Intellectual property rights: Issues and challenges in Malaysian manufacturing firms

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rights: Issues and challenges in Malaysian manufacturing firms Herman Shah Anuar 1,*, Faisal Zulhumadi 1, Zulkifli Mohamed Udin 1 1 School of Technology Management and Logistics (STML) - College of

1 Available at The 3rd International Conference on Technology and Operations Management Sustaining Competitiveness through Green Technology Management Bandung Indonesia, July 4-6, 2012 Intellectual property rights: Issues and challenges in Malaysian manufacturing firms Herman Shah Anuar 1,*, Faisal Zulhumadi 1, Zulkifli Mohamed Udin 1 1 School of Technology Management and Logistics (STML) - College of Business (CoB) - Universiti Utara Malaysia (UUM), Sintok 06010, Kedah Darul Aman, Malaysia Abstract. The purpose of this paper is to explore how manufacturing firms implement protection of Intellectual property rights (IPR). In general, works done in the manufacturing industry involves many applications of inventing or introducing new products to the market. The construct of this paper is based on comprehensive review of recent literatures on Intellectual property rights that focusing primarily on patent. Detailed discussions are as followed to give implications in policy making especially government or related authorities in promoting and enforcing intellectual property rights. Intellectual property rights policy especially regarding patents should be part of firm s business strategy. Implementing IPR will safeguard firm s new invention, innovation or processes in the long run. Intellectual property rights should be treated as new forms of investment. The patent and related intellectual property rights system will have to respond to the market changes. There is probability for the system to have its own weaknesses here and there. The major challenge for patent and other IP elements together with government policies is to ensure a national pay-off from scientific and technological development. In relation to the impact for the operation performance of the firm, patent system should be able to reduce the manufacturing cost per unit, increase product delivery, improve product/process flexibility and high quality products being produced. This paper provides the importance of applying intellectual property rights as firm s business strategy. Manufacturing firms has different goals in determining which business strategy in order to make them remain competitive in the challenging business atmosphere. Keywords: Internal R&D, external R&D, intellectual property rights, patents, operation performance 1. Introduction Intellectual property rights are increasingly recognised as key value driver (Ghosh, 2003) and plays important role in the modern economy as compared to the previous era. It can be seen as a new source of wealth. Many have understood mistakably of the function that IP can serve for. Greenhalgh and Rogers (2007) highlights that economist see IPR as a policy tool to ensure adequate private returns to innovation and creative activities. Firms may use IPR to protect the returns from their investment from being depleted by imitation. * Corresponding author. Tel: , Fax: address: herman@uum.edu.my

2 166 H.S. Anuar, F. Zulhumadi, and Z.M. Udin Intellectual property rights: Issues... Chiesa and Gilardoni (2004) classify that intellectual property rights (IPR) issues can be seen from three major perspectives namely patent intent, patent strategy and patent portfolio management. Patent intent discusses on reason why a patent being filed and how it will be used. Patent strategy focuses on how a certain technological area being protected. Patent portfolio on the other hand elaborates more on how a firm that holds strong patent rights manages them in order to generate value out of it. Intellectual Property Rights (IPR) is a type of property that can generate financial returns which needs to be applied and granted before it can be used. Benefits of owning the property is, owner s work are being protected against infringement and has the rights over its application. At the same time, IP owner has the authority to license its work to another person or organisation to use these rights. The license contains terms and condition on how to use the work. IT also includes how much royalty that should be paid to the IP owner. The most common types of licensing agreements are exclusive, non-exclusive, compulsory, and cross licensing. Different types of licensing are design for different requirements that is needed for firms and IP owners to choose from. IP owner can also benefits IP rights through technology transfer brokerages, and through sale or transfer of ownership (Singh, 2007). Studied done by Connolly (2003) focusing on the impact of technology imports on innovation and imitation across 51 countries found that exist a positive relationship between them. On average, reinforcing IPR on imitation has a positive effects but innovation which is substitute by patent might give some unfair effects. Therefore, it drives to explore more into this situation that maybe strong IPR policy would be able to moderate the relationship between R&D capabilities and operation performance. Implementing protection of Intellectual property rights should become as a main objectives in today s business climate. Protection of new inventions, products or processes could generate new channel of profits. It is crucial for manufacturing firms to understand the value that they can maximize in the future. 2. Literature Review Park (2002) mentioned that there are two ways IPR can impact on firm potential output. One way is directly by affecting the technical efficiency of production. The second way is by indirectly stimulating factor for accumulation especially relating to R&D capital. This can be done by increasing the returns to investment or by the ability to appropriate those returns. These two ways (technical efficiency of production and R&D accumulation) have become hot debates among policy makers and fellow academics. The policy maker would stress on the importance of legal perspectives for the markets to operate. The new growth and/or knowledge based economy adherents would emphasise the role of R&D, inventions and technology as the primary engines growth. Patents are obtained through a costly and lengthy process. In Europe, Japan and the Asia Pacific, the first to file system applies. Whereas, in the U.S., first to invent applies. However, patents application must be filed within one year of first offer for sale of the product or the patent filing will be void (Bastani & Fernandez, 2003). Attributes of patent will cover few elements that have significant towards operation performance of a firm. This includes extensive information about the knowledge which comes from the inventor of that invention, which firm the invention has been assigned, number of claims or contributions has been derived out of it and the technological classes the invention falls into. Patent owned by a firm becomes as evidence showing that they have had a piece of knowledge on their own (Nerkar & Paruchuri, 2005). Benefits of IPR are enormous, according to various types of it. Firm need to choose the appropriate type of IPR can only yield enormous profit for the firms. As being discussed above, firm decision to protect its invention and processes should be taken as a long-term investment. It is true that it can be classified into positive and negative aspect of but, it would rather be safe for firms to protect rather than not. Competitors may have a chance to imitate but the originality and the beauty of the products or processes patented are still not comparable. Chances for getting new partnership, join-ventures and many other strategic alliances are widely open for that patented product. 3. Review and Discussion In the critical context, research and development (R&D) activities done by university lecturer and research institutions which does not protected by the IPR protection is hardly being marketed to be commercialized. Even the creation of R&D being protected by IPR, it is still open to be infringed, copied or imitate by other parties who don t need to invest money and time for it.

