistent in their use of the innovation patent system since its inception, SMEs have increasingly warmed to it over time.  This is, of course, a very interesting trend in view of the rationale for abolishing the innovation patent system, which is largely based on the analysis in IP Australia’s report on the Economic Impact of Innovation Patents.  That report was prepared in 2014, using data available up until the end of 2013, and therefore mostly covered the period of lower SME filings while being unable to look ahead to see whether there have been any more positive impacts from the higher numbers of SME filings that have now been sustained for a number of years.  Although 14 years of operation of the innovation patent system might seem like a long time, it appears as though it was just barely long enough for the system, and its use by SMEs (the main target users) to become established.
Innovation patent filing numbers
Finally, the chart below shows the number of Australian standard patent applications filed each year by Australian applicants, including both ‘direct’ filings, and filings resulting from national phase entry (NPE) of international applications under the Patent Cooperation Treaty (PCT).  As usual, the results reflect the impact of the Raising the Bar law reforms commencing in April 2013, with a spike in filings in 2013, followed by a corresponding dip in 2014 due to applications brought forward to avoid the changes.  Other than that, a general upward trend can be observed in filings by SMEs, along with a slight downward trend overall in filings by individuals.  While I have noted previously that there has recently been a concerning decline in patent applications per capita, it is at least a somewhat positive sign that SME filings have been increasing.
Standard patent filing numbers

How Many SMEs are Active Filers?

The number of applications filed each year is, of course, not the same as the number of applicants – a single application may name multiple applicants, and some businesses and individuals are involved in multiple applications in any given year.  For each year, I therefore counted the number of distinct applicants across all three types of patent filings (i.e. provisional, innovation, and standard). 

The results are shown in the chart below.  The number of large firms actively filing each year has remained fairly constant (at around 200), while the number of active SMEs has increased slightly over time.  Most notably, the number of active individuals has fallen significantly since 2002, primarily due to the reduction in provisional filings by individuals, as discussed above.
Applicant numbers
Using the statistics on businesses of different sizes from the ASBFEO report, the proportion of large firms actively filing in 2015 was around 5.3% (196 active filers out of 3,717 large firms operating in Australia).  It is impossible to know how many individuals who filed patent applications were associated with a small business, although my own experience working with individual inventors suggests that the number is probably quite low.  At best – i.e. if all individuals can be treated as ‘SMEs’ – the proportion of SMEs actively filing in 2015 could have been 0.26% (5,595 active SME and individual filers out of 2,117,518 businesses with fewer than 200 employees).  More likely, however, the proportion is closer to the ‘worst case’ figure of 0.13% (based on 2,849 active SME filers, excluding the individual filers).

As I have already noted, an applicant may file more than one application each year.  The chart below shows the average number of applications per applicant, broken down by applicant type (large firm, SME, and individual).  Individuals tend to file only one patent application.  Interestingly, while the number of SME filers has been gradually increasing over time, the average number of applications filed per SME applicant has remained consistently around 1.5.  Large firms have been the big movers in filing intensity, increasing from just under 4.5 applications apiece in 2002 to just under 5.5 applications in 2016 (after a Raising the Bar-induced peak of 5.66 in 2013).
Average number of applications per applicant

Conclusion – Many SMEs do not Manage Their Intellectual Capital!

There is obviously much more to ‘intellectual capital’ than patent applications.  Indeed, even DIIS’s working definition of ‘ideas, know-how, branding, data, trade secrets, copyright and registered intellectual property (IP) rights…’ is not exhaustive.  Even so, applications for registration of IP rights provide some indication of the level of active management of intellectual capital within organisations – clearly, businesses that give no thought to intellectual capital do not identify registrable IP and do not file applications, while businesses that are filing patent applications must have given at least some consideration to their intellectual capital (even if they do not think of it this way) and how to protect it.

Based on the numbers, in any given year less than 0.2% of all Australian SMEs file a patent application of any kind, compared with over 5% of large companies (i.e. those with over 200 employees).  Of course, many small business operate in service industries and are therefore less likely to be involved in the development of potentially patentable technology.  But it is unlikely that this is a sufficient explanation of the very low filing rates by SMEs compared to larger firms.  Rather, the statistics seem to bear out my own experience, which is that the majority of Australian SMEs barely know what intellectual capital is, let alone have any idea of how to manage or exploit it effectively.

I hope that I am wrong, but the DIIS may be sorely disappointed with the submissions it receives in its consultation.  If you are thinking of making a submission, the deadline is 3 August 2018.


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