CRIC Project - The Role of Intellectual Property Rights in Services Innovation
(Project completed)

• The Problems Addressed
• Empirical Work and Data Sources
• Key Results and Outcomes
• Significance of Results and Outcomes
• Key Publications

The Problems Addressed

CRIC's original interest in developing a research agenda on technology flows in the service sector has given rise to the need to examine the role of IPR in services innovation. Services innovation concerns both innovation in service firms, and in service functions across the economy. A major purpose of this research project was to gain insights into the IPR mechanisms and strategies used to secure competitive advantage among services firms. It also sought to contribute to the theoretical and empirical understanding of the dynamics of IPR systems more generally in the knowledge based economy.

So far the role of IPR in services innovation has embodied several inter-related strands of research:

• Examination of IPR regimes as shaping for the dynamics of services innovation . (Andersen and Howells 2000). This raised the question of what sort of consequences the IPR system, having been developed more to cover tangible innovations than the immaterial innovations often associated with services, hason innovation processes related to service functions.
  
  
• Studying the use of IPR and other strategies for protection of "intellectual capital" among knowledge based services. This study included a study of IPR strategies among Knowledge Intensive Business Services (KIBS) firms, drawing on data from an earlier ESRC study. (Miles, Andersen, Boden and Howells 2000) It highlighted the diversity of protection methods across different sorts of KIBS, and the importance of contractual and "informal" mechanisms.
  
  
• IPRs play an important role in income generation and distribution throughout the supply chain behind some services such as those of the audio-visual music industry (Andersen, Kozul, Kozul-Wright 2000). We have explored this sector as an example of one where intellectual property assets are marketed - and copyable commodities - and especially considered IPR management and IPR processing by the royalty collecting agencies which mediate between the legal IPR regime and the industry bodies (Andersen and Miles 1999).
  
  
• The increased importance of copyright legislation and IPR supporting institutions for knowledge based services was highlighted as the most important area for policy initiatives in the new economy (Andersen, James, Kozul, Kozul-Wright 2000; Andersen and James 2000). While the music sector typically applies copyright to protect aesthetic and cultural products rather than technical and business process innovations (though innovations of both these latter sorts, and associated patents and copyrights, do exist), there are still many points of more general interest emerging from this work. Not the least of these concerns the application of new technologies to enhancing the royalty collection systems.

Empirical Work and Data Sources

The role of IPR in services innovation for the new economy has proven to be a significant field of research, raising numerous important questions concerning economic theory, business management and policy practices. The information sources of this research project have to date been mainly based upon interviews with KIBS firms, industry, as well as government bodies within the UK (Department of Trade and Industry, Department of Culture, Media, and Sport) and overseas. Some of the research involved direct collaboration with bodies within United Nations Congress of Trade and Development (UNCTAD) as well as international policy makers outside the European region.

Key Results and Outcomes

The key findings illustrate that the role (and co-evolution) of IPR in services innovation includes a combination and culmination of several inter-related elements:

(i). Historical consequences of the evolution of industrial structures (i.e. corporate capitalism)

The patent system took off with the rise of corporate capitalism during the Industrial Revolution, as it brought into being changes in production and new industrial processes. Now, in 21^st century, the innovation process in service firms and functions has led to new challenges for the IPR system and such instruments as copyright. The protection of IPR afforded to service innovations has been much weaker and more recent than for manufacturing, reflecting the problems of trying to protect intangible knowledge and information products. The role of the IPR system as an institutional, legal and technical framework in the system of innovation as a whole deserves further study - and in particular, requires that we look beyond the patent system, which has preoccupied innovation studies to date.

(ii). The increased and different use of IPR in knowledge based services

Evidence suggests that service firms have increased their use of IPR. Some IPR use concerns the protection of cultural products and publications, as suggested above (some of these publications, may, of course, be highly technical ones). Some concerns protection of knowledge, which may be routine knowledge (e.g. firm-specific routines that provide a source of competitive advantage), but some of it may concern technical innovations - indeed, given the growing scale and technology-intensity of services, we would expect the latter to grow in importance. Heavy technology users, services whose products are highly informational, and some Knowledge Intensive Business Services are active in protecting processes and products by a remarkable variety of mechanisms. The incentives and disincentives associated with such systems, and the strategies formulated within them, deserve much more analysis.

(iii). The rationales of IPR legislation

The IPR system is an extremely complex system, with strong moral and ethical rationales (including human rights, business and consumer ethics) and strong economic rationales (including incentives to creativity, increased competition and more formal organisation of S&T at the national level). See Table 1.

The institutional, legal and technical framework may affect the formation and operation of sectoral systems of innovation, and the study identified how these influences differ significantly across countries. Table 2 provides examples of the administration of IPR systems in the US, UK, Germany, France and Japan. It could be argued that patents and trademark systems in the US, as well as the entire IPR system in the UK, illustrate an overall economic rationale under the Department of Commerce and Department of Trade and Industry, respectively. The US copyright system is administered by the Library of Congress, and the entire IPR system of France by the Department of Culture, reflecting more of a historical moral and ethical rationale for protection of intellectual creativity. Germany's Department of Justice administers its IPR system, suggesting a moral and ethical rationale based on 'rights'. These major differences between countries demonstrate the complicated lineage of IPR systems, their varying relations to national culture, and, perhaps, cast light on variations in the national systems of innovation.

