Michael Falk:

So my name's Michael Falk. I'm the director of the office of the chief economist here at IP Australia. I wish to acknowledge the traditional custodians of the land we're meeting on today, being Ngunnawal land, I wish to acknowledge and respect their continuing culture and the contribution they make to the life of this city and region. I'd also like to acknowledge and welcome other Aboriginal and Torres Strait Islander people who may be attending today's event.

Michael Falk:

So there's a developing body of evidence that intellectual property rights are a significant driver of growth in employment wages and labour productivity. For the Australian economy to realise these benefits, a crucial factor is the participation of small and medium enterprise in the IP system. As you'll hear today, SMEs comprise the majority of the economic activity in Australia and their potential to achieve high growth is a vital engine of economic dynamism and prosperity.

Michael Falk:

Early this year, the office of the chief economist began research looking at the use of intellectual property rights by Australian SMEs using data on the full population of Australian SMEs over a 15 year period. As you'll hear engagement in the IP system is low though growing, but IP activity is associated with substantial positive outcomes for SMEs. IP owners tend to employ more people and have a high likelihood of achieving sustained growth.

Michael Falk:

The report's author Haiyang Zhang will present the reports findings today, then we'll open the floor to your questions and discussion. Haiyang is an economist with over 20 years experience in intellectual property policy. He completed his masters and PhD in development economics at the Graduate Institute for Policy Studies in Japan. He worked as a research associate at the Australia National University before joining IP Australia in 2016. So I'd like to thank you all for joining us today, both here in the room and online.

Michael Falk:

If you have questions that you'd like to address in the discussion, you can share these through Slido. Go to sli.do, and use the hashtag IP growth. So with that, I'll pass over to Haiyang who'll take you through this new report.

Haiyang Zhang:

Good morning. Thank you Michael, for introduction. Good morning, everyone. Thank you for attending my presentation on intellectual property rights and enterprise growth focusing on the role of IP rights in the growth of SMEs.

Haiyang Zhang:

Research studies indicate that a key force that propels the economy forward is the exponential growth achieved by some small and medium firms. The question is how to unlock value in these firms and ensure they are supported to realise their growth potential. This is crucial for Australia to achieve a broad-based economic recovery from the COVID pandemic. Just to give you some numbers to highlight the importance of the SMEs in the Australian economy. SMEs account for 99% of all businesses, employ 70% of all workers and generate 57% of GDP.

Haiyang Zhang:

Economic research has found that high growth SMEs contribute disproportionately to job creation and economic growth. However, SMEs often face great challenges in pursuing growth, such as lack of investment to expand their business and face the competition from large and numerous competitors. Meanwhile, investors find it hard to identify which SMEs may have high growth potential to make a wise investment. Previous research has shown that for SMEs obtaining IP rights increases investors estimates of their value and their likelihood of obtaining venture capital and critical resources.

Haiyang Zhang:

This study uses data in the business longitudinal analysis data environment which is BLADE, a collection of business level datasets managed by the Australian Bureau of Statistics, ABS. We look at all active SMEs from 2002 to 17 around 600,000 active SMEs who were operating during this period and reported that tax and business information to the Australian government.

Haiyang Zhang:

We further classified high growth firms as those SMEs that achieve 20% annual average growth in employment or turnover over three consecutive years. We explore the relationship and affecting factors between IP and SME growth. The findings suggest that IP data is a good indicator to identify SMEs with high growth potential, which can be used to provide targeted support from the policy perspective.

Haiyang Zhang:

Next let's look at some descriptive statistics of SME IP owners and their comparison with non owners. The recent published patent accessibility research reveals the ratio of SMEs owning patent rights in Australia is only about 0.2%. So the overall proportion of SMEs using IP rights by Australian SMEs is still relatively low compared with some other developed countries. So we used the same methodology to compare the manufacturing SMEs between Australian and some European countries. And the ratio of Australian SMEs filing for IP rights is roughly 1.2% versus 4.6% in the European countries.

