The influence of Digital Innovation and Patents Management on SMEs: a systematic review (Part 1/2)
The following paper is written with the purpose of bringing together different perspectives drawn from researches, articles and studies of primary importance in the fields of patents, digital innovation and technological development and to weigh the actual impact that these different components have on the growth of small and medium-size enterprises (SMEs), especially in the European Union.
Not presuming to foresee either the future or the actual growth of the small and medium-sized enterprises sector, this paper intends, on one side, to provide the reader with all the tools needed to understand at least the trend of the digital revolution that has affected all aspects of our lives, therein including the way of carrying out businesses. On the other side, starting from the assumption that intellectual property represents the bigger sister of competition, the article aims to develop awareness of how patents and management related thereto can enhance the competitiveness of SMEs by helping them to gain market power or to take advantage of both offensive and defensive strategies typical of the owners of intellectual property rights (IPRs).
More specifically, the article will first target digital innovation and the ways in which it can foster the development of SMEs and will then focus on patents, patent management and their impact on businesses, drawing inspiration from the most authoritative and recent surveys carried out on said topic.
Indeed, based on statistical data provided by the European Patent Office (EPO), every year about a third of the total number of applications received comes from SMEs. Increasing awareness of the benefits of intellectual property, this percentage of SMEs’ applications is likely to remain at such a high level and could even increase further.
Hence the final aim of the article, which is to unquestionably demonstrate the positive impact of patents, by far the most important IPRs related to innovative activity, on SMEs and to encourage a greater propensity to fill out patent applications by establishing a cause-effect relationship between such propensity and an increase in revenue.
The role of Digital Innovation: an iceberg to SMEs’ Titanic or an opportunity to exploit?
The most recent and reliable research on the subject has shown that European SMEs employ two out of every three employees and provide 57 % of added value within the EU. However, it is estimated that only around 30-60 % of SMEs survive beyond 5 years of trading. To help the EU economy, SMEs need support to bridge this gap, and innovation is one of the core reasons for businesses surviving and growing.
Innovation allows small businesses to strengthen and grow, and to employ more people, which will ultimately lead to a larger and stronger EU economy. Therefore, innovation within SMEs needs to be encouraged in order to support a sustainable economic growth and the European Commission, for its part, is decidedly intent on encouraging this path by providing the SMEs with the necessary assistance. On the other side of the fence, intellectual property plays a vital role in promoting innovation as it provides those who invest time, effort and money in innovation with a mechanism to protect and benefit from it.
There is no denying that innovation and creative ideas are at the heart of the most successful businesses. It should be remembered, however, that innovation and ideas alone are not of great value. They must be developed, transformed into innovative products or services and successfully marketed so that SMEs can take advantage of such creativity. Intellectual property, particularly patents, can be crucial for turning innovative ideas and inventions into competitive products that significantly increase profit margins. For these reasons it is conceivable to believe that, although the invention represents the engine of most businesses, the patent is the essential spark plug without which such an engine cannot be ignited.
Digitalization and intelligent use of information and communication technologies (ICT) are critical to success, competitiveness and growth, as well as to offer different opportunities for SMEs to strengthen their market position. While large companies increasingly exploit the advantages offered by digital innovation, SMEs must follow the example to avoid being put aside or excluded from rapidly changing markets and supply chains, always bearing in mind that innovation does not necessarily correspond to the invention of brand new products, but includes any new approach to company organization, type of strategy (also related to possible intellectual property rights) or product distribution that allows the company to differentiate itself from its market competitors.
When it comes to digital innovation, we should all agree on the fact that SMEs have the most to gain: as a matter of fact, for them digital transformation has brought unimaginable opportunity to become more agile, to expand themselves and to turn the tables on much larger competitors. When everything is digitized and tracked, businesses can work directly with suppliers and customers while gaining more control over their business.
Almost all small businesses (firms with 10-99 employees) and midsize ones (firms with 100-999 employees) have some of these digital transformation resources in place: collaboration software, powerful computing and communications resources, cloud computing. While there is a clear connection between digital transformation and revenue growth, fast growing SMEs with 10%+ annual revenue are significantly more likely to indicate major progress towards transformation than slower growing firms. Over half of the fast-growing SMEs are actively engaged with digital transformation. Using technology to automate functions and optimize processes is clearly associated with performance gains.
