The State of IP protection,Exploitation and Valuation: Evidence from Select Indian Micro,Small and Medium Enterprises (MSMEs)

Abstract

There is a plethora of literature to support the significance of intellectual property rights (IPRs) in modern organisations in deterring potential infringement of new ideas and in turning them into productive business value. Larger-sized firms attach tremendous value to their intellectual property (IP), whereas in the case of the micro, small and medium enterprise (MSME) sector, much more than a value game, IP rights have strategic importance, as this sector requires constant creativity and innovation to adapt to fast-changing market conditions, short product life cycles and intense market competition. Many of the Indian MSME units rely heavily on their in-house R&D laboratories/personnel, complex designs, unique methods, artistic work, distinctive brand names and innovation ability. They create and use IP assets which range from patents to trademarks, copyrights and industrial designs. Therefore, proper protection, exploitation and valuation of these assets have become more and more critical for the success of Indian MSMEs in the global economy. In this light, the present study aims to examine the practices used by a selected group of Indian MSMEs with regard to IP usage, protection, and exploitation and valuation aspect. In this process, the study also investigates the problems or constraints that resist these firms to exercise such IP management-related practices.

Keywords

IPRs MSMEs protection exploitation valuation patent

Introduction

In today’s global economy, much of the competitive advantage of a business lies in the ability to identify, protect and exploit its intellectual property (IP¹

It is the form of intangible property which is created by mind or intellect and having commercial value.

). Notably, the shift towards knowledge and technology-based industries (e.g., pharmaceutical, telecommunication, information technology, software, health biotech, publishing, medical equipment and so on) has placed increasing importance on intellectual assets as the source of competitive advantage for firms, thus increasing the need to have such assets protected (WIPO, 2006). The IP rights (IPRs²

IPRs are generally said to be a bundle of exclusive rights granted to the owner of intellectual property/asset under intellectual property laws to benefit or reward the owner from their own work, creation or investment. Broadly, IPRs are categorised in two forms: (a) industrial rights which include patents, trademarks, trade secrets, geographical indication (GI) and industrial design; and (b) copyrights cover artistic and literary works, performances, and broadcasts and the like.

) particularly patents (including business method patents) and trademarks have been instrumental to obtain competitive advantage throughout the industrial history and this is supported by economic theory as well (Beladi et al., 2016; Vaver, 2006; Wallerstein, Magee, & Schoen, 1993). The IP rights enable modern organizations to build their business strategies in order to gain competitive advantage, maximise revenue (Roy, 2013; Wang, 2015) and attract investment (Wang, Wang, & Liang, 2016). These rights also allow organisations to sell, buy, trade or license innovation that has been made explicit and codified through the legal system (European Commission, 2014). Indeed, without proper protection of IP, a company’s innovation can be left dangerously exposed and easily exploited by the competitors. A strict IPR regime also encourages firms to commit more resources to innovative activity (Burrone, 2004; Stewart, 1999; Zelaya, 2015). This is because of the increased possibility of firms being able to appropriate the full returns to their own innovative efforts emanating from a strong IPR regime which has severe legal sanctions against those indulging in copying and imitation (Colson, 2001; Mani & Nelson, 2013; Yeh, 2016). For these reasons, all businesses today—big and small, public and private, and high and low technology firms—need to create and extract value from their intellectual capital. However, the capabilities to generate and develop, protect, level of usage and exploitation of IP vary significantly across the organisation, depending on their sector, size (Andries & Faems, 2013), focus, resources and the business environment in which they operate³

The choice of IP rights varies according to sectors. As might be expected, pharmaceutical firms used the patent system most, while telecommunication and software firms used the copyright system in the main.

(Hong et al., 2016; Thiel & Peters, 2016). Big organisations use IPR not only for spurring a firm’s innovation and international competitiveness (defensive purpose) but also for other complementary purposes: to innovate in partnership (cooperation strategy), to pre-empt certain markets (strategy of movement) or to generate licensing revenues (licensing strategy). Furthermore, strategically, larger-sized firms give tremendous value to their intellectual property (Gould & William, 1996; Singh, 2015).

Evidently, around 60–80 per cent of the market value of the firms on S&P-500 (The Standard & Poor’s 500) is attributed to IP. Micro, small and medium enterprise (MSMEs⁴

Today, India’s small sector consists of (a) micro enterprises (village and cottage industrial units), (b) small enterprises and (c) medium enterprises. In accordance with the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the micro, small and medium enterprises (MSMEs) have been classified as follows: Manufacturing Sector and Service Sector (for a detailed information about Indian MSMEs sector, refer to Report of Ministry of Micro, Small and Medium Enterprises (2016).

