«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
In 2005, OSEO40 was established by bringing together the French innovation agency and SME development bank, with the aim of providing assistance and financial support to French SMEs in the most decisive phases of their life cycle. OSEO covers three areas of activity: innovation support and funding for technology transfer and innovative technology-based projects with real marketing prospects; guaranteeing funding granted by banks and equity capital investors; and funding investments and operating cycles alongside banks. It reports to both the Ministry for Economy, Finance and Industry and Ministry for Higher Education and Research.
Every year, the Ministry for Economy, Industry and Employment, through the General Directorate for Competitiveness, Industries and Services (DGCIS) earmarks funds for EUREKA France, mainly providing refundable loans without interest. Grants are also possible for industrial research phases, with SMEs above 50 employees being the main target for this intervention.
Separately, following the work of the European Commission on the Economics of Intangibles, a working group was established in 2011 to focus on ‘Principles of Measurement of Intangibles – proposals for the provision of competitiveness and the sustainable development of businesses’.
Its report later that year concluded that intangible capital is now at the heart of sustainable growth and the qualitative competitiveness of businesses, providing a route to business longevity and a major pillar of lasting value.
In introducing the Report, the current state of Accounting Standards was identified as not giving full visibility of intangible capital. This led the Supreme Council of the Institute of Chartered Accountants to participate. After a year of work, the study made 12 proposals around three major directions to encourage companies to monitor the performance of their intangible assets and to then correctly measure and report to market.
Under the first direction: ‘A Process for the Measure of Intangibles’, the five proposals were:
• Establish mapping of intangible assets that are relevant in furthering competitiveness and business strategy
• Identify and structure the qualitative and quantitative indicators to identify and measure intangible assets that have been “mapped”
• Ensure the relevance and robustness of measurement indicators of intangible assets
• Analyse the link between the performance of the intangible assets and financial performance and select indicators
• Manage the utility value of the intangible portfolio to provide a better long-term valuation of the business Proposals within the ‘Governance and Management in order to control and lead the performance
of intangible assets’ direction were:
• Integrate intangibles in institutional and operational governance
• Use existing processes to achieve the reliable measurement and performance management of intangible assets
• Integrate the measurement of intangible assets in internal and external control processes
• Make intangibles secure by integrating them into intellectual property protection and insurance The final heading, ‘Efficient Communication to promote the value of Intangibles’, included three
• Integrate intangibles’ in the training of analysts and their diagnostic and assessment methodologies
• Integrate intangible investor’s governance and management arrangements
• Enhance businesses’ communication strategies for reporting intangibles 46 The role of intellectual property and intangible assets in facilitating business finance
According to German GAAP, following the Accounting Law Modernisation Act, a company is allowed to capitalise internally generated intangible assets in its balance sheet if the features of an asset are met41. The main criteria for capitalisation are independent marketability and measurability.
A report in 2010 by the Institute of Management and Economics and the Department of Financial and Management Accounting concerned the intellectual capital statement as a component of the management commentary. The aim of the project was to integrate essential intangible factors relevant for the sustainable success of companies into the management commentary; it identified that current information about intangibles is not sufficient to assess the future financial and earning power of a company, especially a SME42.
One of the main project achievements was a checklist with intangible factors and assigned indicators. Based on a national and international survey, complemented with experiences of the trial companies, key factors and indicators were identified. Besides factors of human, structural and relational capital, financial influences on a company’s success were included. The checklist provides guidance for SMEs as well as documenting the advanced implementation process for the audit.
In addition to a standard list an electronic template was developed, the “Wissensbilanz-Toolbox”, to promote usability and to perform different analysis with the data to identify relevant contents.
Guidance and reporting structures were also developed to help companies integrate the results into their management commentary.
In 2007, the Danish Patent and Trade Mark Office established an IP exchange to be “a venue for buyers and sellers of IP rights” and to assist businesses to “better exploit IP knowledge fully by trading IP rights”. The IP Trade portal provides “information and guidelines for trading IPRs, standard contracts and accompanying guidelines for trading patents and utility models, IP evaluation tools and accompanying guidance material in valuation and statistics on trading IPR” 43.
The trading platform, which is free for sellers and searchers, has the capacity to meet one of the key requirements of IP finance, namely a marketplace for the sale of distressed IP assets, although to date, given the infancy of such structured financial frameworks, it has not been used to this end. Also, its aspirations are limited to being a ‘display window’ for patents, designs and trade marks, and the marketplace does not include any transactional facility.
Asia: India To date there has been evidence of some limited appetite amongst banking institutions towards IP. The most (in) famous example is Kingfisher Airlines, which successfully securitised its brand assets to borrow $420m from State Bank of India in 2009, but which has been grounded for around 10 months at the time of writing and currently owes more than $1bn to the banking consortium led by that bank. It has been reported that this brand valuation has been added to the company’s balance sheet.
There have, however, been other securitisation deals in India, such as LT Foods, reported to have used its ‘Daawat’ brand of packaged rice as collateral to raise debt for a £50m acquisition of a US competitor. There have also been successful securitisations of spirits brands within the same Kingfisher group, and other Indian retail and fashion companies have leveraged their brands to obtain bank funding.
