The Australian economy is dominated by SMEs, which account for 99 per cent of all companies, and thus have the potential to play a key role in re-building post-COVID-19.
As we look for ways to build the post-COVID-19 economy, a recent comprehensive study by the European Patent Office (EPO) has provided some insights on the positive role that innovation and Intellectual Property (IP) rights plays in increasing profitability and creating jobs.
The EPO study of more than 127,000 companies found that those companies that held at least one IP right, whether it be a patent, trade mark or design, generated 20 per cent higher revenues per employee than their counterparts without any IP rights. They also paid their employees 19 per cent more, and had more than 2.5 times the number of employees.
For those companies that held patents rights, their performance was substantially better, generating 36 per cent more revenue per employee, paying their employees at least 50 per cent more, and having more than five times the number of employees.
The econometric analysis allowed the results to be stratified based on company size, and this analysis indicated that SMEs were by far and away the main beneficiaries of IP rights. In terms of numbers, around 9 per cent of SMEs held at least one IPR, and less than 1 per cent owned a patent. In contrast, around 55 per cent of large companies held at least one IPR with 18 per cent owning a patent. Despite the low numbers of SMEs holding at least one IPR, they gained much more from this than larger companies, with the average revenue per employee gain of 67 per cent compared to 18 per cent for large companies.
The overarching conclusion of their analysis was that ownership of IPRs, specifically patents, trade marks and designs, was strongly associated with improved economic performance at the individual firm level and that this association was especially strong with SMEs.
Perhaps most telling was that for SMEs that owned patents, trademarks and designs, their revenue per employee was double that of their competitors without any IP rights.
Clearly holding intangible IP rights has very tangible benefits for the rights holders, especially SMEs.
The EPO study is certainly a very comprehensive and compelling study, where they combined IPR portfolio data with economic data pulled from the ORBIS financial database to study more than 127,000 companies (~85 per cent of which were SMEs) in 28 EU states, from 2007 to 2019 (thus spanning the GFC). The study used two complementary analysis methods and calculated descriptive statistics, as well as using a powerful econometric analysis model to study country level and firm size level effects.
Writing as an ex-statistics lecturer, it was particularly warming to read the EPO methodology, including the discussion around the choice of the outcome measures and use of panel regression to control for factors that could have affected economic performance, to “isolate” the relationship between IPR ownership and firm performance.
These results also compare favourably with earlier studies. In 2016, Farre-Mensa of the Harvard Business School was lead author on a NBER study which investigated whether patents helped start-ups grow and succeed. The study analysed all patent applications filed in the US between 2001 and 2014 and found that the start-ups that obtained patents recorded 51 per cent sales growth, a 36 per cent increase in jobs, and double the likelihood of an eventual listing on a stock exchange. Earlier research by Mann and Sager in 2006 came to a similar conclusion, and rather interestingly found these benefits could be reaped through the granting of just one patent.
These results robustly show that SMEs and start-ups that focus on innovation and obtaining IP rights reap the rewards of improved revenue and growth.
The Australian economy currently ranks a lowly 87th in the Harvard Atlas of Economic Complexity. This is particularly appalling given Australia is ranked as having the 8th richest economy.
Australia could thus do well to actively encourage innovation and the uptake of IP rights to strengthen and build the post COVID-19 economy. Not only is this likely to generate greater revenue and jobs, these innovative companies would create a more diverse and robust economy
| Jurisdiction | Person | Restricted securities | Time period |
| Australia (mandatory) |
Seed capitalist who is a related party or promoter or associate of related party/promoter | Ordinary securities for which the recipient has paid a cash amount that is not less than the price paid for such securities in any IPO —none; Securities to which the cash formula applies; or Other securities — all. |
24 months |
| Other seed capitalists | Ordinary securities for which the recipient has paid a cash amount that is not less than 80% of the price paid for such securities in any IPO — none; Securities to which the cash formula applies; or Other securities — all. |
12 months | |
| Related party or promoter vendor | All | 24 months | |
| Other vendoers | All | 24 months | |
| Professional adviser or consultant | All | 24 months | |
| Person under employee incentive scheme who is a related party or promoter | Securities to which the cash formula applies; or Other securities — all |
24 months | |
| Australia (voluntary) |
Any person | Determined under the voluntary restriction agreement | |
| United States | Any person -securities are often subject to voluntary lock-up terms imposed by the company and its underwriter | All | 6 months |
| Hong Kong | All | 6 months- cannot dispose of any interests; A further 6 months – cannot dispose of any interests that would cause it to cease to be a controlling shareholder |
|
| New Zealand | Vendor or major security holder will be prohibited from taking steps which would cause the effective control of the securities to be disposed of for an agreed period of time | N/A | |
| Singapore | Promoters (controlling shareholders and their associates or executive directors with 5% or more interest) |
Promoter — all and then 50% of original shareholding; Investors who acquired securities less than 12 months prior to listing — proportion of shareholding calculated using cash formula; Investors connected to sponsor of IPO — All |
6 months and then an additional 6 12 months 6 months |
| United Kingdom (LSE main market) | Any person -underwriters typically require directors and major selling shareholders to agree to a voluntary lock-up arrangement | All | None |
The way forward
ASX is to be congratulated for its reforms to the mandatory restriction regime. Clearly Australian entrepreneurs and advisers have become adept at navigating the regime. Increasingly however, global capital flows mean companies seeking to list have a range of options as to which exchange and jurisdiction they may seek to list in. Entrepreneurs who have experienced the relative simplicity and reduced impost of other jurisdictions may increasingly seek to IPO in other countries. Can the Australian regime be further simplified to maintain Australia's reputation as a great market for IPOs?
Footnotes
1 ASX Guidance Note 11, paragraph 3.2
2 ASIC Corporations (Amendment) Instrument 2020/72
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