As India tries to stutter (trails unsteadily) back from the economic devastation caused by the pandemic, bold reforms will be desperately needed. Also, there is no doubt that small and medium business are going to be a major fulcrum on which this recovery will depend. However, for the MSMEs to fully realise their potential in the Indian economy, they must not only be nourished back to health in the post-pandemic era, but their competitiveness be improved significantly so that the MSME sector becomes more efficient and becomes a part of the global value chain. And such improvement in the efficiency can never be achieved if the domestic MSMEs do not have access to technology which allows them to innovate.
There are several reasons why MSMEs continue to have problems accessing technology. First is, of course, the costs. Unequal bargaining power between a small business and the Patent holder- which is generally some business giant – makes it harder to negotiate favourable pricing terms. Reducing the cost margin is therefore critical to ensure (innovation) access for the MSMEs in India. However, a bigger issue pertains to the information asymmetry in the Patent market. Often, potential licensees are not even aware of the existence of certain kinds of Patents which can boost their efficiency. Similarly, Patent holders find it difficult to identify potential licensees for their Patents even if they are keen to license their technologies. As per a survey carried out by Maria Pluvia Zuniga & Dominique, only a minority of companies are able to license out their Patents even when they wish to do more of it. The survey also identified inability to find partners as a reason well ahead of other factors such as licensing fees, negotiation costs, and technology advances.
To address this problem, few countries including France, South Korea, Taiwan, and Japan have created a Sovereign Patent Fund which seeks to correct the market failures and the problem of information asymmetry. Policymakers in USA and Canada have also been pushing for creation of such funds. National Electronics Policy, 2019 had also proposed setting up of such a fund for India.
WHAT IS A SOVEREIGN PATENT FUND?
A Sovereign Patent Fund (SPF) is a wholly or partly Government-backed entity which aims to bolster domestic businesses through acquisition and licensing of patented technology. These funds may also be loosely seen as belonging to the genus of sovereign wealth funds, except that sovereign patent funds are dedicated to intellectual property. While the specifics and structure of the fund may vary from one country to another, highly evolved funds can undertake the following activities beyond acquisition and licensing of patents:
• Defensive services: this includes protecting domestic companies from aggressive litigation on the part of patent assertion entities and helping to secure freedom to operate for participating technology companies.
• Commercialisation services: this includes helping Small and Medium Enterprises (SMEs) and Public Research Organizations (PROs) realize the value of their existing IP through licensing and — where necessary — litigation.
• IP Advisory: This entails providing expert advice to mostly high-potential start-up and scale-up firms that might not otherwise be able to access it.
• Prohibiting IP flight: Several such funds also engage in ensuring that domestic IP does not leave the country in cases the owner firm goes bankrupt.
These funds operate as an intermediary in the market and procure license from the Patent holders and then sub-license the same to different businesses in India. Such well capitalized funds can have the necessary expertise to negotiate the licensing terms with Patent giants which small businesses seldom possess, thereby addressing the problem of unequal bargaining powers. The business model of these funds allows them to transact in bulk and that gives them a cost arbitrage which also brings down the costs Patents for eventual licensees.
These funds work in a methodical manner where they determine the demands for specific technologies from the market through studies and can then reach out to prospective patent holders who can supply such technologies. This helps in addressing the problem of information asymmetry referred above.
SPF FOR INDIA
In terms of its functioning, SPF in India may restrict itself to the business of IP acquisition and licensing without venturing into more niche areas like IP advisory and commercialization. However, it is important that this SPF is also professionally managed and attracts private sector participation. for this purpose. Both South Korea and Japan have had private sector participation in their SPFs. This is important not only from the perspective of the efficiency of the fund but also to ensure that these funds operate with some profit motive. Running these funds with a profit motive will ensure that accountability is fixed, and the government contribution is not being splurged on acquiring unnecessary technology and only those which could be put to profitable use are acquired and sub-licensed.
At a time when India is at the cusp of yet another economic revolution, empowering our MSMEs with access to technology can really propel the country to new heights and put us strongly on the path of five trillion-dollar economy.
Ravi Shankar Jha is Senior Investment Specialist, Invest India; Sanchit Goyal is Investment Specialist, Invest India.