Policymakers are attempting to address the reluctance of many SMEs to invest part of their revenue in their digitalization by demonstrating the advantages and the necessary steps to implement digital solutions to SMEs for specific sectors through the use of case studies and knowledge transfers. For example, the European Commission in cooperation with leading companies, has established knowledge platforms for specific industries, which include demonstrations of the use and effectiveness of various digital tools for different types of businesses. Major case studies have been offered to date for the automotive, fashion, transport and logistics, tourism, agri-food and construction sectors. Similarly, the Enterprise Europe Network supports SME innovation and expansion by building international partnerships and providing various advisory services.
Honestly, the advantages of implementing digital innovation are pretty obvious: the integration of technology into business processes requires discipline, but offers clear and continuous advantages such as effective analysis, which can provide extremely valuable information on where business operations are strong and where they are located. In other words, for the sake of simplicity, innovation and digitalization generate insights and refine business processes.
Although it has already been said more than once, one thing that all types of business should always keep in mind is that digital transformation is continuous: underestimating the need to coordinate a growing portfolio of digital resources believing that they are at a sufficient level, can be a huge mistake. To some extent, along with the search of an effective business model (easy, convenient and reliable), the leading perspective should be focused on the journey rather than the destination.
The images, taken from the “2019 IP SME Scoreboard Report” that will be discussed in the paragraph “EUIPO-EPO: knowledge that matters”, show the different propensity to innovation between IPRs owners and non-IPRs owners. The statistics are based on the answers of 4.401 IPRs owner enterprises and on the answers of 3.948 non-IPRs owner enterprises.
Patent management and strategies for SMEs: IP strikes back
The great military theorist Carl von Clausewitz used to say “Tactics win battles, strategy wins the war”; this motto is essential to understand why SMEs aspiring to long-term growth should think in a strategical manner about how to maximize profits from a patent portfolio.
An essential premise before going any further in the topic is that the economic justification does not provide us with ready-made rules on every aspect of patent law. Instead, we are confronted with a constant, built-in dialectic tension between the protection of the patented invention and the promotion of the subsequent innovation. Therefore, the strongest possible protection not only is a logical consequence of the economic justification, but would also unduly focus on one aspect of that tension.
Besides, the innovation already developed in such a way that the reward granted to the current inventor stimulates both the inventor to continue and third parties to develop a subsequent innovation which might compete with the preceding one, thus also spurring on the first innovator, in a virtuous pro-innovation and pro-competition dynamic process.
Given this premise, it is clear that the enforcement of patents provides protection to the innovative SMEs against competition in the creation and distribution (or performance) of their innovations, enabling them to both recoup the initial costs of their innovations and, ideally, to make an attractive profit, such rights can induce potential innovators first to undertake projects they would otherwise avoid and then to commercialize their creations, thus making them available to consumers. In some cases, innovation may be hindered by the fact that the costs related to patenting and the complexity of the patenting process, particularly in relation to the search for “prior art” and the drafting of patent applications, are too high to be borne by short-of-cash SMEs. However, it is equally true that if used strategically patents can become a reliable source of additional or higher income for SMEs (i.e. in a patent-friendly business environment for SMEs or in partnership with others).
For an idea that can result in a patentable invention, the final choice between using the secret trade route or the patent route to protect it should be seen as a strategic business decision that should only be taken at a later stage of its development when all patentability requirements are met (legal material, novelty, inventive step / non-obviousness, susceptibility of industrial application and adequate disclosure). At that stage, the choice would depend on the nature of the invention, its commercial potential, the nature of the competition, the possibility of its independent creation by competitors as well as their ability of easily applying reverse engineering from the product developed. Some emphasize the fact that, whatever the final decision, the invention should initially be protected as a trade secret so that, later, a part of it can be patented and the rest can remain as a trade secret and associated know-how or knowledge tacit ownership of people associated with the patent.
The SME sector is widely regarded as one of the cornerstones for a competitive and sustainable economy. With ambitious ideas and innovative solutions, SMEs are often attributed with high-energy injection and productivity in both traditional and new sectors. The mission that for some years now unites European institutions on intellectual property, upon a precise invitation of the European Commission, is to support these innovators, as well as the whole European economy, providing in particular solid patents and access to published patent information and fostering programs fully dedicated to SMEs like COSME.
However, if on one hand the power of this particular IP form still has ample room for improvement, on the other there is certainly the need to better transmit a 360-degree understanding of how patent protection and information can be used effectively from innovative companies such as SMEs and start-ups, especially after the entry into force of the Unitary Patent System on 20th January 2013.
