IT Knowledge Management

IPRs & Economics of Innovation

in the IT Industry

AKSHAT KUMAR
Indian Institute of Management, Bangalore
+919972025224
akshatk07@iimb.ernet.in

SWAPNA ACHARLA
Indian Institute of Management, Bangalore
+919845458770
swapnaa07@iimb.ernet.in

Page 1 of 10
 TABLE OF CONTENTS

1.0ABSTRACT....................................................................................................................2
2.0THE PROCESS OF INNOVATION...............................................................................2
3.0 CATEGORIZING INNOVATIONS: PATENTABLE / NON-PATENTABLE..............5
5.0 NATURE OF IPR & COST ADVANTAGES................................................................6
6.0 ECONOMICS OF IPRs.................................................................................................8
7.0 STRATEGIC ADVANTAGES OF IPRs........................................................................9
8.0 CONCLUSIONS..........................................................................................................10
9.0 REFERENCES............................................................................................................10

1.0 ABSTRACT
In this paper we focus on innovations, Intellectual Property Rights (IPR), the economics
of patents and licenses and the benefits derived from them. We have focused on the
innovation policies and have highlighted the innovation policies in product-based
organizations (Sun Microsystems, SunGard) and service-based organizations (TCS,
Honeywell).

Our paper can be broadly categorized as focusing on the following areas:

 The innovation policies followed in different organizations.
 Classification of innovations as patentable and non patentable.
 Frequency in patent filings of different organizations.
 Nature of the IPRs and the categorization of IPRs as patents, trademarks,
copyrights, registered marks which in turn, provides organizations with significant
market power, cost benefit and revenue benefits.
 Economics of costs and benefits of IPRs and IPR as a strategic weapon for
achieving competitiveness by the company.

This paper brings out the different models and processes of innovations followed in
different organizations, encouraging the development of ideas, employee participation
and incentivizing innovations. This paper focuses on the economy of market power and
market leadership gained by a firm which not only innovates but reaps the benefits of
their innovation.

2.0 THE PROCESS OF INNOVATION

In this section we will illustrate the process followed in the organization for recognizing
and incentivizing innovation and the process for filing the patents.

2.1 INNOVATION IN HONEYWELL

Honeywell Technology Solutions encourages its employees to innovate through QFI,
Contests, University relations etc.

2.1.1 QFI Tool (Quest for Innovation)

The ideas generated by the employees are entered in QFI. These ideas are reviewed
every month for their value and feasibility. A team of experts review these ideas to find if
the idea is unique and technologically feasible. After this, depending on the value added,
the idea may be approved for patent filing or it may be awarded an innovation award (if it
is not patentable) and sometimes it might be discarded. The employees need to come

Page 2 of 10
up with at least one idea in every 6 months. More the ideas more the recognition and
perks to the employees.

2.1.2 University Relations Programme

Honeywell has also partnered with leading universities in India like (IIT, IISc, etc) to
encourage research programs. Honeywell works with university labs and fosters
collaborative relationships through Fellowships, grants, and shared research programs.
The University Relations program at Honeywell Technology solutions lab (HTSL) was
created to nurture strong mutually supportive partnerships between Honeywell Research
and the academic community. For instance, the Freedom to Innovate contest was
initiated as part of the University Relations program. The primary goal of the contest was
to identify innovative ideas and promote out-of-the box thinking among under-graduate
and post-graduate students of different engineering streams. The contest was rolled out
online in December 2004, making it easier for colleges to enroll. Honeywell often
develops more products, processes and applications than they could ever fully use.
They must select the most promising to them as a company and pursue those.

However, this leaves them with an incredible catalog of intellectual assets from which
others might benefit. If an employee or any external person (e.g. student who wants to
file the patent through Honeywell) identifies a Honeywell technology, which might be
valuable they generally enter a mutually beneficial business arrangement for the patent
filing process. In fact, Honeywell has about 14000 patents worldwide, and in 2006 alone
Honeywell received more than 600 new US patents positioning them among the top
patent-generating companies of the world.

2.2 INNOVATION IN SUNGARD

SunGard (another product based company with software products in the financial &
higher Education domain) has an internal website dedicated for the purpose, where
people can post their ideas and others can supplement it. Besides, there are dedicated
teams whose profile is to explore the new technologies in the market and how they can
be used to advantage within SunGard and incorporated into its products.