) are not lagging behind in the battle of using IPRs to propel their competitiveness and use IP rights, much in the same manner as in large firms (Leong, 2013). However, in case of MSMEs, it is much more than a value game. The IPR has strategic importance as these firms require constant creativity and innovation to adapt to fast-changing market conditions, short product cycles and intense market competition (Brem, Nylund & Hitchen, 2017). The MSME sector uses IP rights not only to protect their inventions and markets, but also to generate investment funding (Ferrantino, 1993; Gould & William, 1996; Horstmann & James, 1987; Sukarmijana & De Vega Salonga, 2014), collaborate and license out their technology (Manap et al., 2016). For instance, in certain innovation and technology-oriented MSME industries such as in the semiconductor, food, garments, pharmaceuticals, biotechnology (Sjöholm & Lundin, 2010), auto-components, microprocessors and electromedical devices sectors, the use of IPRs, especially patenting, is particularly high.⁵

However, it is also true that protecting innovation and ideas are ‘too costly’ and ‘complex’ for small firms. For a detailed discussion, refer Lanjouw and Schankerman (2010).

In MSME sectors, several firms rely on patents to single expertise, either to attract research partners or investment (OECD, 2011; Srinivasan & Lohith, 2017). Further, IP rights such as trademarks and industrial design provide these firms the ability to differentiate their products, create brand image, segment market, find niche market, target specific customer groups and obtain exclusivity over the commercial use of a mark or design that may be the main selling point of a firm’s products or services (as cited in Burrone, 2004). Studies report that there is a positive link between the use of IPR and business performance (Agostini, Filippini, & Nosella, 2014; Belderbos et al., 2010; EUIPO, 2015). A study carried out by International Data Corporation (IDC-EMEA, 2008) confirmed that turnover and profit increase with the size of IPR portfolio. It allows access to some useful technology through IP information and licensing arrangements and helps them avoid wasteful investment in R&D (Alikhan & Mashelkar, 2009; Krajec, 2016). It also enhances the value of the company through effective IP asset valuation (Frey, 2013; King, 2002) and management and gives varied access to venture capital and other sources of finance. Thus, effective management of IP rights can enable this sector to use their IP to improve their competitiveness, productivity and competitive advantage in the global marketplace. However, this sector is often constrained in many more ways than the larger firms in making an effective and efficient use of IP system (Gera, 2013; Singh & Minakshi, 2017). The situation with regard to Indian MSMEs is more complex than their counterparts elsewhere due to the highly heterogeneous and unorganised nature of the firms in this sector.

The Present Study

The Indian MSMEs sector offers an interesting case study as this sector represents almost 90 per cent of the total enterprise population of the country and contributes 8 per cent to India’s GDP, 45 per cent of the manufacturing output, 40 per cent of India’s total exports, employing close to 40 per cent of India’s total workforce, generating 1 million jobs every year, especially at the low skill level (second highest next to agriculture) and produces more than 8,000 quality products for the Indian and international markets, ranging from traditional to high-tech items with high product diversification (Annual Report, 2017–2018; Unnikrishnan et al., 2015). Moreover, this sector embodies the sort of innovative entrepreneurialism which will be the key to the future growth of the economy.

As mentioned above, IP is an integral aspect of most Indian MSMEs, their protection, exploitation and valuation cannot be overlooked. Many of the MSME units rely heavily on their in-house R&D laboratories or R&D personnel, complex design, unique methods, artistic work, distinctive brand name and innovation ability. Consequently, they create and use intellectual property (IP) assets which range from patents to trademarks, copyrights and industrial designs. Use of these IPs is essential for numerous industries composed mainly of MSMEs such as the textile, toy, publishing, music, biotechnology and retail industries, to name just a few. However, most of the MSMEs in India often miss opportunities to maximise the potential return on their investment in innovation by failing to recognise the importance of their IP in ways which would help the businesses to prevent others from copying their products/services or using their innovations, create a strong brand identity, obtain financing, increase commercial value of business and most importantly gain revenue through licensing, franchising or other IP transactions. The issue is observed not only in the granting and enforcement of patent rights but also in other fields of IP as well, such as copyrights or trademarks. In short, the value of IP is often not adequately appreciated and its potential for providing opportunities for future profits is widely underestimated by Indian MSMEs (Singh & Minakshi, 2017).

