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Protecting big ideas by small firms

Published 01 March 2018

Small businesses have more opportunities than ever to sell to customers around the world, but IP theft is one of their biggest risks to pursuing these sales.

Entrepreneurs are the risk-takers in our dynamic economy

We love to celebrate the American entrepreneur. Every day, countless small businesses leverage digital technologies to bring their products to market faster and at lower cost, and they can reach more customers – here and overseas through e-commerce platforms. But with unprecedented ways to connect with customers comes the increased challenge of protecting the source of their success – the intellectual property (“IP”) in their products.

More than any other asset, ideas are powering American productivity and economic growth. But taking invention and innovation from a dorm room or garage experiment to a useful commercial product requires investment. The availability of IP rights and protections are critical to raising capital and investments because they reduce risk and increase the prospects of return on those investments. While the United States has a long history of protecting intellectual property, many other countries are still developing their regimes while the pace of innovation only quickens.

Would you buy stolen property from the back of a van in a dark alley?

Intellectual property rights are a natural extension from the protection of theft against physical property. Nonetheless, plenty of people inside and outside the United States fail to understand or choose to ignore the importance of intellectual property. Worse, they may willfully violate intellectual property rights because it’s gotten easy to do so and it can be done in the privacy of your own home (think illegal downloads of music).

If you had to walk down a dark alley at night and hand over cash to a known criminal to obtain that music, it’s so clearly wrong that the vast majority of us would never consider it for a second. But both are acts of theft of intellectual property. In both scenarios, property was stolen from the composer, performer, and producer of that music, as well as may other individuals or employees of small firms in the music business.

Small creators, inventors, and innovators are making big contributions

How much do ideas and the intellectual property rights attached to them contribute to the U.S. economy? Analysts have identified what they call “IP-intensive industries,” those that produce a high number of patents, copyrights, or trademarks per number of people employed by them. They include the high-tech and scientific sectors that leap to mind, such as computers and electronics, pharmaceuticals and medical products. But they also include “creative” industries such as book publishing, software development, and graphic arts.

Overall, the full slate of IP-intensive industries account for 35 percent of U.S. GDP and 28 percent of all jobs in our economy, according to a study published by the U.S. Department of Commerce. Those statistics describe the industries that most intensively generate and use IP. It’s hard, however, to think of a business that is not directly – or at least, indirectly – involved in an industry where IP plays an important role. So the impact of IP in the American economy is likely understated in these numbers.

Perhaps more important, IP-intensive industries – from software to entertainment to pharmaceuticals – are overwhelmingly populated by small businesses. For example, according to the latest Census Bureau data, among pharmaceutical and medicine manufacturers, 58 percent of employer firms have fewer than 20 workers. Just over 80 percent have fewer than 100 employees and 91 percent employ fewer than 500 people. That’s different from our usual perception of the industry. These figures are even higher in software publishing, in the sound recording industries, and even within the motion picture and video industries.

TradeVistas Graphic Small Businesses in IP-Intensive Industries

When ideas are stolen: Three personal stories and they aren’t alone.

Small businesses have more opportunities than ever to sell to customers around the world, but IP theft is one of their biggest risks to pursuing these sales. Just ask Grainne Kelly, founder of the BubbleBum inflatable booster seat, who discovered that a manufacturer in China had used her original design to apply for a utility patent. Or, ask SylvanSport Inc. founder Thomas Dempsey, who found copies of his popular camping trailer being sold on in violation of his patent. He worries about lost business and brand confusion but says that “chasing down copycats would be a full-time job.”

This is a common complaint among small business owners. Liz Fields, a successful designer of bridesmaid and wedding dresses, says her business dreams were dashed upon discovering that counterfeit versions of her designs were not only undercutting her business but also her credibility. They were cheap imitations bearing her name. She says the counterfeiters not only stole her money, but also diminished the integrity of her brand, which is her name: “It was personal, and it became a nightmare.”

Trade agreements can promote strong IP rights globally

IP is important to attract capital, to foster economic growth, and spur competitiveness. Countries that put in place strong IP rights gain these benefits, and in turn become even better markets for our IP-based products. Conversely, market access in the form of better regulation or lower tariffs is easily undermined by IP theft. That’s why the United States Government tries to negotiate improvements to IP regimes in the context of trade agreements.

According to the World Intellectual Property Organization, differences in innovative activity and corresponding technological gaps between countries help explain why differences in income and productivity levels persist. Countries that protect IP tend to attract investment in these highly productive sectors that contribute to the economy and generate good jobs. In turn, their products often support enhanced productivity by other sectors of the economy.

Protecting the big ideas of small firms

The entire entrepreneurial process is dependent upon strong intellectual property rights. IP-intensive products have high investment costs in research and development, but low copying costs. And when copies multiply, the value of the original collapses. The legitimate IP owner loses revenue and market share to counterfeit products, and when businesses lose revenue, the repercussions are broader — employment and economic growth suffers. The risks and impact for small businesses of IP losses are even more acute.

The United States takes IP protections seriously, which enables American creators to turn ideas into products more prodigiously than their competitors in other countries. Because U.S. firms are leaders globally in creating intellectual property, we have interest in promoting legal rights in other countries to ensure America’s creators reap the economic rewards for their ideas.

© The Hinrich Foundation. See our website Terms and Conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).

Raymond J. Keating serves as chief economist with the Small Business & Entrepreneurship Council (SBE Council), a nonpartisan, nonprofit advocacy group dedicated to protecting small business and promoting entrepreneurship.

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