2.2.1 Concept of Intellectual Property and Performance
The potential effectiveness of intellectual property resources varies according to different institutional factors and the literature concerning the returns to intellectual property in the form of trademarks and the returns to innovation in the growing manufacturing firms take various perspective. Both intellectual property policy makers and competition policy makers have recently observed the demonstrating significant returns to firms from their new brands and secondly by demonstrating the existence of healthy competition through innovation and protection of innovation. However, some policy makers believe that the gains to firms are large, but are also relatively short-lived, and the analysis of interactions between firms within product markets confirms the ability of other firms to compete using the same intellectual property rights. There are various approaches used by practitioners for the measure of firm performance. Industry growth and market share is a forward-looking measure of firm performance.
Some authors believe that measurement of IP and assessment of firms IP depends a lot on the company’s disclosure strategy. Is the company ready to disclose its IP in the annual end of year report, or in the company’s financial statements? Some industries policies do not allow disclosure of their IP rights while others do allow it. Disclosure can however be voluntary and non-quantitative, occurring in sections of the annual report other than the financial statements. However other barriers to disclosure exist such as the cost of obtaining information on intangibles, or the perceived loss of competitive advantage with disclosure (Adewopo, 2002). Performance level, on the other hand being the level of the act of accomplishment by a firm through the amount of useful work achieved compared to the time and resources used, will either increase or decrease depending on the effect of IP on it. The fact still remains however that performance can hardly be measured without adequate and relevant information which will aid the operators of the industry, the stake holders or the relevant agency that is involved in the measurement. This information could be in the form of Return on Investment, Return on Assets, and Return on Equity, Revenue Growth, and Employee Productivity. Other performance indices like productivity or output, profitability, goal attainment, man power utilization, flexibility and growth all come into play. Suffice it to say that goal setting is generally intended to guarantee some minimum level of performance. Osuagwu et al (2004) emphasizes that the only way to ensure that efforts are being geared towards goals is to evaluate performance periodically and relate the measurement to the set goals. Goal- setting is therefore fundamental to the success of performance measurement because it does the following;
1. Provides feedback on current performance
2. Highlights areas of deficiency
3. Shows the level of discrepancies between actual and described performance
Objectives, goals and strategies serve to identify the organization and its mission as well as provide central focus around which human effort and organizational resources can be put to work. Clear vigorous determination of goals and objectives is necessary for effective management. Firms while making their policy and setting their goals should therefore incorporate intellectual property as an important factor. Intellectual property, being one of the most important organizational resources, and also being generated through human effort, at the same time needs a clear and vigorous application of strategy for effective management in order for the firm’s objectives to be achieved. Consequently, organizations objectives cannot be achieved without increase in performance level. Even for non-profitable organizations, performance level can still be measured.
Firer (2006), Turner (2007) and Williams (2003), all find that IP has a significant relationship with asset turnover and market to book ratio, showing that the efficiency with which a firm can use its IP impacts significantly on firm performance. Additionally, Appuhami (2007) does not find a significant relationship between IP and the capital gains made by investors, although the relationship is a positive one. They all seem to show that IP is rarely found to have a significant relationship with performance. Most other writers however, in their own write up believe that the reverse is the case.
Prior studies have measured performance in a number of ways: Return on assets (ROA), Return on Equity (ROE), Revenue Growth (RG) and Employee Productivity (EP) (Firer and Williams, 2007). These four variables all measure performance and are defined as:
• Return on Assets (ROA) = Profit Before Tax / Average Total Assets
• Return on Equity (ROE) = Profit Before Tax / Average Common Stock
• Revenue Growth (RG) = (Current year revenue / Prior year revenue) – 1
• Employee Productivity (EP) = Profit Before Tax / Number of Employees
In order to assess a firm’s ability to create value added (VA) to all stakeholders, the owners, the employees and the general public must first be considered. In its simplest form VA is the difference between output and input. Output represents net sales revenues and input contains all the expenses incurred in earning the sales revenues except labour costs which are considered to be a value creating entity (Nwokocha, 2008). Should a firm wish to disclose quantitative figures, measurement remains a difficulty.
Rarely can a market price be determined for IP, and the cost of creating IP is often difficult to measure (Zambon, 2004). The paucity of published disclosure on firms’ IP provides a challenge to accounting researchers who wish to investigate the link between IP and firm performance.
Zambon (2004) observes that even though intangible assets such as IP have always existed, it is only recently that it started receiving attention in terms of valuation and measurement and the accounting profession has also seriously attempted to define, disclose, and measure them. As such, the nature of the relationship between IP and firm performance is not only a relatively a relatively virgin territory, but also one that needs to be properly investigated.
