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.

How Many Australian SMEs Own IP Rights?

IP Australia’s research confirms that the overwhelming majority of SMEs do not own any formal registered IP rights.  In 2017, only around 4% of Australian SMEs owned IPRs.  The good news – such as it is – is that this proportion doubled since 2002. 

By far the biggest contributor to IPR ownership was trade marks. 

Of the SMEs with any IPRs, 89.1% owned only trade marks, while a further 6.6% owned trade marks in combination with one or more other forms of registered IPR (patents and/or registered designs).  While most trade mark owners did not own any other types of rights, owners of patents and/or designs were more likely than not to also own trade marks.

This is not very surprising.  Almost all trading businesses operate under some form of branding – and it is therefore disappointing that so few Australian SMEs own registered trade marks (PATENTOLOGY, incidentally, is protected by Australian trade mark registration no. 1412805).  However, most small businesses are not based on the development and commercialisation of patentable inventions or registrable designs.  On the other hand, it is to be expected that many businesses that engage with the IP system via the more complex and costly process of patent or design registration will be conscious of the benefits of also registering their trade marks.

It is worth noting that the report makes no mention of unregistered rights – such as know-how, trade secrets and other confidential information, copyrights, internally-developed software, business processes, and so forth – that can be significant IP assets, but are not visible to IP Australia’s economic researchers.

Modelling the Relationship Between IPRs and Growth

IP Australia’s report presents econometric models designed to investigate the relationship between IPR filings and company growth, as measured by annual turnover and number of employees.  ‘Growth’ is defined as achieving three consecutive years of increasing turnover or employment, while ‘high growth’ is defined as an average annual increase in turnover or employment of at least 20% over the same period.

The models are used to predict the probability of a positive outcome (growth, or high growth) for SMEs that filed for IPRs in a year, relative to the probability of an SME that did not file IPRs that year achieving the same outcome.

The modelling indicates that SMEs that file for at least one IP right in a given year are 10% more likely to experience subsequent positive or high turnover growth than SMEs who file for no IP rights in the same year, all else being equal.  Furthermore, SMEs that filed for at least one IP right in a given year are 8% more likely to experience positive employment growth, and 16% more likely to experience high employment growth, relative to SMEs that filed for no IP rights the same year.

However, for SMEs that filed for a single type of IPR, only trade mark filings were associated with positive growth, i.e. SMEs that file for patents only or designs only were not found to be statistically more likely to achieve positive growth than SMEs with no filings.  As observed in the report (page 11) this is possibly attributable to the focus of the modelling on near-term growth potential, i.e. in only the year after filing.  While trade mark applications may reflect protection of an existing brand, or one which is imminently to be launched, patent and design filings tend to occur early in a process of product development that is unlikely to come to commercial fruition within 12 months.

The modelling also found that among SMEs that filed for multiple types of IPRs, only those that filed for all the three types of IPR – i.e. trade marks, patents, and designs – were statistically more likely to experience high growth.  The likelihood of such firms achieving high growth was more than double that of firms that did not file for IPRs.  On the one hand, this makes sense.  One only has to consider the case of Apple – one of the world’s most successful companies – to recognise the growth potential in combining strong branding with technological advances and superior aesthetic design.  On the other hand (for example) the design registration system is grossly underutilised by Australian SMEs, and most design registrations are never substantively examined and made enforceable.  It is therefore somewhat surprising that there is any difference in the performance of firms that file for all three types of IPR over those that file for only trade marks and patents.  This makes me wonder if there is a form of ‘reverse causation’ at work here, i.e. perhaps successful firms have greater available funding and are therefore more likely to invest in protecting whatever IP they can identify.

The models were also used to simulate the effect on employment of having one more of a given right, all else being equal.  The key findings were as follows.

  1. For a business with 50 employees, increasing its number of trade marks from one to two was associated with an increase of six employees in the following 12 months. The increase was 12 for a business with 100 initial employees.
  2. For a business with 50 employees, increasing its number of design rights from one to two was associated with an increase of two employees in the following 12 months. The increase was four for a business with 100 initial employees.
  3. For a business with 50 employees, increasing its number of patents from one to two was associated with an increase of one employee in the following 12 months.  The increase was three for a business with 100 initial employees.

Of course this does not mean that filing for IPRs results in an increase in employment.  (If only!)  It means only that the kind of company that files for additional IPRs after already owning a first IPR is, on average, and all else being equal, also the kind of company that is likely to increase its number of employees over the following year.  It also (perhaps) suggests that ‘brand-focussed’ companies in Australia are more likely to generate employment than those based on product and/or technology development.  I am not sure that I find any of this particularly surprising.

Conclusion – What Can SMEs Learn from this Study?

The message to Australian SMEs is certainly not that if you file for more IPRs you will automatically become more successful.  But it is worth noting the correlation between business success and IPR ownership, and asking what lessons there may be in that for SMEs.  Since the report only reveals what the data tells us, we are (for now) necessarily dependent on a degree of speculation and anecdotal evidence to hypothesise the underlying causes of the observed correlations.

I have worked for a number of years in academia, in two start-up companies, and as a patent attorney for nearly two decades.  It has been my consistent experience that the businesses that succeed and achieve high rates of growth have a number of characteristics in common.

First, few businesses grow unless they want to grow.  It should not be ignored that not all SMEs are interested in growth.  There are many sole traders, family-run businesses, and other small enterprises that serve a local or niche market, are perfectly content with the level of success and remuneration they have achieved, and are not looking to expand, take on more work and responsibility, or employ more staff.  Your local hairdressing salon, corner store, or cafĂ© is unlikely to harbour ambitions to become a national chain.

Second, successful businesses are well-managed.  They have a business plan (even if initially rudimentary).  They have a sound understanding of what is needed to achieve their objectives or milestones, including the costs involved.  They are fully aware of the investment required to implement their plans, and they have a strategy for financing the business.

Third, successful businesses are well-advised.  They are aware of the limits of their internal knowledge and capabilities, and they engage external advisers effectively.  They may be cost-conscious, but they are willing to invest in the services of business advisers, lawyers, financial advisers, marketing professionals, IP professionals and others where necessary. 

Businesses that exhibit the above characteristics are the ones that are most likely to be filing for multiple IPRs.  They do not succeed because they file for IPRs. Nor do they file for IPRs merely because they are successful.  They succeed and grow and file for IPRs because they want to grow, they are well-managed, and they are well-advised.  (Of course, there are also many businesses that do all these things and still fail for the many other reasons that operating and growing a business is uncertain and risky.)

The message for SMEs, then, is that there are obviously exemplars out there that are achieving great success and growth while considering IPRs as a key component of their overall strategy and management processes.  These are the businesses to emulate, not simply in filing for IPRs, but in all of the aspects of business strategy that they deploy including filing for IPRs.  As I have said before (e.g. here, here and here), most Australian businesses are woefully poor at understanding, identifying, managing and protecting their IP.  This report from IP Australia strongly suggests that the exceptions to this rule are also the most likely to succeed and grow.  These are the businesses that others should be identifying and learning from.

We absolutely want to see more Australian SMEs filing for more IPRs.  But we want to see it as part of better business strategy, not just because it is what all the ‘cool kids’ are doing!

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