22 December 2021

New Research Study from IP Australia Confirms IP Rights Ownership as a Signal to Identify Successful SMEs

The role of IP rights in the growth of SMEsIf you are a policy-maker, prospective business partner or investor, IP Australia wants you to know that a useful way to identify small and medium enterprises (SMEs) with high growth potential is to look at their IP activity.  A new research report from the Office of the Chief Economist, titled Intellectual property rights and enterprise growth: The role of IP rights in the growth of SMEs, describes a study using data on the full population of Australian businesses – around 600,000 SMEs over the period 2002–2017 – to examine correlations between IP activity, employment, and growth of SMEs.  The study finds that, on average, SMEs that own IP rights (IPRs) are 3.5 times larger than SMEs with no IP rights (7 employees compared to 2 for SMEs with no IP rights).  Furthermore, rights-holders pay their employees better, with median annual wages being A$53,755 per employee compared to A$43,304 for SMEs with no IP rights.

My opening sentences above were very carefully chosen.  There is a risk that this study may be understood or reported in some quarters as implying the presence of a causal relationship between ownership of IP rights and business success.  It should go without saying, however, that (in the absence of evidence otherwise) correlation is not causation.  This is expressly acknowledged in the report itself (page 10), but IP Australia is also choosing its words carefully in promoting the report.  In information provided to media, the Director General, Michael Schwager, is quoted as saying:

This research paper presents evidence, for policy makers and business investors, that SMEs who file for IPRs are more likely to experience high growth than those who do not file for any IPRs.

On average, SMEs that own IP rights are around 3.5 times larger, are older and pay a higher median wage. SMEs filing for all the three types of IPRs, namely patents, trade marks, and designs, are the most likely to achieve high growth in terms of both turnover and employment.

To the casual reader, these statements might be taken to imply a causal relationship.  Saying that entities that do X are more likely to achieve Y arguably implies that X might be a good thing to do if your goal is to achieve Y.  But of course that is not true here.  If all anybody needed to do to succeed in business was to file a trade mark application, then I am sure everybody would be doing it!  An economist or statistician reading the above statements would merely find a few interesting facts regarding the observed relationships between IPR ownership, business growth, company size, longevity, and employee remuneration.  They would see nothing regarding any causal relationship among these characteristics.  All they would learn is that entities represented in the study data that have achieved Y are also more likely than average to have done X.

It is also notable that Michael Schwager’s statements specifically address policy makers and investors.  What about business owners?  Surely they would want to know how to maximise their prospects of success?  Well, of course they would.  But this study, by itself, tells them nothing about how to achieve that outcome.  Just because more successful businesses are more likely to own more IPRs does not imply that simply filing more applications for IPRs is the hidden secret to business success!

So, let’s delve a little more deeply into this report and see what else it tells us about IPRs and successful SMEs, and attempt to infer, from its findings, something about what makes an SME successful, and where other SMEs should be looking to find exemplars from which they can learn.

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