Intellectual Capital and IPR
A century ago, business corporations
were identified by their physical assets: real estate, buildings and machinery. Over the course of the next hundred years, management and investor attention shifted toward businesses' intangible property: brand names, patents,
business relationships and employee culture etc. The emerging knowledge-based economy stresses the importance of knowledge as a source of competitiveness and growth of firms. The stress has now changed from hard factors to that of
soft ones. The implications here are that the firms have shifted their focus from the tangible and physical assets to that of intangible and intellectual assets. The fundamental change of companies' attitudes towards
knowledge-based organizations is very clear in the recent times as these firms have started accounting for and valuing their intangible assets and also began to show them on to their annual balance sheet. Businesses are
investing less in physical goods such as capital investments, machines, building, etc, and more in soft factors such as human resources, research and development, organizational development, software, marketing, and relationships. Figure I Value of a Firm
A century ago, business corporations were identified by their physical assets: real estate, buildings and machinery. Over the course of the next hundred years, management and investor attention shifted toward businesses' intangible property: brand names, patents, business relationships and employee culture etc. The emerging knowledge-based economy stresses the importance of knowledge as a source of competitiveness and growth of firms. The stress has now changed from hard factors to that of soft ones. The implications here are that the firms have shifted their focus from the tangible and physical assets to that of intangible and intellectual assets.
The fundamental change of companies' attitudes towards knowledge-based organizations is very clear in the recent times as these firms have started accounting for and valuing their intangible assets and also began to show them on to their annual balance sheet. Businesses are investing less in physical goods such as capital investments, machines, building, etc, and more in soft factors such as human resources, research and development, organizational development, software, marketing, and relationships.
Value of a Firm
The Driver of Intellectual Capital (IC) Movement:
The expression Intellectual capital started gaining prominence and gathered momentum in the recent years due to the changes in the environment in which the firms operated. There has been a continuous shift of trend towards competition in the global market. Due to the increase in intensity of competitive pressures, the firms are looking for a specific factor that could increase their competitive advantage and competitiveness in the global market. The factor also had to be such so as to create a differentiation of their firm from that of the competitors.
In this pursuit knowledge has become the most important fact of economic life of organizations; today the chief component of what they buy and sell and the raw material with which they work is Intellectual capital - not natural resources, machinery or even financial capital. Intellectual capital has become the one indispensable asset of corporations. The realization of this has led to the interest in "knowledge management" to exploit this often underutilized resource. Today the concern of organization along with earning profits and being economically viable is to retain and exploit the talent of the people who work in the organization; to gain the loyalty of the customers it serves and learns from; to estimate and increase the value of its brands, copyrights, patents and other intellectual capital; to harness the collective knowledge embodied in its systems, to keep its management techniques, and history unique to itself.
However, the paradox remains that though this intangible is gaining prominence, its measurement is quite difficult. Several methods and models have been designed and developed in the western world to account for these assets. In Indian context the firms are yet to use these models effectively since they need to be modified in Indian environmental context. Moreover, though the firms recognized that the above mentioned are vital assets that are rarely managed and almost never managed skillfully.
The concept of tapping knowledge or other Intellectual Capital became prominent since it was understood that if reaped, managed and nurtured properly it could be a resource which can be used for adding value to the organization at various levels. Thus, the first reason for the development of Intellectual Capital was the concept of training which made the organizations sure and gave them the confidence that the given level of Intellectual Capital could be taken further for organizational benefit.
The second factor that led the development of Intellectual Capital is the increasing importance given by organizations to research and development. Firms started realizing the importance of continuous innovation to maintain their positions and also move into another orbit of the organizational development. This was because of the changing profile of the end users of the products and services in a globalized world.
The Human resource development movement that gained prominence in the recent years is also an important factor in the development of Intellectual Capital. It was understood that human capital if managed properly could prove to be effective in increasing competitiveness and efficiency.
Intellectual Capital it is defined as is any creation which emerges from the human mind or intellect. It is capital because it can be created, transferred and also can be used/reused and most importantly it is a product of the human intellect.
