Intellectual Property Management

Contributions to Management Science

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M. Hofmann/M. List (Eds.)Psychoanalysis and Management1994. ISBN 3-7908-0795-8

R.L. D'Ecclesia/S.A. Zenios (Eds.)Operations Research Modelsin Quantitative Finance1994. ISBN 3-7908-0803-2

M.S. Catalani/G.F. ClericoDecision Making Structures1996. ISBN 3-7908-0895-4

M. Bertocchi/E. Cavalli/S. Komlosi (Eds.)Modelling Techniques for FinancialMarkets and Bank Management1996. ISBN 3-7908-0928-4

H. HerbstBusiness Rule-Oriented ConceptualModeling1997. ISBN 3-7908-1004-5

C. Zopounidis (Ed.)New Operational Approaches forFinancial Modelling1997. ISBN 3-7908-1043-6

K. ZwerinaDiscrete Choice Experiments in Marketing1997. ISBN 3-7908-1045-2

G. MarseguerraCorporate Financial Decisions and MarketValue1998. ISBN 3-7908-1047-9

WHU Koblenz - Otto Beisheim GraduateSchool of Management (Ed.)Structure and Dynamics of the GermanMittelstand1999. ISBN 3-7908-1165-3

A. SchollBalancing and Sequencing of AssemblyLines1999. ISBN 3-7908-1180-7

E. Canestrelli (Ed.)Current Topics in Quantitative Finance1999. ISBN 3-7908-1231-5

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C. Zopounidis (Ed.)New Trends in Banking Management2002. ISBN 3-7908-1488-1

U. DorndorfProject Scheduling with Time Windows2002. ISBN 3-7908-1516-0

B. Rapp/P. Jackson (Eds.)Organisation and Work Beyond 20002003. ISBN 3-7908-1528-4

M. GrossmannEntrepreneurship in Biotechnology2003. ISBN 3-7908-0033-3

H.M. ArnoldTechnology Shocks2003. ISBN 3-7908-0051-1

T. IhdeDynamic Alliance Auctions2004. ISBN 3-7908-0098-8

J. Windsperger/G. Cliquet/G. Hendrikse/M. Tuunanen (Eds.)Economics and Managementof Franchising Networks2004. ISBN 3-7908-0202-6

Klaus Jennewein

Intellectual PropertyManagementThe Role of Technology-Brandsin the Appropriation of Technological Innovation

With 62 Figuresand 22 Tables

Physica-VerlagA Springer Company

Series EditorsWerner A. MiillerMartina Bihn

Author

Dr. Klaus JenneweinT-Mobile International AG & Co. KGGroup StrategyLandgrabenweg 15153227 BonnGermanyklaus.j ennewein @ t-mobile.net

ISSN 1431-1941ISBN 3-7908-0280-8 Physica-Verlag Heidelberg New York

Cataloging-in-Publication Data applied forLibrary of Congress Control Number: 2004109407

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SPIN 11011996 88/3130/DK-5 4 3 2 1 0 - Printed on acid-free paper

With love to my wifeAmelie and my son Leo

,,Ein hohes Kleinod ist der gute Namen"'A valuable gem is the good name'

(Friedrich Schiller,1759-1805)

Preface

Innovation is a source of competitive advantage. In other words, firms mayleverage innovation to generate rents, at least temporarily. And this isintended to be a self-sustained business model: part of the rent extractedfrom the market may be re-invested into new technological developmentswhich in turn permit additional innovations, thus regenerating the sourcesof rents. This is the positive loop of innovation.

In this sense, business would be a permanent hunt for innovations, insearch of rents.

Yet, innovations need to be protected if firms want to benefit from rentsover long periods of time. However, the strategic management literaturetends to suggests that patents are a weak protection against aggressiveimitators. Secrecy may help but we also know that technology ends upleaking in most cases. Speed in new developments to cut "time to market"may be another way of protecting the technological advance of the firm.But again, this may not be enough as start-ups may out-compete theestablished firm in the race for innovation.

This is where Dr. Klaus Jennewein's key idea comes into the picture.The core of his thesis is that brand equity may be combined totechnological protections such as patents to build a multi-layer, complex,intricate shield to protect the sources of rents against competitors andimitators.

Dr. Jennewein presents two detailed case studies which remarkably feedinto his argument. One case is Bayer's aspirin. How come a drug companyis still able to extract rent from an innovation which was first introduced tothe market over a century ago? How come Bayer still has a dominantmarket position when the patent protection disappeared so long ago? Howcome producers of the generic molecule were unable to win against thepioneer of Aspirin?

The second case study tells us the story of the routers of Cisco Systemsin the network business. There we see how a newcomer, a start-up, wasable to build a long-lasting competitive advantage, based on systematiceffort to leverage technological innovation, while carefully building anddefending the reputation of the company, its products and its services. As aresult, Cisco became the de facto standard in the profession, meaning bothinnovative technologies and reliable services. The technology received thebacking of the brand name, and vice versa. When Cisco was badly in needof technological expertise, the name of Cisco helped the company attractand retain the best talents, including through a campaign of acquisition oftargeted companies.

VIII Preface

In the tradition of grounded theory, Dr. Jennewein actually builds fromthese two in-depth, rich and detailed case studies to present a life cyclemodel. The model shows how intangible technological assets may beintertwined over the years with brand equity to build a long lastingprotection to innovations. He shows how the start-up firm focuses onbringing a new technology to the market and enjoys a temporarymonopoly, that of the innovator. More innovations - mostly process andthen incremental innovations - are generated as the start-up consolidatesits position as a recognized pioneer. Interestingly enough, this recognitionbrings along an emerging brand name which is going to becomeincreasingly important as imitators come into the picture. The brand namehelps sustain market shares and significant margins, yielding enoughreturns to invest in new developments. When radical innovation strikesagain, the company is now an incumbent. It cannot fully rely on itstechnological capabilities, as these are only partly relevant to the newcontext. The incumbent thus primarily relies on its brand name whichhelps the company bridge over towards the new technological paradigm.