Thus, the most crucial concern that remains for the Indian MSMEs is to understand how to convert their knowledge into business value by manufacturing new products or creating services and making profits out of research being conducted by the small innovative companies. There is a great need for new entities to manage the IP system and have in-depth and up-to-date knowledge of IP systems and convert their assets into profit-making tools (Kapoor & Nagpal, 2015). It is against this backdrop that our study explores the practices used by the Indian MSMEs with regard to IP usage, protection and exploitation. Our study also investigates the problems or constraints that prevent these firms from introducing IP management-related practices. As IP valuation is closely linked to IP identification, protection and exploitation, the study also explores these facets of MSMEs. Further, we review various approaches to IP valuation (cost, market and income-based approach) and the prevalent tools of IP valuation in Indian MSMEs. In conclusion, we make suggestions for helping Indian MSMEs to fully exploit their innovative and creative capacity.

Methodology

Our study is exploratory in nature as we have tried to test specific problems in a given set of conditions. The survey method was utilised covering a total of 120 MSME units with representatives from manufacturing, service and trading sectors, located in the northern states of Haryana, Uttarakhand and Delhi (National Capital Region [NCR]). The selection of the units has been made on the basis of convenience sampling, a non-probability sampling technique. A summary of the units sampled from different states is given in Table 1.

Table 1.

Survey Sample

Enterprises	States
Enterprises	Uttarakhand	Haryana	Delhi (NCR)	Total
Micro	11	07	11	29
Small	16	18	16	50
Medium	13	15	13	31
Total	40	40	40	120

Source: Author's own.

For the purposes of collecting data, a well-structured questionnaire was prepared. The questionnaire was prepared in two phases. In the first phase, unstructured in-depth interviews were conducted to create an initial questionnaire. Expert opinions on the questionnaire were collected and improvements made to the original questionnaire. In the second phase, a pilot survey was conducted with five MSMEs to evaluate how well the questionnaire was understood and to test alternative framing of the questions. During this process, some weaknesses in the design were found. The survey helped the researchers in rewording and restructuring parts of the questionnaire. The validation of the questionnaire was done by the feedback from academicians, practitioners and by the issues identified in the relevant literature. Finally, a structured questionnaire was prepared, and the survey was conducted by explaining the purpose of the research to the respondents. Personal interviews with MSME owners/directors/technical directors or managers were conducted to secure correct and collect necessary information. The survey was conducted over a period of 5 months between September 2014 and January 2015. A total of 163 questionnaires⁶

To collect the data from 120 MSME firms, 163 respondents firms were chosen, and questionnaires were distributed to them with anticipation that every survey is bound to leave some questions unanswered/incomplete or inaccurate.

was distributed personally to all the respondent firms, of which 132 valid data samples were gathered. Finally, 120 respondent firms were selected fulfilling the criteria of completeness and accuracy of information.

For analysing the data, and beyond the use of descriptive statistics, a Likert scale was used to measure the intensity of the respondents’ attitudes towards the selected attributes (Boote, 1981; Chang, 1994; Hartley & MacLean, 2006; Miller, 1991). The respondents were asked to rate the variables on the five-point scale,⁷

These scales offer an efficient method for capturing a wide range of variance in self-reported attitudes and behaviours.

which ranged from ‘strongly agree’ to ‘strongly disagree’, and a four-point scale (ranging from ‘highly effective to ineffective’). The weighted average scores were also calculated at the appropriate places where respondents were asked to rank/rate different statements, either according to the degree of their importance or according to the extent they agree with the statements. Given the qualitative nature of a Likert scale, a scoring system was used to quantify the responses.

Discussion of the Survey Results

The results of the survey present a consistent picture of IP awareness, usage, protection, exploitation and valuation of IP in Indian MSMEs. The study reveals that 26.67 per cent respondents have no knowledge of IP and its protection while a paltry 7.5 per cent are fully aware of it. Of the remaining 65.83 per cent of the respondents had negligible or close to no knowledge about IP assets. Moreover, the majority of the respondents (approximately 75%) are either unable to identify their IP assets or are not sure about that. Correspondingly, only 15.83 per cent are aware of the fact that IP assets are entitled to be protected legally. Of the respondents, 32.50 per cent report that for them IP means ‘patent’. This is followed by ‘trademarks’ (15.83%) and ‘copyrights’ (12.50%). Only 1.67 per cent of the respondents consider ‘trade secrets’ as IP assets (Table 2), while 39.17 per cent respondents have opined that the publication of an invention does not hinder the process of obtaining a valid Indian patent (under Indian Patent Law), with 26.67 per cent of respondent reporting otherwise. Table 2 summarises the familiarity that our respondent firms had with IP assets.

