IP/C/W/686  
 
25 February 2022  
(22-1835) Page: 1/3 
Council for Trade Related Aspects of Intellectual 
Property Rights  Original: English  
 
INTELLECTUAL PROPERTY, INNOVATION AND MICROFINANCE  
COMMUNICATION FROM AUSTRALIA, CANADA, CHILE, THE EUROPEAN UNION, JAPAN, 
SINGAPORE, SWITZERLAND, THE  SEPARATE CUSTOMS TERRITORY OF TAIWAN, PENGHU, KINMEN 
AND MATSU, THE UNITED  KINGDOM, AND THE UNITED STATES OF AMERICA  
1  INTRODUCTION  
1.  At its 8 -9 June 2021 meeting, the TRIPS Council discussed a paper by the Friends of IP and 
Innovation (FOII) on IP for investment, financing and funding (document IP/C/W/679 ). The paper 
in question sought to explore this issue  in general terms, and thus focused mostly on the links 
between IP, innovation and conventional financing, such as through banks and venture capital. 
However, for innovation -based businesses on the smaller end of the micro, small, and medium -sized 
enterpri se (MSME) spectrum, and likely for IP and/or innovation -based MSMEs in least -developed 
Members in particular, "conventional" financing might present challenges, such as in terms of 
accessibility, financial literacy, perception of risk by lenders, and overa ll financial inclusion. The FOII 
now propose a discussion on the links between IP, innovation and microfinance (also known as 
microcredit). This particular focus is less visible and less studied than the links between IP, 
innovation and "conventional" fina ncing, and therefore the FOII seeks discussion and enhanced 
understanding in this area.  
2  IP, INNOVATION AND MICROFINANCE  
2.  Microfinance are financial services directed at "borrowers who are considered 'unbankable' by 
conventional services" (Miles and Nugruho,  2012), and can include "small scale financial services" 
(Miles and Nugruho, 2012), including loans, or microcredit. Indeed, "[f]inancing innovation has been 
a long -standing concern" "there is remarkably little examination of the connection between 
microfi nance and innovation" (Miles and Nugruho, 2012), which appears to be particularly the case 
in relation to MSMEs, despite the increasing interest in IP -backed financing. This is both a challenge 
and an opportunity.  
3.  Looking at microfinance from a neutral poi nt of view, in this paper and any ensuing discussion, 
we are seeking to discuss and explore the access to, as well as the modalities and implications of, 
IP-backed financing for MSMEs, particularly those at the smaller end of that scale. In this paper, we 
consider the notion of "innovative and/or IP -based MSMEs" broadly; existing literature and 
discussions tend to focus on "innovative" as meaning "such that involves or could lead to patenting 
activity", but we readily include copyright or brand -identity -based businesses as well, for example.  
4.  A fundamental challenge in addressing the link, or links, between IP, innovation and microfinance 
is that much of the existing literature and discussions focus on microfinance as an innovation, and/or 
on innovation in or  for microfinance, rather than microfinance for innovation, although these are 
ultimately multiple aspects of the same issue. This highlights a second challenge: deciding whether 
to focus on:  
a) whether (and how) IP ownership or innovation promotes access to microfinance, and/or  
b) whether (and how) access to microfinance promotes innovation.  IP/C/W/686  
 
