Small businesses contribute disproportionately to job creation and aggregate productivity growth – by one estimate up to 60% of growth – through their innovative activity.1 A dynamic business environment featuring the influx of small businesses has the potential to limit the economic impact of crises such as COVID-19 and alleviate their employment effects.2 Strengthening business dynamism and an inclusive recovery relies on broad access by business to the tools for entrepreneurship and for creating high-growth businesses.

Firm-level studies using US data have shown that patents can cause substantial increases in employment, wages and labour productivity. A recent study estimates a 22% increase in firm size following the grant of a patent.3 Studies of entrepreneurship show that for start-ups, obtaining patents and trade marks can increase investors’ estimates of a company’s value, especially during early investment rounds.4 Such investment allows start-ups to invest in advance of profits and access resources critical for growth.

IP Australia has conducted research to understand the role of registered IP rights (patents, trade marks and designs) in the growth of Australian small and medium enterprise (SMEs). The study used business microdata provided in the Business Longitudinal Analysis Data Environment. Administered by the Australian Bureau of Statistics, this data covers the full population of Australian businesses active since 2002. The present study focused on around 600,000 SMEs active over the period 2002 to 2017. High-growth SMEs were identified as those that achieve at least 20% annual growth in employment over 3 consecutive years. The results reveal that Australian SMEs that file for registered IP rights are more likely to achieve high growth and employ more people than their peers with no recent filings.

After filing for IP rights, Australian SMEs are more likely to achieve high growth than their peers

A simple comparison of Australian SMEs that own or do not own IP rights, based on their median number of full time equivalent (FTE) employees, implies that IP-owners are 3.5 times as large as non-owners (7 employees compared to 2). Rights owners also pay a higher median annual wage ($53,755 per employee compared to $43,304 for non-owners).

Regression model estimates suggest that SMEs filing for at least one IP right in a year are 16% more likely to achieve high employment growth than non filers. Focusing just on start-ups, those that file for at least one IP right in their first year are twice as likely to achieve high growth than their peers with no rights in their first year.

Figure 7.1 shows the estimated effects of SMEs obtaining bundles of different rights. SMEs that filed for patents, trade marks and design rights have the highest estimated growth probability – nearly twice as likely to achieve high employment growth than peers with no recent filings. When added to a portfolio, trade marks and designs can act in complement to patents in helping businesses capture returns from innovation through compelling branding.

Source: PATSTAT Autumn 2021 edition.

After filing IP rights, SMEs employ more people

Based on economic modelling, we simulated the effect on employment of an SME adding a given right to its initial stock of that right, all else being equal. (Note that the greater a business’s stock of a given right, the smaller the marginal benefit from obtaining an additional right.) Table 7.1 presents the estimated marginal effects on employment of an SME moving from having one to 2 of a given right for firms of different sizes.

  • For a business with 50 employees, adding a trade mark is associated with an increase in its number of employees by 6 in the 12 months after. The increase is 12 extra persons for a business with 100 initial employees.
  • For a business with 50 employees, adding a design right is associated with an increase in its number of employee by 2 in the 12 months after. The increase is 4 extra persons for a business with 100 initial employees.
  • For a business with 50 employees, adding a patent is associated with an increase in its number of employee by one in the 12 months after. The increase is 3 extra persons for a business with 100 initial employees.

Table 7.1: Simulation of the employment effect of an additional right, for given values of employment and stocks of patents in force, trade marks in force and registered design rights

Firm size (FTE employees) Marginal effect of a patent (FTE employees) Marginal effect of a trade mark (FTE employees) Marginal effect of a design right (FTE employees)
2 0.1 0.3 0.1
20 0.7 2.5 0.9
50 1.7 6.3 2.3
100 3.3 12.7 4.6
150 5.0 19.0 6.9

The above estimates suggest that IP activity is a significant forward indicator of employment growth for Australian SMEs. The results are consistent with previous ‘event studies’ showing that significant increases in size, skill and capital intensity within a firm coincide with the grant of a patent,5 though a business may take up to 3 years to scale to its new level.6

Using BLADE data on Australian firms, Figure 7.2 plots average employment before and after a firm’s first trademark filing, for “treated” companies that file the mark and a group of “control” companies that do not use trademarks but are matched to the treated companies for age, size and industry. Based on this descriptive data, employment growth is flat in the years before trademark filing both for the filers and non-filers. After filing there is continuous growth in employment for the trademark filers but much less growth for the control group.