Table 2.

Familiarity with Intellectual/IP Assets

Parameter	Option
Copyrights	15 (12.50)
Patents	39 (32.50)
Trademarks	19 (15.83)
Ownership	00 (0.00)
Geographical indication (GI)	04 (3.33)
Ideas/information/knowledge/research	08 (6.67)
Intelligence/intelligent people	04 (3.33)
Goodwill	05 (4.17)
Human resource/people/executives	01 (0.83)
R&D	03 (2.50)
Invention/creation/product development	09 (7.50)
Trade secrets	02 (1.67)
Nothing/not familiar at all/don’t know	11 (9.17)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

Only 10.83 per cent of the respondents consider IP to be crucial to their firm’s success. A large majority, 85.83 per cent of the respondents has reported not having invented or developed products or processes that are significantly new to the markets, with only the remaining 14.14 per cent indicating that they invented relevant products or processes. The survey also shows that 54.17 per cent of the respondents spent less than 5 per cent of their turnover on R&D and 39.17 per cent of the respondents did not spend any amount at all. These figures are tabulated in Table 3.

Table 3.

Amount Spent on R&D (as a percentage of the total turnover)

Range	Option
Nil	47 (39.17)
Less than 5 %	65 (54.17)
Between 5 and 10%	04 (03.33)
Between 10 and 15%	03 (02.50)
Between 15 and 20%	01 00.83)
More than 20%	00 (00.00)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

From the survey, it also appears that medium-sized enterprises are more IP aware than the small and micro enterprise counterparts that do not appear to have any such awareness of IP systems and practices. There is a variation within the industry sector but leaving aside outliers such as hotels and restaurants and the education sector.

IP Usage, Exploitation and Protection

A majority of the respondents (56.66%) are either not using or are unaware of the applications of IP to their business. A majority of the remaining 43.44 per cent respondents use trade secrets (14.16%) and trademarks (9.16%), followed by patent (7.5%), copyrights (6.66%), registered design (4.16) and database rights (02.50%). The firms using patents acquired these patents on their own through the patent application process. A small cohort of 1.67 per cent of the respondents reports that they licensed the patent from outside. An equal number of respondents report that they purchased it directly. Interestingly, none of those patents were acquired through the process of merger and acquisitions, cross-licensing or patent pools (refer Table 4 for a breakdown of patent ownership).

A whopping 95 per cent of the respondents are found to have never sold patents or another form of IP to other enterprises, and only 3.33 per cent of respondents reported having engaged in any such activity. Nearly all the latter group of firms (96.67%) involved in such activity reported an increase in the book value of their enterprise consequent upon the sale of patents or other IPRs.

Table 4.

Source of Patent Ownership

Parameter	Yes	No
Applied for by your enterprise	03 (02.50)	117 (97.50)
Originated with founders or predecessors	01 (00.83)	119 (99.17)
Licensed from others	02 (01.67)	118 (98.33)
Purchased directly by your enterprise (excluding merger and acquisitions)	02 (01.67)	118 (98.33)
Obtained through merger and acquisition	00 (00.00)	120 (100.00)
Obtained by strategic alliance or partnership	01 (00.83)	119 (99.17)
They were crossed licensed	00 (00.00)	120 (100.00)
Owned by your foreign head office	00 (00.00)	120 (100.00)
Accessed through patent pools	00 (00.00)	120 (100.00)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

The respondents were asked to identify the possible reasons behind the protection of their IP. Their responses were gathered on a five-point Likert scale. From the ranking of the mean score presented in Table 5, four important reasons for IP protection are identified: ‘protection against imitation’ followed by ‘protection of brand value’, ‘building competitive advantage’ and ‘enhanced reputation of the firm’, in that order. ‘To attract the investors’ was ranked lowest, followed only by the miscellaneous ‘others’ category.

Table 5.

Reasons for Protection of IP

Parameters	Mean Score	Rank
Attract investors	2.825	11
Protection against imitation	3.883	1
Build competitive advantage	3.533	3
Protection in Overseas Market	3.075	6
Protect brand value	3.575	2
Establish a foothold in the market	3.067	7
Increase market share	3.417	5
Send a signal to market	3.017	9
Enhance reputation	3.467	4
Gain licensing revenue	3.050	8
Performance measures	2.975	10
Others	1.083	12

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

The respondents were further asked to rate the effectiveness of different types of IP protection. Their responses gathered on a four-point scale are presented in Table 6. Respondents report that ‘confidentiality agreements/trade secrets’ are rated as the most effective form of IP in their business. ‘Patent rights’ are ranked at second highest and followed by ‘trademarks’. The ‘innovation patents’ were ranked as the lowest.