Table 2. Government departments under which patents, trademarks and copyright are administered

(iv). The efficiency of the macro economic institutional governance structure surrounding IPR, and its interaction with IPR strategies at the firm level

The institutional, legal and technical IPR framework spans the whole economy, but may have different influences on different types of activity. It thus may be critical in the formation and operation of sectoral systems of innovation. IPR, of course, protects more than innovative knowledge (e.g. protecting brands and content), and innovative knowledge may be protected and diffused by means other than the formal IPR system (for example, in professional services, professional associations play a key role in controlling entry and promoting good practice). The linkages between sectoral activities and institutions, and the IPR regime, are thus complex. The way in which the economic system operates can sometimes undermine the purported rationale for the IPR regime. This is especially evident in the study of the audio-visual industry, in which barriers to entry into the industry contributed to the unequal distribution of royalties from IPR and the wealth of the record companies. Other examples may be apparent for the software industry.

Hence, in order to understand the full significance and impact of the IPR regime, a closer empirical investigation needs to be undertaken of the micro-foundation of such a regime. We also need to answer the questions concerning the costs of operating such a system, and the extent to which the mode of organisation of a given regime may influence its distribution of costs and benefits.

(v). IPR as information sources and indicators

The macro economic institutional governance structure surrounding IPR has been informed by the use of IPR as information sources and indicators. The latter have helped IPR experts, as well as national and international policymakers, to shape new IPR regimes to cope with new technological challenges. However, like all indicators, the data are inherently partial. Attention should be paid to the scope for, and the problems and limitations of, using patent data as indicators of innovative activity within services. There may indeed also be scope to use copyright and other IPR data in ways similar to those used with patent statistics. Even so the research suggests that considerable variations exist across sectors and firm sizes - as well as over time - in the use of copyright, and in particular in its application to technological innovation. There is undoubtedly a good case for new measurement tools and methods to analyse service innovations, and the study thus links into other lines of CRIC work examining measurement issues. (Some of these feed into our study, too: thus the analyses of CBI data in Analysis of Innovation Survey Data can tell us about patent and copyright activities across the economy.) Much needs to be done before the use of copyright and other IPR mechanisms can be judged useful and valid within the wider scope of innovation research.

(vi). The increased role of IPR supporting institutions for services with the emergence of the Information Technology revolution

The IPR regime involves much more than legal norms. In a case study on the audio-visual music industry, we saw how monitoring and administering copyrights highlights the important role of collecting societies as part of a functioning copyright regime. Such bodies are often central agents standing halfway between the legal and financial systems, and cover both the national institutional and sectoral aspects of the music industry. They are important innovative entities in their own right.

The copyright regime, for all its flaws, is vital to modern IPR-based (content) industries, especially as new Information Technology is associated with radically reduced costs of reproduction and distribution. Unless societies develop and adjust such institutions to match the new technological possibilities, we may be unable to fully realise the benefits from the creativity and talents of people. Research with international agencies (UNCTAD - United Nations Conference on Trade and Development) has highlighted how international IPR legislation set by the WTO (World Trade Organisation) and WIPO (World Intellectual Property-right Organisation) is inadequate for capacity building in a global knowledge-based economy. It illustrates how less developing economies need substantial institutional development to integrate and participate in the global economic sphere.

In sum, the key results and outcomes are that:

• The new service economy paradigm challenges the form, function and impact of the IPR system. However, institutional structural adjustment at all levels of aggregation is necessary to enhance the potential for the new economy.
• The diversity of IPR strategies suggests that considerable care is required before generalising from the experiences of one or other sector. For example, the application of copyrights to software has been controversial in its own right, and the concerns now being expressed about "business process" patenting and the new economy indicate that there is considerable dissent about the effects of inappropriate regimes.
• Service firms rarely report that copying is a significant impediment to their innovation, which raises the question of whether they are really protected from this problem, merely resigned to it as part of the environment, or able to find ways of forestalling copying by means of standard IPR instruments or otherwise.

Significance of Results and Outcomes

New forms of competition:

The research on technology flows in the service sector illustrated some new important elements of IPR. In this context, IPR are playing a part in the new forms of competition in the knowledge based service economy. This is especially in relation to sectors based upon new Information Technology, such as audio-visual and software services, as well as some more or less technology-based KIBSs such as architecture and design engineering. It is plausible that as computer-assisted systems are further developed and diffused to cover more traditional professional services (law, accountancy etc) that more products will need to be protected by IPR. What we see at present is a complex articulation of strategies to protect and apply knowledge that is competitively significant - ranging from intra-organisational arrangements (e.g. parcelling out knowledge resources on a "need to know" principle), through employment and trade secrets regulations (restricting staff members from working for competitors), contracts with, or informal lock-in of, business partners, and efforts to attain IPR protection by registration, checking for misuse, etc.

