While large firms have the ability to finance R&D internally, this is often not an option for smaller firms, and as a consequence they must rely on external funders. Dr. de Rassenfosse explains how SMEs can leverage their IP to facilitate R&D financing. There are two ways in which patents can help finance innovation. Patents can be used: i) to reduce the cost of external capital; and ii) to generate additional cash flows.
Patents can help finance innovation
The rationale for the former effect is twofold. First, patents can serve as a credible signal that reduces information asymmetry. By taking patents on promising innovations, the inventor reveals some information to investors. This information will make investors more able to differentiate between good and bad projects. By so doing, the inventor can negotiate more favourable financing conditions. Second, patents materialize the value of knowledge stock: they codify the knowledge and make it tradable, such that they can be used as collateral.
The rationale for the latter effect is obvious. Taking patents in view of licensing them out is a way to generate additional cash flows from licensing deals, especially in the absence of the complementary assets needed to exploit the invention internally (such as distribution channels or marketing capabilities).
Monetary patents are more prevalent among SMEs
Dr. de Rassenfosse uses the term “monetary patents” to refer to patents that are taken in view of attracting investors or licensing out the technology. Using data from an international survey carried out from June to September 2006 by the European Patent office, he studies firms’ motivations to patent. The survey asked firms who had applied for a patent to rate a series of statements to determine their motivations. The ratings ranged from 1 (completely disagree) to 6 (fully agree) and included: imitation (I patent mainly to prevent imitation by competitors); secrecy (I will not patent an innovation that I can keep secret); freedom (I patent mainly to protect my freedom of operation); investors (I take patents in order to convince investors or banks of the value of my invention); and licensing (I take patents in view of licensing).
Source: adapted from de Rassenfosse (2010), p. 21.
As expected, the most popular motivation was to protect against imitation with a mean score greater than 5.5 (see above figure). This was followed by freedom of operation, attracting investors, and then licensing. In relation to company size, the share of SMEs taking patents for monetary reasons (attracting investors and seeking to license their products) is considerably higher than larger firms – 40% for SMEs in contrast to 15% for larger firms. In addition to preventing imitation, larger firms were mainly concerned with protecting freedom of operation.
The fragmented market for technology in Europe hinders technology licensing
de Rassenfosse then wonders how the licensing rate differs between Europe and the United States. Considering willingness to license and the size of the patent portfolio, he finds that the share of patents licensed by European SMEs is significantly lower than the share licensed by SMEs in the US. Using advanced econometric techniques, he finds that European SMEs willing to license are twice less likely to have a high share of their portfolio licensed as compared with US SMEs willing to license, which he suggests is due to inefficiencies in the European market for technology.
 Gaetan de Rassenfosse, 2011., “How SMEs exploit their intellectual property assets: Evidence from Survey data. Small Business Economics,” forthcoming. Electronic copy available at http://ssrn.com/abstract=1726208
 Shaun Larcom provided valuable input to the present document.
 There exist other ways to monetize IP such as the sale and license-back of IP rights or IP securitization. Another option consists of selling patents, particularly if they belong to non-core IP. These monetization techniques, however, are often too complex and costly to implement for SMEs.
[This post originally appeared at ipeg.]