Executive Summary: Intellectual Property Rights for ICT producing SMEs

The critical role of IPR for ICT SMEs’ competitiveness

This study aimed at producing original evidence, based on a survey and case studies, about the awareness and use of IPR (Intellectual Property Rights) by European SMEs (Small and Medium Enterprises) active in the ICT (Information and Communication Technologies) Industry. Intellectual property rights (including copyrights, patents, trademarks and other informal tools) are widely recognized as a key driver of innovation in the ICT arena.

ICT SMEs are approximately 731,000 in the EU 25, but are very important for the dynamism and competitiveness of the European economy. ICT SMEs must deal with increasing international competition, keep up with the pace of technological innovation and adapt to the reorganization of world supply chains. To do so, ICT SMEs need to develop original knowledge, to protect it and to bring it to the market as fast as possible. Therefore they have an increasing need to exploit the full range of formal and informal IP tools, to help to build and defend their competitiveness. However, IPR regulation is at the heart of some of the most heated competitive battles in the ICT industry. They concern the existence and role of software patents, piracy and counterfeiting of software and digital content (affecting Digital Rights Management), the management of IPR in ICT standardization and interoperability processes, particularly for open standards development.

ICT SMEs face greater barriers than large enterprises in IPR adoption, because of their minor resources and lack of specific expertise. This means that IP protection is an extremely sensitive issue, where policy makers have a considerable power to influence the development of the market. 

The adoption of IPR is increasing but advanced users are a minority

ICT SMEs are following the general market trend, increasingly adopting IPR, both formal and informal. Their IPR portfolios are more articulated than normally expected from SMEs.  But the most common tools remain informal IPR (confidentiality agreements, used by 69% of the study sample), followed by copyright (41%), trademarks (31%) and patents (25%). The study identified three main typologies of users, remarking that the size of the IPR portfolio tends to grow with company size. They are Low Profile Users (29%) with only one type of IPR, usually informal; Mainstream IPR Users (36%), the relative majority of ICT SMEs, who use 2 or 3 different IPR tools and are more present in the Software and ICT services industries (copyright is the cornerstone of their IPR strategy); Advanced IPR Users (23%) with a portfolio of 4 to 7 different IPR tools covering the full range of IPR, both formal and informal. These firms most frequently use copyright, patents, Confidentiality Agreements and DRM. Nevertheless, there is a gap between the actual use of IPR and the potential benefits, which ICT SMEs might gain, if they exploited the full range of IPR tools.

Only the minority of advanced IPR users are fully exploiting the potential of their portfolios. For example, the majority of ICT SMEs do not have a dedicated IPR department or manager, and only a third of firms use specialised external support. The problem is not a lack of generic awareness about the role of IPR, rather a lack of knowledge about the potential benefits of specific IPR tools for the firm business strategy, and the best way to exploit them.

Using IPR for competitive advantage and innovation

Advanced ICT SMEs are learning to use IPR to protect their research investments and defend their competitiveness in global supply chains. Overall, it appears that many ICT SMEs have progressed in the learning curve of IPR, described by literature, beyond the first stage, which is the purely defensive strategy, towards a use of IPR to implement innovation and achieve competitive advantages.

According to our survey, the majority of ICT SMEs use copyrights, trademarks, registered designs and utility models mainly to exploit innovation, in order to launch new products and services. Gaining access to funding (using IPR as a financial asset, which is a fairly sophisticated strategy) is the second-ranking goal for copyrights and registered designs, followed by Exchanging IPR (one of the most common ways to use IPR in business alliances).  The least important goal appears to be blocking competitors, which used to be one of the main reasons to adopt IPR according to most sources.

The case studies of advanced IPR users confirm this view, providing evidence of use of IPR to attract investment capital and to access finance, to protect original knowledge and research investments when entering new and international markets, to build a portfolio of patents for exchange in cross-licensing agreements. Many advanced ICT SMEs use IPR to protect original knowledge within supply chains, business alliances and other networks and to improve the company image and competitive positioning.

