Innovation per se doesn’t automatically translate into economic benefits. To profit from innovation firms need to convert it into viable products or services while also having the capacity to protect the innovation against imitators. This is the appropriability problem I’ll try to address in what follows.
Innovation is the main source for companies’ competitiveness. Through innovation SMEs can differentiate their offerings in the market, gain a competitive advantage and escape from the so-called commodity trap, i.e. low-price pressures that flow from emerging countries.
However, there are many factors that stifle investments in technology and innovation for SMEs. First and foremost, an overall lack of funds and financial resources poses a challenge for R&S investments. Secondly, as many SMEs are family-owned, they have a higher risk aversion that can be magnified by underlying conflicts of interest between family and company’s assets. These can also negatively affect investments in R&D and innovation. Finally, and this is the focus of the article, innovation can be compromised by the nature of knowledge itself. Indeed, “new” knowledge can be considered as a public good, that is not excludable, not rivalrous and therefore not appropriable.
Not excludable means that once produced, it is difficult to prevent anyone from “consuming” the new knowledge. The only way to exclude others from knowledge is to keep it secret – however, many forms of knowledge become evident through use.
Not rivalrous refers to the logic that the amount that one person consumes does not affect the amount that other people can consume.
Not appropriable refers to the impossibility or difficulty to capture all profits generated by an innovation because others can also take advantage from it.
These three characteristics, allowing free riding behaviours – using a good without paying for it – undermine incentives to invest in R&D and thus to introduce new innovations.
Under these circumstances, companies, and SMEs in particular, have to carefully design strategies to be adopted in order to appropriate the benefits of its investments in innovation, to protect their advantage by imitators, thus to obtain the returns on investments in innovation.
A possible solution comes from patents that according to the European Patent Office (EPO) definition are “a legal title granting its holder the right to prevent third parties from commercially exploiting an invention without authorization”.
Besides protecting the innovations, patents are also valuable because they can be used to develop a reputation, to negotiate or collaborate with other companies, to avoid or deflect legal challenges, to block investments in R&D by other companies (the so-called patent blocks) and as a proof of value for banks or investors like VC. However, the effectiveness of the patent system has been challenged because patents have some drawbacks:
- Competitors could invent “around” companies’ patents and by doing so limit their protection given to the owner.
- The patenting requires information disclosure that triggers a leaking of information.
- To apply and defend a patent can be prohibitively expensive. SMEs limited resources are often insufficient to monitor and implement patent legal expenses especially for international litigations.
This explains why, in many sectors patents are perceived as a necessary but not sufficient condition to protect innovation.
There are other ways that enable companies to protect against imitators and benefit from its innovation:
- The industrial secret is an effective means of protection, especially for the process innovation where the reverse engineering is less efficient.
- It is difficult to imitate tacit knowledge that is accumulated, in particular when integrated in specific regions or firms.
- The time to market and the after-sales services are considered as major sources of protection against imitation, in particular for product innovation, they facilitate the creation of brand loyalty and credibility.
- As a first mover a firm can enjoy lower production costs because of learning economies magnified by customer feedback and product improvements. This creates an effective entry barrier to imitators.
- In order to commercialise an innovation, competencies and complementary assets in the sales and distribution are required. Those who have these assets often succeed.
- Time, cost and competencies needed to copy complex products also represent a means of protection.
- Establish a de facto standard. The widespread diffusion of a company’s product and the effect of network economies raises barriers against competitors.
- Introducing innovations with features valued by customers can disrupt the market from the bottom up.
To sum up, SMEs should consider – beside patents – a strategy based on a combination of the eight above-mentioned factors to protect from imitators, improve the appropriabililty of innovation and fully benefit from R&D investments.
Giovanni Zazzerini is the Secretary General of INSME – the International Network for Small and Medium Enterprises. He is also adjunct professor at the Department of Management of LUISS Guido Carli of Rome and contracted professor of Marketing at the Department of Economics of the University of Perugia. He works as an expert for the Italian Ministry of Foreign Affairs in development cooperation projects in China and Vietnam and he is regularly appointed by the European Commission to advise research projects on exploitation of research results, commercialization of innovation and business plan development. Giovanni also worked as a consultant in developing projects in the field of innovation, entrepreneurship and internationalization for SMEs for more than 15 years. Beside public institutions he has advised national and multinational companies (Vodafone, Sky, Ericsson, DHL, etc.). He holds a Ph.D. in Marketing from University of Perugia (Italy), a Master’s Degree in Technology and Innovation Management from SPRU, University of Sussex (United Kingdom) and a Bachelor Degree in Economics from University of Perugia.