In a way, K. Jennewein is celebrating the wedding of the patent with thebrand, the technology with the market reputation, the engineer with themarketer. Dr. Jennewein further suggests to organize the corporation insuch a way that this marriage be successful. Instead of letting thedevelopment Engineer deal with technology in his unit, the Lawyer at theheadquarters deal with patent and other forms of technological protections,the Marketer in his marketing departments deal with brands, K. Jenneweinrecommends to pursue an integrated intellectual property strategy. Heinsists to show that the multilayer shield to protect the innovations must becrafted by a coordinated team working hand in hand over the years. This isactually not what I observe in most companies today. To our opinion, thisis the core contribution of this book.

This is a brilliant and convincing book with many concrete implicationsfor both business practitioners and academics in the field.

Prof. Dr. Thomas Durand Prof. Dr. Alexander GerybadzeEcole Central Paris Universitat Hohenheim, Stuttgart

Acknowledgements

"On ne voit Men que par le cozur. L 'essentiel est invisible pour lesyeux "

Antoine de Saint-Exupery

According to the currently ongoing scientific discussion in the field ofstrategic and in particular technology management, intangible assets andespecially intangible technological assets represent the most importantstrategic asset for business corporations. However, although the given highstrategic importance of intangible assets, many authors criticise theinefficiency of the existing system of intellectual property right protection.Empirical studies have clearly revealed that singular patent right protectiondoes generally not enable companies to efficiently and effectivelyappropriate the returns of their intangible technological assets. Thegrowing awareness of the shortcomings of legal protection rights hasencouraged the investigation of alternative protection modes with a mostlytechnological focus. On the other hand, the investigation of the role ofcompany specific market based assets in the appropriation of returns ofintangible technological assets has been almost entirely neglected byresearch, so far.

This lack of research has motivated the here presented investigation ofthe role of brand equity in the appropriation of intangible technologicalassets. The investigation reveals by an empirical and theoretical analysisthe complementary relationship between technological and market basedassets, and shows how this relationship affects the ability of companies toappropriate the returns of technological innovation. The investigation isplaced at the intersection of strategic management, technologymanagement, and the management of brand equity and builds upon theresource based view.

A major endeavour such as this work which has been handed in as PhDthesis at the University of Hohenheim at Stuttgart and the Ecole CentralParis would never have been possible without the support and guidance ofmany people which I want to thank here.

The research was undertaken during my time as PhD student at theCentre of International Management and Innovation at the University ofHohenheim and the Laboratoire Strategic et Technologie at the EcoleCentrale Paris. My first and greatest debt of gratitude is to Prof. Dr.Thomas Durand and Prof. Dr. Alexander Gerybadze my two PhDsupervisors. It was their creative and professional opinion as well as thesufficient freedom which have inspired and enabled the realization of this

X Acknowledgements

endeavour. Prof. Dr. Bertrand Quelin of Ecole HEC as well as Prof. Dr.Helmut Kuhnle and Prof. Dr. Ulrich Schwalbe at the University ofHohenheim I want to thank for their constructive questions and remarks.

Next I have to thank the companies and research institutes that enabledthrough their cooperation to realize the empirical investigations and to gainfurther empirical evidence. Here I want to thank in particular Mr. MichaelChmilewski of Bayer AG, Mr. Harald Zapp of Cisco Systems GmbH, Mr.Robert Chanezon of Rhodia SA, Mr. Jean Moulin, Mr. Jochen Maser, andall the others who gave so generously of their time. I want to particularlyshow appreciation to Mr. Ulrich Schmoch of the Frauenhofer Gesellschaftat Karlsruhe for extremely valuable support and help in searching andprocessing of the patent and trademark data. His generous help inaccessing the needed data-bases and encouraging discussions considerablycontributed to the success of the extensive econometric investigation.

I also owe a great debt of gratitude to my colleagues at the Centre ofInternational Management and Innovation at the University of Hohenheimand at the Laboratoire Strategie et Technologie at the Ecole Centrale Paris.In particular I want to thank my friend and former colleague MichaelStephan for the inspiring and reassuring discussions. The mutual support,above all during the data mining and data processing process, has probablyhelped the both of us to avoid some major frustration. I also would like toexpress my thanks to Miss Barbara Ungerer and Miss Fatiha Gunelli, whohave always been a source of encouragement and were of great help tomaster the bureaucratic hurdles encountered during the binationaldoctorate studies. Last but not least, I want to thank Nuria Martin, EricPfaffmann and Wolfgang Burr for the good co-operation and cheerfultime.

I reserve the last acknowledgement for those who really made thisresearch project possible - my wife and my parents. To Amelie, Annelieseand Martin I owe the greatest debt. The constant support, encouragement,and reassurance made it all worthwhile. To all of you, my thanks and love.

Klaus Jennewein

Contents

I The New Era of Intangible Assets 11.1 Problem Development 3

1.1.1 General Economic Significance of Intangible Assets 41.1.2 Role of Intangible Assets in Business Enterprises and the

Central Problem of Appropriation 61.2 Field of Investigation and Terminological Specification 10

1.2.1 Survey of Previous Research Work in the Field ofAppropriating Intangible Assets and the Role of BrandEquity 11

1.2.2 Main Focus of the Thesis 141.2.3 Terminological Specification 16

1.3 Research Structure 18

II Case Studies on the Appropriation of Intellectual Assets 2311.1 Methodology of the Case Studies 23

11.1.1 Choice of Case Examples 2311.1.2 Data Ascertainment and Specific Sources of Information..25II. 1.3 Methodological Proceeding and Validity of Case Studies..26

11.2 Case-Study: Bayer Aspirin 28H.2.1 Company and Product Profile 28

11.2.1.1 The Innovation: Acetylsalicylic Acid 30II.2.2 Appropriation Regime and Intellectual Property

Constellation 34H.2.2.1 From Technological Invention to a Global Brand 3711.2.2.2 Bayer Aspirin in the Inter- and Post-War Period 3911.2.2.3 The Revival of Bayer Aspirin 44

n.2.3 Persistent Market Share 5111.2.3.1 Bayer's Sustainable Strategic Advantage: The