Karl-Erik Sveiby in his 1989 book titled "The Invisible Balance Sheet" first proposed a classification for Intellectual Capital into three broad areas of intangibles namely Human capital, Structural capital and Customer capital - a classification that was later modified and extended by replacing customer capital by relational capital.
Classification of Intellectual Capital
Human capital signifies the individual and collective experience, knowledge, competencies and skills of the manpower in an organization.
Structural capital comprises of the intangible infrastructure that exists in an organization. This includes the organization's processes, manuals and policies, software, trademarks, patents etc.
Customer capital includes the relationship dynamics that an organization enjoys with its customers. This includes customer loyalty index, satisfaction levels, and repeat business. Customer capital was separately shown in the structure to indicate the valuable role that customer relationships play in an organization's life.
Converting IC into Intellectual Property Rights (IPR):
Globalization required cooperation amidst competition for faster economic progress of all those concerned. In this context of ever-emerging competition a need was felt for protecting the creation of human mind (intellectual capital). The need of the hour for most of the firms was to improve their quality of competition in the global market. The aim was also to increase their revenues and profits by using the intangible assets they have created and generated as a tool of product differentiation. However the problem was that if the idea moves from person to person, and from country to country then the creator faces risk that at any given point of time he may not be able to claim the ownership of his own idea. There was always a chance of misuse and duplication.
The idea or the thought itself could not be protected since it was completely intangible or invisible. However, the end product of the human thought, the outcome which is tangible could have been protected, thus the legal concept is created where a capital gets converted into a property. A property concept gives the owner a clear right over his asset and this is recognized by law. Thus, an intellectual capital gets converted to an intellectual property when it gets legal acceptance.
Thus, Intellectual property refers to the creations of the human mind and human intellect which are legally protected. Most of the intellectual capital is protect able by the various forms of intellectual and industrial property rights created over the last 200 years and governed by international treaties and regional and national laws. Patents and utility models protect technical innovations. Trademarks protect brands. Design patents or registrations protect industrial designs. Copyright protects literary and artistic works as well as software. Circuit design registration protects integrated circuit architecture, and so on. Recent years have seen certain examples of crossover protection like business method and software patenting. Copyright has also received increased attention due to the introduction of digital technologies and the Internet.
Intellectual property system is designed to benefit society as a whole, and it strikes a delicate balance to ensure that the needs of both the creator and the user are satisfied. Intellectual property rights usually allow the creator to commercially exploit his work exclusively for a limited period of time. In return for granting such rights, society benefits in a number of ways. Most of the laws confirm that the rights of a patent holder are placed on a higher pedestal than obligations.
Intellectual Property Rights (IPR) can be in any of the following categories as mentioned below:
(a) Copyrights and related rights.
Before explaining the economic benefits derived from these IPRs by the economy, firm and individual, it is imperative to explain each of these IPRs in detail.
Classification of Intellectual Property
It is quite clear from the above chart that Intellectual Property is divided into two broad heads of Industrial property and copyrights and related rights.
Industrial property is further sub-classified into Patents, Designs, Geographical Indications, Trademarks and Trade Secrets.
Copyright is given to the creators of original works, which come under the category of literature, dramatics, music, art etc. Since an idea is always intangible, it cannot be copyrighted unless it gets transferred in some form, which is tangible. Eg., a book, a CD, music cassette, painting etc., Copyright prevents copying of only the expression. A copyright is valid throughout the life of the author.
It is a monopoly right exclusively granted to an inventor over his invention for a limited period of time by the government of a country. This is a right of the creator. However, if the inventor or the creator assigns any other person or any organization under a contract to get the benefit of his creation, then the patent is granted to the organization/person assigned. For instance, if a scientist or groups of scientists are working on a new drug development in Dr.Reddy Laboratory for a wage or any other monetary benefit, the patent of the drug developed is given to DRL and not to the individuals. There can be many patents or IPR's on the same product. Eg., the grip of the pen, free flow ink, roller tip etc., are patentable and patented.
An innovation to be granted Patent requires to fulfill three criteria for becoming eligible to get registration. A patent is granted only on that invention which has the novelty, applicability and which is non-obvious. A patent is given for a period of 20 years, and the patent expires after this due date if not renewed. A patent has to be applied in each country separately by the inventor. A patent would not be granted for the invention, which has already been publicized through various means. Therefore, it is necessary that inventor first files patent and then makes his invention public.
