Revealing the link between trademarks and innovation

Firms apply for IP rights in order to make money from their innovation. In the past, economists have focused primarily on the benefits resulting from patent applications. The benefits of trademark applications and the complementarity of patents and trademarks were neglected almost completely until the seminal publication “Trademarks as an indicator of innovation and industrial change” by Sandro Mendonça, Tiago Santos Pereira and Manuel Mira Godinho in the academic journal Research Policy in 2004. However, research into the relationship between trademark applications and innovation activity is still in its infancy, despite Adam Smith’s intriguing paper calling for research into “locating the missing link between trademarks and innovation” (World Trademark Review issue 30). Smith rightfully pointed out that innovation extends the R&D stage, more directly related to patent applications, and observed correctly that “nobody knows exactly at which stage trademarks enter the innovative process”. However, we have now studied this in a cross-sectional study, which also examines the extent to which new trademarks refer to innovative products and services. In addition, we have studied the motives for trademark registration, for both innovators and non-innovators. In this article we report our main findings. A research paper with all the details and the findings of our second trademarks and innovation study (TIS) can be found at www.feweb.vu.nl/nl/afdelingen-en-instituten/post-graduate-school/postgraduate-school-management-consultant/m-flikkema/index.asp.

Distribution of survey

To answer our basic research question – “How do new trademark filings relate to innovation?” – we sent an online questionnaire to applicants which had filed at least one trademark at the Office for Harmonisation in the Internal Market (OHIM) or the Benelux Office for Intellectual Property (BOIP) in 2009 and which had been granted that trademark within two years. The survey set out several questions, varying from structural characteristics of the respondent – such as firm size, market orientation (eg, business-to business (B2B) or business-to-consumer (B2C)), industry type, branding strategy and maturity of the IP rights strategy – to aspects of the trademark registration process, such as motivation, involvement of trademark attorneys, timing of the trademark filing and strategies of bundling trademarks with other IP rights. We also asked respondents to fill out the reference of their trademarks to different types of innovation. Email addresses from trademark applicants were retrieved from the OHIM and BOIP databases. The remaining addresses were collected with the help of attorneys, predominantly those employed by Novagraaf, to ensure the participation of sufficient applicants that received help from trademark attorneys. The questionnaire was electronically linked to the BOIP and OHIM databases, enabling respondents to fill out the questionnaire while checking details of their trademarks.

Do new trademarks refer to innovation?

They certainly do. The 1,015 respondents were asked whether the trademark that they registered referred to any of the five types of innovation that we distinguished. Overall, 62.4% of the trademarks in the sample referred to at least one of the innovation types. The reference to product innovation was highest (37.9%) and almost twice the trademark reference to service innovation (20.6%). Figure 1 shows that Community trademarks (CTMs) referred more frequently to product innovation than Benelux trademarks (BTMs), as well as to process innovation (a difference of 10.8% and 4.7% respectively). The opposite held true for service innovation, to which BTMs refer somewhat more strongly (5.6%). The trademark reference to other types of innovation was rather limited (less than 10%).

Figure 1: The reference of new trademarks to innovation

Motives for trademark registration

Motives for trademark registration were various, although IP protection predominated. A list of motives was compiled based on four strands of literature. The economic literature focused on the role of trademarks in improving, safeguarding and capitalising on the distinctiveness of products and services, and on appropriating the rents from innovation by using trademarks as barriers to entry. Marketing literature emphasised the importance of building brand equity and brand-driven customer loyalty; while strategic management literature highlighted the need to combine and leverage resources to gain a competitive advantage. Finally, literature inspired by institutional theory suggested mechanisms through which companies might apply for trademarks simply to conform to or imitate other players in their markets. Usually a combination of (latent) motives drives companies to register a trademark. However, empirical research into the dominant motives and whether they occur in combination is lacking and we started to tackle this question with a new study published in Industry and Innovation (Flikkema et al, 2014). Respondents were asked to indicate the relevance of the registration motives. Table 1 ranks the motives based on the average score, which is based on a five-point Likert scale ranging from zero to four.

Protecting intellectual property is ranked first, with an average score of 3.43. This may seem counterintuitive, since strictly trademarks do not protect intellectual property in the same way as patents. The importance of this motive is further underpinned by the fact that 85.5% of the companies value this motive as (very) important (three or four, where four is highest) – by far the highest score. Building brand value is ranked second, with an average score of 3.00 and 72.9% of the firms scoring it a three or four. All other motives score significantly lower. Nearly half of the respondents ranked making the innovativeness of new products and services more credible with a three or four, which refers to the above-mentioned improving and safeguarding the distinctiveness of new offers.