Trademark Bayer Aspirin 5211.2.3.2 Innovations Nurturing Existing Brand Equity 5511.2.3.3 Bayer Aspirin in the 21st Century 59

II.2.4 Discussion and Findings 6211.3 Case Study: Cisco Systems 66

11.3.1 Company Profile 6611.3.2 From the Computer Lab to the Global Leader in the

Internet Economy 67II.3.2.1 Cisco Systems: A Large Multinational with the

Culture of a High-tech Start-up 69

XII Contents

II.3.2.2 Central Attributes of the Success of Cisco Systems ...7511.3.3 The Multibillion Brand 84

11.3.3.1 Leveraging Brand Equity 8611.3.3.2 Brand Strategies 8811.3.3.3 The Brand Cisco Systems in an Internet World 90

11.3.4 Discussion and Findings 92II.4 Contrasting the Two Cases 95

III Intangible Assets: Characteristics, Generation & Protection 101III. 1 Characteristics of Intangible Assets 102

III.l.l Particular Characteristics of Intellectual Assets 102III. 1.1.1 Qualification & Structure of Immaterial Assets 103III. 1.1.2 Public Good Characteristics of Intellectual Assets.. 107III. 1.1.3 Non-Abrasion in Use I l l

III. 1.2 Human Capital, Intangible Asset, and IntellectualProperty: A Definition 113

III .1.2.1 Human Capital, Intangible Assets, and IntellectualProperty 114

III. 1.3 Upshot I: Types and Characteristics of IntangibleAssets within Business Enterprises 120

111.2 Generation and Acquisition of Immaterial Assets 121111.2.1 Generation of Intangible Asset within Business

Companies 125111.2.1.1 Research- and Development Activities 126111.2.1.2 Learning-by-Doing 134

111.2.2 External Sources of Intangible Assets 137111.2.2.1 Acquisition of Intangible Assets: Licensing 140111.2.2.2 Integration of Intangible Assets: Merger &

Acquisitions and Enticement of Employees. 143111.2.2.3 Excursion: Internal R&D and the Acquisition of

External Immaterial Assets 149111.2.3 Co-operative Forms of Intangible Asset Creation 151

111.2.3.1 Joint-Ventures, Strategic Alliances, and Networks .152111.2.3.2 Networks and Informal Knowledge Trading 155111.2.3.3 Co-operation Decision Process 158

111.2.4 Upshot II: Sources of Intangible Assets 160111.3 Protection Modes of Intangible Assets 161

111.3.1 Legal Property Rights 162111.3.1.1 Patent Rights 163111.3.1.2 Trademarks and Brand Equity 168111.3.1.3 Petty-Patents 175

111.3.2 Further Possibilities of Protection 176

Contents XIII

m.3.2.1 Trade Secrecy 177111.3.2.2 Lead-Time-Advantages 180111.3.2.3 Complementary Resources 182

111.3.3 Choice of Efficient Protection Mode for TechnologicalAssets 183

111.3.4 Upshot III: Intangible Assets and Their EffectiveProtection in Globalised Markets 192

IV Strategic Management of Intangible Assets 195IV.l Intangible Technological Assets as a Strategic Resource 195

IV. 1.1 Strategic Role of Intangible Technological Assets inthe Competitiveness of Business Enterprises 201

IV. 1.1.1 Intangible Asset Ambiguity and Barriers toImitation 201

IV.l.1.2 The Complementarity of Strengths 204IV.l.1.3 Legal Barriers to Imitation 205VI.1.1.4 Up-holding Imitation Barriers 208

IV.l.2 Central Problems of Intangible Technological Assets inthe Generation of Sustainable Competitive Advantage...21O

IV. 1.2.1 The Key Importance of the Appropriation ofEconomic Returns of Intangible Resources 211

IV. 1.2.2 Strategic Limitations and Shortcomings of PatentProtection 219

IV. 1.2.3 The Advantage of Multinational Enterprises in theAppropriation of Intangible Technological Assets .222

IV.l.3 Upshot IV: Strategic Role and Importance of theProtection of Intangible Assets in the Generation ofSustainable Competitive Advantage 224

IV.2 Brand Equity in the Protection of Technological Assets 225IV.2.1 What is Brand Equity? 227

IV.2.1.1 Dimensions of Brand Equity 228IV.2.1.2 Strategic Relevance of Brand Equity 234

IV.2.2 Generation of Brand Equity and the Advantage ofBeing First 237

IV.2.2.1 Pioneering Brands and Customer Switching Costs.238IV.2.2.2 Brand Equity and First-Mover Advantages 239

IV.2.3 Strategic Role of Complementary Brand Equity inProtecting Intangible Technological Assets 245

IV.2.3.1 The Role of Intangible Technical Assets inEstablishing Brand Equity 246

IV.2.3.2 The Complementary Nature of Brand Equity inProtecting Intangible Technical Assets 247

XIV Contents

IV.2.3.3 Integration of Technology Management and theManagement of Brand Equity 251

IV.2.4 Upshot V: Strategic Significance of ComplementaryBrand Equity and Immaterial Technological Assets 254

IV.3 Model of Complementary Brand Equity 256IV.3.1 Intangible Technological Assets, Complementary Brand

Equity and the Effective Appropriation of Returns 256IV.3.1.1 The Importance of Brand Equity in Appropriating

the Returns of Technological Assets 257IV.3.1.2 The Role of Complementary Brand Equity in

Generating New Intangible Technological Assets ..262IV.3.2 Efficient Management of Established Brand Equity 268

IV.3.2.1 The Role of Subsequent Technological Innovationsin the Upholding of Established Brand Equity andthe Advantage of the Innovator 268

IV.3.2.2 The Management of Complementary BrandEquity and Intangible Technological Assets alongthe Technology Life-cycle 273

