Risks of Illicit Trade in Counterfeits to Small and Medium-Sized Firms

2. SMEs and Intellectual Property Rights

The economic importance of SMEs

According to most definitions, small and medium-sized enterprises (SMEs) are companies with fewer than 250 employees and either an annual turnover not exceeding EUR 50 million or a total balance sheet not exceeding EUR 43 million.1 SMEs can be further broken down into micro, small and medium sized; although there is no common definition of these categories, the SME Intellectual Property Scoreboard categorises firms as micro if they have fewer than 10 employees and a turnover of less than EUR 2 million, and small if they have under 50 employees and a turnover of less than EUR 10 million (EUIPO, 2022[1]).

SMEs play a key role in most economies, and notably in OECD countries where they are the predominant form of business (around 99% of all firms in most OECD countries) and the major employers (around two-thirds of total employment). In addition, they contribute to more than half of value added in OECD countries. SMEs also actively participate in global value chains, where their indirect exporting activity (in value-added terms) is greater than their direct activities (in absolute terms). On average across OECD countries, SMEs accounted for 40% of gross exports and for 50% of the value added of gross exports. Figure 2.1 shows the gap between the direct and indirect export activity of SMEs in OECD countries. This reflects the role SMEs play as suppliers of inputs to larger direct exporters (OECD, 2021[6]).

Figure 2.1. Direct and indirect exporting activity of SMEs in OECD countries

Source: “Accounting for firm heterogeneity in global value chains: The role of Small and Medium sized Enterprises”, STD/CSSP/WPTGS(2018)5.

Governments around the world have long recognised the importance of SMEs to economic growth, job creation, local development, inclusion and social cohesion. SMEs also play a crucial role in helping economies and societies adapt to major transitions, including digitalisation, globalisation, demographic shifts, labour-market transformations and the transition to more sustainable practices and models. At the same time, SMEs are very diverse with respect to size, sector, location, capacities and aspirations, as well as their ability to overcome inefficiencies in the business environment and policy sphere. Such diversity has important implications for the design and implementation of policies.

Countries worldwide have diverse policy frameworks in place which are to account for relevance to SMEs. These often have a broad scope and affect a large number of actors, ranging from reforms that shape framework conditions to policies for the business population at large and SME-targeted measures.

Building on more than two decades of OECD work, the OECD Council adopted in 2022 a Recommendation of the Council on SME and Entrepreneurship Policy (Annex A). This offers a coherent and strategic approach to SME and entrepreneurship policies, encompassing a mix of targeted and horizontal policy dimensions and emphasising effective governance mechanisms. While aiming to be widely applicable, it recognises the different circumstances, institutional contexts and stages of development across jurisdictions, and that countries use a variety of policy frameworks to support their SMEs and entrepreneurs. The recommendation is a response to a long-standing demand for frameworks and tools to improve SME and entrepreneurship policy effectiveness, ensuring coherence and synergy across varied policy areas and actors, and accounting for the diversity of the SME and entrepreneur population.

SMEs go digital

In recent years SMEs have significantly increased their online presence. This was particularly in response to the COVID-19 containment measures implemented by governments. Entrepreneurs and SMEs across the globe increased their digital presence, selling on line using e-commerce platforms or through personal websites, engaging with social media and digitally advertising. For example, Amazon reported that between June 2019 and  May 2020, the average sales of its European selling partners (mostly comprised of SMEs) increased from EUR 70 000 to EUR 90 000.2 This increase during a global economic downturn indicates a shift to e-commerce in response to external shocks, such as lockdowns. For many firms, this forced push to online sales was their first experience of connecting with consumers digitally. Facebook conducted a survey in February 2021 and found that, among SMEs, the three most frequently reported uses of digital tools were selling goods and services to customers, digital advertisements, and communication.3

As OECD governments develop their COVID-19 recovery plans, the digitalisation of SMEs is a high policy priority. Throughout the pandemic period, OECD governments have implemented diverse policy tools, including vouchers and grants for business digitalisation, strengthening e-government services to businesses, enhancing the digital re-skilling of entrepreneurs, improving access to digital infrastructure, and initiatives to facilitate the uptake of e-commerce and teleworking technologies. Instances of such instruments and initiatives have increased since the onset of the pandemic. In July 2020, OECD research found that only 13 of the 60 countries tracked had SME digitalisation support measures in place, but by the first quarter of 2021 this had risen to at least 24 countries. This increased focus on SME digitalisation in “build back better” recovery packages is linked to the central role that digital tools have played in response to the COVID-19 crisis (OECD, 2021[7]).

