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No wonder SMEs struggle with innovation

17 March 2016. Posted by Ceri Wells.

Innovation poses big challenges for any business. For most SMEs, it is enough of a struggle trying to survive in a competitive market and generate a profit commensurate with the effort and risk, without the significant drain in time, effort and resources that research and development involves.

Having invested so much to develop something with commercial potential, it seems ridiculous that an SME would then not seek to own that innovation through IP registration, but it happens time and again. Unfortunately, many SMEs exhaust their resources developing and proving an idea, and are then left with limited funds to commercialise their ideas, let alone patent or otherwise protect them.

Registering the IP in an invention protects the R&D investment from competitors and is necessary if an SME wants to multiply the returns on its innovation through licensing or sale of the IP, both here and overseas. 

There is more bad news in the timing of IP registration expenses. The IP in a new product or process must be protected before it is disclosed to the public, which means incurring costs before being able to conduct market testing and gain confidence in the idea’s commercial viability.  However, that’s just a fact of life and it’s difficult for the IP system to operate any other way.  Otherwise, having a system in which ownership of an invention goes to the first person claiming to have had the idea leads to argument, litigation and inevitably unscrupulous manipulation of the history of development in order to secure priority and ownership over a particular invention. 

There is no doubt that SMEs in New Zealand wanting to innovate and commercialise their innovation face a huge uphill battle. There is no culture of venture capitalism in New Zealand, or Government support (by way of grants or realistic tax deductions) to assist with the costs of IP ownership.  This explains why New Zealand can rate so highly internationally in terms of innovativeness, but so low as regards our success in commercialising those innovations. The barriers to IP ownership and commercialisation will remain until we have a Government that truly understands and wants to encourage an innovation-led economy. 

It is often heard that New Zealand SMEs are deterred from even attempting to own and register their IP, out of fear that the IP rights they might obtain would not protect them against a much larger corporation that was determined to exploit their new product, process or service. The risks of this happening vary from country to country, but let’s take just two jurisdictions as examples.  

In the United States, a company that wilfully infringes a patent is subjected to treble damages.  That is, any money the infringing company makes out of the infringement could be trebled and payable as damages.  As a consequence, US corporates are very nervous about knowingly infringing patents, especially in an environment where there are businesses making millions out of funding litigation for others, and there are lawyers who readily take patent infringement cases on a contingency basis.

It is true that IP litigation in the United States is ridiculously expensive.  However, it is expensive even for US companies, and many now carry insurance against patent infringement actions.  Because of the high cost of litigation and the risk of high damages, insurance companies have an overwhelming motivation to settle rather than pay millions to lawyers and risk a large award of damages.  

In China, the IP landscape is rapidly changing.  In the top tier East Coast provinces in which most New Zealand companies trade, specialist IP courts have been set up, and competent legal decisions are often reached faster and cheaper than could be expected if similar legal action was brought in a New Zealand court.  Many Chinese provinces also have local government enforcement agencies that can make resolving infringement issues quick and cheap.

China is currently the third largest filer of patent applications internationally, and is likely to become number two within the next couple of years.  There is therefore considerable incentive for the Chinese Government to ensure that foreign owned IP rights in China are respected and are readily enforceable, because Chinese nationals will be seeking to do exactly the same internationally.  Also, the reputation for China as being a country which copies technology is one the Chinese Government is trying desperately to overturn as it transitions into a higher tech economy. 

The harsh reality is that without IP protection, the prospects of a Kiwi SME finding investment or partners to commercialise one of its ideas in markets where real revenue can be generated, are very slim indeed. 

To any SME that believes that getting in first, flooding the market, selling and getting out is a realistic strategy, there is a simple response.  Name one New Zealand SME that has ever achieved that.  New Zealand companies (and particularly SMEs) are simply too small and under-resourced to be able to flood any international market, let alone do so before bigger and better resourced competition.  And if a product were so good that it could, then that would be precisely the sort of product which should have been patented, so that such market domination and sales could be enjoyed exclusively, for much longer. 

The decision whether or not to patent something is, unhelpfully, best answered with hindsight. No one is going to copy an invention which is not commercially viable or for which the market is difficult to crack.  If it is copied, then clearly it was commercially viable, and it should have been protected.  If you believe in something, and it stacks up after serious market analysis, then it should be protected if a worthwhile monopoly can be obtained.

As for people being scared to pursue IP protection because of possible changes to IP laws under TPP, or because of upheavals in society caused by terrorism or global warming etc, these are merely excuses for inaction.  For so long as the current veneer of civilisation in our world is retained, business will continue to drive our economies and our lives.  Business needs strong IP laws to survive.  As a consequence, any changes to IP laws arising out of international agreements and treaties will only serve to facilitate the ownership and control of knowledge by business and therefore strengthen IP rights, not diminish them.

This article was written by Ceri Wells, Partner, James & Wells. Ceri has been involved in patent drafting, litigation, trade mark ownership, unfair competition and copyright matters for 30 years. Based in our Hamilton office, he specialises in working with start-up companies, venture capitalists and seed funding organisations in an effort to see New Zealand innovation encouraged and effectively commercialised.  For more information and for expert IP advice contact Ceri on Email: ceriw@jaws.co.nz or Phone: +64 7 957 5660 or 0800 INNOV8.