Exploring a Sense of Intellectual Property Valuation for Indian SMEs

Exploring a Sense of Intellectual Property Valuation for Indian SMEs

Sumanjeet Singh (Department of Commerce, Ramjas College, University of Delhi, Delhi, India) and Minakshi Paliwal (Department of Commerce, Ramjas College, University of Delhi, Delhi, India)
DOI: 10.4018/ijabim.2014010102
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Abstract

As intellectual property (IP) has become an integral part of business strategy, the valuation of these assets has become more and more critical. Consequently, the strategic decisions of Indian SMEs also increasingly depend on understanding the economics affecting the value of these assets and most crucially appraising the approximate value of their IP. In this light, the paper reviews the principal approaches and methods used to evaluate an IP asset and proposes a framework to help the Indian SMEs to select an appropriate approach for effective valuation of their IP. In the background, paper discusses various scenarios where IP valuation is required and needed for SMEs and also explores some problems and issues generally faced/reported by the Indian SMEs in IP valuation. Further, the paper examines the broadening set of channels through which SMEs can exploit their IP. The paper provides five constructive building blocks (descriptions of IP assets, valuation purpose, influencing factors, valuation premise and Standardizing IP valuation) for Indian SMEs to choose a viable approach. The paper concludes that the selection of an appropriate method depends upon the circumstances surrounding the valuation, including the type of IP being valued, the purpose of valuation, the basis of valuation and most importantly the availability of information. The clear understanding of the underlying assumptions and theories behind the various valuation methodologies will assist the Indian SMEs greatly in negotiations for the sales or licensing of their intellectual property.
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Introduction

There are several compelling reasons in the literature to protect the intellectual property1 (IP). It encourages innovation (Kremer, 1988; Helpman, 1993; Jeffe & Josh, 2004; Chen & Thitima, 2005; Crosby, 2007) and rewards entrepreneurs (Gans, 2003; Boone, 2001; Teece, 1987), drives economic growth (Schmookler, 1966; Falvey et al., 2004; Thompson and Rushing, 1999; Gould and William, 1996) and competitiveness (Landerman and William, 2003; Lai, 1998 and Chaudhuri et al., 2006), creates and supports competitive jobs (Vandenbussche et al., 2007; Burke and Fraser, 2007; Burke et al., 2002), protects consumers and families (Frank & Salkever, 1997; Hausman & Leonar, 2002; Giancarlo & Harvey, 1997), and helps generate breakthrough solutions to global challenges (Bruno,2009; GIPC, 2011; Norm et al., 2011). Most importantly, the shift towards knowledge and technology-based industries has placed increasing importance on intellectual assets as the source of competitive advantage for firms, thus increasing the need to have such assets protected (WIPO, 2004). All businesses today- big and small, public and private, high and low technology enabled- need to create and extract value from their intellectual capital. However, the capabilities to generate and develop, protect, level of usage and exploitation of IP varies significantly across the organization, depending on their sector, size, focus, resources and the business environment in which they operate. Larger sized firms give tremendous value to their intellectual property (Christine & Mark, 2007; Gould & Gruben, 1996; Sumanjeet, 2012). Today, between 60-80 per cent of the market value of the companies on S&P is attributed to IP (Roberts, 2012). In 2007, 90 per cent of the Global 2000 enterprise value was attributable to ‘intellectual assets’ (up from 20 per cent in 1978). In 2011, the brand value of the Coke Company’s intangibles (excluding goodwill) was estimated at around US$ 71,861 million, followed by IBM at US$ 69,905 million, Microsoft at US$ 59,087 million and Google at US$ 55,317 million (Table 1).

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