Trademarks: Economic Measures of Innovation andEffects on Firm Performance (*)
Overseas Researcher: Kenta NAKAMURA (**)
The importance of policymaking based on evidence has long been advocated. This is also
true in innovation policies and the method to accurately measure innovation has become anincreasingly significant issue. Amidst such a situation, in recent years, trademarks have been
gaining more attention as a possible new innovation indicator. This is based on the idea that, inmany cases, trademark applications are filed immediately prior to putting the products or serviceson the market and thus the trademark applications and the new products or services are linked andtrademark data can be used as the proxy variable for innovation. However, this field of research isimmature and involves fundamental problems. Moreover, the research methodology, as well as theacademic evaluation as an innovation indicator, are yet to be established. Thus, in this study,
trademark applications and applicants’ behavior in Japan were examined to find whether or nottrademark data can be used as an innovation indicator that complements patents. Then, as a resultof an empirical analysis into the relationship between trademark applications and corporate
outcomes, it was revealed that there was no effect of intensifying trademark activities but
productivity improved when competitors launched more new products with trademarks in the same
market. This was suggested that there was an externality such that the increase in the productvariations led to an increase in product (or product group) recognition and thereby leading toefficiency improvement mainly in downstream processes such as sales and distribution.

I. Introduction
Studies on innovations and intellectual property rights in economics were developed mainly
on “research and development” and the “patent system” that protects the outcome thereof. The
trademark system, which is the subject of analysis in this research, had been given some slightattention since the 1980s in the context of law and economics, but it never gained widespreadattention.
However, in Japan where a total of 1,470,000 applications for trademark registration are filed
in a year (2015 results), demand for the trademark system is not insubstantial. In addition, it can beconsidered that intellectual property rights other than patents are becoming increasingly importanton a global basis. The number of trademark applications worldwide, which accounted for about 1
million in 1985, reached 6 million in 2015 (a tripling in number, even if those filed in China are(*) This is a summary of the report published under the 2016FY Industrial Property Research Promotion Project entrusted by theJapan Patent Office.
(**) Associate Professor, Graduate School of Economics, Kobe University, at Max Planck Institute for Innovation and Competition,over a period of approximately 11 months from April 6, 2016 through March 15, 2017, as an Overseas Researcher under the
Program for the Fiscal Year 2016.

iexcluded). Although it may be an extreme example, in August 2012, in “Apple Inc. v. Samsung
Electronics Co.” instituted with the United States District Court, Northern District of California, ajury verdict was rendered ordering Samsung to pay a huge amount in damages, to the sum of
approximately one billion dollars. Those damages were awarded with respect to infringement of thedesign patents. Similarly, in 2012, Apple paid a settlement to the amount of 60 million dollars to a
Chinese company in relation to a lawsuit over trademarks concerning iPads in China. Furthermore,
recently, under the slogan “IP bundle” (OECD, 2013), the importance of securing competitive
advantage by the multiple use of IP rights including patents, design rights and trademarks is beingemphasized.
Against this background, since the 2000s, economic analysis of trademarks has been
increasingly pursued in foreign countries. However, in Japan, trademark data for research had long
been unavailable and thus, studies on trademarks have only just begun. Therefore, in this research,
we investigate two themes that are fundamental in studies on trademarks. First, the characteristicsof trademark applications in Japan will be examined with respect to the possibility pointed out inseveral studies such as Mendonça, et al. (2004), namely, the concept that trademark data could
serve as an innovation indicator that complements patent data. Secondly, the effects of trademark
activities on corporate outcomes will be empirically examined with respect to Japanese listedcompanies. This research study aims to provide knowledge that serves as a basis for studies on
trademarks therefor through the abovementioned analysis.

II. Outline of the Trademark System
Article 1 of the Trademark Act of Japan provides that “The purpose of this Act is, throughthe protection of trademarks, to ensure the maintenance of business confidence of persons who use
trademarks and thereby to contribute to the development of the industry and to protect the interestsof consumers.” Patent law is enacted to provide incentives for innovation, whereas trademark law
is enacted to maintain the goodwill accumulated in the trademark.
The subject of protection is the “trademark” provided in Article 2 of the Trademark Act
which was provided in the past as “any character(s), figure(s), sign(s) or three-dimensional shape(s)or colors, or any combination thereof.” In the current Act enforced in April 1, 2015, “new types oftrademarks” have been added to the subject of protection and the relevant provision has beenrevised to “among those recognizable by human perception, any character(s), figure(s), sign(s) or
three-dimensional shape(s) or colors, or any combination thereof, sounds, etc. provided by Cabinet
Order.” At present, new trademarks include the following: [i] motion marks (trademarks whosecharacters or figures, etc. change with time); [ii] hologram marks (trademarks whose characters orii