Ramello (2006) and Ramello and Silva (2006), note the approach to trademarks and performance in Landes and Posner (1987, 2003). Landes andPosner argue that trademarks have value since they help to solve the information asymmetry between seller and buyer, as firms use trademarks to signal to consumers that the product is of a certain, consistent quality. In this way the “search cost” of customers are reduced, the firm can charge a higher price, and the firm’s profits increase. This implies that there should be a positive association between the firm's stock of trademarks and its profitability and market share
Shakina, and Barajas (2000) strongly denotes that the concept of intellectual property has become increasingly prominent in academicand business literature. Although this phenomenon is growing in relevance and importance but some researchers do not agree on the context of intellectual property as a management issue and as a term that should be treated singularly. The key feature of intellectual property they believe consists in its ability to enhance effectiveness of other resources, including tangible assets. That way, they can positively affect organizations performance. Intellectual property thus relates to the ability of an organization to ‘add value’ to products or services in a manner that offers extraordinary growth or high profits when it is related to other company resources. Despite the specific features of intellectual resources, they should be considered as part of the companies’ invested capital and characterized according to the common approach to capital identification.This means that companies should first identify the amount of intellectual capital employed. Given that the intangibles are largely not reflected in the company’s balance sheet, they need to assess these characteristics using different proxies. Other researchers argue that intellectual property is becoming nearly the only competitive advantage of a company in the new economy. The economic profit or residual income concepts are based on the fact that the competitive advantages of a particular company only provide additional value creation. Therefore, the close connection of modern value-based management concepts and knowledge management becomes obvious
In doing this, an analysis to the mainstream literature on intellectual property through innovation, which often involves process and product innovation is very pertinent. Process innovation facilitates the production of some existing products at lower cost, permitting supply of a given package of product characteristics at a lower price while Product innovation is the case of offering a new product with a novel package of characteristics; hence launching a new variety
What the producer of the good entering the efficiency frontier, he achieves an enhanced market share as he takes customers from the producers of closely related brands, who move to purchasing his variety as this offers a more cost-effective way of satisfying their tastes. No wonder Lands and Posner (2000) made some statements about it on what they termed a social returns. When there is a successful launch of a new product or a lower cost existing variety, the efficiency frontier has moved outward so consumer utility has increased. Thus even if firms as a group have played a zero-sum game in market share, society has gained from this competition as long as the resource costs of product and process development are exceeded by the gain in consumer surplus. This model fits well with the Schumpeterian notion of competition via the process of innovation, aptly described as creative destruction in his early writings (Schumpeter, 1982). The term creative destruction succinctly acknowledges that there are individual gainers and losers within a competitive innovation process that is ultimately beneficial for society. While intellectual property protection by the firm is beneficial to its performance, rapid IP acquisition by other firms within the same product group or sector diminishes the firms’ ability to profit from its own recent IP in the short run. Just as a product innovation improves the size and loyalty of the firms’ customer base, so the rapid introduction of new varieties by competitor firms will tempt these customers to defect to other firm’s products. Nevertheless, positive spillovers occur due to knowledge flows and demonstration effects on incumbent firms, provoked by the launching of new product varieties and qualities by competitors or new entrants. Thus market stealing is the stick that creates incentives to innovate which its occurrence leads to IP protection against possible stealing by others in order to improve the firm's product quality and lower its prices to regain its market share. Equally the expected future success from innovation is the carrot that drives managers to redesign company products and seek new market niches. This Schumpeterian competition for market share through IP reflected in IP activity, is likely to raise the productivity, profitability, market share, market value and other performance indices of all firms in the sector in the medium run, for example through raising the ability of the sector to compete in world markets for traded goods and services, and/or by satisfying a growing customer base for the expanding range of products. Of course there is then a harder question of what is the optimal number of brands in the marketplace. Lancaster (1978) attempts to deal with this issue and concludes that the market may provide more or less than the optimal degree of product.
2.2.2 Concept of Intellectual Property as an Intangible Asses
A property is anything tangible or intangible owned by a person, group of persons, community or country for which value is attached to. It is a thing, things, or possessions belonging to someone either individually or collectively. A property can be a tangible or intangible property.Intellectual property belongs to the nonphysical property which is regarded as intangible assets. It originates from the thoughts, ideas, conceptions, assumptions, imaginations, and dreams of people while in their various homes, offices, schools, communities and careers of life. When these ideas and thoughts are transformed and put into physical objects like discs, books, products and processes, they become intellectual property.
In order words, the property therein refers to the ideas embedded in these physical objects and not the objects per say. This is because that is where the value lies. Some writers have referred to it as Tangible Research Property, (TRP) meaning those tangible items produced in the course of system research that can be physically distributed including such items as Biological Materials, Engineering Drawings, Equipment Integrated Circuit Chips, Computer Data Base etc.