2.3 INNOVATION IN TCS

In a service based company such as TCS, the Innovation Network looks like a web
which consists of innovation partners, academic institutions and the labs of its large
technology partners. TCS’ innovation partners are start-ups funded by the leading
Venture Capital Funds. JacZone, Fortify, Casaalt are a few such start-ups. Academic
institutions provide the environment for TCS funded early stage research and feed into
TCS Innovation Labs and TCS’ consulting efforts. TCS has alliances with Stanford
University, University of Wisconsin, University of Massachusetts, Indian Institute of
Technology [Delhi, Bombay, Kharagpur, Chennai] etc.

TCS Innovation labs range from Applied Research to domain specific applications. The
collaboration with labs of leading product partners such as IBM, Microsoft etc allows
TCS early access to tomorrow’s technology. Through this network of partnerships, TCS
is able to bring solutions based on leading edge technology even if the technology is not
developed in-house. The most important participant in this network is the customer. The
network brings down the cost of discovery of new technology/innovation for the clients,
increases the chances of new technology/innovation discovery for TCS customers
compared to their competition and combined innovation with TCS’ proven delivery.

Page 3 of 10
TCS partners with customers in some of these cases for a success based pricing. The
Corporate Technology Organization (CTO) in TCS governs innovation processes, sets
benchmarks, guides creation of Intellectual Property and facilitates Innovation diffusion.

2.4 INNOVATION IN SUN MICROSYSTEMS

Sun Microsystems also follows the policy of encouraging its employees to come up with
ideas. Sun pays a bonus just for submitting an idea. If the idea is selected for patenting,
the employee is awarded another bonus when the patent application is filed. The
process of patent filing in Sun Microsystems is as per the following maze:

2.4.1 INCENTIVIZATION FOR INNOVATION IN SUN MICROSYSTEMS

The current program provides awards for:
 Approved invention disclosures submitted to the patent department via the
Invention Disclosure Tool (IDT). Each inventor listed on an approved invention
disclosure will receive $X, with a maximum total of $Z per invention disclosure.
For example, if an approved invention disclosure lists four inventors, then each
inventor will receive $Y.
 Filed patent applications.
o Each inventor listed on a filed utility patent application will receive $A,
with a maximum total of $3A per filed patent application. A utility patent
application covers items (essentially anything that can be made) and
processes/methods.
o Each inventor listed on a filed design patent application will receive $B,
with a maximum total of $3B per filed patent application. A design patent
application covers only the aesthetic appearance of an item
 Published technical papers based on invention disclosures which are not filed as
patent applications. Each inventor listed on a published paper will receive $B with
a maximum total of $3B per published paper
 Issued patents. There will be no monetary award for issued patents. However,
each inventor will still receive a patent plaque after the issuance of a patent.
.

Page 4 of 10
The awards program is intended to provide inventors with more compensation earlier in
the patent process to coincide more closely with when inventors typically contribute most
of their time during the patent process. Thus, the largest award is the patent application
filing award. The difference in the filing awards for utility and design patent applications
is based on the fact that more time is typically needed from inventors to file a utility
patent application. Rewarding inventors for published technical papers which are not
filed as patent applications recognizes their contributions and provides a different venue
for their work.

2.5 EXPENDITURE ON IPRs: SUNK COST/FIXED COST

Any expenditure that has been made and cannot be recovered is a Sunk Cost. In these
cases, the expenditures the companies make in the form of giving incentives to its
employees for filing patents cannot be recovered. In fact the companies give their
employees the incentives much before an idea gets approved (if at all) as a patent.
Hence they treat it as a sunk cost (usually as part of their R&D expenditures).

3.0 CATEGORIZING INNOVATIONS: PATENTABLE / NON-PATENTABLE

The process of categorization of ideas into patentable and non-patentable ones can be
summarized as shown in the block diagram on the next page.