Motives for trademark registration were also measured by means of statements with which respondents could agree or disagree. These motives are based on a five-point Likert scale ranging from one (disagree) to five (agree) and are therefore separated from those in Table 1. Table 2 lists the statements and the respondents’ answers. The motive of lacking the resources to protect the firm’s assets with other IP rights is ranked first, although it has a rather low average score of 2.67 and 31.4% of firms score it a four or five. In fact, almost the entire table consists of second-best motives, which are derived from limitations such as lacking money, knowledge or success – although the motive that a trademark enables the applicant to raise prices is a clear exception.

We checked the different motives for registering a CTM or BTM. CTMs imply the protection of brands at the EU level, while BTMs provide Benelux protection. In general, CTM applicants had a much stronger motivation. The biggest difference in motivation (1.41 on a four-point scale) was found for supporting the organisation’s international strategy, which was unsurprising. In addition, innovators had a much stronger motivation for trademark filing than non-innovators; hence, generally speaking, trademark registration seems to be a deliberate strategy to make money from innovative efforts.

The data also allowed differences between the motivations of service and manufacturing firms to be studied. Overall, manufacturing firms report a stronger motivation for registering a trademark than service firms. The most significant difference was again found for supporting an organisation’s international strategy, which can be explained by the fact that it is harder to export services. In addition, there were differences between B2B and B2C companies. In particular, building brand value, raising prices and enhancing the supply chain or end-market position were more important for B2C firms, as was being able to introduce a franchise formula. However, B2C firms also reported a more severe lack of resources for protecting their assets with other IP rights.

Next, the differences between mature firms and start-up firms were examined. Overall, mature firms were more motivated to apply for trademarks than start-up firms. Start-up firms reported a stronger – but still low – motivation for introducing a franchise formula or for licensing than mature firms, and tended to be more motivated to sell the trademark when appropriate. Perhaps such firms consider franchising to be a faster way to grow their business and are more eager to capitalise on entrepreneurial efforts in the short term. However, there were other significant differences from mature firms. Their stronger motivation for filing a trademark became most obvious when it came to the importance of new products or services for the organisation, enhancing the firm’s supply chain or end-market position and leveraging the value of other trademarks through, for example, sub-branding umbrella brands. Stronger motives for start-ups mainly centred on internal considerations, such as lacking the resources and the expertise to apply for other IP rights.

Finally, the survey distinguished between pro se filers – applicants which filed the trademark themselves – and applicants which received help from a trademark attorney. The second group reported more motives as being important. The biggest difference was found for the motive that a trademark agency or representative recommended the applicant to do so, which could be expected ex ante, since by definition pro se filers did not involve trademark agents. In addition, applicants supported by an attorney focused much more (on average +20%) on enhancing their supply chain or end-market position – although this may have been part of the trademark attorney’s sales pitch. Second-best motives, including price/costs considerations, were more important for pro se filers.

How timing of filing relates to innovation process

How the timing of trademark filing relates to the innovation process depends and there was a lot of variation between applicants. To compare the timing of trademark registration with the process of innovation, Cooper’s New Product Development (NPD) model is used as a reference (Cooper, 1983). This comprises a linear sequence of seven phases: idea generation, research, development, testing, marketing, market introduction and commercialisation.

Figure 2: Timing of trademark filing compared to stages of NPD process

Figure 2 shows the timing of trademark registration compared to the stages of the innovation process. Academics assume that brands are registered shortly before market launch of a new product or service, therefore indicating a later phase in the innovation process than patents, since patent application seems to be predominantly an output of the R&D process. Figure 3 shows that this assumption holds for approximately one-fifth of the trademarks used for innovation. Almost half of the trademarks are registered already during the four early stages of the innovation process, while more than 10% are filed after the market introduction.

Figure 2 shows that most trademarks are filed during the development and marketing phases. However, the trademark registration patterns for product and service innovation are somewhat different. Trademarks referring to new services are registered more frequently than product innovations in the first two phases of the innovation process or during the last phases, whereas trademarks referring to product innovation dominate the middle stages of the innovation process; the biggest difference is found in the marketing phase (11.5%). This can be explained by the differences between product and service innovation processes. Services are intangible and thus imply an early need for new service marks for communication purposes, as well as internal communication. Trademarks filed later in the service innovation process may refer to the emergence of innovations during service delivery. Innovation on the job in interaction with a client is an important innovation mode for service firms and may explain late registration (Den Hertog, 2000). In such cases firms try to scale up and commoditise new work practices, methods and tools.