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  5.  Here, we purposely do not purport to argue for one of these causal links over the other, and 
rather leave this to any ensuing discussion, such as of Members’ domestic experiences.  
6.  The SME Finance Forum, established in 2012 by the G20 Global Partnership for Financial Inclusion 
to "expand access to finance for small and medium businesses" and managed by the International 
Finance Corporation, notes in its most rec ent, 2017 MSME Finance Gap report that "[a]ccess to 
finance is frequently identified as a critical barrier to growth for MSMEs" (IFC, 2017). Notably, this 
report finds that 40 percent of MSMEs in developing countries have an unmet financing need of 
USD 5.2 trillion every year (IFC, 2017). The 201 3 ADB-OECD Study on Enhancing Financial 
Accessibility for SMEs notes that "[w]ithout access to finance, investment is limited and growth 
potential wasted" (ADB, 201 3). 
7.  In addition to challenges associated with colla teral, the ADB -OECD Study also notes that there is 
often "reduced access to credit except for large companies or wealthy individuals with substantial 
land holdings" (ADB, 201 3). Microfinance, however, tends to purposely eschew the use of 
conventional colla teral (such as e.g. real estate or physical assets), and to rather use social collateral 
in the form of pooled lending, and thus joint liability. This suggests that intellectual assets might not 
be relevant to traditional microfinance, such that an innovat ive or IP -based MSME would not be at 
any particular advantage as regards access to microfinance. In fact, research suggests that "group 
loans may have a negative  effect on innovative behavior" [emphasis added] (Hirth, 2014) in that 
"either group borrowers may be excluding innovative individuals from their borrowing groups or 
innovative individuals may be self -selecting out of participating in group loans" (Hirth, 2014).  
8.  With the question of IP as microfinance collateral aside for now, a further question is whether 
access to microfinance promotes innovation, or otherwise supports innovative or IP -based MSMEs. 
Literature suggests a clear positive correlation, although anecdotally the research we have reviewed, 
though avowedly only a small sample, often outline s this by highlighting that the lack of financing is 
an obstacle  to innovation. For example, there are indications that "financial constraints are the most 
important of the internal and external factors constraining innovation" (Miles and Nugruho, 2012), 
and that MSMEs might tend to "[fund] innovation through their cash flows" (Miles and 
Nugruho,  2012), which requires the existence of such cash flows to start with. A particular challenge 
is that "[i]ntangible assets may be undervalued when being used as col lateral for credit" (Miles and 
Nugruho, 2012). While again this might be less relevant in microfinance, this suggests that 
innovative or IP -based MSMEs might in fact face greater challenges than "traditional businesses" in 
accessing credit, be it microcred it (given the aforementioned inherent features of microcredit) or 
"conventional" credit (given e.g. awareness and valuation issues). Further, as noted in the Global 
Innovation Index 2020 , which focused on "Who Will Finance Innovation?", "the main idea behi nd 
microcredit is the alleviation of poverty rather than the support of transformational entrepreneurship 
and innovation" (Cornell, INSEAD and WIPO, 2020).  
3  SUMMARY OBSERVATIONS  
- MSMEs in general have large unmet financial needs.  
- Innovative or IP -based MSMEs  do not appear to be at any particular advantage over 
"traditional" businesses in terms of access to microcredit and may in fact face unique 
challenges.  
- IP awareness and/or valuation issues might represent a challenge in innovative or 
IP- based MSMEs’ acce ss to "conventional" credit.  
- Lack of financing appears to be an obstacle to innovation by MSMEs.  
- Given the links between innovation and export performance, the issues of financial 
inclusion for innovative and/or IP -based MSMEs has broader implications for inclusion in 
international trade and thus trade finance; this highlights the importance of collaboration 
between the WTO and inter alia  the International Finance Corporation, particularly 
regarding the needs of innovative and/or IP -based MSMEs.  IP/C/W/686  
 
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  4  NON-EXHAUST IVE LIST OF PROPOSED QUESTIONS FOR DISCUSSION  
- What specific financing needs or considerations pertain to innovative and/or IP -based 
MSMEs?  
- What are some best practices or options in terms of IP -backed financing for MSMEs and/or 
other financing for innovative or IP -based MSMEs?  
- What are some best practices or options for financing innovative and/or IP -based MSMEs 
that cannot access microcredit, and/or that might seek to transition from microfinance to 
"conventional" financing?  
- Which, and how can, innovations in finance, technological or otherwise, support innovative 
or IP- based MSMEs?  
- At what stage in an enterprise’s development does IP -backed financing become an option?  
- What is the level of awareness of IP -backed financing among innovation and/or  IP-based 
MSMEs? What are some best practices or options in enhancing this awareness?  
- What is the level of awareness of the financing needs and realities of innovation and/or IP -
based MSMEs? What are some best practices or options in enhancing this awarene ss? 
- How can IP rights be divided in ways that allow MSMEs to maintain some direct control and 
revenue generation from their IP while also leveraging IP for capital?  
REFERENCES  
Asian Development Bank. 2013. ADB -OECD Study on Enhancing Financial Accessibilit y for SMEs: 
Lessons from Recent Crises. Mandaluyong City.  
Cornell University, INSEAD, and WIPO. 2020. The Global Innovation Index 2020: Who Will Finance 
Innovation? Ithaca, Fontainebleau and Geneva.  
Hirth, R. 2014. "How Microlending Affects Innovation and Entrepreneurship: Evidence from 
Ethiopia". Theses and Dissertations. Fayetteville.  
International Finance Corporation. 2017. MSME Finance Gap: Assessment of the Shortfalls and 
Opportunities in Financing Micro, Small, and Medium Enterprises in Emerging Marke ts. Washington, 
DC. 
Kuś, A. and D. Grego -Planer. 2021. "A Model of Innovation Activity in Small Enterprises in the 
Context of Selected Financial Factors: The Example of the Renewable Energy Sector". Energies 2021, 
14, 2926.  
Miles, I. and Y. Nugruho, 2012, "Microfinance and Innovation". Innovation Policy Challenges for the 
21st Century. New York: Routledge.  
Padilla -Ospina, A. M., J.E. Medina -Vásquez, J.H. Ospina -Holguín. 2021. "Financial Determinants of 
Innovation in SMEs: A Machine Learning Approach". Journ al of Small Business Strategy, 31(5), 117 -
131. Restrepo -Morales, J.A., O. L. Loaiza, J. G. Vanegas. 2018. "Determinants of Innovation: A 
Multivariate Analysis in Colombian Micro, Small and Medium -Sized Enterprises". Journal of 
Economics, Finance and Admini strative Science, 24(47), 97 -112. 
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