Page 5 of 10
The starting point of such an operation is generally the compilation of ideas from
employees, university relations or from other sources into a central database. The ideas
thus collected are then reviewed by a team of experts. Each idea is evaluated to
ascertain the feasibility of implementing it. The value of the idea in terms of the
economic and competitive advantage it can give to the implementer is also determined.
Feasible ideas are then subjected to a categorization process. Here, the patentable
ideas are distinguished from the non-patentable ones. Patent filing process is then
initiated for the worthy ones.

5.0 NATURE OF IPR & COST ADVANTAGES

5.1 IPR MODEL IN TCS

TCS is involved in providing consulting, developing, customization, maintenance and
other support related functions for a large number of clients scattered across different
parts of the world. Many of the clients are in the same or similar kinds of business and
they are on many occasions in competition with each other. Therefore, IPRs on
proprietary products and work products developed by TCS for the clients play a very
important role.

Whenever TCS has a proprietary product, it retains all the IPR rights on the work product
developed for a client which is similar to, based on or derived from TCS’s existing
products and the client is given a perpetual, irrevocable, non-transferable, worldwide and
royalty-free license to use the deliverables and the documentation. If a TCS product is
customized to a specific client requirement, then depending on the nature of
customization, the client is given an exclusive license to the customized product or in
some cases an IPR could also be given to the client for customized part of the product. If
a product is being developed at the same time for more than one client in the same line
of business, then the IPR rights are usually held by TCS and the clients are given a
perpetual, paid up worldwide license to use the work product. Wherever necessary the
client may be permitted to modify or enhance the work product or create derivative
works from it. In case where this is not possible, IPR rights could be held by TCS jointly

Page 6 of 10
with the Client, with rights to TCS to develop products with same or similar functionality
for other clients without in any way compromising the Confidential Obligations
undertaken by TCS with regard to the Client’s Proprietary and Confidential Information.
For this purpose, where necessary TCS may agree that the same human resources
involved in the Development Work for a client are not deployed in another similar project
for a period. The client will be given right to use the products or modify or enhance or
create derivative works from them. Additionally, if business prudence requires, joint
marketing and revenue sharing may also be considered. In situations, where TCS is
required to develop independent and specific product to client specific requirements
(bespoke products), IPR rights in the Deliverables may be assigned in favor of the
Client, while TCS retaining IPR rights in the tools, processes, methodologies or utilities
used in the development of the Product. TCS should also retain right to develop any
other products with same or similar functionality to another client independent of the
Product developed for a Client, using the general knowledge, idea and expertise gained
while providing services to a Client.

As can be observed, TCS, in most cases, retains the right to make use of the ideas,
innovations, and the developments conceived or developed while providing services for
one client, in developing solutions for the other clients. This translates into cost savings
for TCS as the cost of generating these ideas/innovations/products has been covered by
one client and they may be subsequently put to use by TCS in proposing solutions to
other clients. In a nutshell, it means that TCS can propose superior solutions to the other
clients without having incurred any costs of development of the solution. So, this can
result in increasing client base which will in turn result in increased revenues. Also, since
TCS holds the IPRs on the work products developed, it can also earn more revenue by
way of granting licenses to the other users of the product.

5.2 IPR MODEL IN HONEYWELL

Honeywell generally derives the greatest value from its technology by investing in
facilities to manufacture and market products based on that technology. Honeywell often
reinvests in technologies to expand capacity and/or to build new production lines.
However, for numerous reasons, Honeywell may choose to limit continuing investment in
a technology or product line. In order to continue to generate value from the basic
technology and the improvements developed, Honeywell, despite its continuing use of
the technology, may choose to license the technology to others so they may capitalize
on Honeywell's knowledge and invest in their own manufacturing facilities.

5.2.1 LICENSE COSTS

The price for a license depends on a number of factors starting with a negotiation of the
technology value as seen through the eyes of the licensor and licensee. Typically,
negotiation starts with an expression of interest by a potential licensee followed by a
proposed term sheet prepared by the licensor. The price of the license will also be
influenced by whether the license is for exclusive or non-exclusive rights, the
geographical region, the fields of use and other considerations

5.2.2 ASSISTING A LICENSEE IN USING/ADOPTING A TECHNOLOGY

Honeywell does assist a licensee to use or adapt a technology. Honeywell makes the
decision on a case by case basis following discussion with the potential licensee. It is in
Honeywell's best interest for the licensee to be able to utilize licensed technology as fast
and efficiently as possible. As a recent example, Honeywell granted a license to Sony
Corporation authorizing it to use a patented Honeywell technology that increases the

Page 7 of 10
brightness of images and reduces the appearance of certain interference effects on
liquid crystal display (LCD) products.