Table 6.

Effectiveness of Different IP Rights

Types of IP Rights	Mean Score	Rank
Patents	1.992	2
Licensing agreements	1.067	7
Trademarks	1.658	3
Confidentiality agreements/trade secrets	2.15	1
Copyrights	1.25	5
Business method patents	1.208	6
Innovation patents	1.042	8
Registered designs	1.267	4

Source: Data is collected by the author (primary data).

The respondents also indicated the strategic use of their IP rights, with a majority of them reporting that they consider it as a common feature of business strategy. They also report that the strategic use of IPR also depends on the nature of technology. Very few respondents consider that IPRs are an important part of their business strategy (refer Table 7 for a ranking of the parameters).

Table 7.

Strategic Use of IP Rights

Parameters	Mean Score	Rank
IPR is an important part of business strategy	2.442	6
IPR is used more likely after seeking advice	2.458	5
Depends on the nature of technology	2.90	2
IP management is a common feature of business strategy	2.950	1
You are forced by competitors/market conditions	2.700	3
Access to external knowledge	2.675	4

Source: Data is collected by the author (primary data).

With regard to the exploitation of IP rights, a majority of the survey firms report that ‘brand value/image’ is the most commercially exploited asset (35.83%) of the organisation, followed by ‘business process’ (24.17%). ‘Know-how’ ranked number three among 18.3 per cent of the sample. A total of 17.50 per cent of the respondents expressed their intention to supplement their income by commercialising IP, while 80.83 per cent were not keen on doing the same. A considerable number, constituting 42.8 per cent of the respondent firms, is expecting to generate extra income in the foreseeable future through the commercialisation of their IP rights mainly licensing into third parties and 19.0 per cent through the sale of IP rights.

Management of IP Assets and Rights

On the issue of management of IP, a meagre 10.83 per cent of the respondents indicated that they delegated responsibilities for the management of IP rights, while, significantly, 81.67 per cent of the respondents report not having done so. Only 23.08 per cent of those respondents who delegated duties for managing IP right created a separate IP department while the remaining, large majority of firms do not have any dedicated department for IP management. A significant 85.83 per cent of the respondents do not appear to have an overall IP policy. Only a small number of firms (9.17% of the respondents) have any such IP policy in place within their firms. Of those respondents who do have an IP policy, only 4.17 per cent involved others or explained the policy to their staff members, while the vast majority (93.3%) never explained or disseminated any information regarding the IP policy to their staff. Added to this, only 5.83 per cent of the respondents are known to have provided adequate staff training in matters pertaining to IP management. A large number 89.17 per cent of the respondents abstained from providing any such training facilities. A similar number (87.50% of the survey firms) did not offer incentives to their staff to procure IP rights.

Only 3.33 per cent of the surveyed firms provide for incentivised methods of procuring IP rights. A very high 98.33 per cent of the firms are found neither to be not active in monitoring potential infringe-ments nor they identify the need to do the same. Only 1.67 per cent of the respondents were concerned about IP protection and took adequate measures to achieve the same. Significantly, 91.67 per cent of the respondents reported that their firm had neither ever outsourced their IP protection processes nor they are aware of outsourcing outlets available for IP protection. A tiny minority (5.83%) indicated being beneficiaries of the IP protection and management through outsourcing mechanisms. Among those who did outsource their IP protection processes, a majority did so to law firms (57.1%), followed by trade mark agents (28.5%). A large majority of the respondents accounting for 90.83 per cent have not been involved in any commercial dispute pertaining to IP affairs and only 2.50 per cent of the respondents have had to deal with conflicts of this kind. Nearly all the respondents, 99.17 per cent, are not insured against any contingent costs relating to IP issue, and only 0.83 per cent of the respondents have sought relevant insurance cover. In the group without insurance cover to protect against the uncertainty of future costs arising out of IP disputes, 81.67 per cent of respondents are not even aware of the existence of such protection, while 12.5 per cent assumed that the costs of procuring such insurance are too high.

On the question of IP management practised in the organisations, a total of 35.8 per cent respondents reported that they actively encourage and reward creativity and extended use in order to maximise the income from IP. Fifteen per cent reported that they have developed a systemic process of managing it from identification to infringement. They have also developed a process for identifying key assets that can generate additional income from third parties. A majority of respondents (64.1%) have not yet developed or utilised any process relating to IP management (refer Table 8 for a summary of IP management practices).

Table 8.