figures, etc. change based on holography and other means); [iii] color marks (trademarks consistingof a single color or combination of colors); [iv] sound marks (trademarks consisting of music, voice,natural sounds, etc. which are recognized by its sound); and [v] position marks (trademarks which
specify the position of the goods, etc. to which the marks consisting of characters or figures, etc.
will be attached). These marks had already been widely covered by protections under trademark
laws in foreign countries and thus the Japanese system required changing.
The primary and most basic function of trademarks is to distinguish one’s own goods orservices from those of others. Next, based on the first function, the “function to indicate the source,”
the “function to guarantee the quality” and the “advertising function” are generated. The function toindicate the source is to show the identity of the source of goods or service to which the same
trademark is affixed. The function to guarantee the quality is a function which promises consumers
that goods or services to which the relevant trademark is affixed have certain qualities, and it isimportant that this promise provides incentives to companies to maintain the quality into the future.
Lands and Posner (1987) described such features of trademarks as “self-reinforcing.” If companies
are able to provide the goods or services expected by consumers, the trademark will be recognized
positively and the trademark itself will have the effect of increasing consumer willingness to buy.
This is the advertising function.
Trademarks transmit information to consumers on characteristics that cannot be observed,
such as the quality of goods or services, while they provide incentives to companies to maintain or
improve the quality of their goods or services. These functions reduce the information asymmetry
between companies and consumers, ease the problem of adverse selection, reduce consumers’
search costs, and as a result, enable efficient market transactions. However, the use of trademarksthat take a free ride on the goodwill of others or cause confusion over the source of goods orservices reduces the trademark’s functionality in smoothing market transactions. Therefore, legal
protection of trademarks can be justified from the standpoint of preventing acts of unfair
competition for the purpose of protecting consumer trust.

III. Previous Studies
In the past, trademarks were discussed in the context of laws and economics or marketing as
represented by the “brand equity” model of Aaker (1991). In recent years, however, trademarks are
gaining more attention in the field of innovation studies. In Chapter III, the following two types ofresearchs on trademarks were marshalled: [i] studies that discuss the availability of trademarks as
an innovation indicator, and [ii] studies on the relationship between trademarks and corporate
values and corporate outcomes.

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1. Trademarks as an innovation indicator
Developing quantitative indicator for innovation activities had long been one of the central
issues in innovation studies. Since the 1990s, attempts to approach innovation activities using
questionnaire surveys have been made in various countries by means such as the implementation of
innovation surveys based on the Oslo Manual. Meanwhile, R&D expenditure and the number ofpatents remain as the representative innovation indicator due to their convenience in regard tofactors such as the availability of systematic data.
The utility of patent data as an innovation indicator can be found as follows: [i] systematic
data collection based on the patent system of each country; [ii] availability of chronological andinternational comparison thanks to the long history of the patent system; and [iii] technology
classification attached to patents. On the other hand, patents are merely inventions which areafforded legal protection and there is uncertainty as to whether or not the relevant invention will
have an economic impact. Therefore, when innovation is defined based on Schumpeter’s theory,using patents as the proxy variable of innovation is invariably the subject of criticism.
With respect to these criticisms, there is growing literature focused on the availability oftrademarks as an innovation indicator complementing patents (e.g., Schmoch, 2003; Mendonça, etal., 2004; Millot, 2009). In a paper titled “Trademarks as an indicator of Innovation and Industrial
Change,” Mendonça, et al. (2004) stated that while patent applications are often filed at theinvention stage, i.e. at an early stage of the innovation process, trademark applications are filed
immediately prior to putting the products on the market. Due to the abovementioned timing of
filing, in many cases, trademark applications are linked to new products or new services and thus
trademarks can be used as the proxy variable for innovations. In addition, Mendonça, et al. (2004)
pointed out the fact that while the applicants of patents are mainly large-scale manufacturing
companies (especially, companies in the high-tech industries), those of trademark applications
include small-scale companies and/or companies in the non-manufacturing industries such as theservice industry, and this fact is useful in the sense of complementing patent data. In actuality, some
empirical studies have found correlations between the existing innovation indicator and the use of
trademarks, and an argument is made for the usefulness of trademarks as an innovation indicator
based on such findings (e.g., Schmoch, 2003; Mendonça et al., 2004; Millot., 2009; Jensen andWebster, 2009; Gotsch and Hipp, 2012). However, evidence from Japan is not yet available in theliterature.