6.0 ECONOMICS OF IPRs

Innovations in the knowledge economy have an interesting feature since they use
natural capital and traditional knowledge accumulated over the years as essential inputs
for R&D stage. The basic public policy rationale for intellectual property laws is that they
facilitate and encourage the pursuit of innovation and the disclosure of knowledge into
the public domain for the common good, by granting authors and inventors exclusive
rights to exploit their works and invention for a limited period. From the perspective of
economics, intellectual property is a temporary monopoly on the use or exploitation of
that good, supported by legal enforcement mechanisms. The exclusive rights granted by
intellectual property laws are generally negative in nature, and therefore only grant the
holder of IP the ability to exclude third parties from infringing on their monopoly. The
exclusive rights conferred by intellectual property laws can generally be transferred, or
licensed to third parties. Exclusive rights are generally divided into two categories: those
that grant exclusive rights only on copying/reproduction of the item or act protected (e.g.
copyright) and those that grant a right to prevent others from doing something. The
difference between these is that a copyright would prevent someone from copying the
material form of expression of an idea, but could not stop them from expressing the
same idea in a different form, or from using the same form of expression if they had no
knowledge of the original held by the copyright holder.

Patents and trade marks on the other hand, can be used to prevent that second person
from making the same design even if they had never heard of or seen the claimed
"property". Those rights must be applied for or registered and are more expensive to
enforce. Copyright licenses grant permission to do something. A patent license is a
declaration not to do some things, under certain conditions. Most exclusive rights are
awarded by a government for a limited period of time. Economic theory typically
suggests that a free market with no exclusive rights will lead to too little production of
intellectual works relative to an efficient outcome]. Thus by increasing rewards for
authors, inventors and other producers of intellectual works, overall efficiency might be
improved. On the other hand, granting exclusive rights is by no means the only viable
method to finance intellectual property production in a market system.

Intellectual property laws create transaction costs that could in some circumstances
outweigh these gains. Another consideration is that restricting the free reuse of
information and ideas will also have costs, where the use of the best available technique
for a given task or the creation of a new derived work is prevented. Equally important,
granting monopoly rights on production introduces a deadweight loss into the economy,
and incentives rent seeking behavior. Further, the economic rationale for IPRs stems
from the fact that innovation or knowledge is a public good, it is likely to be under-
supplied as its social value exceeds its private value. A mechanism ensuring that
positive externalities are internalized is therefore necessary. The implementation of IPRs
is one such way to achieve the same. By granting a temporary monopoly over the use
and exploitation of his innovation, intellectual property regimes give the innovator the
incentive to invest by ensuring he captures part of the social value he has generated.
Therefore there is a trade-off between giving firms the incentive to invest and conceding
the monopoly power to innovative firms that creates a distortion in the economy.

Page 8 of 10
6.1 INNOVATION NETWORK EXTERNALITIES
Innovation is about ideas. To generate new ideas, resources must be invented. For most
innovations, human capital is not enough. Researchers themselves may often well be
intrinsically motivated, so that incentives are not necessary and they may even be
counterproductive. However, for the professional, environment intrinsic motivation is
much less likely to work. If outsiders are interested in the idea, innovation has a positive
externality. This is due to the fact that ideas are pure public goods. Once the idea is
publicly available, nobody can be prevented from exploiting it. If one person relies on the
idea, this does not make the idea less valuable. Neither exclusion nor rivalry in
consumption is present. Public goods theory predicts that such goods will not be
provided in the socially desirable quantity. If the individual benefit is below the cost, the
good will not be provided at all. This prediction is based on a game theory model.

The relationship between the innovator and all outsiders can be conceptualized as a
prisoner's dilemma. As long as those interested in the innovation stand no chance of
forming coalitions, a two-person model suffices. It describes the interaction between the
potential innovator and every single person interested in the innovation. Since we are in
a situation of strategic interaction, my payoff not only depends on what I do, but also on
what my interaction partner does. The model assumes that we take these decisions
simultaneously. There is thus no planning meeting where we write a joint production
plan. Excluding dominated strategies, or looking for the Nash equilibrium, neither firm
invests in innovation. This is a dilemma since, by investing in both firms would be
individually better off.

