A comparison of the use and value of patents and trade marks in large and small firms* by Mark Rogers +, Christian Helmers ++ and Christine Greenhalgh † + Harris Manchester College, Oxford University ++ Wolfson College, Oxford University † St Peter’s College, Oxford University and all associated with the Oxford Intellectual Property Research Centre Seminar at Melbourne Institute for Applied Economic and Social Research * The research was supported by the UK IP Office and UK Trade and Investment.

Intellectual Property and firm size Well known that IP is widely used by large firms Many studies of these large firms show benefits of both patents and trade marks One hypothesis concerning SMEs is that they may do less innovation, so obtain less IP SMEs may have a lower propensity to protect their innovation, so again leads to less IP Rather few studies have comprehensive data on IP in SMEs Notable exception is Jensen and Webster for Australia – see Economic Record, March 2006

Some reasons for less IP in SMEs (full survey of factors in Jensen and Webster) SMEs do less innovation investment as face higher risk, e.g. bankruptcy, cannot diversify risk as in large firm with many product lines for R&D Liquidity constraints affect ability to undertake R&D investment with long pay-back period SME applies for less IP per innovation, as lacking in information about procedures and cannot afford an IP specialist in management team Cost of IP application high in relation to turnover and potential litigation costs also high, so see less potential return to IP All these factors would lead to lower IP intensity (IP relative to size of firm) in SME

Our objectives in this study Document for the first time for the UK the actual IP use by SMEs and compare this with larger firms and micro firms Explore the determinants of IP intensity (measured relative to assets) focusing on the role of firm size Analyse the comparative performance of IP active and inactive firms to see if IP is good for SMEs Performance to be investigated by analysis of firm survival rates – does IP help or hinder? Also explore firm asset growth in years following acquisition of new IP

Small and medium enterprises (SMEs) –2m Euros < total assets < 43 million Euros –10 < employment < 250 –Euro 10m < turnover < 50m Euros Subsidiaries of large UK firms are not classed as SMEs Problem in that some SMEs have foreign parents of unknown size – we can exclude later Micro firms have assets < 2m or missing, but if owned by an SME reclassified as an SME Large firms have assets >43m Euros MR calls this the Oxford Firm Level IP (OFLIP) data Definitions

UK companies in Fame database (actively trading in 2005) Trading Companies All companies 2,198,825 Large (> £28.7m total assets) 88,832 SMEs (£1.3m < assets < £28.7m) 159,399 Micro (assets <= £1.3m) 1,950,594 The FAME Dec 2006 data also contains 926,503 firms that are now classified as inactive. The FAME database only removes inactive firms after five years from dissolution so the record during is complete.

Matching these firms IP acquisitions Matching of patents and trade marks registered in either (or both) the UK or in Europe Matching conducted by company names recorded in the IP application Also matched IP for firms that existed during 2001 to 2005, but listed as inactive by 2006 Inactive includes live but not trading, in receivership, dissolved, and liquidated firms Total sample approx. 3m firms of which 2.1m live, but bulk of population is micro firms

All SMEs and IP active SMEs Year All trading SMEs IP active SMEs % Foreign owned IP active SMEs , 082 3, % ,243 3, % ,215 3, % ,221 3, % ,399 3, % ,855 10, % 1,604 For comparison, during , 5.4% of large firms and 0.8% of micro firms were IP active in one or more IP types

Benchmarking the matching outcome (IP publications in 2003) Official Data OFLIP Data (%) UKIP – UK patents 5,708 4, UKIP – UK trade marks 18,071 12, OHIM – Comm. marks 6,301 4, EPO – patents 4,361 4, Not expecting 100% as official data is for UK residents: individual, corporate, university, or government agency

Numbers of IP assets by year and type

Numbers of patents by year and class of firm

Numbers of trade marks by year and class of firm

The facts so far UK has a large number of SMEs and even larger number of micro firms A small but significant proportion of both classes were actively seeking patents and trade marks during The absolute number of patents by SME plus micro firms stands comparison in scale with the total for all large firms over the period By 2005 the within-year total for SME + micro patents exceeded that for large firms The absolute number of trade mark applications by SME plus micro firms exceeded that of large firms in each year of the study

IP active SMEs and IP assets per firm (by sector ) Sector UK TMAvCom. TMAvUK PatAvEPO Pat Av Agric. Mining Manufacturing 2, , , , EGW, construction Whole, retail, hotel 2, , Transport, telecom Finance, real estate Computer related R&D services Business Services 1, Health, educ, culture 1, SIC missing in FAME All sectors 9, , , ,

Median IP intensity of firms without foreign parents by size class (IP intensity per £1m assets) Firm size by assets UK trade marks CTM trade marks UK patents EPO patents Large SME Micro