In most economies of nations, production requires not only such traditional factors as capital and labor but also skills, organizational structures and processes, culture and other factors collectively referred to as intangible assets. The Chambers 20th century dictionary defines a property as something that is owned; the exclusive rights of possessing, enjoying and disposing of a thing, an attribute or abstract quality which is characteristics of a class of objects or associated with an individual, object and/or concept. From these definitions, it is seen that property can be tangible such as cars, houses, lands, etc or intangible such as talents, discoveries, innovations etc. Properties can thus be classified into two types; physical and non-physical. Physical properties consist of objects and things that one can see, feel or touch, while nonphysical consist of things that one cannot see, feel or touch.
2.2.5 The Conceptof Knowledge: Knowledge Flows, Creativity and Innovation;
Creativity is the capacity to develop new ideas coupled with new ways of looking at problems and opportunities in the business setting. Innovation on the other hand is the ability to apply creative solutions to problems and opportunities with a view to enhancing or enriching the lives of people concerned. Invention thus is the by-product of creativity and innovation (Agbaeze, 2007:177). This goes to say that the process of thinking out new ideas or new ways of doing things is creativity while the act of putting it into use to solve human needs is innovation. Manufacturing companies on the other hand are entrepreneurs who use these creativity and innovation concepts to either manufacture new things or improve on already existing products. Drucker(1995) in Aluko et al(2004:182) declare innovation as one of the eight areas in which organisational objectives might be developed and maintained. All this cannot take place without the concept of knowledge. This is because creativity declines with lack of knowledge. As was stated by Agbaeze(2007:178), creativity could be taught. However, even for a creative minded individual, creativity tends to decline with age, lack of education, and lack of use. On the other hand, Knowledge can either be tacit or explicit.It is far from homogenous and ranges from knowledge that can be packaged and exchanged without making additional effort (Explicit knowledge) to knowledge that is so personal that nobody else can understand it, (Tacit knowledge) In between these poles is implicit. Knowledge that may not be in written form but can be shared with little to moderate effort within experts for example; among cancer researchers, lawyers or business people or even the non-experts.While all forms of knowledge is required in science and innovation, knowledge network deals principally with the circulation of implicit and explicit knowledge rather than the tacit knowledge. There is thus need for firms to take into account the nature of the incentives to invest in knowledge creation and dissemination to improve reduction of problems associated with it. They are tools used by the entrepreneur to achieve competitive advantage in the face of threats and opportunities(Adewopo, 2012:35).
In the absence of these intellectual property rights, transfers could be costly either in terms of identifying the relevant holders or identifying and bringing together relevant units of knowledge. The effort required to share knowledge ranges from the cost of communicating it (e.g., access to the Internet or to published articles), to the cost of writing it down (e.g., detailed laboratory notes) to absorbing it by working alongside of someone who has this knowledge (e.g., by working in a laboratory, through an internship or from other hands-on experience). Fundamentally, the amount of effort varies in proportion to how implicit, as opposed to explicit, the knowledge is: knowledge that is more implicit requires more effort to record and pass along than does knowledge that is already in an easily digestible form.
Von Hippel (1994) in (OECD, 2000) captures the idea of cost of transfer of knowledge through the concept of “stickiness”. He refers to stickiness as the incremental costs that one must expend in order to transfer a unit of knowledge in useable form to a person wishing to use it. The more explicit a unit of knowledge is, the lower these costs and thus the lower its stickiness. Intellectual property management can therefore be seen as knowledge management and it provides a set of mechanisms designed to facilitate the circulation of knowledge among independent parties, their form and structure will depend on the nature and stickiness of the knowledge in need of circulation.
As was earlier stated, in recent times, intellectual capital is recognized as the most important asset of many of the world largest and most powerful companies. It is the foundation for the market dominance and continuing profitability of leading companies and corporation. It is often the key objectives in mergers and acquisitions and knowledgeable companies are increasingly using licensing routes to transfer these assets to low tax jurisdiction (Nwauche,2000:129). The degree to which a company exploits its intellectual capital is a key factor in determining the sustainability of the company. Because of this, business managers obviously need to know the value of all assets and liability under their stewardship and control to make sure that these values are maintained. Nwauche (2000:150) identifies four main value concepts; Owner value, Market value, Fair value, and Tax value.
