By Kishalaya Pal

 

Small and medium enterprises (“SME”) have emerged as a highly effective and dynamic sector of Indian industries and economy. Not only does it contribute immensely to production, but it also generates massive employment, second only to the agriculture sector. By virtue of the Micro, Small and Medium Enterprises (“MSME”) development act, 2006, a replacement of the small-scale industries act, a host of privileges like collateral-free bank loans, concession on electricity, tax benefits etc. are provided to SMEs to maintain a steady credit flow into the sector and help them stay afloat in the competition with the dominating firms.[1]  Under the aegis of ‘Atmanirbhar Bharat’, the criteria for the classification of SMEs were drastically expanded to entail a greater number of SMEs and facilitate them to overcome the difficulties of the COVID pandemic.[2] Nevertheless, the SMEs in India are up against multi-faceted challenges,[3] one of which is establishing and adopting a well-oiled machinery of Intellectual Property Rights (“IPR”).

 

IPR is a framework consisting of legislations, regulatory bodies and international organisations which seek to provide a means for commercially exploiting novel ideas, knowledge and intellect. It establishes a virtuous cycle in the economic and business realm where innovation is incentivised which in turn upgrades the quality of goods and services that are made available and on the other hand the proprietors of the intellectual substance behind the innovations receive their due rewards for their merit which they could further invest in research and development. With the adoption of these means, the entire knowledge pool expands and by way of appropriate collaborations, it enhances as well. In India, the various types of IPR are governed by their respective laws which are the Indian Patents Act,[4] Trade Marks Act,[5] Geographical Indications Act[6] and the Copyright Act.[7]

The Indian government, especially in the last few years has taken a lot of steps to ameliorate the practice of IPR in SMEs. Despite this, small enterprises suffer from a severe shortage of the concepts and benefits of IPR. The condition of the medium enterprises, although better, is still below par.[8] Even with awareness, many small players don’t explore this aspect of business management owing to limited financial resources. But there are studies based on cost analysis to show that in the long run, IPR has the potential to yield highly productive results.[9] This essay discusses the unique needs of IPR for SMEs and then moves on to analyse the approach of the Indian dispensation in depth. Finally, it proposes some key improvements in the system and a possible medium to achieve them.

Not Merely a Value Game

The commercial advantages of IP for SMEs go beyond the generic advantages that stem from the founding principles of IPR. In the business realm, small firms tend to have shorter product life cycles and thus, need constant improvisations in their products to adapt to the fast-changing market conditions.[10] Moreover, IPR provides a tool to the SMEs to keep their heads above water amidst the daunting competition from the larger enterprises who possess the means and methods to holistically exploit the intellectual property available to them. They generate massive licensing revenues, enter into joint ventures or other corporate arrangements and effectively pre-empt certain markets which, given the importance of time, can have far-reaching implications. IP protection through patents is positively related to performance in terms of commercialization success for small firms.[11]

From an economic point of view, industries in the developing economies have shown a substantial shift towards transforming into knowledge and technology-based[12] which has created opportunities for the production of new high-value products and services and this has further necessitated the protection of intellectual property rights. This is because the principal capital of such enterprises is their intellect on how to optimise the use of the existing knowledge and how to further improvise it to maximise their benefits. Also, such industries tend to cluster and with the injection of competition, research and development (“R&D”) is stimulated to improve and create new technology.[13] The mobility of a similar labour pool within the cluster leads to knowledge transfer and promotes competition and growth. A structured IPR framework can be an excellent tool to capture this knowledge aggregation due to the fluidity of human resources.

We find that from the perspective of SMEs, adopting a strong mechanism of IPR for their product and services can propel them to overcome the various other business and economic challenges they are faced with. The growth of industry although not linear, does roughly conform to a trajectory that constitutes large parts of gradual and proportional growth, especially in the introductory phase where most of the SMEs find themselves to be and that is where IPR can prove to be a game-changer. It is much more than just a value game for SMEs. As compared to the rest of the business arena, there is a greater and more importantly a unique requirement of IPR for SMEs.

Indian Approach and Critique 

Steps Taken

Over the last few years, the Indian government has taken some key steps in assisting SMEs to obtain and exercise their IPR. With an objective to enhance awareness of SMEs about IPR so their ideas and business strategies can be protected, the Ministry of MSME launched a scheme called ‘Building Awareness on Intellectual Property Rights.[14] This scheme has laid special emphasis on selected clusters of MSMEs by providing them funds for conducting pilot studies among other facilities. The Department of Electronics and Information Technology (Deity) has launched a scheme entitled “Support for International Patent Protection in E&IT (SIP-EIT)” to provide financial support to MSMEs for international patent filing wherein reimbursement up to 15 lakhs or 50% of the total expenses incurred, whichever is lesser, will be provided.On the legislative front, one of the key changes came in the form of the introduction of financial assistance to ‘small entity’ in the patents act by an amendment in 2014 that slashed the patent filing prices by half.[15] The criteria to be recognised as such were the same as the MSME Act.[16] These measures have yielded some positive results, like a 63% increase in the grant of patents as compared to 2018-2019.[17] Under the ‘Startup India’ scheme, the examination and disposal of patent applications from start-ups would be fast-tracked and a panel of facilitators would be assisting them in filing for the IPRs.[18] This perhaps was one of the most crucial steps taken for a small business as the time taken to realise the investment gains is of absolute importance. This is because even the subsidised amount invested might be a considerable fraction in its books, and that would become burdensome by the day.