Haiyang Zhang:

So from the figure, you can see that over the study period the share of SMEs with at least one active IP right has doubled. Actually not only the share doubled from 2 to 4%, absolute number also doubled during this period. The increase of the number and the share of SMEs IP owners is mainly due to the increased trade mark use in deregulated and diversified goods and services over the last decade as approximately 90% of SMEs IP owners own trade marks only.

Haiyang Zhang:

We compared IP owners and non owners in relation to their median number of full-time employees and any salary. So the median number of full-time employees of SMEs with IP rights is seven, which is 3.5 times as large as their peers without IP rights in terms of their median full-time employees. SME IP owners also pay a higher median wage than no owners. And SMEs with all the three types of IP rights are even larger and more remunerated than those non owners or owning only one single type of IP rights.

Haiyang Zhang:

Next let's shift to the key part of this research, the relationship between SMEs IP filing activity and their subsequent growth by adopting econometric analysis to control for both external factors and firm level influences. A particular aim of this analysis is to understand the types and combinations of IP rights that can serve as signals of high growth potential for Australian SMEs and stimulate the impact of IP activity on employment growth outcomes.

Haiyang Zhang:

Yeah, for noneconometrics, econometric or regression analysis can be complicated. I will not go into details of the modelling, but I'm happy to ask any questions if anyone is interested, or you may refer to the report for detailed explanation.

Haiyang Zhang:

We looked at the relationship between filing IP activity and the growth controlling for firm's characteristics that include initial level of firm size, initial level of turnover or employment, firm age, industry, and market factors.

Haiyang Zhang:

We also control firm level factors that do not vary much over time, like firm structure, such as whether firm is corporate, or partnership, or family owned businesses. To make the results more straightforward, I use figures to illustrate the results. Here, the red markers represent the effect sizes of all ratio of SMEs filing for IP rights compared to non-filers of IP rights.

Haiyang Zhang:

So the green bars represent 95 per confidence level intervals, and the stars on the top right shows the statistical significance level. So the figure illustrates that SMEs filing for at least one IP right in a given year are 8% more likely to experience positive employment growth on the top row and 60% more likely to experience high employment growth at the bottom row relative to their counterparts that do not file for IP right in the same year.

Haiyang Zhang:

As I mentioned at the beginning that we are also particularly interested in new startups as they are a key force that propels the economy forward that achieved the exponential growth. Nevertheless, when pursuing growth startups often face significant challenges. We reestimated our baseline models focusing solely on newly established SMEs and assessing their growth over the three years following their establishment.

Haiyang Zhang:

From the figure you can see that the newly established SMEs that file for at least one IP right in their first year are 46% more likely to experience positive growth, and approximately one time more likely to experience high growth than those that do not file for any IP rights. This finding re-enforces the value of IP data for signalling SMEs with high growth potential so as to provide targeted investment and support.

Haiyang Zhang:

Now we turn to look at the probability of an SME achieving high growth, more than 20% annual increase in employment over three consecutive years. And we compared those IP owners in seven different IP right types. What you can see in the bottom row is that after a firm files for all the three types of IP rights, that's trade marks, patents, and designs is almost one time more likely to achieve high growth than its peers that do not file for any IP rights.

Haiyang Zhang:

This may indicate that the technological in inventions as proxied by patent application are more likely to be financially rewarding when they are also commercialised as proxied by trade marks and combined with the innovation in effective, designing, and marketing as proxied by designs.

Haiyang Zhang:

We also found that for SMEs, adding trade marks to their portfolio is a particularly potent signal of their near term growth potential. So firms that file for trade marks and designs are 40% more likely to achieve high growth than their peers who do not file for any IP right. And those that file for trade marks only are 18% more likely to achieve high growth.

Haiyang Zhang:

The effect sizes for other IP rights or bundles are not statistically significant, which means they are not different from zero. This may indicate that patents and designs may take longer time to be commercialised and translated into firm growth. We undertook the same analysis, looking at growth in turnover, and the results were qualitatively similar.