For example, the Portuguese recovery plan includes EUR 650 million for measures targeting SME digitalisation. These policies include tailored digital skill training, coaching, and e-commerce support for micro enterprises. Similarly, Latvia’s recovery plan dedicates EUR 125 million to the digitalisation of business. These measures aim to support firms in introducing digital technologies such as e-commerce solutions, the innovation of new productions and digital mentoring (OECD, 2021[7]).

Intellectual property rights and EU SMEs

This section uses data from the recently published SME IPR Scoreboard (EUIPO, 2022[1]) to examine more closely the details of ownership of IPR among EU SMEs, breaking them down both by firm size, and by their degree of innovation.

Intellectual property ownership

The IPR ownership rate among SMEs is relatively low. Analysis of a sample of over 110 000 European SMEs conducted by EUIPO and the European Patent Office (EPO) (EPO/EUIPO, 2021[8]) showed that slightly less than 9% of SMEs have a registered patent, trademark or design. Similarly, only approximately 10% of the SMEs surveyed for the SME Scoreboard reported that they had registered any IPR (EUIPO, 2022[1]). As Figure 2.2 shows, the rate of ownership increases with firm size, although the differences across micro, small and medium-sized firms do not exceed 1 percentage point.

Figure 2.2. IPR ownership among SMEs, by firm size, 2022

Note: N=4084 firms from a random sample of SMEs. Based on Q6: “How many of each of the following Intellectual Property Rights (IPR) types does your company own?”

Source: EUIPO (2022), 2022 Intellectual Property SME Scoreboard, https://data.europa.eu/doi/10.2814/28513.

However, innovativeness does make quite a large difference to the propensity of SMEs to register IPR. Figure 2.3 compares the rate of ownership among SMEs based on whether they had introduced any improvement in terms of goods, services or business processes in the three years before the survey. The rate of IPR ownership among firms that had introduced any such improvement is more than twice the rate of those that did not. Firms that had introduced innovations were further broken down by how radical they were, with the highest rate of IPR ownership found among firms which introduced innovations novel to the market in which they operate. These firms have almost three times the rate of ownership than SMEs that did not introduce any innovation in the previous three years. The rate of IPR ownership is somewhat lower among firms that introduced innovations novel to the world (13.5%) and novel to the firm (12.2%) but still much higher than among the firms that did not introduce any.

Figure 2.3. IPR ownership rates among SMEs, by degree of innovation, 2022

Note: The figure shows the rate of IPR ownership among respondents to the 2022 IPR SME Scoreboard survey broken down by type of self-reported innovation. N=4084 firms from a random sample of SMEs. Based on Q3 “To the best of your knowledge, how novel were the improvements you introduced?” (those answering “Do not know” were omitted) and Q6: “How many of each of the following Intellectual Property Rights (IPR) types does your company own?”

Source: EUIPO (2022), 2022 Intellectual Property SME Scoreboard, https://data.europa.eu/doi/10.2814/28513.

The impact of registering intellectual property

As the preceding section has shown, IPR ownership rates tend to be higher among the most dynamic SMEs, actively looking for ways to improve existing products, services and business processes. Although innovation may be risky, it also increases the chance of better performance. This is confirmed by the findings from a previous EUIPO/EPO report, that SMEs that own IPR have 68% higher revenue per employee than SMEs that do not (EPO/EUIPO, 2021[8]). The same report showed that improvements in firm performance depends on the type and combination of IPR, with highest ownership premium associated with firms combining different types of intellectual property (Figure 2.4).

The 2019 EPO/EUIPO report (EPO/EUIPO, 2019[9]) found that SMEs that have filed at least one IPR are approximately 20% more likely to experience subsequent growth and 10% more likely to experience high-growth episodes.

The 2022 IPR SME Scoreboard (EUIPO, 2022[1]) also found that 93% of SMEs that registered IPR experienced a positive impact from registration. The share is high among all SMEs, but some differences are found when firms are broken down by innovativeness. Among those firms that did not introduce any innovations in the three years before the survey, 89% experienced some positive outcomes of IPR registration. However, among those that implemented changes new to the world, the corresponding share reaches almost 95% (EUIPO, 2022[1]). Also, as Figure 2.5. illustrates, SMEs that implemented innovations novel to the market were able to name on average one more positive outcome they experienced after registration of IPR than those that did not introduce any improvement.

Figure 2.4 IPR ownership premium among SMEs, by type of IPR, 2022

Note: IPR ownership premium has been defined as a difference in turnover per employee between relevant IPR ownership category and SMEs that were not owners of registered IPRs. The differences have been found to be statistically significant for all the IPR ownership groups.