The timing of trademark filing for start-up firms and pro se filers on the one hand and organisations that receive help from a trademark attorney and mature firms on the other also shows dissimilar characteristics. Start-up firms and pro se filers tend to file their trademarks in the early phases of the innovation process – probably to protect their trade name, as start-up firms use their marks 60% more frequently for all products and services – whereas organisations that receive help from a trademark attorney and mature firms often file their trademarks in the marketing and commercial phase. The difference may also be a result of different ways of organising innovation. In mature firms, innovation might be more departmentalised. If the assumption that marketing officers take responsibility for brand management – including trademark registration – in mature firms is valid (in our sample confirmed by 21% of respondents from mature firms, 0% for start-ups), then this may partially explain why trademark applications are more often a back-end activity in the innovation process in mature firms. The relatively late filing of trademarks by attorneys can be explained partly by the over-representation of mature firms hiring attorneys and may also be a consequence of attorneys’ experience with trademark filing and the inherent handling times of national and EU trademark offices. Attorneys will probably postpone registration for as long as possible in order to avoid early signalling of innovation to competitors. It is reasonable to assume that pro se filers are less familiar with the handling times and costs of early registration as a consequence of signalling innovation to competitors. Finally, since trademark attorneys are involved predominantly in cases where the product or service innovation is close to the market or already being marketed, the crystallised market potential or even the unexpected success of new products and services may also be a reason to take more care and spend more resources on a new brand. It might have been the primary reason for involving specialised attorneys in some (or a lot) of these cases.

Bundling of trademarks with other IP rights

Bundling of trademarks with other IP rights does happen to some extent, depending on the type of innovation – although to understand the role of trademarks in the innovation process, it is important to look at the way these are bundled with other formal IP rights. Bundling IP rights can be seen as demonstrating the value of an object, making it more likely to be a valuable innovation for the organisation. Bundling may increase the barriers to imitation, thereby creating a more sustainable competitive advantage.

Trademarks are most frequently combined with patents to capitalise on innovation, which can be explained in some cases by the complementarity between the two sets of rights. Some innovations are protected by more than two IP rights. The overall bundling figures are 55% for product innovation and 36% for service innovation. Hence, bundling trademarks with other IP rights takes place 1.5 times as often in case of product innovation. CTMs referring to innovation are most frequently combined with patents (18.8%), followed by design rights (17.7%) and copyrights (13.4%). BTMs referring to innovation are mostly combined with copyrights (11.6%) and patents (7.2%). Small firms show the lowest (33%) tendency to bundle trademarks with other formal IP rights for innovation purposes, compared to medium-sized (45%) and large firms (39%).

When one compares product and service innovations – see Figure 3 – some important differences emerge. In case of product innovation, trademarks are most often combined with patents and design rights. If a trademark refers to a new product, then in one out of four cases (26.5%) the product is protected by a patent as well. The same holds true for design rights (17.9%). However, if a trademark refers to a new service, then the applicants have applied for a patent or design right in only 8.1% of cases. In case of service innovation, trademarks are mostly combined with copyrights (18.7%), which has to do with the fact that innovations in the service sector are less tangible than innovations in the industry sector, making it more difficult to enforce legal rights such as patents and design rights in order to exclude imitators.

Figure 3: Bundling trademarks with other IP rights for innovation purposes

Conclusion

The findings of our in-depth study of CTMs and BTMs reveal a strong link between trademarks and innovation. Trademark applications relate to innovation in various ways. It seems that trademarks are part of the “right fanfare” (Smith, 2011, p 22) to bring new products and services to market. Trademarks are used primarily to identify new products or services and to distinguish them from other goods and services.

Second, the study finds that innovation plays a major role in trademark registration, since protecting an organisation’s intellectual property is by far the most important motive for registration. More than 85% of applicants indicated this motive to be (very) important. Making the innovativeness of new products and services more credible is also in the top five motives, further confirming the strength of the link between trademarks and innovation.

Third, regarding the timing of applications, although a limited amount of trademarks were filed in the front end of the innovation process, during the idea generation and research stages, applications occurred most frequently during the development stage. This indicates that innovating firms are sometimes concerned with trademark registration even when their products and services are not yet fully defined.

However, about half of the sample trademarks were filed in the backend of the innovation process and roughly one-third during the market introduction of an innovation or even beyond. This holds true in particular for trademarks referring to service innovation. The specific characteristics of the service innovation process – especially the fact that service innovation often occurs in co-creation with customers – may explain the late applications. Early filing can be explained by trademark bundling with other IP rights and the involvement of attorneys, or large investments in radical innovation which make firms more risk aware and risk sensitive.

Fourth, trademarks are often bundled with other IP rights to make money from innovation. The findings show that trademarks are most frequently bundled with patents, followed by copyrights and design rights. In case of product innovation, trademarks are mostly combined with patents and design rights, whereas copyrights are used most in case of trademarked service innovations.

Finally, trademarks appear to be most relevant for measuring service innovation, since the overall bundling statistics show that trademarks referring to product innovation are combined 50% more often with other IP rights than trademarks referring to service innovation. In other words, many service innovations are protected only by trademarks and therefore will not show up in patent statistics.