Figure 7.2. Trademark filers grow larger than their peers after filing their first trade mark

Enhancing access to the tools for innovation

While the share of Australian SMEs with an active right is low it has doubled over recent decades, from 2% in 2002 to 4% in 2017. As reported in Chapter 2, the SME share of patent applicants with Australian operations (excluding individuals) reached a decadal high in 2021, following 27% growth in SME filings that year. Even as use of patents has grown, the key driver of growth in the use of IP by SMEs has been an upsurge in the use of trade marks.

IP rights including trade marks provide a vital set of tools for innovation, entrepreneurship and for creating high-growth businesses. Based on the available evidence, IP Australia is working to embed consideration of IP early in a company’s life, to ensure that small businesses have the information they need to make informed decisions about IP protection.

IP Australia offers a range of services and practical guidance to help SMEs apply for IP rights. Our SME Case Management service connects potential applicants with a dedicated subject matter expert to help guide them through the application and examination process. SMEs are also eligible to fast track their patent applications to progress through examination faster. Fact sheets, case studies, online education, tools and checklists are available at www.ipaustralia.gov.au.

The full report of this chapter’s study, ‘Intellectual Property Rights and Enterprise Growth: The role of IP rights in the growth of SMEs’, was published in December 2021 as part of IP Australia’s Economic Research Paper Series.


Disclaimer: The results of these studies are based, in part, on ABR data supplied by the Registrar to the ABS under A New Tax System (Australian Business Number) Act 1999 and tax data supplied by the Australian Taxation Office (ATO) to the ABS under the Taxation Administration Act 1953. These require that such data is only used for the purpose of carrying out functions of the ABS. No individual information collected under the Census and Statistics Act 1905 is provided back to the Registrar or ATO for administrative or regulatory purposes. Any discussion of data limitations or weaknesses is in the context of using the data for statistical purposes and is not related to the ability of the data to support the ABR or ATO’s core operational requirements. Legislative requirements to ensure the privacy and secrecy of this data have been followed. Only people authorised under the ABS Act 1975 have been allowed to view data about any firm in conducting these analyses. In accordance with the Census and Statistics Act 1905, results have been confidentialised to ensure that they are not likely to enable the identification of a particular person or organisation.

Endnotes

  1. Klenow, PJ and H Li (2020), Innovative growth accounting. NBER Working Paper Series 27015.

  2. Business dynamism during the COVID-19 pandemic: Which policies for an inclusive recovery? OECD Policy Responses to Coronavirus (COVID-19), OECD.

  3. Kline P, Petkova N, Williams H and Zidar O. 2019. Who profits from patents? ‘Rent-sharing at innovative firms.’ The Quarterly Journal of Economics, Vol 134, No 3, pp 1343–1404.

  4. Hsu D and Ziedonis R (2013) ‘Resources as dual sources of advantage: Implications for valuing entrepreneurial-firm patents.’ Strategic Management Journal, 34:7, 761–781. Block JH, de Vries, G, Schumann JH and Sandner P (2014), ‘Trademarks and venture capital valuation.’ Journal of Business Venturing 29:4, 525–542.

  5. Balasubramanian N and Sivadasan J (2008), ‘What happens when firms patent? New evidence from US economic census data.’ Review of Economics and Statistics, 93:1, 126–146.

  6. Kline P, Petkova N, Williams H and Zidar O. 2019. Who profits from patents? ‘Rent-sharing at innovative firms.’ The Quarterly Journal of Economics, Vol 134, No 3, pp 1343–1404.


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