IV.3.2.3 The Role of Established Brand Equity in theMarket Introduction of Subsequent ProductGenerations 277

IV.3.3 Upshot VI: The Strategic Role of ComplementaryBrand Equity in the Appropriation of IntangibleTechnical Assets 281

IV.4 Organising and Implementing Efficient Brand EquityManagement 283

IV.4.1 Legal vs. Managerial Responsibilities 284IV.4.2 Principal Organisational Forms of Brand Equity and

Technological Management 286IV.4.2.1 Models of Organisational Integration of

Technology and Brand Equity Management inDiversified Companies 287

IV.4.2.2 Ensuring Sufficient Investments in Brand Equityand Technological Assets 294

IV.4.3 Apparent Problems in the Integration of Brand Equityand Technology Management 299

IV.4.4 Tools for Aligning Brand Equity and TechnologyStrategies 306

IV.4.5 Upshot VII: Organising for an Effective Brand Equityand Technological Management 314

Contents XV

V Econometric Analysis 317V.I Methodology 318

V.I.I Data Sources and Ascertainment 318V.1.2 Choice of Object and Scope of Investigation 320V.I.3 Theoretical Concept and Derived Hypotheses 324

V.I.3.1 Underlying Theoretical Concept and ItsOperationalisation 324

V.I.3.2 Research Hypotheses 328V.I.4 Method of Statistical Evaluation and Statistical Validity

of Results 330V.2 Statistical Analyses 335

V.2.1 Descriptive Statistics 335V.2.2 Econometric Analyses 342

V.2.2.1 Cross-sectional Analyses 343V.2.2.2 Industry Analyses 351V.2.2.3 Analysis of the Impact of Patent Filings,

Trademark Registrations on Companies' BrandEquity and Operating Profits 358

V.3 Discussion and Findings 363

VI General Summary and Conclusion 367VI. 1 Discussion of Methodological Proceeding 369VI.2 Resume of Research Finding and Implications 371

VI.2.1 General Summary of Findings 371VI.2.2 Implications for Research and Practice 378

VI.3 General Conclusion and Scope for Further Research 383

Bibliography 385

List of Abbreviations

adj. R2

A&DAGAPCapprox.ASAAMAAVVIDBTOCEOCICDCTOcf.chap.cp.DMDPAe.g.EoSEPOEUFDAISPICGSi.e.IOSIPIPCIPOM&AMNEN.A.NIHOTCp./pp.PCPCTR&Dresp.

adjusted coefficient of determinationacquisition and developmentAktiengesellschaft / public companyAlien Property Custodianapproximatelyacetylsalicylic acidAmerican Medical Associationapplication, voice, video, and integrated textBenelux Trademark Officechief executive officerCorporate identity and corporate designchief technology officerconfer tochaptercompare withDeutsche Mark / German MarkDeutsches Patentamt / German Patent Officefor exampleeconomies of scaleEuropean Patent OfficeEuropean UnionFood & Drug Administration (USA)Internet service providerInternational Classification of Goods and Servicesthat isInternetworks Operating SystemsInternet ProtocolInternational Patent Classificationinitial public offeringmerger and acquisitionmultinational entreprisenot availablenot-invented-here-syndromeover the counter drugs/self-medication drugspage/pagespersonal computerPatent Co-operation Treatyresearch and developmentrespectively

XVIII List of Abbreviations

ROI return on investmentRTA revealed technological advantagesect. sectionSCA sustainable competitive advantageTM trademarkTRIPS trade related aspects of intellectual property rightsUK United Kingdomunpubl. unpublishedU.S. United States of AmericaUSPto U.S. patent and trademark officeVoIP Voice over Internet ProtocolWIPO World Intellectual Property Organisation

I The New Era of Intangible Assets

In the 21st century the most valuable strategic resources for businessenterprises will no longer be physical assets such as land, machines, etc.,as it was the case in the beginning of the 20th century, but rather intangibleassets such as knowledge, know-how, and intellectual property rights.1

Moreover, various authors have stated that in order to be successful inmost industries, companies need to have a competitive advantage ontechnological grounds which enables them to offer superior products. Liparticular technological progress has continuously accelerated over the lastcentury so that the average duration of product-life-cycles and eventechnology-life-cycles has been considerable reduced. This increasingtechnological progress has not decreased, but rather increased the strategicimportance of technological expertise. Therefore, companies are forced toconstantly learn, create, and update new technological competencies, aswell as unlearn obsolete procedures in order to be able to remaincompetitive in a world characterised by rapid technological progress.Accordingly Nonaka (1991) stated:

"In an economy where the only certainty is uncertainty, the one suresource of lasting competitive advantage is knowledge. When marketsshift, technologies proliferate, competitors multiply, and productsbecome obsolete mostly overnight, successful companies are thosethat consistently create new knowledge, disseminate it widelythroughout the organization, and quickly embody it in newtechnologies and products. "2

However, the creation of new technological know-how and knowledgewhich improves existing products and is supposed to give the inventingcompany a competitive edge on the market, necessitates considerableinvestment. On the other hand, technological assets represent intangibleassets that generally show the qualities of public goods of non-rivalry,non-excludability, non-abrasion in use, and high fixed cost in production.These characteristics of immaterial valuables render the appropriation ofthe returns generated by these assets particularly difficult or evenimpossible.3 As we know, companies will only invest in the creation ofnew information and knowledge if the marginal return on additional

1 Cp. Teece, D. J. (2000); Teece, D. J. (2000a), chap. 1.2 Nonaka, I. (1991), p. 96.3 For a more detailed discussion of the public good characteristics of intangible

assets and their influence on the appropriation of returns generated by theseassets see chap. III. 1.

2 I The New Era of Intangible Assets

knowledge exceeds or at least equals the marginal cost of production.4

Hence, the higher the costs of production and appropriation of the returnsthe higher the marginal cost and thus the lower the overall output.Consequently, if companies cannot appropriate the returns of theirimmaterial assets, marginal returns are low and hence they will bereluctant to invest the resources necessary for their creation and in turnendanger the company's competitive advantage and thus survival in thelong-term.