The use of IPR is correlated with better business performance

According to the survey data, there is a link between IPR use and business performance. First of all, ICT SMEs with IPR are more likely to declare turnover, market share and employment growth, than firms without IPR. The likeliness to show turnover and profit growth increases with the size of the IPR portfolio, since a higher percentage of ICT SMEs in the group of advanced IPR users are growing (77%), compared to the group of Low profile IPR users (where 56% are growing). From the point of view of the composition of the IPR portfolio, firms with patents are more likely to grow, while firms with informal IPR are even less likely to grow than firms without IPR.

Impact of IPR on competitiveness

The evolution of the value chain in the ICT industry is leading to increasing specialization of the different actors, with knowledge-intensive tasks such as R&D and design increasingly outsourced to dedicated firms, within complex global networks. This creates the opportunity for newly emerging business models based on the creation and exploitation of IPR, essentially new market niches. They can be divided between “pure” IP–based business models, where IP are the most important, if not the only, source of revenues, and IPR are a sine-qua-non condition, and other innovation models, where ICT SMEs use IPR to participate in supply chain networks. They are illustrated through the case studies.

IP-based New Technology Firms gather all their revenues from licenses and royalties of IP and use IPR broadly. Three of our case studies (Array Technology-Denmark, Comsys-Israel and DxO Labs-France) fall in this typology, focusing on design and development activities, and outsourcing production. These firms are inherently exposed to high risks, because of the need to keep investing in R&D and remain one step ahead of the competition in technological innovation.

Firms with Cooperative innovation Business Models depend on IPR as a competitive advantage and gain part of their revenues from IP-protected products and services. IPR allow these ICT SMEs to increase sales and market share in competitive global markets. Three of our case studies fall in this typology: Eurotech, Net Insights and Vierling, who are ICT manufacturing firms.

Open Source Software Business Model: OSS firms gain their revenues from a combination of licensing and services, so also their revenues depend on IP-protected products. The case studies show that IPR management is an issue also for these firms, because the licensing and copyright regime requires specific knowledge and skills. 

Policy implications

The development of the knowledge economy is changing the scenario for the use of IPR, which is becoming more challenging and complex. ICT SMEs face two order of problems concerning the use of IPR: those specific of the ICT sector, which affect ICT SMEs more than large competitors, and those descending from the inherent weaknesses of small enterprises, such as undercapitalization and lack of specialized human resources and knowledge. There is a need for a revision of the basic assumptions of IPR policies for ICT SMEs, to move beyond general support without industry specificity, taking instead into account the new range of emerging needs, in order to remove barriers and enable small, innovative ICT players to implement the right IPR strategy to compete effectively. The study conclusions suggest the following policy recommendations.

Improve the quality of IPR adoption and management by ICT SMEs: There is a need for streamlining and reinforcing the broad range of IPR support services for SMEs, already existing in Europe. They should be encouraged to progress beyond an excessive focus on patents to promote wider IP protection strategies, taking into account the full range of formal and informal IPR, and to provide industry-specific services, particularly to ICT SMEs. To address the needs of Innovative ICT SMEs, policy makers should consider carefully the business case for launching, and/or contributing to, specialized, value-added IPR consulting, enforcement and implementation services, possibly web-based, dedicated to specific vertical market segments. These services should allow ICT SMEs to find help to compete and cooperate in business chains with larger enterprises with greater means. To address the needs of less innovative ICT SMEs, policy initiatives and support services should still promote the diffusion of practical knowledge of the IPR system and of existing alternatives to achieve competitive advantages. Advanced awareness initiatives should include periodical monitoring and comparative assessments of the suitability of the different IPR tools (or alternative protection methods), from the point of view of ICT SMEs business strategies.