Haiyang Zhang:

To provide an understanding of the potential economic significance of the results reporting so far, we estimated the marginal effect of an SME filing for an additional patent, trade mark, and design right on its employment. Haiyang Zhang: Here we present the results of a simulation where for each right we have estimated the effect on employment of a firm adding an additional IP right to a stock of that right. These are the baseline figures for a firm that moves from having one to two rights. First are focusing on the effect of adding a patent. Based on this estimate, the added increase in full-time employment is 0.1 for a firm with two employees riding to three to a firm with 100 employees.

Haiyang Zhang:

Next let's look at the effect of adding a design. Based on this estimate, the added increase in full-time employment is 0.1 for a firm with two employees riding to five for a firm with 100 employees.

Haiyang Zhang:

Finally, looking at the effect of adding a trade mark. Based on this estimate, the added increase in full-time employment is 0.3 for a firm with the two employees riding to 13 for a firm with 100 employees.

Haiyang Zhang:

I would emphasise that the median number of employees for SMEs in our sample is two. These are the effects for firm moving from one right to two rights. But as a firm's stock of given rights increases, the marginal effect of adding additional rights decreases. To explain the relatively lower estimate for patents, it appears the estimates are larger for those rights that are closer to commercialisation side of the innovation process. These are the near term estimates. It may be that employment growth related to patents occurs over the long run. This will be a focus of ongoing research.

Haiyang Zhang:

To summarise, this report shows that for Australian SMEs IP rights provide an important set of tools for gaining competitive advantage in the market. They are instrumental for attracting finance licensing and selling intellectual assets and earning a return on intangible investment.

Haiyang Zhang:

More specifically, with an increasing IP activity by Australian SMEs. Those who file for IP rights are more likely to achieve high growth than their peers who do not file for any IP rights. And filing for all the three types of IP rights is the strongest indicator of future high growth potential. This major finding highlights the existing complimentarity between different categories of IP rights and the relevance of SMEs of combining patents, trade marks, and designs to more effectively support the high growth of their business with trade marks playing a particularly significant role in characterising SMEs near term growth potential.

Haiyang Zhang:

These results are of particular relevance to policy makers, potential investors, and business partners who wish to identify firms at an early stage in their development, but which have high growth potential as IP data is openly available and provides a rich source of information to identify such firms. Although the potential of SMEs using IPRs has doubled... Sorry. Although the proportion of SMEs using IPRs has doubled in recent decade, the overall proportion of SMEs owning IP rights is still low in Australia.

Haiyang Zhang:

Our research evidence indicates that SMEs filing for IPRs are more likely to grow. This has a strong policy implication on how the Australian government should improve its IP system to increase SME participation in the IP activity. IP Australia offers a range of services and practical guidance to help SMEs apply for IP rights.

Haiyang Zhang:

Our SME case management service will connect you with a dedicated subject matter expert to help guide you through the application and examination process. SMEs are also eligible to fast track their patent applications, so they progress through examination faster. Fact sheets, case studies, online education tools and checklists, all are available at ipaustralia.gov.au.

Haiyang Zhang:

One of key patent accessibility review findings identifies a major barrier for SMEs use of patents is the high cost of enforcement and the review recommended improved access to court enforcement or alternative dispute resolution.

Haiyang Zhang:

The government is considering the review of recommendations. No position has been announced yet, but preliminary work has commenced to look at those recommendations. Following on this research, IP Australia is investigating the drivers of SME participation in the IP system, the effect of IP activity on employee mobility, and the extent that SMEs license and sell their IP to benefit from good ideas.

Haiyang Zhang:

All right. So this is the end of my presentation, and here are some contact messages. You can reach me in the future if you have more questions. And thank you for your kind attention and I welcome to answer your questions. Thank you.

Michael Falk:

Okay. So thank you, Haiyang. As you can see, IP Australia has a very active research program and we're just starting to explore a range of different issues. Looking at the drivers of participation in the IP system and the effects on the Australian economy.