3 H.S. Anuar, F. Zulhumadi, and Z.M. Udin Intellectual property rights: Issues After IPR registration, then the process of commercialization can be done which later on will give a big impact to economic innovation. It is common that as consumer, they purchase, use products or services in many aspects of their life. This shows that brands, patents, inventions, symbols, trademarks, and design have significant contribution on consumer choice of buying. When considering two suitable products or services, normally, products or services with reputable brand will become as a main choice of preference. No doubt those big firms always try to portray the best image and branding in front of their targeted consumer. From another point of view, big firms will opt to sell their rights to other firms in the name of strategic licensing, franchise or royalty (Ujang, 2010). According to Encaoua, et al., (2006), focus on improving human capital is well coordinated by implementing policies that promotes economic development and growth. At the same time, it creates new mechanism which will support innovation and encourage R&D investment. Incentives to R&D can be increase by the introduction of intellectual property system. This has been identified as one of the main policy instruments. Romer s (1993) influential work highlighted that knowledge s public good nature will lead to the less rewarding of R&D investments. This happen based on unpredictable spillovers and approvability troubles. The system of IPR main objective is dealing with the non-excludability attributes of knowledge production function. The uncompensated social gains that come out from spillovers would give explanation for public intervention. This includes subsidizing or conducting public R&D. According to Maskus and Yang (2001) there is a strong political tendency in supporting the effort to strengthen patent/ipr laws and enforcement. It is argued that with such implementation it can avoid trade distortion from happen and foster innovation in the technological frontier. It is going to have an impact for innovation to become faster, safer licensing processes and ordered diffusion. By implementing IPR, the owner of property rights has the authority to prohibit others from using their ideas. This idea includes production processes and trading products that represent the product. In such a way, it creates the environment of monopolistic-like market structure which for some authors does not agree with it. When this scenario occur, it shows that IPR offers protection against market entry and give ample time for firms who owns them to enter and/or develop an industry or market. Andersen & Konzelman (2005) argued that without IPR, a sustainable industry will not be allowed to grow and mature because only IPR provides incentives to invest an invention and innovation. Many notices have been mentioned through literature on the potential threat of too much protection of IPR. For example, by providing the owners of ideas with more protection, stronger IPRs may reduce incentives to innovate and introduce new technologies (Helpman, 1993; Bessen & Maskin, 2000). The major challenge for the management of Intellectual Property is to create incentives for provision that do not unnecessarily inhibit distribution. From another perspective, this incentive also can be considered as fundamentals or first principle of intellectual property (Shadlen, et al., 2005). In addition, Haned (2009) stressed that a firm may have higher intention to protect its intellectual capital by implementing rights such as patents, trademarks, industrial design, and any other rights to safeguard their profits from being taken over by competitors. At the same time this IPR efforts have a significant impact to fund its future growth. 4. Conclusion As a conclusion, Akiyama and Furukawa (2009) highlighted that appropriate innovation is safe from imitation due to stronger IPR protection. At the same time, this effort will result in decreasing certain perfect appropriate innovation. Innovators also do not need to mask technology they invented due to strict protection IPR. Akiyama and Furukawa (2009) pointed out very strong and a very weak IPR policy in developed countries has impact that should be given serious attention. Therefore, it is hoped that moderate policies of IPR can be established in the near future. Bontis (1998) mentioned in Intellectual capital: an exploratory study that develops measures and models, that intellectual capital does not include intellectual property. From his research perspectives, intellectual property only serves as assets to a firm which includes copyrights, patents, semiconductor topography rights, trade and service marks, and various design rights. An innovation which is produced by the inventor is protected by the law once the patent is being enforced under monopolistic conditions. If the patent is not enforced, the commodity is open to any kinds of imitation. Other parties will try to produce it by a competitive fringe. If this occurs, the inventor or innovator gains no profits at all (Eicher & Garcia-Penalosa, 2008).