Promote greater coordination between Innovation policies, ICT industry policies, IPR policies for SMEs: In order to respond to specific ICT SMEs needs in this area, IPR policy should not be considered only as a horizontal, general SME policy tool, but should be better integrated with innovation and ICT industry policy goals, at the EU, national and regional levels. To achieve this goal, there is a problem of coordinating the institutions and actors responsible for the different policy strands. For example, institutions operating in the national innovation system should ensure that IP is adequately incorporated into the broader framework of support for entrepreneurs and SMEs and for the ICT industry.  In doing so, institutions should take into consideration the main obstacles faced by entrepreneurs and SMEs not just in seeking grant/registration of IP rights but throughout the IP management cycle.

Analyse the implications of the IP-based business models in the ICT industry for IPR policies: This study confirmed that emerging IP-based business models have increasing relevance in the new global supply chains of the ICT industry, particularly for start-ups and new-technology based firms.  These ICT SMEs deserve to be supported, because they are showing high growth and competitiveness. It is advisable to understand better whether there is a specific need for IPR policies integrating innovation policies in this area.

Respond to ICT SMEs Needs of Improvement of the IPR System in Europe: ICT SMEs ask first of all for a greater harmonization of the IPR regulatory framework between the European and national level, particularly for patents. They ask for streamlining and harmonization of bureaucratic processes, rather than a deep overhaul of the IPR regulatory framework; only the patent system raises strong criticisms.

The adoption of a Community Patent granted by one central authority and subject to the same rules throughout the EC is ideally the best solution to reduce the present inefficiencies of the European Patent system. But it presents several problems and should be encouraged only if the costs of such Community patents could be affordable to all patent holders including SMEs. In order to respond to ICT SMEs needs, the overall efficiency and timeliness of the European patent system should be improved, and the burden of excessive translation costs should be reduced. Additional funding could be considered to fill the gap in time when ICT SMEs must anticipate costs for patents, before new revenues start to come in. 

Enhance technology transfer and knowledge sharing, also solving the problem of software patents:  From the point of view of the policy maker, the improvement of the IPR system should lead to better technology transfer and knowledge sharing, rewarding inventors but also helping to leverage inventions at the system level. This is particularly important for the ICT industry and for ICT SMEs, who need to develop their own innovations within the digital ecosystem building on other enterprises inventions and technology advances. Real progress on this issue would need a resolution of the conflict on software patents, which is not only an ICT SMEs problem but involves also large players.  As shown by the analysis of this report, the differing opinions on the software patents issue are entrenched. Any resolution favourable to both sides is likely to be complex, requiring a delicate balancing act among the interests of all competitors.  Given the difficulty to achieve a suitable compromise, there is a risk that the present situation (with the EPO releasing CII patents, recognized by some and contested by others, including courts and judges in different countries) may continue indefinitely. It is important that the EC steps up its efforts to solve this problem with a generally acceptable compromise. Competition law may play a role in this effort.

Defend the role of ICT SMEs in the open standards development: This study documented the increasing conflict about the best way to deal with IPR in the ICT standards development arena, particularly about open standards, which are a key EU policy goal. Many ICT SMEs advocate ensuring positive complementarities between IPR protection, particularly patenting, and standardization and interoperability, particularly open standards. Many other ICT SMEs (and some large players) argue that IPR stand in the way of open standards development and should not be used at all in that context. It is important that the EC continues its activities to defend the interests of ICT SMEs in the standards development process.

It is also recommended that the High Level Policy Group on ICT standardization, announced by European Commission Vice-President Günter Verheugen, engage widely and take into account in particular the issues of standardization and IPR from the ICT SMEs perspective based on a practical review of the ICT SME competitive issues in the software and standardization-interoperability areas..

Further resources

• Table Report 2007/08 - Intellectual Property Rights for ICT producing SMEs (.xls , 289 KB )
• Study Summary - Intellectual Property Rights for ICT producing SMEs (.pdf , 2,1 MB)