Source: EUIPO/EPO (2021)

Figure 2.5. Positive outcomes from IPR ownership among SMEs, by degree of innovation, 2022

Note: N=3985 SMEs which confirmed having registered IPR and reported the type of innovation introduced: 904 SMEs had not introduced any innovation, 2257 reported innovation novel to their firm, 952 novel to the market and 167 novel to the world. Based on Q3: “To the best of your knowledge, how novel were the improvements you introduced?“ and Q12: “What are the positive impacts of registering IP? Please indicate all forms of positive impact you have experienced.”

Source: EUIPO (2022), 2022 Intellectual Property SME Scoreboard, https://data.europa.eu/doi/10.2814/28513.

Figure 2.6. Types of positive outcomes from IPR ownership among SMEs, by degree of innovation, 2022

Note: N=3985 SMEs which confirmed having registered IPR and reported the type of innovation introduced: 904 SMEs had not introduced any innovation, 2257 reported innovation novel to their firm, 952 novel to the market and 167 novel to the world. Based on Q3: “To the best of your knowledge, how novel were the improvements you introduced?“ and Q12: “What are the positive impacts of registering IP? Please indicate all forms of positive impact you have experienced.”

Source: EUIPO (2022), 2022 Intellectual Property SME Scoreboard, https://data.europa.eu/doi/10.2814/28513.

Better protection of inventions topped the ranking of the positive outcomes of registering IPR for three out of four groups of SMEs, broken down by their degree of innovation (Figure 2.6). Improved reputation or image also made it to the top two positive outcomes in three of the four groups of firms. Among SMEs that implemented innovations new to the world, the second-most frequently reported outcome was the strengthening of business prospects. Notably, the more radical the innovations firms have implemented, the more likely they were to cite strengthening innovation as a positive outcome of registering IPR.

Motivations for registration

As Figure 2.7 shows, one of the most important reasons why SMEs decide to register IPR is to prevent other firms from copying their products or services. This motive is most frequently chosen by micro and small firms and ranks second among the medium-sized ones. It is worth noting that “it guarantees better legal certainty of extent of protection” is ranked among the top three for all size groups of SMEs. Over 88% of all IPR owners cited at least one of the “enforcement” options4 among the reasons for registering IPR.

Figure 2.7. Reasons for registering IPR among SMEs, by firm size, 2022

Note: N=4278 SMEs which confirmed having registered IPR: 1050 micro, 2151 small and 1077 medium-sized firms. Based on Q8: “Why did your company register IPRs? Multiple answers possible” (those answering “other” were omitted).

Source: Source: EUIPO (2022), 2022 Intellectual Property SME Scoreboard, https://data.europa.eu/doi/10.2814/28513.

Figure 2.8. Reasons for registering IPR by SMEs, by degree of innovation, 2022

Note: N=3985 SMEs with registered IPR and reported on the type of innovation introduced; 2257 SMEs novel to their firm, 904 no innovation, 952- novel to the market and 167 novel to the world. Based on: Q8: “Why did your company register IPRs?” (“other” omitted) and Q3: “To the best of your knowledge, how novel were the improvements you introduced?” ( “Do not know” omitted).

Source: EUIPO (2022), 2022 Intellectual Property SME Scoreboard, https://data.europa.eu/doi/10.2814/28513.

Preventing the copying of products or services is also one of the prime motives for registering IPR regardless of firms’ innovativeness, appearing among the top three reasons for all groups (Figure 2.8). It was the most frequently chosen option among firms that had introduced improvements either novel to them or to the world in the preceding three years. Surprisingly, improving the image of the company was the most popular reason for registering IPR for firms at opposite ends of the innovation scale: both firms that did not introduce any innovation and those that introduced improvements novel to the world.

Notes

← 1.  See, for example, the EU definition introduced in the in the EU recommendation 2003/361, available here: http://data.europa.eu/eli/reco/2003/361/oj.

← 2.  Amazon, Small Business Success in Challenging Times: 2020 Amazon European SMB Impact Report, https://assets.aboutamazon.com/bf/78/0bfc1dda40b181b7dcc91638b351/amazon-eu-smb-report-2020.pdf.

← 3.  Facebook, Global State of Small Business: Insights into Women-Led and Minority-Led Businesses in Early 2021, https://about.fb.com/wp-content/uploads/2021/04/Global-State-of-Small-Business-Report-March-2021.pdf.

← 4.  That is: it guarantees better legal certainty of extent of protection; it helps me prevent others from copying my solutions, products or services; it increases the chances of effective enforcement.