IP Management Practices

Parameters	Response
Developing an inventory of all registered IP	3 (2.50)
Develop a registry of all intellectual assets	2 (1.67)
Implementing IP management software	1 (0.83)
Developing performance metrics for IP	4 (3.33)
Evaluating IP tax strategy	0 (0.00)
Developing a process for identifying key assets that can generate additional income from third parties.	7 (5.83)
Developing a process for systematic identification of infringements	18 (15.00)
Establishing comprehensive legal barriers to infringement.	6 (5.00)
Including IP in internal audit procedures	1 (0.83)
Regular reporting of IP status to the management board	0 (0.00)
External reporting of IP	1 (0.83)
None of the above/don’t know (M12)	77 (64.17)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

Challenges in IP Protection and Exploitation

To investigate the possible barrier to IP protection, the respondents were asked to rate the various reasons behind the poor protection of IP at five-point scale. ‘Lack of assistance’ (3.62%), ‘lack of expertise’ (3.53%) and ‘high cost’ (3.46%) are reported as the biggest reasons behind poor IP protection and therefore ranked as 1, 2 and 3, respectively. On the other hand, ‘lack of time’ (2.675) and ‘relevance factor’ (2.658) are regarded as the least important reasons behind the protection of IP in their firms (refer Table 9 for challenges in IP protection).

Table 9.

Challenges in IP Protection

Parameter	Mean Score	Rank
High cost	3.467	3
Lack of awareness	3.442	5
Relevance	2.658	10
Lack of time	2.675	11
Perceived complexity	3.125	8
Difficulty of enforcement	2.967	9
Disclosure risk	3.15	7
Lack of expertise	3.533	2
Lack of assistance	3.625	1
Do not think it is necessary	3.192	6
Do not see the value of it	2.458	4
Other	0.000	12

Source: Data is collected by the author (primary data).

In the context of IP management-related challenges, 27.2 per cent of our surveyed firms reported that ‘protection of IP’ is the biggest issue of concern, followed by ‘exploitation of IP owned by the firms’ (22.2%) and ‘creating an IP strategy’ (18.0%), respectively.

On the issue of IP infringement/violation, 18.3 per cent of respondents have shown fear of the theft of their trade secrets. An equal number of them said that they are concerned about the infringement of their trademarks followed by violation of their patent rights (refer Table 10 for a tabulation of these results).

Table 10.

Fear of Breach/Infringement/Violation of IP Rights

IP Rights	Option
Patents	17 (14.17)
Theft of trade secrets	28 (23.33)
Trade marks	22 (18.33)
Industrial designs	14 (11.66)
Copyrights	19 (15.83)
Others	20 (16.67)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

Survey firms have also shown their strong concern related to exploitation of their IP rights. ‘Identification of transaction partner’ is considered to be as the biggest challenge in the exploitation of their IP rights and has been ranked at number 1. ‘Fear of losing knowledge’ is ranked at number 2 and is followed by ‘barriers of high transaction cost’ (refer Table 11).

Table 11.

Challenges in Exploitation of IP Rights

Parameter	Mean Score	Rank
Identification of transaction partner	3.375	1
Does not fit corporate strategy?	2.658	7
Labour cost	2.737	6
Price building	2.90	4
Fear of losing knowledge	3.292	2
Transaction costs	2.025	3
Others	2.758	5
No barriers	2.458	8

Source: Data is collected by the author (primary data).

Valuation of IP

The valuation aspect is closely linked to protection and exploitation of IP Rights. On the IP valuation front, significantly, 36.67 per cent of respondents indicated that IP valuation was unimportant, while another 15.83 per cent of them have attached adequate importance to it. The percentage of respondents who have given IP valuation its due importance is 19.17 with 14.17 per cent, attaching significant importance to the importance of valuation. A very high 94.17 per cent of respondents never read their IP valued, and only the remaining 5.83 per cent ever tried to assess the worth of their intellectual property.

The study has also probed the reasons behind not making IP valuation by the surveyed firms. Significantly, 21.24 per cent of the respondents have cited that ‘IP valuation is a costly affair’ as a prime reason for not valuing IP while 17.70 per cent of the respondents suggested that IP valuation would breach their secrecy. A 13.27 per cent of the respondents are of the opinion that lack of expertise/no in-house expertise is one of the root causes of abstaining from IP valuation (refer Table 12 for reasons of not making IP valuation).

Table 12.