On the other hand, the increasing globalisation of the economy as awhole, the non-transferability of intangible assets across open markets thatis due to the public good characteristics of these valuables, and theincreasingly shorter product and technology life times create increasinginterest of managers and scientists alike on multinational enterprises. Themultinationality of an enterprise is perceived per se as a strategicadvantage vis-a-vis competitors since it gives the company an advantage inrecognising, seizing, and exploiting new innovative market based as wellas technological trends in a multitude of different national and regionalmarkets. Consequently, a company bestowed with an internationalorganisational network is supposed to show advantages in acquiring andcreating new know-how, knowledge, and competencies with respect tocompanies only active on a national or regional level.5

In the ongoing discussion of the economic role of intangible assets andthe globalisation of the economy the aspect of the internationalappropriation of economic returns generated by intangible assets is at thecentre of interest. Companies are reluctant to invest in the generation ofintangible assets when a sufficient appropriation of the potential returnsgenerated by these assets is not warranted. Therefore, the completetechnological development would come to a complete halt if companies donot have the possibility to protect and thus exclude third parties from theuse of their immaterial assets and consequently generate some economicreturns that justify the initial investments. In the fundamental discussion ofthe possibility of companies to exclude actual and potential competitorsfrom using their intangible achievements, authors have predominantlyfocused on the possibility to place legal patent rights which bestow theowner with a legal monopoly right on the use of the subject matter of thepatent for a limited period of time. The growing awareness of theinefficiencies of such patent rights in the real world has encouraged theinvestigation of alternative protection modes with a mostly technological

4 Cp. Magee, S. P. (1977).5 For a more detailed discussion of the advantages of multinational enterprises see

chap, m.2 and IV. 1.2.

I.I Problem Development 3

focus, e.g., lead-time advantages or company specific complementarytechnological competencies. Alternatively, the investigation of the role ofcompany specific complementary market based assets in the appropriationof the returns generated by intangible technological assets has, however,been almost entirely neglected, so far.

Our research was motivated by the insufficient investigation of thepossibilities of how companies can ensure an efficient and effectiveappropriation of the returns of intangible technological assets which arebroadly claimed to be of utmost importance for the continued existence ofcompanies. Thus, our investigations intend to analyse the role of marketbased assets, and here in particular brand equity, in the appropriation ofthe returns generated by intangible technological assets in the long-term.Companies are recognising brand equity increasingly as a corporate assetof utmost strategic importance, where single brands can attain marketvalues of a multiple of the companies' book values.6 Hitherto, research inthe field of brand equity has principally concentrated on the analysis of therole of brand equity for companies active in consumer goods markets, andhas largely neglected to investigate the role brand equity plays in general,and in particular in the appropriation of economic returns for technologyintensive firms. However, before entering the empirical and theoreticaldiscussion of the role of brand equity in the sustained appropriation of thereturns of intangible technological assets, we will further specify theproblem investigated in our research work and in particular point out therole of intangible assets for business enterprises and the economy as awhole, as well as specify the problem of appropriation in chapter 1.1 whichis of central importance in the knowledge-base economy. Subsequently,we will specify our research focus and terminology used in our analysis inchapter 1.2 before presenting the overall structure of the thesis in chapter1.3.

1.1 Problem Development

This section outlines the general field of intangible assets, their role in theeconomy in general, as well as for the individual business enterprise, andclearly specifies the problem of appropriation immanent to any immaterialtechnological asset. This problem is at the core of our research. Scientistssuch as List, Hayek, or Arrow have already perceived the general

• Cp. Hatch, M. J. & Schultz, M. (2001).

4 I The New Era of Intangible Assets

economic importance of immaterial valuables in the early 20th century.7

Hayek, for example, pointed out in his studies the problem of the efficientutilisation of existing information and knowledge in society which are notconcentrated in one single person but are rather dispersed over a largenumber of individuals.8 Arrow, on the other hand, already stressed thedifficulty of non-appropriability of the returns generated by intangibleassets because of their public good characteristics which leads to an under-investment of the free economy in such assets.9

In the following sections we are going to point out the importance ofimmaterial assets which we consider to consist of information andknowledge, for the present economy and business enterprises.10 We firstanalyse the transformation of the general economy towards a knowledge-based economy. Building on this general discussion the resultingconsequences for business enterprises that result from the so called "thirdeconomic revolution" are depicted.

1.1.1 General Economic Significance of Intangible Assets

The late 19th and early 20th century were dominated by the industrialrevolution which considerably augmented wealth in Europe due toincreased productivity in industrial production. This increase inproductivity had been, as discussed by Adam Smith in his famous book"The Wealth of Nations," rendered possible by the availability of newmachines, the accumulation of specialised capabilities, and the opening ofnational markets which significantly lowered trade barriers.11 Nowadays,the wealth of nations and entire regions depends increasingly onaccumulated knowledge and its effective and efficient utilisation. As Listalready perceived in 1841, the national income does not only depend on

7 Cp. Freeman & Soete (1997), chap. 2; Hayek, F.A. (1945); Arrow, K. J. (1962a,1962b, 1969).

8 "The economic problem of society is thus not merely a problem of how toallocate 'given' resources - if 'given' is taken to mean given to a single mindwhich deliberately solves the problem set by these 'data'. It is rather a problemof how to secure the best use of resources known to any of the members ofsociety, for ends whose relative importance only these individuals know.", Vgl.Hayek, F.A. (1945), S. 519-520.

9Cp. Arrow, K.J. (1962a).10 For a detailed definition of the different forms of intangible valuables see in

particular chap. III.l.11 Cp. Freeman, C. & Soete, L. (1997), chap. 2.