As provided by the “SME case studies on IP strategy and IP management” published by EPO, besides relying on patents to protect their products and services in the market, SMEs have developed additional ways of further benefitting from their patents, such as licensing – SMEs can license out patented inventions to external partners, enabling collaboration – enterprises can use patents as a bargaining chip to obtain freedom to operate, make use of third parties’ patents or set up collaborations, attracting investment and customers – patents help SMEs to attract investors and support their image towards consumers as companies offering high-quality products, entering into new markets – in several cases, patents have been pivotal in enabling companies to renew their business models and enter into new markets.
It is clear, then, that the acquisition of protection on a specific invention guaranteed by patents is essential to pave the way for the use of different strategies, both offensive and defensive. The next lines will very briefly discuss each of them.
First of all, intellectual property asset gives potential market power; nevertheless, using an IP right is not always the best solution, especially in the case of SMEs and start-ups. Indeed, in order to exercise market power, a firm must have, in addition to legal exclusivity and effective enforcement, also absence of substitutes, which means that in the eyes of a potential consumer there are no equally useful substitutes.
Basically, remaining on the offensive strategy side, there are at least three valid alternatives to the exercise of market power:
- An enterprise might sell the IP asset to another company. This is quite common when the subject that detains the IPR lacks the necessary knowledge or the funds to start large-scale production of the patented invention and, therefore, decides to monetize immediately by selling to another entity that is able to develop the product on a large scale. Of course, there are cases in which such path cannot be pursued due to the particular features of the asset, such as its uniqueness in the market or its high-value in context-specific;
- In case option 1 is not viable, an enterprise might license another firm to make use of its asset for a fee. This type of strategy offers a wide range of advantages, as it helps increasing capacity and demand on one hand while it discourages other competitors from “inventing around” on the other;
- An enterprise might use its IP asset as a vehicle to construct collaboration with other firms which would make it more lucrative than going alone. A SMEs could apply this strategy to build a relationship with competitors, with developers of complementary products, with customers, with Governments and foundations or even with infringers.
Most SMEs and start-ups initially do not focus on preparing a strong IP defense since they are, as they should be, thinking about how to build the best product or service they can, and how to get the most customers to use it. What they often do not see coming is that their success can sometimes make them a target for frivolous litigation, as lawsuits are distractions and cash drains, especially when you are a lean enterprise or a start-up in the midst of managing high growth. For trolls, these are easy targets, because SMEs and particularly start-ups often have limited resources, lack internal patent expertise and, therefore, have a huge incentive to settle (that still remains a widespread practice even among giants, like Apple and Qualcomm). Although nobody wants to be a cautionary tale, here are some valid alternatives when the game moves into the defensive side of the pitch:
- An enterprise might assert a legal privilege, which is probably the best weapon for resisting suits. This strategy aims to defend the legality of use by challenging the validity of another owner’s IPRs. Sure, this strategy still brings with itself possible risks such as the high costs of litigation. Moreover, competitors are free to capitalize on one’s success, while in case of loss the damages and the attorneys’ fees could be catastrophic for small-size businesses. For all these reasons, only in rare circumstances defensive litigation may be the preferred option;
- To avoid the expenses related to option 1, an enterprise might instead decide to develop an alternative. The main benefits arising from this type of strategy, in addition to the abovementioned avoidance of the litigation costs, are the dodging of license fees and the enhancement of bargaining position in license negotiation or acquisition. Even in this case, however, the costs associated with the development of an alternative might still be very high;
- As a third solution, an enterprise might consider to get permission for the utilization of a determined number of IPRs. The immediate benefits would be a faster landing on the market and the elimination of the risks related to IP infringement. On the other hand, although costs could still vary in relation to the number of IP rights that must be obtained, there could be more space for “amicable settlements”;
- Eventually, an enterprise might even infringe intentionally another one’s IPRs. Such strategy, which is commonly considered as risky and unethical, is more plausible if the relevant industry is characterized by non-enforcement (so the infringer counts on the fact that the IP owner is not willing to bring suit). Concealed infringement is based on another tactic called “Rapid dissemination”, according to which if a company manages to deploy putatively infringing technology fast enough to provoke either favourable judicial ruling or license, there is a chance that by the time a dispute ripens, the systems will either be too valuable to IP holders to suppress or will be culturally embedded. Despite the necessary citation of this possible alternative, it should be pointed out that this is an all-in strategy that, as such, is not advisable for most of SMEs and start-ups.
Special thanks go to Dr Domenico Golzio, Director at the European Patent Office, for sharing part of his extensive knowledge and expertise in the field of patents with me and for his precious support.
 SMEs have fewer than 250 employees and a turnover of less than €50 million. For a detailed definition see (last accessed on 1st November 2019). The definition includes individual inventors licensing or assigning their inventions to third parties.