Reasons for not Making IP Valuation

Parameters	Responses
Not convinced with the benefits of IP valuation	07 (6.19)
Very costly affair	24 (21.24)
Lack of expertise/no in-house expertise	15 (13.27)
Fear of breach of secrecy	20 (17.70)
Complexity in valuation process	06 (5.31)
Inconsistency and reliability in valuation models	11 (9.73)
Don’t think IP valuation is necessary	10 (8.85)
Lack of time	04 (3.54)
Do not know how to do it	14 (12.39)
Other	00 (0.00)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

Those who have put in considerable efforts to value IP in the first place were asked to mention the frequency with which IP valuation is carried out in their organisations. We found that 42.86 per cent of the respondents occasionally indulge in IP valuation while 28.57 per cent rarely carry out any valuation process. In the case of 57.14 per cent of the respondents, the principal performing entity is the ‘in-house staff’, and 28.57 per cent have used a ‘special valuation firm’ to carry out the valuation functions in their respective firms. Fourteen per cent of the respondents have relied on the ‘accounting firm’ and ‘consultant’ as their evaluator of IP (refer Table 13).

Table 13.

IP Valuation Performing Entity

Parameters	Option
In-house staff	04 (57.14)
Accounting firm	01 (14.28)
Special valuation firm	02 (28.57)
Consultant	01 (14.28)
Others	00 (0.00)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

In the context of professional valuation of IP, 92.50 per cent of the respondents have never had their IP professionally valued, and only 2.50 per cent undertook professional valuation on more than just one occasion.

Respondents also cited reasons for the IP valuation. A good 49.56 per cent of the respondents indicated that ‘IP licensing and sale’ was the main reason behind IP valuation, and 15.04 per cent reported that IP valuation may be useful in a situation of conflicts such as court proceedings or alternative dispute resolution mechanisms (such as arbitration). The percentage of respondents who hold the opinion that financing/securitisation/loan justifies the process of IP valuation is 11.50 (refer Table 14 for a summary of the reasons behind IP valuation).

Table 14.

Reasons behind IP Valuation

Reason	Option
Licensing and sale	56 (49.56)
Merger	02 (1.77)
Acquisition	03 (2.65)
Internal management	06 (5.31)
Financing/securitisation/loan	13 (11.50)
Accounting and tax issues	00 (0.00)
Bankruptcy	00 (0.00)
Support in situations of conflict, such as court proceedings or alternative dispute resolution mechanisms (such as arbitration)	17 (15.04)
External reporting	05 (4.42)
Others	11 (9.73)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

On the issues affecting the valuation of a licence or any other IP deal, a high percentage (44.17%) of firms feel that ‘critical use of IP for end product and services’ is the major issue affecting valuation of an IPR, whereas 39.17 per cent of the respondents reported ‘IP commercialisation’ to be a hindrance to the valuation process (refer Table 15).

Table 15.

Issues Concerning Valuation of a License or other IP Deal

Parameters	Option
Valuation is mandatory	06 (05.00)
Sale	04 (03.33)
Merger and acquisition/joint venture	02 (01.67)
IP commercialisation	47 (39.17)
Critical use of IP for end product or service	53 (44.17)
Others	08 (06.67)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

When asked to select the methodologies being used (or preferred for use by their firms) for IP valuation (refer Table 16), the results were mixed. For patent valuation, most of the surveyed firms, 35.83 per cent, employed or would prefer to employ a ‘cost-based approach’. This is followed in second place by the ‘market-based approach’ (26.67%) and the ‘income approach’ (19.17%). For the valuation of trademarks, 42.50 per cent of the surveyed firms employ, or would prefer to employ, a ‘market approach’. Of the other approaches, the ‘income-based’ (22.50%) and the cost approach (19.17%) came in second and third in their ranking. With regard to the valuation of copyrights, the highest 40.83 per cent of firms reported using (or would prefer to use) the income approach, followed by 30.8 per cent for the market approach) and 25.83 per cent for the cost-based approach. As for the valuation of their trade secrets, 40.83 per cent of the surveyed firms employ (or prefer to employ) the income-based approach which is followed in second place by the market approach (30.83%) and in third, by the cost approach (25.83%).

Table 16.

Methodologies Used/Preferred to Use for IP Valuation

	Patents	Trademarks	Copyrights	Trade Secrets
Income approach	23 19.17)	27 (22.50)	49 (40.83)	49 (40.83)
Cost approach	43 35.83)	23 (19.17)	31 (25.83)	31 (25.83)
Market approach	32 (26.67)	51 (42.50)	37 (30.83)	37 (30.83)
Excess operating profits/premium profits method	06 (5.00)	06 (5.00)	02 (1.67)	02 (1.67)
Premium pricing method	03 (2.50)	01 (0.83)	00 (0.00)	00 (0.00)
Cost-saving method	03 (2.50)	01 (0.83)	00 (0.00)	00 (0.00)
Royalty-saving method	01 (0.83)	00 (0.00)	00 (0.00)	00 (0.00)
Enterprise value enhancement method	09 (7.50)	11 (9.17)	01 (0.83)	01 (0.83)
Others	00 (0.00)	00 (0.00)	00 (0.00)	00 (0.00)

Source: Data is collected by the author (primary data).