I.I Problem Development 5

the employment of physical capital but also on the utilisation of theprevalent immaterial valuables:

"In opposing to this reasoning, Adam Smith has merely taken theword capital in that sense in which it is necessarily taken by renters ormerchants in their book-keeping and their balance sheets. ... He hasforgotten that he himself includes (in his definition of capital) theintellectual and bodily abilities of the producers under his term. Hewrongly maintains that the revenues of the nation are dependent onlyon the sum of its material capital. "n

The importance of immaterial assets in the generation of revenuesstressed by List has considerably increased since the mid 19th century.Today the access to scarce natural resources, e.g., coal, ore, or petrol, andto factors of production such as machines no longer has the centralimportance it had had at the beginning of the 20th century. Prices for rawmaterials have continuously declined throughout the past century andfactors of production such as machines but also natural resources areglobally available at constant quality and uniform competitive prices. Inthe 20th and 21st century which have been characterised by an increasingglobalisation of the economy, the creation and utilisation of immaterialassets are of utmost importance in the determination of the wealth ofnations.

These new insights have lead to so called "new growth theory," whichdoes not perceive physical assets at the basis of national economic growthand national income, but rather knowledge and capabilities of theworkforce of a country.13 The appearance and increasing recognition of thenew growth theory which reveals the formation of the workforce as theelementary factor in the determination of economic growth and wealth,have initiated a fundamental change in public policies in mostindustrialised and even developing countries.14 Moreover, publicauthorities endeavour to warrant a sufficient supply of the economy withintangible technological assets.15

12 Freeman, C. & Soete, L. (1997), p. 296.13 For a detailed discussion of immaterial assets in macro-economic growth theory

see Romer, P. M (1986); Grossman, G. M. & Helpman, E. (1990), Stiglitz, J. E.(1999a).

14 Cp. Dunning, J. H. (1994).15 For a detailed discussion of the role of public authorities in the generation of

intangible assets and innovation see in particular Freeman, C. & Soete, L.(1997), chap. 16.

6 I The New Era of Intangible Assets

Derc

en

—•-

__jr

•jcnOOU

OUU

ocn

A cr\

ioU

•inn JIUU *19

-US i r

- E U r

87 1988 1989 1990 1991

it. royalties and license fees -*

oyalties and license fees —•

1992 1993 1994 1995 19

•— US total exports (goods)

•— EU total exports (goods)

>

;

96

Source: OECD (1998).

Figure 1.1: Development of the international trade in immaterial assets

This change towards a knowledge-based economy has not only becomeapparent on the national level, but has also a considerable influence at thelevel of business enterprises. The development of the international trade inimmaterial assets has, for example, disproportionately increased withrespect to the growth in the international trade in physical assets. As figureI.I illustrates, income from royalties and licensing fees have risen in theUS and EU between 1987 and 1996 by 222 and 192 percent, whereasincome from exports of physical goods have only increased over the sameperiod of time by 145 and 124 percent, respectively. Building on thesegeneral findings we discuss the role of intangible assets on the companylevel in the following section 1.1.2.

1.1.2 Role of Intangible Assets in Business Enterprises and theCentral Problem of Appropriation

The above described economic changes do not only influence thecompetition on a national or regional basis, but also considerably modifythe global economic environment surrounding business companies.Consequently, the success of companies in the 21st century will no longerdepend on the access to factors such as land, raw-materials, and physicalcapital but is rather determined by the effective and efficient generation,

I.I Problem Development 7

acquisition of new intangible assets and their profit maximising utilisation.As already pointed out above, natural resources and physical assets can beacquired on the global market at competitive prices and consequently thesefactors of production do no longer confer a company a defendablecompetitive advantage.

The success of companies is and will increasingly depend upontechnical invention and innovation and hence on the generation,acquisition and utilisation of intangible asset such as knowledge, know-how, patents, trademarks, and information, for example. Moreover, theincreasing economic globalisation, the ever faster technologicaldevelopment, as well as the appearance and establishment of new mediasuch as the Internet have increased competition in most product marketsover the past decades. The Internet, for example, enables companies toenter national markets and offer their products to a large number ofconsumers without even establishing a subsidiary. In addition, the Internetenables consumers to directly compare offers from different companies invarious national markets and thus to choose the most attractive offer withsearch-costs that approach zero. If a company wants to remain successfulin such globalised markets, characterised by fierce competition, shorteningproduct- and technology-life-cycles, it has to possess advantages andcapabilities that are company specific and cannot be easily imitated,replicated, substituted or acquired on the market by other companies.

As illustrated in figure 1.2, the value of the immaterial assets of theselected companies outweighs by far the value of their physical capital asstated in the companies' balance sheet.16 In the case of Yahoo, forexample, a provider of Internet-portals and search machines, the marketvalue of the company was in December 1998 5400% higher than thecompany's actual equity capital stated in the balance sheet. Even in thecase of Cisco Systems the market value was still 20 times the company'sstated equity capital and in the case of Bayer more than 50% of thecompany's market value can be attributed to the company's intangibleholdings.17

16 Cp. Hall, R. (1997); Sveiby, K. E. (1997), chap. 1.17 It has to taken into consideration that the actual market value of the company is

also influenced by general disturbances. For a detailed discussion of thedetermination of the value of intangible assets see chap. III. 1.

8 I The New Era of Intangible Assets

Yahoo

Microsoft

Cisco Systems

SAP

Sun Microsystems

Nokia

IBM

Intel

Hewlett-Packard

Biogen

Walt Disney

Volkswagen

Boeing

Alcoa

Bayer

Pechiney

Source: Company reports; Hoover database (www.hoovers.com).

Figure 1.2: Value of immaterial assets in business enterprises18

It is argued that company specific intellectual assets represent onepossibility to establish a strategic advantage vis-a-vis competitors.19 Suchintangible valuables can, in general, not be acquired on an open marketand, moreover, companies have to invest considerable resources in theircreation. These immaterial assets show, however, the characteristics ofcollective goods which render the appropriation of the returns generated bythese assets extremely difficult or even impossible. However, if companiescannot appropriate the returns of the intangible assets generated byconsiderable investments in R&D, for example, enterprises will bereluctant to invest private resources in their creation. Such an under-investment in the generation of intangible assets would, however, not onlyendanger the competitiveness of the individual company or nationaleconomy but would bring the whole economic development to a halt.

