Innovation

　　Generally put, an ‘innovation’ is developing a new idea and putting it into practice. As this article is focused on the competitive strategy of a private enterprise in a market-driven business environment, the term ‘innovation’ is used here to refer to the process of bringing valuable new products (goods and services) to market i.e., from the idea/concept formulation stage to the successful launching of a new or improved product in the marketplace2, or the result of that process, so as to meet the explicit or implied needs of current or potential customers. In other words, through innovation an enterprise seeks to deliver unique new value to its customers. In this context, ‘marketing’ is the understanding of that unique new value and communicating it to the current and potential customers of a business so that the product sells itself.

　　Technological innovation may be classified in several ways: product vs. process, radical (basic or fundamental) vs. incremental (improvement), and disruptive vs. sustaining (sequential and/or complementary). Other important types of (non-technological) innovations that do not result from scientific and/or technological R&D, but are often crucial for profitably marketing the products and services resulting from the investment made in R&D are: marketing innovation, institutional innovation, and complementary innovation.

　　In this article, however, the focus is on technological innovations. Nowadays, it is generally accepted that in a knowledge-driven, competitive business environment, technological innovation (hereafter, for the sake of simplicity, simply called ‘innovation’) is a principal determinant of successful firm performance. But differences of opinion persist amongst economists and policymakers about the exact role of intellectual property (IP) in relation to innovation. On the one hand, in theory, the IP system is considered to be absolutely necessary “to encourage creative intellectual endeavor in the public interest,”3 and on the other, some observers believe that, in practice, the IP system hinders competition to the extent that it is often seen to be playing a negative role in innovation.4 Hence the need for a systematic and periodic study and review of the actual use by businesses of the tools of the IP system so that economists are able to provide empirical, evidence-based guidance to policymakers to adapt the IP system so that it continues to serve the conflicting private and public interest in spurring further innovation and its wide diffusion in the shortest possible time. This article, however, does not deal with these otherwise important aspects.

　　Managing innovation better than its competitors is one of the main objectives of a business that wishes to survive and thrive in today’s economy. By relying on practical examples, this article highlights the important contributions made by the effective use of the different tools in the IP system to the process of taking innovative technologies to market, through launching of superior products and/or services. For explaining the role of the tools of the IP system, it goes beyond merely looking at technological innovation as either radical or incremental technological breakthroughs. Instead, it looks upon technological innovation as an interactive process made up of a number of distinct stages. It begins with the formulation of a novel idea/concept and, through a series of stages, ends in the successful launching and marketing of a new or improved product in the marketplace. In other words, it looks at practical IP issues of relevance to different stages in the whole new product development process in which technological innovations may be introduced at different stages of the value chain from the producer to the end user.5 For the sake of simplicity, it focuses on the idea stage and the research and development stage.

　　Intellectual Property, Inventions and Innovations

　　So, what exactly is IP? Broadly speaking, the term ‘IP’ refers to unique, value-adding creations of the human intellect that results from human ingenuity, creativity and inventiveness. An IP right is thus a legal right, which is based on the relevant national law encompassing that particular type of intellectual property right. Such a legal right comes into existence only when the requirements of the relevant IP law are met and, if required, it is granted or registered after following the prescribed procedure under that law. In practically all countries the world over, a national legal system of intellectual property rights have evolved; this has been created over varying periods of time during the last 150 years or so. It has enabled the grant of property-like rights over such new knowledge and creative expression of mankind, which has made it possible to harness the commercial value of the outputs of human inventiveness and creativity. This is usually done by its orderly use, exchange or sharing it amongst various types of business partners in a complex network of strategic relationships that generally work harmoniously during the new product development process for creating and marketing new and improved goods and services in domestic and export markets.

　　The grant of a property right by the government, albeit generally for a limited period of time, over useful intangible intellectual output provides the owner of such legal property rights the right to exclude all others from commercially benefiting from it. In other words, the legal rights prohibit all others from using the underlying IP asset for commercial purposes without the prior consent of the IP right holder. The different types of IP rights include trade secrets, utility models, patents, trademarks, geographical indications, industrial designs, layout designs of integrated circuits, copyright and related rights, and new varieties of plants.

　　While innovations are concerned with the commercialization of new ideas; in contrast, an ‘invention’ may not be directly associated with commercialization.6 As such, innovation may be seen as a process of interaction and feedback during the various stages of the new product development process. An invention is considered as the generation of a new idea or knowledge, which aims to solve a specific technical problem. Inventions could relate to products or processes and are characteristically protected by trade secrets, utility models/petty patents or patents. Utility models/petty patents or patents are granted/registered under the relevant national/regional law by the relevant national or regional patent office. As not all inventions are commercialized, so it is clear that not all inventions result in innovations. A lot of new ideas are created or born but, quoting Brandt (2002), “Most die a lonely death, never seeing the light of commercial success.”7

　　Technological basic or fundamental innovations produce new markets and new industrial branches for a new product. Such an innovation is also described as a radical or disruptive innovation. An improvement innovation (also called an incremental, sustaining, sequential or complementary innovation) would lead to an improved product over its ancestor in terms of quality, reliability, ease of use, environmental protection, raw material use, labor cost, and so on. It may also include the application of new and better production processes or techniques that allow old or new products to be made more reliably, of better quality, or simply in larger quantities, or at a lower price. Trade secrets, utility models/petty patents and patents are relevant for protecting, managing, exploiting and leveraging both basic and improvement innovations.