Distributed innovation processes:

The research also illustrated how innovation processes co-evolve at all micro, meso and macro levels throughout the economic system. Individual innovations sometimes emerge from the collective actions of a wide distribution of agents throughout the economic system; but also such individual innovations also may create tensions or mismatch with other parts of the economic system, which may need to adjust (innovate) before economies of scope (and perhaps even scale) can be fully realised. Some of these issues may involve complementary innovations, some involve social innovation or less radical change in institutional structures. This, in its turn, can have implication for policy design.

Consumption innovation and demand:

One interesting example of new forms of competition, distributed innovation processes, and efforts to create new markets is apparent in the field of new media. As multimedia products span the traditional protection frameworks that have evolved to govern print, audio, images, and video resources, so firms involved have been seeking to develop new "asset trading" systems, whereby resources can be found, and their owners and availability established. This is upstream of the market for the multimedia products themselves, and involves a number of concerted efforts by groups of actors to establish new trading regimes - similar to the "electronic markets" and "virtual business communities" being established in other spheres, but with distinctive features reflecting the intangible nature of the products. Consumer issues arise in respect of several strategies for IP protection, as suppliers are seeking to forestall illicit copying of consumer products like DVDs, and even to restrict forms of consumption that they disapprove of, such as viewing of films in the UK before their official release date here - though the movies can be legitimately acquired in the US. Technological innovations are one of the strategies applied here, with various copy-protection and other devices being used. Other strategies involve use of packaging and complementary material that is harder to copy than the disc itself. These issues are now hotting up, especially with the availability of music in MP3 form sending a shiver through the recording industry. This means that the question of how consumers wish to acquire and consume information products - and indeed whether the illicit consumption actually does impose costs as to formal purchasing of the products, which is debatable - becomes of more interest. For CRIC this forms a strong bridge between the IP and consumption lines of research.

Key Publications

Andersen B and Howells J (2000): "Intellectual Property Rights Shaping Innovation Dynamics in Services ", in: Birgitte Andersen, Jeremy Howells, Richard Hull Ian Miles, and Joanne Roberts (eds): Knowledge and Innovation in the New Service Economy, Edward Elgar: Cheltenham

Andersen B, Howells J, Richard Hull, Miles I, and Roberts J (2000): Knowledge and Innovation in the New Service Economy, Edward Elgar: Cheltenham.

Andersen, B, Kozul, Z, and Kozul-Wright, R: "Copyrights, competition and development: The case of the music industry ", United Nations Conference on Trade and Development Discussion Paper Series, No. 143, January.

Andersen, B, James, V., Kozul, Z, and Kozul-Wright, R (2000): "Copyrights and competition: Towards Policy Implications for Music Business Development, CRIC Discussion Paper No. 33, January

Andersen B and James V (2000): "Schumpeterian Innovation and Competition in the Music Industry: Some Implications for Institutional Policy". The Eighth International Joseph A. Schumpeter Society Conference - The Millennium Conference. Change, Development and Transformation: Transdisciplinary Perspectives on the Innovation Process. CRIC, Manchester, June 2000. Paper intended for the CRIC Discussion Paper Series before prepared for final publication.

Andersen, B and Miles, I "Orchestrating Intangibles in the Music Sector: The Royalty Collecting Societies in the Knowledge Based Economy". Presented at (i) CRIC-MIT Workshop Sloan School of Management ~ October 1999, (ii) CISTEMA Conference: Mobilising Knowledge in Technology Management, Copenhagen, October 1999, as well as at (iii) EAEPE Conference: Inequality and Integration: Challenges for Institutional Economics, Prague, November 1999. Paper intended for the CRIC Discussion Paper Series before prepared for final publication.

Miles I., Andersen B., Boden M. and Howells J. (2000) " Service Production and Intellectual Property", International Journal of Technology Management, Vol 20, Nos.1/2, Pp. 95-115.

[Back to projects]

Top

CRIC has combined with PREST to form the Manchester Institute of Innovation Research (MIoIR).

New book: Trust in Food, A Comparative and Institutional Analysis by Unni Kjaernes, Mark Harvey & Alan Warde.

CRIC Final Report to ESRC:"Main Report" and "CRIC Performance Indicators 1997-2006".

'Instituted Or Embedded? Legal, Fiscal and Economic Institutionalisation of Markets' by Mark Harvey

'Beyond Efficiency and Market Shares: Competition within the Finnish Games Industry' by Mirva Peltoniemi

'Accounting for Economic Evolution: Fitness and the Population Method' by Stan Metcalfe

'Innovation and Final Consumption: Social Practices, Instituted Modes of Provision and Intermediation' by Andrew McMeekin & Dale Southerton

'Alfred Marshall’s Mecca: Reconciling the Theories of Value and Development' by Stan Metcalfe