iv

2. Effects on corporate value/corporate outcomes
If trademarks reflect innovation activities of a company, filing applications for trademarks or
holding them could have a positive effect on corporate outcomes. In empirical studies, the impactsof trademarks are analyzed via two major approaches. The first approach analyzes the relation
between trademarks and the market value of companies while the second one analyzes therelationship between the outcome variables, such as the sales growth and productivity, andtrademarks.
Assuming a stock market with full information and rational behavior, corporate values shouldbe equal to the sum of the present value of net cash flow. Therefore, if intangible assets contributeto future corporate earnings, their effects should be observed as a rise in corporate values.
Beginning with Griliches (1981), the corporate value approach analyzes the contribution of
intangible assets using the abovementioned relationship and a number of studies have been carriedout. In the 2000s, some studies explicitly dealing with trademarks as intangible assets have beenreported (e.g., Griffiths and Webster, 2006; Greenhalgh and Rogers, 2012).
In the corporate value approach, the long-term contribution of intangible assets is measured
since corporate values are calculated based on their stock price. On the other hand, in the corporate
outcome approach, the effect of trademarks on relatively short-term corporate outcomes such as thesales growth and productivity is analyzed (e.g., Greenhalgh and Longland, 2005; Helmers and Rogers,
2011; Greenhalgh and Rogers, 2012). Extensive literature survey has been performed and obtained
studies suggested that trademarks have positive impacts on corporate values or corporate outcomes.

IV. Availability of Trademark Data in Japan
Several studies including Mendonça, et al. (2004) have found the availability of trademark
data as an innovation indicator. This is based on the idea that trademark applications are linked to
new products or new services and thus trademarks can be used as the proxy variable for innovation.
In addition, it has been pointed out that the fact that applicants of trademark include small-scalecompanies or companies in the non-manufacturing industries such as the service industry while
those of patent are mostly large-scale manufacturing companies (especially, companies in thehigh-tech industries) is useful in the sense of complementing patent data. As shown in Chapter III,
some empirical studies supporting this idea have been reported. However, behavior characteristicsof the potential applicants may be not homogeneous between countries in terms of such as
propensity to trademarks. Thus, it remains a priori unclear as to whether the knowledge obtained
abroad is applicable in Japan. Thus, in Section 1, the features of the trademark data of Japan werev

