SMEs and Intellectual Property: how to escape the middle-income trap

Talks about avoiding or escaping the middle-income trap are widespread around the world, not least in South-East Asia, where only two out of ten countries – Brunei and Singapore – are currently in the high-income bracket ([1]). It has become increasingly obvious that innovation is the key to escaping this trap. While technology transfer and direct foreign investment have brought much wealth to many economies in previous decades, this development pathway has its limits. Many countries are now stuck in the middle-income trap, facing with an uphill struggle to achieve economic growth while sandwiched between those countries with advanced technology and those offering cheap labour.

Strengthening research and development capabilities and promoting entrepreneurship have been identified as vital to a country’s economic success. Many researchers and economists have looked to South Korea, a close neighbour to the South-East Asian region, whose transition into being a high-income country took some 15 years between the 1990s and the early 2000s ([2]). During this transition, South Korea’s R&D expenditure as a percentage of gross domestic product was around 2.4 %. Meanwhile, the country’s small and medium-sized enterprises were active in R&D activities, spending as much as 10 % of their total sales on R&D in the early 1990s ([3]).

Globally, SMEs are the backbone of any economy as they represent about 90 % of all businesses and more than 50 % of all employment ([4]). These figures are even higher in the European Union (99.8 % of businesses and 64.4 % of employment ([5])) and South-East Asia (98 % and 66.4 % respectively ([6])). For those countries trying to climb the income classification ladder, focusing on innovation and SMEs is the place to start.

But to do so comes with a series of challenges, both for governments and the SMEs themselves. Research has shown that only a small number of SMEs are protecting their innovation and intellectual property. In the EU, less than 9 % of SMEs have a registered patent, trade mark or design ([7]). While counterfeiting is prevalent, targeting all types of innovative goods produced by SMEs, most firms, particularly independent ones that have no support from a parent company, often lack the resources to monitor IP infringements and enforce their rights.

Moreover, 15 % of the EU SMEs that do own IP have experienced an infringement. This rate becomes almost 20 % for innovative firms. Yet this number is still probably undervalued as 40 % of SMEs do not monitor their markets. More worrying is the finding that an SME whose IP has been infringed is 34 % less likely to survive than an SME that has not experienced an infringement ([8]).

This negative impact is a strong argument for why governments, firms and individuals need to pay more attention to intellectual property. Innovation can only thrive and propel economic growth and prosperity in an environment where IP is strongly protected and enforced.

To achieve this goal, more needs to be done on the IP front. Governments need to improve laws to enhance IP protection and enforcement, reduce barriers to IP registration and raise SMEs’ awareness of the importance of IP protection. There is also an urgent need for authorities to collaborate more with their stakeholders to exchange the latest information and increase enforcement efforts. In addition, the integration of national and international IP tools will ease the search and registration process. Thailand and Vietnam recently integrated their design data into the EUIPO’s DesignView search tool ([9]) ([10]), making industrial design searches easier for businesses wanting to enter new markets.

Regarding SMEs, learning more about IP rights is a wise and necessary business strategy. In addition to understanding how IP works for business, companies should know how to monitor markets for potential risks and seek assistance from enforcement authorities. Cooperation among the relevant participants is needed for effective and efficient IP protection and enforcement. This includes the engagement of intermediaries such as social media and e-commerce platforms, internet service providers and delivery firms, who are all playing an increasingly important role in combatting infringements.

In the EU, 93 % of SMEs that have registered IP rights saw a positive impact as a result of that registration. Most commonly, they reported that registration improved the reputation or image of their company (mentioned by 60 %), that it provided them with better IP protection (58 %) and that it provided better long-term business prospects (48 %) ([11]). Furthermore, SMEs that own IP rights have approximately 68 % higher revenue per employee than those that do not ([12]).

More broadly speaking, industries that have an above-average ownership of IP rights per employee contribute significantly to the economy. During the 2017-2019 period, these ‘IPR-intensive industries’ generated more than 47 % of the total economic activity (GDP) in the EU, worth EUR 6.4 trillion. They also paid significantly higher wages than the other industries, with a wage premium of 41 % above other industries ([13]).

So, understanding that innovation should be developed and intellectual property protected so that companies and countries can stay ahead in the global market would seem to be a no-brainer.