SMEs and the role of Intellectual Property in their growth
Small and medium enterprises (SMEs) are the engines of the world economy. Over 90% of businesses worldwide are SMEs and 70% of people that are employed in the private sector, work at an SME. SMEs are key drivers to job creation, innovation and growth. According to the World Bank, “relative to large firms, SMEs enhance competition, entrepreneurship, job growth and spur economy-wide efficiency, innovation and economic growth.”1
President Cyril Ramaphosa has stated on many occasions that the growth of the South African economy will be sustained by SMEs, as is the case in many countries around the world.2 However, data is very sparce about South African SMEs, there is not sufficient information regarding the types of SMEs that exist, the fields in which they dominate, number of people employed and contribution to GDP amongst others.2 This means that there is a significant probability that most policies and support initiatives may be created based on a lot of estimates and assumptions rather than true facts about SMEs.2
The Department of Trade and Industry estimated that there are around 2.2 million SMEs in South Africa.2 However, a study conducted on South African SMEs found that there are only 250 000 formal employing SMEs. These firms account for 28% of employment as opposed to the international figure of 70% employment.2 South African SMEs have not reached their full potential and capacity of job creation which is tragic as South Africa has an unemployment rate of over 30%. A lot more has to be done to understand these SMEs and how to structure support initiatives such that they provide customized support for them. One of the key factors that contribute to the growth of SMEs is intellectual property.
A report by the European Union IP Office found that SMEs that have filed for protection for at least one intellectual property right (IPR) are 21% more likely to experience a subsequent growth period and 10% more likely to become a high growth firm (HGF).3 The likelihood increases by 9% for an SME that has filed at least one patent and increases by 13% for SMEs that have a trademark.3 SMEs that have multiple IPRs (patents, trademarks, designs etc.) are 33% more likely to achieve high growth than SMEs with just one category of IPR.3
Diagram obtained from https://euipo.europa.eu/tunnel-web/secure/webdav/guest/document_library/observatory/documents/reports/2019_High-growth_firms_and_intellectual_property_rights/2019_High-growth_firms_and_intellectual_property_rights.pdf
Thus, the question of whether or not IP systems are relevant to SMEs is a resounding yes, SMEs that want to be HGF require IP systems to thrive. South Africa is one of the 193 member states of the World Intellectual Property Organization (WIPO), which administer 26 international treaties pertaining to the protection of IPR. Innovators are able to obtain protection for their copyright works, trade marks, patents, plant breeders’ rights and designs.4 Despite the strong IP systems, most SMEs lack awareness thereof and clarity of its relevance to businesses. The biggest limiting factor, however, is how it appears expensive and time consuming to obtain IPR, from the SMEs perspective. This results in SMEs not fully exploiting their innovations and creations.
A significant number of SMEs have lost opportunities of growth and income generation due to lack of protecting their brands, inventions and designs. This is because instead of identifying the value of the IP and what strategy they are going to adopt for growth from the beginning, they only realise the value of their IP when its already too late. The avenue available to defend their IPR is through lengthy court processes where ownership has to be painstakingly made clear. In addition to the research conducted by EUIPO, there other compelling reasons for SMEs to protect their IP and in a paper by Muredzi and Mkhali (2015)5, these were summarised as follows:
- Strong market position and competitive advantage (IPR grants exclusive rights to prevent third parties from infringing one’s rights thus an opportunity to establish a dominant position in the market); IP gives enterprises the exclusive right to prevent others from commercially using a product or service, thereby reducing competition for their innovative product and enabling the enterprise to establish its position in the market as a pre-eminent player.
- Higher profit or returns on investment (IPR may increase the ability to recover money spent on R&D); has invested a significant amount of money and time in R&D, using the tools of the IP system is important to recover the SME’s R&D investments and obtain
higher returns on its investments.
- Additional income from licensing or selling (assigning) IPR; (assigning) IP. IP owner may choose to license or sell the rights to other enterprises in exchange for lump sum payments or royalties, in order to generate additional income for the enterprise.
- Creating bargaining power; of interest to others may be useful when SME’s are seeking authorization to use the IP assets of others. In
such cases, enterprises often negotiate cross-licensing agreements, which are agreements by which each side authorizes the other enterprise to use its IP assets in the manner specified in the licensing contract.
- Enhanced ability to acquire funding at reasonable interest rates;
- Provides credibility to investors and enhance ability to attract investors; rates of interest .In some circumstances, SME’s seeking to commercialize a new technology may be able to more easily raise capital, based on their IP assets, for example, by including information about their IP assets in their business plans while approaching investors, financial institutions, government agencies, etc.
- Credibly threaten or take action against imitators; and
- Positive image for SMEs.
South Africa has several programmes aimed at supporting SMEs with taking their ideas to market as depicted in the flow diagram above. There are some privately run incubators and a lot that were established by government. We will mention a few starting with the work done by the Technology Innovation Agency. The TIA is a national public entity that plays a key role in bridging the innovation gap between R&D from Universities, science councils and private sector, and the commercialisation of this R&D. TIA focuses on technology development and assists innovators and SMEs from proof of concept to pre commercialisation. To this end, TIA established the Seed Fund, Technology Development Fund and the Commercialisation Support Fund.
The Innovation Hub (TIH) is a wholly owned subsidiary of the Gauteng Growth and Development Agency and was established to promote economic development and competitiveness within Gauteng by nurturing innovation and entrepreneurship. The TIH offers innovators support from the ideation stage to product development. They have incubators in several sectors such as agroprocessing, ICT and the green economy to name a few. There are countless other support programmes, please contact us if you require further information.
Although more still has to be done, we have foundations to help SMEs with protecting their IPR and taking their ideas to market. It is apparent that the biggest stumbling block for SMEs is a lack of knowledge and awareness about IP and its value that it brings to a company. One of the greatest tasks ahead is thus to continue to create awareness about IP in as many SMEs as possible. SMEs have the potential to enable South Africa to reduce its very high unemployment rate. As a result, a lot has to be done to improve the chances of survival and growth of these SMEs.
Written by: Tumelo Mashabela, Managing Director and Registered Patent Attorney
For all your IP, commercial and corporate law services, please contact us on 012 942 8710 / firstname.lastname@example.org. You can also find us on social media platforms with the handle @TshayaMashabelaAttorneys (@TshayaMashabela on Twitter).