Trademark are words, names, brands, symbols, labels etc. used or proposed to be used by manufacturer of goods to create a unique identity for their product. Trademark is used for distinguishing one firm's product from that of another. Trademark is very beneficial for industries operating in a monopolistic market where customers have high brand loyalty and product differentiation is very important to operate.
A trademark is represented by the symbol "TM". This is used as soon as an application is filed. It is replaced by the symbol ® as soon as the registration is confirmed officially.
Design deals with features, shapes, patterns, etc. applied to an article by an industrial process, manual or mechanical. Eg., chair is a utility item. However, chair itself does not qualify for IPR, but if special carvings, embossing etc., is done which increases the value of chair though it's utility remains same, it becomes eligible for IPR under designs act.
It is an indication that originates from a definite geographical territory, which is used to identify natural and manufactured product. For e.g., Pochampally sarees, Dharmavaram sarees, Madhubani paintings etc, all qualify for registration under this category. It is valid for 10 years. The application for registration can be by an association of persons, organization or by producers.
In case of all IPR's, any or all of the rights of ownership may be transferred by the owner of the right to any other individual, group of individuals or organization. This is done through a legal procedure.
Economic Benefits Derived from IPRs:
IPRs confer lots of economic benefits for the innovating economies. Besides providing Protection Against Piracy and Infringement, this acts as an Incentive to Produce and Share, thus the demand for the innovated product becomes global Increasing the Exports both in Real and Nominal terms for the firm that has a patent for the innovated product. This further proves to act on the exchange rate making the domestic currency appreciate and making Cheaper Imports possible.
The innovating firm reaps Monopoly Profits, the consumers get Better Quality and Variety of Products and Services, and the society feels good because it has resulted in Sustaining Innovation and Creation. The industries that provide the inputs and support services to the export sector also grow resulting in overall and all round economic development of the innovating economy.
The IPR's have a specific significance to the innovating country as it imparts Economic benefits in the form of the following:
The exports of the innovating country tend to increase in real terms as well as in nominal terms the product in its protection is unique in its own sense.
The imports then become relatively cheaper due to appreciation of its domestic currency, the citizens of the innovative country have the best of the two worlds where they get the best price for their exports and also get the imports at the cheapest prices.
Besides the above two benefits there is every possibility that the monopoly profits are also reaped by the innovating firm in the short as well as long run.
The increase in exports has an obvious impact on the other domestic industries, which have a link with the exporting industry thus enhancing the overall development of the economy through the forward and backward linkages.
Emergence of WTO and Trade Related Intellectual Property Rights (TRIPS):
The WTO established in the year 1995, based on the principles of Non-Discrimination, Transparency and Reciprocity served the above purpose aptly and encompassed several agreements to which its member countries had consented on. The initial agreements were few related to trade in goods and some included later covered vast areas of trade in services and also that related to capital and labour. Some of them were General Agreement on Trade in Services (GATS), Agreement on Agriculture (AOA), Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), and The Agreement on Trade Related Investment Measures (TRIMs). Thus it can be said that in the arena of international trade before WTO, that is GATT regime, regulation confined to only goods, international conventions ruled the matters of Intellectual Property Rights (IPR), and Services trade.
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), was an agreement under WTO, it required all its members to provide a minimum norms and standard of protection for a wide range of IPR as classified above.
The Agreement sets out minimum standards to be adopted by the parties, though they are free to provide higher standards of protection. A transition period of five years is available to all developing countries to give effect to the provisions of the TRIPS Agreement. This period ended on 1.1.2000. No transitional period is available, however, for grant of national treatment and most-favoured-nation treatment. Countries that did not provide product patents in certain areas of technology as on 1.1.1995, could delay the grant of product patents in those areas for another five years i.e. up to 1.1.2005.