Michael Falk:

We have some time now to answer any questions or have an open discussion about the findings in this report. So you can suggest a question through Slido by going to sli.do and using the hashtag IP growth. And we've just got some questions coming through now.

Michael Falk:

The first one is, did you assess the categories of SME and business area? So did you look at different types of SMEs working in different business areas? For example, are trade marks more important in retail?

Haiyang Zhang:

Yes. We controlled those different categories of businesses using NC code. So they were controlled in the model. But we didn't look at the... For each specific industries. Well, that's what next we'll do. That we will look at that to compare the effects of filing of IP rights on different industries and to see their differences. But we did control them in a model and their coefficient estimation are not reported in a report, but they were included in a model.

Michael Falk:

So the second question is, it's a comment really. And it's the findings basically say that only innovation that is commercialised contributes to growth innovation that has not much effort. Do you have a comment on that?

Haiyang Zhang:

Yeah, well, at the beginning... Innovation has nature of risk. When you start, you don't know whether you can be successful or not. So the IP system encourages your innovation and encourages investing innovation. So the good innovation will pay out at the end.

Michael Falk:

The third question is, do we have any idea of the driving factors and interactions behind this data? Could it be business acumen or perhaps revenue that's driving IP participation? So what is driving participation of SMEs with the IP system?

Haiyang Zhang:

I think there are many reasons or factors will be behind driving SMEs participation in the IP system, including investment, whether the SMEs have the same investment or whether their innovation ideas attracts investment from the potential investors. Yeah, all those things will contribute. And whether they are easy to... Whether the process streamlined, whether there are enough support to help them to understand the IP system and all those things will help SME's participation in the IP system.

Michael Falk:

And it's probably worth mentioning that in the models for this report, you're controlling for initial levels of turnover employment and factors relating to the firm that don't vary much over time.

Haiyang Zhang:

Yes. Yes. So by controlling of those external factors, we were concentrated on the effects of IP filing activity on their growth potential.

Michael Falk:

Okay. So the next question is great presentation. What will your immediate next steps be with this work?

Haiyang Zhang:

I think maybe Michael, you want to talk about this question. Yeah.

Michael Falk:

So building on this work, there's still some work left to do in terms of scoping out the full picture of the relationship between IP rights and SME growth. For one thing, the focus in this report is very much on the near term growth potential of SMEs relative to their filing activity. But of course, the employment outcomes of the use of industrial rights like patents and design rights can occur over a much longer run. So we're in the process of looking at those longer run outcomes and they'll be published early next year.

Michael Falk:

In addition, we are looking at other drivers of participation in the IP system more broadly. So not just SMEs, but other demographic groups and using really amazing data resource for this. Which provides really detailed information on the employees of Australian companies. So we can start to look at educational influences, demographic influences, et cetera.

Michael Falk:

In addition, we're starting to look at the strategies that firms use to bring IP to market, which bring new ideas to market. Whether they choose to commercialise those in the product market or transfer license and sell their ideas to other companies, and to what extent small firms are utilising IP trading as a strategy to benefit from innovation.

Michael Falk:

And as Haiyang mentioned, we're also starting to look at what are the productivity implications of the IP system in its effect in allocating talent across firms, driving the movement of talented workers across firms.

Michael Falk:

Okay. So the next question is, can you tell us more about your data sources on employment?

Haiyang Zhang:

Yeah. So we use business longitudinal data. This is called BLADE. It's a government data that's based on the whole population of Australian businesses registered in Australia. That they have a duty to report tax and other business information to Australian government each year. So we use the kind of most reliable data, available data in Australia on businesses.

Haiyang Zhang:

And what we further... We use the active SMEs. That means many SMEs that registered on the business, but they don't actually operate, they don't report tax and other things. So we only use those businesses that they provide information on their number of employees, on their revenue expenses. So we focused on those active SMEs in Australia.

Michael Falk:

Okay. So the next question is, what do you define as growing? I'm not talking about high growth. If the firms turnover grows by $1, do you flag the firm as grown?