Strategic interaction prevents them from getting at the superior solution; this is due to a
combination of greed and fear. Greedy firms prefer their individually best outcome over
their individually second best outcome. Fearful firms preempt this by themselves
defecting. If the legal orders grants the inventor a property right, outsiders are no longer
able to leverage the idea, unless the investors allow them to do so. The property rights
thus allocate bargaining power. The innovator is able to take it or leave it offer. The
strategy space of the firms is extended to giving or buying licenses.

7.0 STRATEGIC ADVANTAGES OF IPRs

Like all intellectual property, patents are a tool that form part of a wider business strategy
aimed at giving your company a commercial advantage. IPRs give you a competitive
advantage in the following ways:

7.1 EXPANDING AND PROTECTING COMPETITIVE POSITIONS

 IPR gives you the right to exclude others from making, using, selling or importing
the subject matter that has been patented. Therefore an IPR can protect your
market share, thereby ensuring that only your company benefits from your R&D.
 IPR delays competitors from entering the market. This allows you to set up sales
channels and promote customer association with your brand.
 IPR will prevent competitors from blocking your market space by acting as a
defensive document against any later patent applications they might file.

7.2 THE DIFFERENTIATOR ADVANTAGE

 IPR adds value and credibility to a product by distinguishing it from other
products sold in either a competitive environment or in a market where
technological superiority is important. E.g. Intel, maker of “microprocessor of

Page 9 of 10
 choice”.

7.3 THE COST ADVANTAGE

 IPRs create more revenue through licensing or sale. You may be able to sell your
patent or license use of your technology if you are either not using the full scope
of your patent or you are not using the technology at all.

7.4 THE SUSTAINABILITY ADVANTAGE

 IP is a primary way the benefits of innovation and competitive advantage can be
made exclusive and sustainable

7.5 INCREASED ACQUISITION ATTRACTIVENESS

 During an evaluation of a company as a potential target for merger or acquisition,
the acquirer will keenly evaluate and value a company’s intellectual property
assets. Similarly, institutional investors will value a company’s IP assets for
purposes of determining whether to invest.

8.0 CONCLUSIONS
In this paper we have analyzed the economics of innovation and intellectual property
rights and the benefits derived from them. We have also analyzed the different
innovation policies of companies like TCS, Honeywell, Sun Microsystems and SunGard.
Our analysis concludes that these companies follow different policies either by having an
internal tool or website to encourage employees to generate ideas or collaborate with
educational institutes and other partners to generate ideas. Our analysis also concludes
that the incentive policies for patents are mostly similar across organizations. We have
examined the categorization of ideas and found that most of the firms follow a funnel
model to filter the ideas from different sources into patentable and non- patentable ideas.
We have also explored the nature and the economics of IPRs. Our analysis suggests
that IPRs provide significant advantage to the firm and it increases the attractiveness of
both the firm and the market. We have concluded our analysis by examining how game
theory is involved in innovation models.

9.0 REFERENCES
* Internal, External websites of TCS, Honeywell, Sun Microsystems, SunGard

http://ideas.repec.org/p/mpg/wpaper/2007_4.html
www.mises.org/rothbard/mes/chap15d.asp
www.bmj.com/cgi/content/full/333/7582/1279
http://www.coffeesuntechnology.com/web-analytics/best-practices/210/
http://www.sun.com/2002-0625/feature/index.html
http://www.aviationtoday.com/av/categories/military/8781.html
www.ftc.gov/opp/intellect/020418danieljgifford.pdf
http://ideas.repec.org/p/wpa/wuwpdc/0508001.html
www.iie.com/publications/chapters_preview/99/3iie2822.pdf
www.iue.it/Personal/Motta/courses/Amato-Motta/2-MarketPowerCompetition-Welfare.pdf
http://blogs.sun.com/dennisding/entry/open_standards,_ipr_and_innovation
www.copyright.com.au/reports%20&%20papers/benefits%20&%20costs%20of%20copyr
ight.pdf

Page 10 of 10