Thus, the appropriation of the returns is at the core of the discussion ofthe knowledge-based economy. The fundamental importance of theappropriation problem becomes particularly apparent by the considerableefforts of public authorities in most nations to establish a system of

18 The bars indicate the value of the companies' intangible assets in relation totheir equity capital indicated in the companies' balance sheet (fiscal year 1998).The relationship was calculated on the grounds of Dec. 1998 stock quotes.

19 For a more detailed discussion see chap. Ill and IV.

I.I Problem Development 9

intellectual property rights which has the aim to enable the inventor toappropriate a sufficient part of the returns generated by his invention inorder to justify the extremely risky investments in the creation of newintangible assets. These intellectual property rights, e.g., patents andtrademarks, bestow the owner with a legal monopoly over the coveredintangible assets and thereby enable him to appropriate a better part of thereturns generated by his immaterial assets. However, intellectual propertyrights in general and in particular patents with respect to intangibletechnological assets are not as effective in practice as is often believed intheory.20

Various authors have heavily criticised the prevailing system ofintellectual property rights because of its limited effectiveness and thehigh costs of implementing and upholding protection. However, theseauthors have mostly regarded one isolated protection mode, e.g. patents,and did not take the complementary nature of the different existingprotection modes available to companies into consideration.21 In spite ofthe broad and fundamental critique on the current system of intellectualproperty rights, the considerable research on the effectiveness of patentright protection that revealed the insufficiency of patents in the protectionof intangible technological assets,22 and the ongoing discussion of thecentral importance of immaterial assets in generating competitiveadvantage, the general problem of the appropriation of intangible assetshas been largely neglected, so far. Moreover, the past discussion onappropriation mostly focused on the protection of intangible assets bysingular intellectual property right protection leading to an immediateeconomic return measured in monetary terms. However, in order to fullyunderstand the problem of appropriation and thus to be able to efficientlyand effectively appropriate the returns of intangible assets a more holisticview of the topic is needed. In our view appropriation is not onlyconcerned with the protection of existing immaterial assets but, asdescribed by Morin (1988), also includes the functions: optimisation,enrichment, stocktaking, evaluation, and supervision (cf. figure IV.6).23

Furthermore, the complementary nature of the different existingintellectual property rights as well as alternative modes of protection haveto be taken into consideration if a company wants to ensure the effective

20 For a detailed discussion of the different intellectual property rights and theirshortcomings see chap. III.3.

21 Cp. Erickson, G. & Jacobson, R. (1992), Thurow, L. C. (1997).22 See in particular chap. 1.2.1 and III.3.23 For a more detailed description of the model established by Morin (1988) see

chap. IV. 1.2.1.

10 I The New Era of Intangible Assets

appropriation of the returns of its intangible technological assets in thelong-term. Thus, as described above and discussed in detail in chapters IIIand IV, a company may fail to recuperate its investments made in newproduct and process technologies and/or may not be able to benefit of theinvention in the long-run by merely considering patent right protection inits technological management.

Consequently we can claim, if intangible assets are a 'company's mostvaluable asset,' as stated by Steward (1994), a company has to ensure anefficient and effective protection of its immaterial valuables that enables itto appropriate the returns generated by these assets in the long-run.

1.2 Field of Investigation and Terminological Specification

As outlined above, the appropriation of returns generated by immaterialvaluables is central to the discussion of intangible assets as an economicresource. If companies cannot appropriate the returns of their intangiblevaluables they are not prepared to invest the considerable resourcesnecessary for their creation. Such an under-investment would not onlyreduce the competitiveness of the individual firm, but would alsoconsiderably slow down or even bring to a complete halt the generaleconomic development. Consequently, legal authorities have established asystem of intellectual property rights in order to enable innovativecompanies to appropriate, at least in theory, a better part of the returnsgenerated by their intangible assets. These intellectual property rightsshow, however, in reality considerable shortcomings in the protection ofintangible technological assets. Various investigations in the past revealed,on the one hand, the significant importance of patent protection inappropriating the returns generated by the use of the subject matter of thepatent. On the other hand, the investigations pointed out majorshortcomings of patent protection which severely limit the possibility togenerate sufficient economic returns in order to justify the investmentsnecessary to generate intangible technological assets.

In the following section we will briefly summarise the findings ofprevious investigations of the relationship between patent rights andinnovative efforts and the effectiveness of patent right protection inappropriating the returns of a technical invention in the long-term. Eventhough the findings of the mostly econometric investigations have revealedconsiderable limitations and deficiencies of patent right protection inassuring the appropriation of the returns, most studies have merelyconcentrated on patent protection as the only effective means to

1.2 Field of Investigation and Terminological Specification 11

appropriate the returns. Building on the results of these investigations onthe effectiveness of patents in enabling a company to appropriate thereturns of the investments in new intangible technological assets, wepresent and discuss the findings of the rare investigations which haveanalysed the role of complementary market based assets, and particularlybrand equity, in the appropriation of the returns of intangible technologicalassets. The discussion of previous research work will help us to furtherspecify the research focus of our work that will be pointed out in detail insection 1.2.2. Finally, we give some terminological definitions andspecifications in section 1.2.3 which have the aim to facilitate and clarifyour subsequent discussions.