Critique

As is the case with most of these schemes which are initiated for the upliftment of the new entrants or the unestablished segment of the market, the schemes related to IPR in SMEs are mostly based on large subsidy packages. While financial constraints of a small enterprise is a major barrier, there are certain issues that are specific to the nature of IPR that perturb the small enterprises, which should be addressed specifically.

Firstly, there is a gap between the bargaining powers of the dominating firms and the smaller firms. The larger firms acquire this advantageous position by virtue of them being relatively small in number as compared to MSMEs which are projected to be around the six-crore mark. This significantly increases the bargaining power of the buyers.[19] This is a tormenting situation for the smaller firms as there are a lot of direct transactional interactions between the disadvantaged small firms and the advantaged larger firms. This is because a sizeable section of SMEs act as ancillary to the larger firms by supplying them with what they produce or supplementing them with services. These may also comprise novel ideas and involve an inventive step of production and is thus capable of IPR protection. Owing to their disadvantaged position the smaller firms might be forced to sell their IPR at a price below the fair value and can also have their IPR portfolios undervalued in mergers and acquisitions.

Secondly, the aforementioned measures are essentially one-time interventions. The constituent provisions in the scheme solely emphasise the obtainment of the IPR. For realising the objectives of public good which the underlying rationale for granting rights seeks to achieve, IPR should be in the form of an instrument to promote technological innovations as well as the transfer and dissemination of technology. Its protection cannot be seen to be an end in itself.[20] This will lead to the exclusivity of the resources instead of exclusivity of the intellect which will be highly undesirable from an economic perspective.

It can be justifiably inferred that the approach adopted by India in many ways has some fundamental shortcomings which can be an explanation for some of the disappointing observations mentioned earlier. A generic approach no matter how plentiful it may appear will always be inadequate if it does not adopt a calibrated and issue-specific approach to address the problems.

Moreover, the dispensation in India has adopted a highly peripheral approach to deal with the issue of the protection of IPR. That is to say, the scope of their efforts is limited to facilitation and providing subsidies as facilitative bodies. Often SMEs lack a fitting administrative and organisational structure to actually accrue from these facilitations and imbibe a sustainable culture of regularly exercising their IPRs.  This peripheral approach needs to be complemented by further reforms both at the legislative and policy front to have a greater binding effect that percolates into the SMEs and also the other industries in commercial interaction with them. These reforms should be representative of the massive and unique importance that IPR holds for SMEs.

 

[1] Micro, Small and Medium Enterprises Development Act, 2006, No. 27, Act of Parliament 2006, (India).

[2] Notified vide S.O. 1702(E) dtd.01-06-2020, Notification of Ministry of Micro Small and Medium Enterprises Development Act, 2006.

[3] Sonia Mukherjee, Challenges to Indian micro small scale and medium enterprises in the era of globalization, 8 Journal of Global Entrepreneurship Research, (2018), https://doi.org/10.1186/s40497-018-0115-5.

[4] The Patents Act, 1970, No. 37, Act of Parliament 1970, (India).

[5] The Trade Marks Act, 1999, No. 47, Act of Parliament 1999, (India).

[6] The Geographical Indications of Goods (Registration and Protection) Act, 1999, No. 48, Act of Parliament  1999, (India).

[7] The Copyright Act, 1957, No. 14, Act of Parliament 1957, (India).

[8] Sumanjeet Singh, The State of IP protection, Exploitation and Valuation: Evidence from Select Indian Micro, Small and Medium Enterprises (MSMEs), 4 Journal of Entrepreneurship and Innovation in Emerging Economies, 159, 172   (2018), https://doi.org/10.1177/2393957518782038.

[9] João Pereira Cabral, Intellectual Property – A Story of Two SMEs, MONDAQ (June 27th, 2021, 8:47 PM), https://www.mondaq.com/trademark/1062106/intellectual-property–a-story-of-two-smes.

[10] Sumanjeet Sinha, supra note 8, at 160.

[11] Alexander Brem et al., Patenting activities and firm performance: Does firm size matter? Product Innovation Management, 55 Emerald Insight: Management Decision 1089, 1096-1097 (2017), https://doi.org/10.1108/MD-04-2016-0223.

[12]Asian Development Bank, Moving Toward Knowledge-Based Economies: Asian Experiences, Asian Development bank, (September, 2007).

[13] Chandan Dev Singla, Knowledge-based Cluster Development in India Opportunities and Challenges, Core, (2008), https://core.ac.uk/download/pdf/4423035.pdf.

[14]Ministry of Micro, Small, Medium Enterprises, https://msme.gov.in/sites/default/files/Revised%20IPR%20Guidelines_5.pdf, (Last visited 1st July, 2021, 01:43 PM).

[15] Patents (Amendment) Rules, 2014, Rule 2(i), No. 91, Notification of Ministry of Commerce and Industry 2014, (India).

[16] Ibid., Rule 5.

[17] Intellectual Property Rights India, Patents, Designs and Trademark: A figurative status, 1 IPR Newsletter, 1, 1 (2021), http://www.ipindia.gov.in/writereaddata/Portal/Images/pdf/APRIL_NEWSLETTERFinal.pdf.

[18]Startup India, https://www.startupindia.gov.in/content/dam/investindia/Templates/public/Startup%20India%20Kit_Digital_Jan19.pdf, (last visited 2nd July, 10:45 AM).

[19] Michael E. Porter, How Competitive Forces Shape Strategy, Harvard Business Review, (27th June, 2021, 04:32 PM), https://hbr.org/1979/03/how-competitive-forces-shape-strategy.

[20] D Elizabeth Verkey, Intellectual Property 3 (Eastern Book Company 2015).