 See J. Edler, H. Cameron, M. Hajhashem, “The intersection of intellectual property rights and innovation policy making – A literature review”, Jul. 2015, Prepared by the Manchester Institute of Innovation Research, University of Manchester, United Kingdom for the Innovation Policy Section, Department for Transition and Developed, WIPO. Available at the following link: https://www.wipo.int/edocs/pubdocs/en/wipo_report_ip_inn.pdf.
 See P. Muller, J. Julius, D. Herr, L. Koch, V. Peycheva, S. McKiernan “Annual Report on European SMEs 2016/2017 – Focus on self-employment”, Nov. 2017, Karen Hope Editor. This report was prepared in 2017 for the European Commission, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs; Directorate H: COSME Programme; SME Envoys and Relations with EASME by the consortium composed of: CARSA, PwC Luxembourg, London Economics, Innova, The University of Manchester, Manchester Institute of Innovation Research DIW, Econ.
 See C. Kalanje, “El papel de la propiedad intelectual en la innovación y el desarrollo de nuevos productos”, Chapter XI “La P.I. para sobrevivir en el “Valle de la Muerte” de la innovación”. Available at the following link: https://www.wipo.int/sme/es/documents/ip_innovation_development.htm.
 See, for instance, the Horizon 2020 initiative and the projects and research thereto related. Horizon 2020 is the biggest EU Research and Innovation programme ever with nearly €80 billion of funding available over 7 years (2014 to 2020) – in addition to the private investment that this money will attract. It promises more breakthroughs, discoveries and world-firsts by taking great ideas from the lab to the market. The program actively supports SMEs by providing both direct financial support, and indirect support to increase their innovation capacity. ‘Innovation in SMEs’ aims at creating a bridge between the core of the framework programme – support to research, development and innovation projects – and the creation of a favourable ecosystem for SME innovation and growth.
 See S. Blank, “Why Companies Do “Innovation Theater” Instead of Actual Innovation”, Oct. 2019, Harvard Business Review. Available at the following link: https://hbr.org/2019/10/why-companies-do-innovation-theater-instead-of-actual-innovation. Last accessed on 15th November 2019.
 See “Thriving in the Digital Economy – How small and midsize enterprises are adapting to digital transformation”, Feb. 2016, an International Data Corporation (IDC) InfoBrief sponsored by the German software multinational corporation Systeme, Anwendungen, Produkte in der Datenverarbeitung (SAP), p. 5. In order to understand more about the pace and nature of digital transformation, IDC conducted a survey of 3.210 small and midsize firms from 11 different countries. The goal was also to identify the different benefits and opportunities associated with digital transformation.
 Ibid, p. 5
 See J. Velthuijsen, B. Yuldrum, G. Kramer, R. Schmidl, “Innovation and Digital Transformation: How do European SMEs perform?”, Oct. 2018, PwC Netherlands, p. 5.
 See V. Morabito, A. Ghose, “Trends and Challenges in Digital Business Innovation”, 2014, Springer International Publishing, p. 89. The book summarizes the key aspects of digital business, but with a focus on showing something new to professionals from an academic perspective.
 Ibid, p. 90-91
 See T. Vollmann, “The transformation imperative: achieving market dominance through radical change”, 1996, Boston MA: Harvard Business School Press.
 See G. Dhillon, “How to approach digital transformation”, Apr. 2019, The LSE Business Review. Available at the following link: https://blogs.lse.ac.uk/businessreview/2019/04/08/how-to-approach-digital-transformation/
 See “2019 IP SME Scoreboard Report”, October 2019. Available at the following link: https://euipo.europa.eu/tunnel-web/secure/webdav/guest/document_library/observatory/documents/IP_sme_scoreboard_study_2019/IP_sme_scoreboard_study_2019_en.pdf, p. 29-31. Last accessed on 15th November 2019.
 See C. von Clausewitz, Vom Kriege, 1832.
 See G. Ghidini, “Intellectual Property and Competition Law: the innovation Nexus”, 2006, Edward Elgar, p. 24.
 See T. Bereuter, Y. Ménière and I. Rudyk, “SME Case Studies on IP Strategy and IP Management—Releasing Untapped Value”, Dec. 2017, Nov. 2017, Les Nouvelles – Journal of the Licensing Executives Society, Volume LII N. 4, December 2017, p. 258. Available at the following link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3068763
 Ibid, p. 259.
 See W. Fisher III, “When should we permit differential pricing of information?”, Nov. 2006, 55 UCLA Law School Review, p. 21.