1.2.1 Survey of Previous Research Work in the Field ofAppropriating Intangible Assets and the Role of BrandEquity

The protection of intangible technological assets with the aim to excludeother companies of the use of knowledge in question and thus toappropriate a better part of the returns generated by the utilisation of theknowledge, as well as the output measurement of companies' innovativeactivities have been subject to a multitude of investigations.24 Theseanalyses have, however, generally focused only on patent right protectionand entirely neglected other alternative and complementary modes ofprotection. In addition to the disregard of alternative protection modes andthe resulting singular inspection of the relationship between the inputvariable 'R&D expenditures' and the output variable 'patent filings,' moststudies entirely neglected the facts that not all intangible technologicalinnovations are patentable, and neither are all patented innovationseconomically useful nor do they guarantee their legal owners a perfectappropriation of the returns.25

Nevertheless, past analyses revealed a strong correlation betweencompanies' R&D expenditures and patent filings. Econometricinvestigations such as Pakes & Griliches (1984), or Bound, Cummins et al.(1984) revealed a strong and significant relationship between companies'

24 Cp. Kamien, M. I. & Schwartz, N. L. (1974); Kitch, E. W. (1977); Pavitt, K.(1982); Griliches, Z. (1984); Mansfield E. (1986); Basberg, B. L. (1987); Narin,F., Noma, E. et al. (1987); Cockburn, I. & Griliches, Z. (1988); Griliches, Z.(1990); Caves, R. E., Whinston, M. D. et al. (1991); Berkowitz, L. (1993); Patel,P. & Pavitt, K. (1995); Almeida, P. (1996); Ernst, H. (1998).

25 For a more detailed discussion of the patentability of innovations and quality ofpatents see chap. III.

12 I The New Era of Intangible Assets

R&D expenditures and patent filings. Moreover, Griliches & Mairesse(1984), Griliches (1984b), and Clark & Griliches (1984) have revealed apositive link between a company's R&D investments and its productivitygrowth, as well as market value. These results indicate that a company'sinvestments into R&D activities can be valued as investments intointangible assets which are subsequently protected by patent rights.

The findings of Mansfield, Schwartz et al. (1981) and Levin, Klevoricket al. (1987) on the effectiveness of patents in protecting technologicalinnovations and companies' choice of preferred protection mode have,however, been largely ignored in the discussion of the appropriation of thereturns of intangible technological assets. The econometric investigationsof Mansfield, Schwartz et al. (1981) revealed that although patents aredeemed to significantly increase imitation costs, with considerablevariations between the different industries, 60% of the patentedinnovations in the sample had been imitated within 4 years after theirintroduction. Accordingly, Levin, Klevorick et al. (1987) and Arundel &Kabla (1998) have shown in their analyses that even though companiesassume patents to considerably increase imitation cost in most industries,patent protection is perceived as least efficient protection mode in the caseof process innovations. Furthermore, although product patents were foundto be significantly more efficient as product patents, companies stillregarded lead-time, learning curve, and sales and service efforts as moreeffective protection mechanisms as patent rights. Accordingly, Arundel &Kabla (1998) have stated:

"Patents are relatively unimportant compared to alternativeappropriation methods such as lead time advantages or technicalcomplexity in sectors that produce complex products that are costly tocopy, or where high investment costs and expertise levels create entrybarriers that limit competition from new entrants, such as inaerospace.><26

Nevertheless, it has to be recalled that considerable differences in theeffectiveness of patents prevail with respect to the industry in question,type of innovation, as well as national origin of the company.27

Hence, these studies have clearly shown that the singular considerationof patent rights in the protection of immaterial technological assets cannotbe regarded as sufficient. Although the results of the independentlyperformed investigations are significant and coincide, they have beenlargely ignored in the discussion of the strategic importance of intangible

26 Arundel, A. & Kabla, I. (1998), p. 129.27 Cp. Levin, R. C, Klevorick, A. K. et al. (1987); Arundel, A. & Kabla, I. (1998).

1.2 Field of Investigation and Terminological Specification 13

assets. Moreover, the role of complementary market based assets, such asbrand equity, distribution channels, etc., in the protection andappropriation of the intangible technological assets have been mostlyneglected, so far. On the other hand, a vast discussion of the strategicimportance of market based assets and in particular brand equity hasevolved over the past years largely independent of the technologymanagement discussion.28 Only very few authors have seen somecoherence between the topics of brand equity and technologymanagement.29 Pettis (1995a), for example, clearly pointed out thestrategic importance of market based assets and in particular brand equityfor companies active in technology based industries.

Although brand equity is nowadays perceived as one of the mostvaluable assets of companies, and especially the brands of technologicalcompanies which are among the most valuable brands of the world,30 theinvestigation of the potential relationship between technologicalproficiency and brand equity has been almost entirely disregarded, so far.In particular the role of market based assets in the protection of existentidiosyncratic intangible technological assets, as well as in their generationand acquisition has, hitherto, been largely ignored. Up to now, only oneempirical investigation of the potential link between technologicalinnovation and trademark protection has been carried out by Allegrezza &Guarda-Rauchs (1999) which has revealed promising results.

The econometric analysis of Allegrezza & Guarda-Rauchs (1999) isbased upon survey data collected in 1996 for the Benelux TrademarksOffice (BTO). The data set includes the responses of some 1600companies headquartered either in Belgium, Netherlands, or Luxembourgand focused in particular on small and medium sized companies. With theavailable data the authors performed a logit multiple regression analysiswith the aim to explore on an ad hoc basis the factors influencing a firm'sdecision to file for trademark registration at the BTO. The results indicate,among other things, a positive and statistically significant correlationbetween the dependent variable trademark deposits and the firm's size, its

28 See in particular Aaker, D. A. (1989, 1991, 1992, 1996, 1997); Kapferer, J. N.& Thoening, J. C. (1994); Richards, I, Foster, D. et al. (1998); Srivastava, R. K.,Shervani, T. A. et al. (1998); Farquhar, P. H. (1989); Geobbels, R. (1997, 1998);Kapferer, J. N. (1999); Interbrand, (1999a); Esch, F. R. (2000).

29 See particularly Pettis, C. R. (1995a, 1995b); Tibesar, A. (1996, 1997, 1998);Goebbels, R. (1998); Allegrezza, S. & Guarda-Rauchs, A. (1999).

30 Cp. Badenhausen, K. (1996); Interbrand (1999); Khermouch, H., Holmes, S. etal. (2001).