Note: Figures in parentheses indicate percentages.

Considering the reliability, flexibility and cost aspects of IP valuation methods, a significant 30.83 per cent of the surveyed firms argued that the cost-based IP valuation is the most flexible, reliable and comparatively cheaper method of IP valuation, and it is followed by market approach (26.67%) and income approach (22.50%).

Conclusion

The study reveals that medium enterprises in India are comparatively more IP aware, while small and micro enterprises are essentially unaware of its value or significance. The IP protection mechanism, in the small and medium enterprises sector, has limited take-up primarily due to cost concerns, a fear of secrecy breach through such registration and a lack of assistance and expertise. Only a handful of firms use IP rights with many firms relying primarily on trade secrets. Most firms are unable to express primarily nights commercially due to the problems they face in identifying transaction partners and the fear of any loss of knowledge. They do not have IP policies or organisational structure in place. There are no departments dedicated to IP management, and even when there are arrangements in place, they are managed by inadequately trained members of staff. Due to several impediments, a majority of firms never had their IP valued. IP licensing and sale is the main reason behind the IP valuation for firms that do it, and cost-based IP valuation is the most preferred method of IP valuation.⁸

To make IP valuation relevant and viable, it is suggested to consider relative merits and demerits of various approaches and take into account factors such as type of IP being valued, purpose of valuation, basis of valuation and availability of information in a given situation. An understanding of the underlying assumptions for different valuation methodologies would assist greatly in negotiations for the sale or licensing of their intellectual property. To assign a fair value of IP assets, it is suggested to combine quantitative and qualitative methods. Since the value of an IP asset does not remain constant over time, a periodic revaluation of the IP is suggested. It is also suggested that the method chosen should be applied consistently.

Most MSME firms are found to be unaware of the concept of IP, their infringement and legislation to protect IP. Some of them find it difficult even to identify and describe their IP assets. In order to protect and appraise an IP, the first step is to identify and understand its origin, nature, current and future uses and the potential to generate profits. But this can be a costly process and many Indian firms do not apply for IP protection due to high capital requirements. Moreover, the firms usually lack any understanding of how IP protection generates competitive advantage. Even where firms are able to recognise the importance of IP protection and put in place appropriate measures, they may be at a substantial disadvantage in enforcing them due to structural and communication problems. Many Indian firms still rely on informal methods of IP protection, such as complexity of design and the secrecy of innovation or trade secrets. Firms’ investments in innovation, especially technology, which is closely connected with intellectual property, are very low in India (Vohra & Singh, 2014). The lack of appropriate finance prevents Indian businesses from being able to convert their creative and innovative ideas into business value.

Finally, despite the fact that IP is frequently bought and sold, there is a high degree of scepticism over IP valuations as expressed by Indian firms. Interestingly, most traditional firms rely more on secrecy and prefer not to disclose their know-how. As a result, IP valuation is ignored. The valuation aspect of IP is directly related to the protection and exploitation of IP.

This fragmented IP environment calls for strong policy intervention and support programmes that help to fully exploit the innovative and creative capacity of Indian MSMEs. At the policy front, there is a need to introduce ‘awareness and training programmes’ to help MSMEs make informed decisions about protecting their ideas, using their intellectual property, and the right tools for technology upgradation and enhancing competitiveness, providing access to technical facilities and providing value addition to their business. These are necessary measures alongside making IP registration process more oriented towards maintaining trade secrets, in order to dispel traditional fears over the valuation process. The valuations 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, government agencies should work closely with various accounting firms and associations and other professional bodies to explore ways with which to standardise the valuation methods for obtaining accurate and reliable IP values.

Acknowledgements

The author is very thankful to Dr Sudhanshu Kumar, Dr N. D. Vohra and A. Vijay Kumar for making a number of helpful comments and constructive criticisms in preparation of the final draft. Thanks are also due to the anonymous reviewers whose insightful observations and suggestions helped to improve the quality of this study. This study is part of innovation research project submitted to Innovation Centre, University of Delhi. The author also acknowledges the financial and infrastructural support of the University of Delhi.

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