 See M. Rogers, “The Definition and Measurement of Innovation”, May 1998, Melbourne Institute of Applied Economic and Social Research, University of Melbourne, p. 14.
 See J. Pila and P. Torremans, “European Intellectual Property Law”, Mar. 2019, Oxford University Press, p. 140.
 Ibid, p. 154
 See A. Upgedrove, R. Bekkers, “A Study of IPR Policies and Practices of a Representative Group of Standards Setting Organizations Worldwide’ (2012), Commissioned by the US National Academies of Science, Board of Science, technology, and Economic Policy (STEP), Project on Intellectual Property Management in Standard- Setting Processes (finding that all analysed SSOs contain FRAND or royalty free licensing rules).
 COSME is the EU programme for the Competitiveness of Enterprises and SMEs, running from 2014 to 2020, with a budget of €2.3billion. COSME will support SMEs by facilitating access to finance, supporting internationalisation and access to markets, creating an environment favourable to competitiveness, encouraging an entrepreneurial culture. COSME is a programme implementing the Small Business Act (SBA) which reflects the Commission’s political will to recognise the central role of SMEs in the EU economy.
 See K. Haft, “The Unitary Patent System from an SME’s Perspective”, Nov. 2017, les Nouvelles – Journal of the Licensing Executives Society, Volume LII No. 4, December 2017, p. 2-3. Available on SSRN at the following link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3068807
 See for further information “SME case studies on IP strategy and IP management”, 2017, EPO, p. 3. Cfr. on the same topic footnote n. 14. These case studies help to create a wider awareness of the different ways in which patent protection can be employed. With the prospect of the coming Unitary Patent and the Unified Patent Court https://www.iusinitinere.it/unified-patent-court-will-the-dream-ever-come-true-21840, they also underline how SMEs are set to benefit from reduced costs of up to 70 %, a simplified application procedure and greater legal certainty. Whether it is the Unitary Patent or the classical European patent, or a combination of the two, both can help to support the success of SMEs in Europe.
 See “Aerogen – Breathing new life into aerosol drug delivery” case study, 2017, EPO, p. 2. Available at the following link: https://www.patentsoffice.ie/en/commercialise-your-ip/ip-case-studies/sme-case-study.pdf
 Ibid, p. 3
 See “Cosmed – At the cutting edge of cardiopulmonary diagnostics” case study, 2017, EPO, p. 4. Available at the following link: https://www.i3pm.org/EPO-Case-Studies/sme_case_study_cosmed_en.pdf
 See I. Cockburn, M. MacGarvie, “Entry and Patenting in the Software Industry”, Jun. 2010, Management Science.
 See S. Borenstein, J.Mackie-Mason, J. Netz, “Market Power in Proprietary Aftermarkets”, Jun. 2000, Massachusetts Institute of Technology, Journal of Economics & Management Strategy, p. 161.
 See M. Granieri, “Intellectual property managers. Law, practice and strategy”, May 2015, Luiss University Press, p. 17
 See R. Kumar, “Bayer’s Acquisition of Monsanto: Integrated Case Studies”, Jan. 2019, Wealth Creation in the World’s Largest Mergers and Acquisitions, pp. 281-287, to observe a concrete application of this strategy.
 See J. Medved, “Why startups need a defensive IP strategy”, Aug. 2016, Tech Crunch. Available at the following link: https://techcrunch.com/2016/08/17/why-startups-need-a-defensive-ip-strategy/. Last accessed on 1st November 2019.
 See “Apple and Qualcomm settle a feud over patents”, Apr. 2019, The Economist. Available at the following link: https://www.economist.com/business/2019/04/17/apple-and-qualcomm-settle-a-feud-over-patents.
 See C. Hogson, “Qualcomm outlines $4.7bn revenue boost from Apple settlement”, May 2019, Financial Times. Available at the following link: https://www.ft.com/content/9a831cf2-6c49-11e9-80c7-60ee53e6681d.
 See J. Contreras, F. Gaessler, C. Helmers, B. Love, “Litigation of Standard-Essential Patents in Europe: A Comparative Analysis”, 2017, Berkeley Technology Law Review forthcoming (data for 2000-2008 period).
Nato a Genova nel 1992, si laurea in Giurisprudenza nel 2017 con una tesi in Diritto Internazionale. Da sempre amante di cinema, sport, musica ed attualità politico-economica, più di recente ha sviluppato un concreto interesse per l’industria tech ed il suo sempre più stretto rapporto con il mondo del diritto. Candidato al Master LL.M. in Law of Internet Technology dell’Università Luigi Bocconi.