India had, along with like-minded developing countries made proposals under this category. In respect of the TRIPS Agreement, these proposals included the following2: -
01. To extend the period for application of non-violation complaints to the TRIPS Agreement.
Challenges and Opportunities for Indian Industries:
The above situation is not all so rosy and easy for the developing economies like India who are net importers of the products which are technology intensive, more so when the TRIPS Agreement places the rights of a patent holder on a higher pedestal than obligations. These are specific reasons that many developing countries including India have highlighted implementation issues and concerns. One of the major challenges that Indian economy faces is in terms of the changes that are necessitated to meet the requirements of new regime, some are already compatible while others have to be made so. For e.g. Patent act is being modified in phases, the trademark act already revised etc.
Companies will be forced to set new investments in research and development. Companies will also be forced to target niche markets and tailor their products according to the market requirements. The implementation of WTO's Trade Related Intellectual Property Rights gives standard protection to copyrights, trademarks, layout designs and product rights. But there are many possibilities that Indian exports could even be banned because of the product patents. For instance, exports can be barred if the product in question violates patent rights in the importing country. Traditional items like basmati rice will have to be patented. Automobile ancillaries will face product wrangles.
Software programmes and data applications will have to be protected under the patents law. Pharmaceutical companies will face a series of product patents issues. The Information Technology Agreement singed under the WTO, Indian hardware and software companies can become major players in the value-added arena. Availability of high-skilled of IT personnel and low cost of labour and operation will allow India to compete in the international market. The SSI will be affected, as no reverse engineering now will be permissible. This may affect its cost competitiveness.
Another problem is the enforcement of these laws; the governments of the developing countries have to ensure the enforcement with the cooperation of the several groups who are working towards the above objective. The penalties for infringement (unauthorized usage) should be tough and enough to deter violations. The dispute settlement procedure to solve the disputes between the nations also should be put in place so that justice is done to the cause of developing countries. Besides these the remedies should be appropriately framed along with the rights. The present objective should be to provide solution expeditiously, legally, predictably, and in a non-burdensome manner. A legal mechanism is needed to deal with the problems, but it should not open TRIPs agreement for re-negotiation.
IPR standards vary widely across nations affecting the trade between countries, and also encouraging trade in counterfeit and pirated goods. In a globalized world where exchange of goods have become a common phenomenon protection of the rights become necessary not only for the inputs and technology. Therefore, an enterprise requires comprehensive, well thought of and planned structure to manage intellectual capital. The increase in competition requires the intellectual capital to become the intellectual property through adequate legal protection. However, there is a huge opportunity in terms of JV's.
Therefore, transparent and balanced rules become an imperative for overall betterment of conditions across nations. The developed countries argue on the ground of huge expenditure that is incurred on the research and development of the product that is innovated, however this can be taken care by framing rules and developing a proper system of IPR's with respect to the Transfer of technology, Licensing and Joint ventures. This will make the faster technological advancement of the developing countries. This would help them in creating a competitive edge for them in the global market.
Some Concluding Observations:
Having understood the intricacies of the terms and their respective details and impact, it is necessary to state that Indian firms should seriously start looking at these intellectual properties as their assets and stop bothering about the prospective challenges of the competition ahead. The main problem/ challenge that face the organizations are
Lack of clarity and proper understanding regarding the various concepts of intangible assets and their significance in increasing the value of the organization.
Even if very few knowledge based firms realize the value of these intangibles, there is no proper system in place in many organizations which take care of the measurement of these intangibles.
Different models are used by different firms to valuate and measure these assets, either resulting in partial valuation, over valuation or under valuation.
Disclosure of the value of the intangible asset is considered unimportant even today by many firms. Whereas research has shown that such disclosure results in enhancement of the stakeholder's value of the firm.
Reporting of these intangibles in the annual balance sheet is not mandatory and therefore, not done by many firms.
Thus, it can be seen that firms face a huge challenge as well as an opportunity in the post WTO regime as far as intellectual aspects is considered. The challenge is mainly takes the form of proper management of these assets. It is high time that at least knowledge firms take note of the above developments and start acting on it seriously. Finally, it can be said that intellectual capital management is an imperative for every firm if it aims at surviving the increasing global competitive pressures successfully.
References and Further Readings :
1. Sveiby Karl-Erik (1989), The Invisible Balance Sheet, New York.
Source: E-mail March 12, 2007
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