　　An innovative new or improved product that meets customer expectations offers an existing or new business, new market territory without competition for so long as it retains its innovative advantage. The IP system plays a significant role in helping a business to gain and retain its innovation-based advantage. As a consequence, the competitive edge that an entrepreneurial business may gain with a basic or disruptive innovation is likely to be longer lasting than that obtained merely from an improvement innovation, assuming that the technological barriers to competitors taking advantage of similar innovations are approximately equivalent, since a basic innovation establishes a new class of product or service, entry of competition requires that the opportunity provided by that class is recognized by a potential competitor before it attempts to enter the market. In the case of an improvement innovation, not only are competitors for the class of product already in place, but since the improvement innovation typically amounts to a better, faster, or cheaper way to build the product, its advantages are far more quickly understood and replicated.8 Hence the need to use the tools of the IP system for both types of innovations, except that generally there is a need for devising an offensive IP strategy for a basic innovation versus a defensive IP strategy for an improvement innovation.

　　A survey of economic studies reveals that patents are the most preferred IP rights in relation to technological innovations. This seems to be due to the use of the terms ‘innovation’ and ‘invention’ as synonyms. This may explain why studies on innovation have, in many cases, treated patents as proxy input for innovation.9 To be specific, the number of patents owned by an enterprise has often been used as one of the main indicators for determining innovation intensity of that enterprise. In addition, patents are also used as a measure of output of innovation. However, while such an approach is useful, it does not look at the “big picture” about the important role of the whole IP system, including the subsystem of enforcing IP rights (comprised essentially of the police, customs authorities and the judiciary), in facilitating the success of innovation in the marketplace. In this article, however, the focus is limited to all IP related actions that must be taken within an enterprise at different stages of the new product development process or cycle for using the different tools in the IP system for market success.

　　Innovation as a process, therefore, requires effective participation of individuals from different sections/divisions of an enterprise, such as technical experts in R & D, marketing, management, finance, legal, etc., apart from outside consultants, suppliers, outsourced component manufacturers/service providers, business partners and lead users.

　　However, for the sake of simplicity, it is assumed in this article that all actions concerning innovation in relation to new product development happen within an enterprise.

　　An enterprise would be well positioned to benefit from innovation if it takes into consideration from the initial stage of the new product development process the full range of IP issues. This is true whether the decision to innovate is taken as part and parcel of the overall business strategy, one-off development of a new idea, or as a reaction to developments in the marketplace.

　　Role of IP in Innovation

　　As there are many players involved in facilitating the market success of an innovation,  the effective use of the tools of IP will play an important role in reducing risk for the players involved, who may then be able to reap acceptable returns for their participation in the process. IP plays an important role in facilitating the process of taking innovative technology to the market place. At the same time, IP plays a major role in enhancing competitiveness of technology-based enterprises, whether such enterprises are commercializing new or improved products or providing service on the basis of a new or improved technology.

　　For most technology-based enterprises, a successful invention results in a more efficient way of doing things or in a new commercially viable product. The improved profitability of the enterprise is the outcome of added value that underpins a bigger stream of revenue or higher productivity.

　　Perception of Innovative Ideas

　　Whether an enterprise’s decision to innovate has been influenced by the overall business strategy (e.g. growth through innovation) or a reaction to developments in the market-place, it is imperative that an innovative idea must be treated as a secret if an enterprise wishes to appropriate potential commercial benefits from the idea (i.e. the information surrounding the creation of the idea must be protected carefully as a trade secret). It should be noted that not all commercially viable ideas can be or will be patented10, hence the importance of treating ideas as trade secret, in particular at the inception stage.

　　Empirical evidence indicates that generally small and medium-sized enterprises (SMEs) are more inclined to use trade secrets rather than patents as a form of protecting their inventions to stay competitive.11 The main reasons given by SMEs for shying away from patenting their inventions include high costs and complexity of the patent system. A study on patenting activity in Australia indicates that 44% of the firms used patents while 74% used trade secrets as a way of protecting their ideas. It also showed that size was an important factor in determining the propensity to patent, i.e. 35% of small firms with less than 20 employees used patents, while 75% of firms with more than 500 employees patented their knowledge.12

　　In some cases, while patenting-related costs and complexity of the patenting process (especially relating to ‘prior art’ search and to the drafting of patent claims) may be seen to hamper innovation, (particularly, in cash ‘strapped’ SMEs) it is equally true that if used strategically, (i.e. in a patent-friendly business environment for SMEs or in partnership with others) patents can become a dependable source of new, additional or higher revenue for SMEs. For an idea that may result in a patentable invention, the ultimate choice between the use of either the trade secret route or the patent route for protecting it should be seen as a strategic business decision that should be taken only at a later stage of its development when all the requirements of patentability are met, namely, statutory subject matter, novelty, inventive step/non-obviousness, capable of industrial application, and adequate disclosure.　 At that stage, the choice would depend on the nature of the invention, its business potential, the nature of competition, the possibility of its independent creation by competitors and the ability of competitors to reverse engineer it easily from the product developed by using it. It should, however, be pointed out that whatever the ultimate decision, initially it must be protected as a trade secret so that, later on a part of it may be patented and the rest of it may still remain as the associated trade secret and know-how, or tacit knowledge owned by individuals that are associated with the patent.