4 168 H.S. Anuar, F. Zulhumadi, and Z.M. Udin Intellectual property rights: Issues... Government incentives can be applied to find its welfare maximisation through various level of IPR protection (Grossman & Lai, 2004). This also leads to another important branch of literature that examines consequences of differing IPR regimes on growth, trade and product life cycle. Acknowledgements The author would like to thank for the supports given by the Ministry of Higher Education of Malaysia and Universiti Utara Malaysia especially School of Technology Management and Logistic in contributing for the success of this research paper. To those who involved directly or indirectly in helping through out of the research, a token of appreciation is given to all of you. This research paper would not be accomplished without much of your help. References [1] Akiyama, T., & Furukawa, Y. (2009). Intellectual property rights and appropriability of innovation, Journal of Economics Letters, 103, [2] Andersen, B. & Konzelman, S. (2005). In search for a useful theory of the productive potential of Intellectual property rights, Paper to be presented at the DRUID Tenth Anniversary approaches (3rd ed.). MA: Allyn & Bacon. [3] Bastani, B., & Fernandez, D. (2003). Intellectual Property Rights in Nanotechnology, Cited in AY Industry Study, Final Report. Washington, D.C.: The Industrial College of the Armed Forces, National Defense University, Fort McNair. [4] Bessen, J.,& Maskin, E. (2000). Sequential innovation, patents and innovation, Working Paper no 00-01, Department of Economics, Massachusetts Institute of Technology. Available on the internet at [5] Bontis, N. (1998). Intellectual capital: an exploratory study that develops measures and models, Management Decision, 36(2), [6] Chiesa,V., & Gilardoni, E. (2004). Intellectual property strategy and management, retrieved on 21 Mei 2010 from [7] Connolly, M. (2003). The dual nature of trade: measuring its impact on imitation and growth, Journal of Development Economics,72, [8] Eicher, T., & Garcia-Penalosa, C. (2008). Endogenous strength of intellectual property rights: Implications for economic development and growth, European Economic Review, 52, [9] Encaoua, D., Guellec, D., & Martínez, C. (2006). Patent systems for encouraging innovation: Lessons from economic analysis, Research Policy, 35, [10] Ghosh, A. (2003). Singapore: Aspiring to be a global intellectual property hub. PricewaterhouseCoopers. [11] Greenhalgh, C. A., & Rogers, M. (2007). The value of Intellectual property rights to firms, Department of Economics Discussion Paper Series, Number 319, ISSN , [12] Grossman, G. M., & Lai, E., 2004, International Protection of Intellectual Property, American Economic Review, 94 (5), [13] Haned, N. (2009). Economic returns to innovation: Between efficiency and effectiveness, Proceedings of the European Conference on Entrepreneurship & Innovation, [14] Helpman, E. (1993). Innovation, imitation and intellectual property rights, Econometrica, 61, [15] Maskus, K.E. & Yang, G. (2001). Intellectual property rights and licensing: An econometric investigation, Review of World Economics (Weltwirtschaftliches Archiv), Springer, 137(1), [16] Nerkar, A., & Paruchuri, S. (2005). Evolution of R&D Capabilities: The role of knowledge networks within a firm, Management Science, 51, [17] Park, W.G. (2002). Do intellectual property rights stimulate R&D and productivity growth? Evidence from crossnational and manufacturing industries data, retrieved from [18] Romer, P. (1993). Ideas and things: The concept of production is being re-tooled. The Economist (Sept 11), [19] Shadlen, K.C., Schrank, A., & Kurtz, M.J. (2005). The political economy of Intellectual Property protection: The case of software, International Studies Quarterly, 49, [20] Singh, K.A. (2007). Intellectual property in the Nanotechnology Economy, Article on Intellectual Property in the nanotechnology economy: trends, patent landscape and the challenges, [21] Ujang, Z. (2010). Harta intelek mampu beri impak besar kepada ekonomi inovasi, Berita Harian, 2010/04/30. Retrieved on 30/05/2011 from

5 H.S. Anuar, F. Zulhumadi, and Z.M. Udin Intellectual property rights: Issues Cite this paper Anuar, H.S., Zulhumadi, F., and Udin, Z.M. (2012). Intellectual property rights: Issues and challenges in Malaysian manufacturing firms, Proceedings of The 3 rd International Conference on Technology and Operations Management: Sustaining Competitiveness through Green Technology Management, Bandung Indonesia (July 4-6), pp ISBN:

Effectiveness of R&D Capabilities towards Operational Performance Moderated by Intellectual Property Rights

Effectiveness of R&D Capabilities towards Operational Performance Moderated by Intellectual Property Rights Herman Shah Anuar +, Faisal Zulhumadi and Zulkifli Mohamed Udin Department of Technology Management,