Rank- Ordering Approach
In an extension of the rank-ordering approach, a group of researchers argue that dynamic criteria can be shown by a simplex pattern in the correlations (Austin, Humphreys, & Hulin, 1989 in Brown et al, 2010:17). This pattern occurs when the highest correlation is observed between adjacent time periods (Time + 1) with systematic reductions in the magnitude of correlations as the interval between occasions increases (Time + 2, Time + 3, Time + k) (Hofmann, Jacobs, & Gerras, 1992; Ackerman, 1989 in Brown et al 2010:29). The conclusion drawn from the observation of a simplex-like pattern is that individuals are changing their rank order over time, and thus that job performance is dynamic. Early studies conducted by Rothe (1978) and Ghiselli and Haire (1960) find that individuals do in fact change their rank order over time. Since these initial studies, many studies examining change in performance over time have discovered the simplex pattern.
Self-Consistency Theory: A Main Effect Perspective
The notion that individuals seek consistency has been central to psychological thinking for decades, with researchers suggesting that individuals seek cognitive consistency or balance between their attitudes and behaviors. One of the earliest integrations of this notion within organizational psychology was Korman’s (1970) self-consistency theory.
Self-consistency theory sought to provide a theoretical framework for organizational hypotheses regarding self-esteem level, with the general premise being that individuals with high self-esteem would be more satisfied, more productive at work thus leading to improved organizational performance. In Korman’s (1970), cited in Pierce, and Gardener, (2004:36), “individuals will be motivated to perform on a task or job in a manner which is consistent with their self-image,” suggesting a positive main effect of self-esteem level on job performance. This theoretical framework has been the basis for a substantial amount of organizational research on self-esteem level. However, a recent review of the literature concludes that, contrary to self-consistency theory predictions, the evidence is equivocal on whether or not high self-esteem is related to better performance, (Borman, et al., 1993:27). A review by (Judge and Bono, 2001 in brown et al., 2010:36) came to a similar conclusion, noting that although an overall positive relation exists between self-esteem level and job performance it is still larger in magnitude than the relation between job performance and generalized self-efficacy or conscientiousness. Based on these narrative and empirical reviews, the overall main effect of self-esteem level on job performance has been questioned
Behavioral Plasticity Theory: A Moderating Effect Perspective
In contrast to self-consistency theory’s proposed main effect of self-esteem level on job performance, an alternate perspective is that self-esteem level moderates the effect of other variables on job performance. This perspective has been labeled behavioral plasticity theory. Borman (1993:30), suggests that individuals who have low self-esteem levels are more reactive (exhibiting “plasticity” or malleability) to external variables.
Behavioral plasticity theory is consistent with the notion that high self-esteem can act as a resource, providing a buffer against negative conditions and reducing their impact. Individuals with low self-esteem lack such a buffer and hence are more adversely affected by negative circumstances
Thus, the effect of negative circumstances on outcomes should be stronger for those individuals with low self-esteem, relative to those with high self-esteem. Typically, self-esteem level has been examined as a moderator of the effects of role stressors such as role ambiguity(RA) and role conflict (RC). RA is the extent to which a role’s goals and objectives are unclear or poorly defined. Role conflict (RC), is the extent to which a role contains conflicting demands, requirements, and pressures. High levels of self-esteem are thought to weaken the relation between role stressors and their outcomes.
Self-Esteem Contingencies Theory
Although we may encounter successes and failures in many different domains during our lifetime, it is likely that only a small subset of these outcomes will have the ability to influence how we feel about ourselves. For some individuals, for example students, failing a test can cause one to sink into a great depression, whereas burning cupcakes in an oven is likely to be shrugged off easily. For other individuals for example chefs, the reverse would be true. In other words, our self-esteem is contingent upon some domains. This reflects the presence of self-esteem contingencies, which Crocker, and Wolfe, (2001:59) define as a domain or category of outcomes on which a person has staked his/her self-esteem, so that the person’s view of his/her value or worth depends on perceived successes or failures or adherence to self-standards in that domain.” Self-esteem contingencies thus represent a form of ego-involvement in a particular domain such that one’s actions and outcomes in that domain hold implications for one’s broader sense of self, with failure in that domain threatening one’s self-esteem level, (Crocker, Luhtanen, et al., 2003; Crocker & Park, 2004; Crocker & Wolfe, 2001 in Brown et al 2010) The notion of self-esteem contingencies can be traced back to pioneering work on the self, where they note that individuals stake their self-esteem to certain domains and ignore other domains. In the performance theory therefore, some individual’s self-esteem affect their performance only when they find themselves in the domain on which they base their self-esteem. In this domain, failures are real failures and triumphs real triumphs, carrying shame and gladness respectively with them. Their deficiencies in other domains give them no sense of personal humiliation at all. However, although the notion of self-esteem contingencies has been with us for a long while, it is only recently that measures of self-esteem contingencies have emerged.