Apart from professional advisers, the primary organisations driving commercial activity in IP rights have been the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Federation of Micro, Small and Medium Enterprises (FISME). Recognising the growing contribution of intellectual property to member organisations, FISME has initiated a number of programmes with assistance from the National Manufacturing Competitiveness Programme under the Office of the Development Commissioner within the Ministry of MSME.
Following the creation of a number of IP facilitation centres in New Delhi, Bangalore and Hyderabad, FISME has gone on to explore two key themes; IP valuation and the creation of a mechanism to sell the IP and realise the value. It obtained additional support from the Prosperity Fund, provided by the British High Commission in order to set up a prototype IP marketplace at www.IPRexchange.in.
This is an experimental site established to facilitate outright sale, licensing or franchising to rights that have been identified and protected, both to assist participating businesses and to provide a demonstration of the financial value associated with IP. It is not yet populated, but the Controller General of the Indian Patent Office has called it a “very good initiative; we would be willing to help as far as possible”.
China launched a major IP strategy in 2008 to support the creation, utilisation, management and protection of IP, with the aim of fostering ‘indigenous innovation’. This concept, defined as advancing domestic Chinese innovation via ‘original’ innovation, integrated innovation (combining existing technologies in a new way), and assimilated innovation (making improvements to imported technologies) was set out in the National Medium and Long-Term Plan for the Development of Science and Technology (2006-2020), setting the objective of making China a world leader in technology by 2050. A variety of initiatives have followed, most recently the 12th Five Year Plan for Establishing National Indigenous Innovation Capacity (Plan) promulgated on May 20th 2013 by China’s State Council.
48 The role of intellectual property and intangible assets in facilitating business finance Seven industry sectors have been specifically targeted for stimulus measures: energy conservation and environmental protection, new generation IT, biotechnology, advanced manufacturing, renewable energy, materials, and environmentally-friendly automobiles. However, these are not proscriptive, and many other industries (including some in the ‘social sphere’) also have government-led plans associated with indigenous innovation. The Plan also specifically references the importance of building innovation in cultural industries and developing these into a pillar industry in China.
More generally, the Chinese government is trying to boost domestic ownership of intellectual property rights in more industries. One such approach is to set targets for rewarding and otherwise assisting in the development of Chinese indigenous IP. As noted above, tax incentives are also in place, and the increased appreciation of the importance of IP to economic output has spurred progress in the enforceability of IP rights in China (to the benefit of domestic and foreign companies).
Asia: Hong Kong
The Innovation and Technology Commission (ITC) was set up on July 1, 2000 with the mission to spearhead Hong Kong’s drive to become a world-class, knowledge-based economy. In January 2004, the Hong Kong government established a Steering Committee on Innovation and Technology to co-ordinate the formulation and implementation of innovation and technology policy and ensure greater synergy among different elements of the innovation and technology programme.
ITC works with other government departments, the industrial and business sectors, institutions and industrial support organisations to promote applied research and development (R&D) in different technology areas. Following a comprehensive review and a public consultation exercise,
the ITC set up five R&D centres in 2006 to drive and co-ordinate applied R&D in five focus areas:
automotive parts and accessory systems; information and communication technologies;
logistics and supply chain management-enabling technologies; nanotechnology and advanced materials; and textiles and clothing. At the end of February 2013, 527 projects from the R&D Centres were approved at a total project cost of $3 billion.
The ITC manages funding schemes to encourage companies in Hong Kong to develop innovative ideas and technology businesses. The Innovation and Technology Fund (ITF) was set up in 1999 with an injection of $5 billion. There are four programmes under the ITF to cater for different needs: an Innovation and Technology Support Programme; a University-Industry Collaboration Programme; a General Support Programme; and a Small Entrepreneur Research Assistance Programme.
As at the end of February 2013, 3,215 projects with total ITF funds of $7.3 billion were approved.
Most of the funded projects were related to information technology (19 per cent); electrical and electronics (17 per cent); manufacturing technology (11 per cent); and biotechnology (10 per cent). ITC also manages the development of the Hong Kong Science Park, due to open in 2014.
local research institutions. Under the Scheme, a cash rebate is provided on the applied R&D investments by enterprises. The Scheme covers projects funded by ITF and applied R&D projects conducted by enterprises in partnership with local designated research institutions.
Since February 2012, the level of cash rebate has been increased from 10 per cent to 30 per cent. As at end of March 2013, 577 applications with a total cash rebate of $41.4 million were approved.
South-East Asia: Singapore
In April 2013, the government of Singapore accepted the recommendations of its IP Steering Committee, which has drawn up a ten year strategy to establish the island as a central ‘hub’ for Intellectual Property in South East Asia. The committee was originally convened in May 2012.
Among the various initiatives, the government plans to introduce an IP financing scheme which includes the concept of partially underwriting the value of patents used as collateral for bank loans in event of default. This measure is intended to encourage banks to recognise IP as an asset class, to build IP financing capabilities among financial institutions, and allow IP-rich companies to raise capital more easily using their patent assets, and was referenced by Singapore Deputy Prime Minister Mr Teo at the 4th Global Forum on Intellectual Property (GFIP) in August 2013. The scheme is due to become available from Q1 2014.