Haiyang Zhang:

Yeah. So for positive growth, that means for the three consecutive years, your annual average growth rates is positive, is larger than zero. So this is, we identify as a positive growth firms. For high growth firms, you have to meet more than 20% annual average growth in three years.

Michael Falk:

Okay. And have you linked the results to VC investment, Venture Capital investment.

Haiyang Zhang:

Okay. No, we don't have this data on Venture Capital. But yes, simple answer maybe. No, we don't have the data on Venture Capital. Yeah.

Michael Falk:

But if I could jump in. There is a substantial literature with evidence on the extent to which for innovative startups obtaining patents and trade marks influences a company's potential to attract venture capital as well as the investors' estimates of the firm's value. So this adds to our intuition around why IP rights may contribute to the growth of SMEs. But of course it's much more relevant to the startup segment of that population.

Haiyang Zhang:

Yes. We would be happy to, if you can get this data on venture capital especially for these startups and to see whether finding for IP rights, did attract a lot of venture capital in the future. Yeah. But our major findings that showing that filing for IP rights is a good signal for high growth potential. I think this will definitely attract the venture capitals on those SMEs with IP filing activity.

Michael Falk:

And a not unexpected question. Were you able to work out correlation versus causation, did the IP lead to more employees or are there other drivers that led businesses to apply for IP that might also be contributing to those growth outcomes?

Haiyang Zhang:

Yeah. We tried our best to try to get a causal effect on the IP filing activity on the employment growth, but through the model we cannot one hundred percent say that this is causal effect because there are some other uncontrolled effects that may still influence the growth of employment of SMEs.

But however, our results shows this strong, strong correlation between IP filing activity and employment growth. I believe that behind the IP filing activity is the innovation effort made by those SMEs. I think those are the causal reason for their employment growth.

Michael Falk:

And I might add to that. There is evidence from other countries, a developing body of evidence, which does identify causal effects of IP activity on employment, labour productivity, and wages. But the methodology for those studies was not available to us due to data constraints in this situation. But it is certainly a focus for us to be identifying of those causal effects. Are there any questions within the room?

Speaker 3:

[inaudible 00:33:57].

Haiyang Zhang:

We separate the estimates for different IP rights. So the marginal rights, what we show is just the increase from one to two. Yeah. For given rights. Yeah. So for patent, maybe for firm with 100 employees if you filing from already have one patent you filing for the second one. You intend to increase your employment by three while for trade marks maybe riding to 13. So increase by 13 employees. So that margin effect is larger for filing a trade mark comparing with filing a patent. Yeah.

Speaker 3:

[inaudible 00:34:56].

Haiyang Zhang:

No.

Speaker 3:

[inaudible 00:35:04].

Haiyang Zhang:

Yeah. A trade mark add to another trade mark. Yeah. Yeah.

Speaker 3:

[inaudible 00:35:10].

Haiyang Zhang:

Yeah, I think we could do that. Yeah.

Speaker 3:

[inaudible 00:35:27].

Haiyang Zhang:

Yes. Maybe this is also another topic we can look at in our future research to see that combination, even combination increase of IP rights to how many employees that they intend to increase.

Speaker 3:

[inaudible 00:36:02].

Michael Falk:

Well, I think that there's a tendency to think of IP as a kind of defense against infringement and a kind of hygiene factor for companies that are in their early stages or that are of a smaller or medium size. They have a lot of other things to worry about, like how to secure those external resources and scale.

Michael Falk:

And I think what this report demonstrates is that IP rights are a fundamental driver of business value for small and medium enterprise. And going back into... Our office has been producing a number of reports which are really aimed at showing how IP rights are used as a tool to navigate changes in market conditions, to drive business value and as a platform on which to achieve high growth. So I think that, and of course a key focus for IP Australia is to be translating those insights into actionable insights for small business.

Michael Falk:

Okay. Well, with that we'd like to thank you all for joining us today, and we really appreciate you spending the time with us. And if you'd like to contact us, we're always open to collaboration. We're always open to working with partners to reach industry. And thank you.

Last updated: 
Wednesday, December 22, 2021