Regressions of IP intensity (trimmed at 95 th %ile) ( include year, region and industry dummies) IP Intensity:UK trade marksCommunity trade marks UK patentsEPO patents Log. assets (72.54)**-5.72 (43.07)** (37.79)**-8.62 (34.55)** Log. assets (58.36)**0.24 (36.73)**0.55 (32.03)**0.38 (29.53)** Age of firm0.14 (14.49)**0.03 (7.40)**0.04 (4.44)**0.05 (6.52)** Age (10.07)** (5.11)** (2.72)** (4.99)** University link-1.13 (0.99)0.22 (0.23)-0.45 (0.36)2.45 (1.73) Foreign parent2.80 (18.74)**0.42 (7.34)**2.20 (14.54)**1.05 (9.80)** Constant82.44 (18.60)**32.46 (43.14)**53.31 (43.68)**47.12 (36.04)** Sample26,87411,1257,5205,879 R

Conclusions so far SME and micro firms are more IP intensive relative to their asset base than are large firms Declining IP intensity with size is confirmed in multivariate regressions controlling for many firm characteristics (including industry and region) Older firms are more IP intensive Firms with foreign parents are more IP intensive Co-location with a university increases EPO intensity (not strongly significant) Regional dummies are insignificant once industry dummies are included No trends exist in IP intensity over 5 years

What outcomes for SMEs in 2001 by 2004? Are they related to IP activity?

Survival outcomes depend on many factors Firm-level –IP use, experience, strategy, human capital, etc Industry level –stage of product cycle, competition, growth rates, innovation, spillovers, etc Regional and macro level Initially use probit analysis: exit2004=1, 0 Explanatory variables all from 2001 –IP dummies (0,1) e.g. ‘did SME TM in 2001?’ –Industry IP intensities

Using IP to create industry variables

Probit: Exit = 1, Survive = 0 All SMEsAge < 5Age Age >=11 Dummy for UK trade marks (2001) (3.80)**(0.00)(2.35)*(3.67)** Dummy for Comm. trade marks (2001) (0.43)(1.70)(0.79)(1.87) Dummy for UK patents (2001) (1.39)(0.46)(0.39)(1.16) Dummy for EPO patents (2001) (1.13)(0.55)(0.89)(1.15) UK pat per mill. asset SIC3 Large firms (0.57)(0.14)(1.91)(0.44) UKTM per mill. asset SIC3 Large firms (6.21)**(2.42)*(4.13)**(3.61)** UK pat per mill. asset SIC3 SME firms (1.41)(0.01)(0.80)(1.36) UKTM per mill. asset SIC3 SME firms (1.94)(0.87)(1.75)(0.73) Observations lnL / lnL 0 (Psuedo R 2 )

Own IP activity in 2001 has some impact –UK trade mark(s) reduces prob(exit) by –Community mark(s) have impact for older firms Industry variables –More trade marking by large firms tends to reduce SME exit (1 sd  = ↓0.004 prob) –More trade marking by SMEs increases exit (1 sd  =  prob) –SME industry patenting may imply spillovers (but none from large firms) – but crude method used here (no proximity weighting) IP and survival - interpretation

Asset growth* of 2001 SMEs * Total assets available for 82% of initial sample. All cross-tabs statistically significantly different from non-IP active firms

Turnover* growth of 2001 SMEs Turnover available for 28% of SMEs. Cor(growA, growT)=0.44 [0.52 in Manu] UK patent distribution not statistically different from non-IP SMEs, other IP types are different

Modelling firm growth More intuitive and revealing to re-write Asset growth: mean=55%, median=1%,max=193,000% Turnover growth: mean=75%, median=3.7% IP active firms have similar distributions …. an example of results

Growth summary OLS regressions sensitive to sample Robust regression and median least squares as checks Main results SME UK trade marking associated with increased growth (3 to 6% p.a.) No. with UKTM =1670 SMEs in 2001 (1.58% of sample) Some evidence of positive association with Community trade marks Patents mostly have little association with growth, sometimes negative –Of course, only looking at growth in next three years (and patents published), so maybe growth long term –But, not encouraging for SME patent use (UK or EPO)

Conclusions about innovation and IP in SMEs Our evidence firmly refutes view that SMEs innovate less than larger firms (pro rata) (unless prepared to argue that large firms are innovating more, but have lower patent and trademark propensity!) Findings on IP intensity support the view that SMEs do perceive value of IP protection Traditional view that SMEs are so disadvantaged that they cannot use IP is firmly rejected Cannot yet positively establish level playing field in costs and returns compared with larger firms

Conclusions about IP and performance Exit probability of SMEs within three years of IP activity is reduced in case of UK trade marks Exit of older firms is reduced by Community trade marks Growth of assets and turnover in all SME firms are enhanced by UK trade marks Other types of IP use are not significant for exit or growth over this short period Seems likely that the returns to patents take longer given that we observe similarly high intensity of patents and trade marks in SMEs