reviewed with the availability thereof as an innovation indicator in mind. In Section 2, we analyzed
the correspondence relations between trademarks and actual new products/services for the Japanesecomplete vehicle manufacturers and pharmaceutical companies and discussed the issues that weshould be aware of when using trademark data.
1. Complementary use of patent data and trademark data
The share of nominal value-added of the service industry, i.e. the tertiary sector of industry,in the nominal GDP, which was about 50% in 1970, constantly increased and reached 73% in 2014.
This trend has also been observed in Western countries and servitization of the economy isadvancing mainly in developed countries but also on a global basis. With the servitization of theeconomy, there are increasing demands for the accurate measurement of innovation in the service
industry. However, patent data, which has widely been used, presents difficulties in responding tosuch needs for the following reasons. In the first place, companies in the service industry may not
be filing patent applications. Moreover, it is difficult to identify whether or not the patented
invention will be used by the manufacturing industry or the service industry. Of course, thebibliographic data of each patent contains information about the technology classification such as
IPC and some concordance tables are developed to link the IPC symbols to the industrial
classifications (e.g. Schmoch et al., 2003; Lybbert and Zolas, 2014). However, in the existing
concordance, technology classification is basically allocated to a single or multiple service
industries but is not supposed to correspond to the service industry. Therefore, the fact that thetrademark classification, i.e. the Nice international classification, officially supports services is
extremely important in terms of measurement of innovation in the service sector.
When the trademark applications filed in Japan during the period from 2002 to 2005 andthose filed in 2014 are compared in terms of the class of goods or services, the share of service has
increased by 11% in about a decade (from 28% during the period from 2002 to 2005 to 39% in2014). It is important to note that the increase in trademark applications can be caused by two
factors: the increase in innovation and the increase in propensity to trademarks. However, this trend
at least suggests that innovation activities in the broad sense that include IP activities in theJapanese service sector have been activated, and this implies that trademark data could be an
important source of information in analyzing innovation related to service.
Next, the availability of trademark data is examined based on the distribution of applicants.
When classifying the applicants by the annual number of applications (in 2010) filed for patents
and trademarks, respectively, it is found that with respect to either patent or trademark, more than
60% of the applicants file only one application in a year. Moreover, it is found that patents andvitrademarks have a similar distribution with respect to the composition of the number of applicants.
Looking at the total number of applications in each class, there is a major difference between
patents and trademarks. In the case of patents, applications filed by applicants with more than 100
applications a year (who account for only 2% of the total applicants) account for 73% of the total
applications. This result is consistent with the statements by Mendonça, et al. (2004) that most patentapplications are filed by large-scale companies. On the other hand, with respect to trademarks, thenumber of applicants with more than 100 applications a year is less than 1% and the number ofapplications filed by such applicants accounts for only 10% of the total applications. In contrast, thefact that the number of applications filed by applicants who file no more than 5 trademark
applications a year accounts for more than 50% of the total number of applications is a characteristicfeature in trademark applications. As applicants with no more than 5 applications are presumed toinclude a large number of individuals and small and medium enterprises (SMEs), it is suggested that
trademark data is useful in analyzing the innovation activities carried out by such applicants.
There were 4,786 applicants who filed applications for both patents and trademarks. Suchapplicants account for only 19.3% of the total number of applicants who filed patent applications
and 14.0% of the total trademark applicants. In other words, since the coverage of patent data andtrademark data are largely different, complementary use of the two data is expected to provide amore comprehensive grasp of innovation activities. Moreover, it is expected that the upstream anddownstream stage of the innovation process can be analyzed in a comprehensive manner by
combining patent and trademark data for a single applicant. As stated above, there are 4,786
applicants who filed the both. In addition, the number of patent applications filed by suchapplicants accounts for about 80% of the total patent applications, and the data reveals the specificclass of goods/services for which each applicant filed a trademark application. Therefore, in theory,a linkage between technology and products can be drawn and we can observe the process in which
technology becomes embodied in products and services.
2. Trademarks and actual products/services: a case study on Japanese complete vehicle
manufacturers and pharmaceutical companies
Although only a few studies have confirmed that trademarks are linked with actual new
products/services, Malmberg (2005), the only exception, has found that corporate trademark
strategy depends largely on industry practices. Specifically, in the electric machinery andautomobile industries, a trademark corresponding to a new product may not be filed because there
is a tendency to identify a product by model number, whereas in the pharmaceutical industry,
trademarks are filed for each product. In Section 2, we analyzed the correspondence relationsvii

between trademarks and actual new products/services for the Japanese complete vehicle
manufacturers and pharmaceutical companies and discussed the issues that we should be aware ofwhen using trademark data.
The key findings from the investigations are as follows: [i] trademarks are linked (to someextent) to actual products/services. Therefore, trademark data are a potential indicator of productinnovation; [ii] on the other hand, some trademarks are not affixed to the physical product; [iii]typically, trademarks are attached to “new-to-the-firm” products and services and not to“new-to-the-world” innovations; [iv] among the “new-to-the-firm” products and services, there are“big” products and “small” products; [v] the number of trademark applications depends on industry
attributes and the business field where the company operates. Against the background of thesepoints, we have also discussed the difficulty of aggregating trademark data at the firm level.

V. Trademarks and Corporate Outcomes
The purpose of the trademark system is prescribed in the Trademark Act as “through theprotection of trademarks, to ensure the maintenance of business confidence of persons who use
trademarks and thereby to contribute to the development of the industry and to protect the interestsof consumers.” As shown in Chapter III, in foreign countries, some empirical studies supporting
such legislative intent have been reported. However, in Japan, studies are limited to discussions on
the relationship between R&D stock and/or patents and corporate values, and there are extremely
few studies on the effect of intellectual properties other than patents. Thus, in this Chapter, theeffect of trademark is analyzed based on the corporate outcome approach.
1. Outline of the regression analysis
We employ the Cobb-Douglas production function of the following form:
𝑌

𝐴𝐾 𝐿

（1）

where (Y) denotes output (added value), (K) is capital (tangible assets) and (L) is labor. (A) shows thelevel of productivity. By taking the natural logs of both sides of equation (1), equation (2) is obtained.
𝑙𝑛𝑌

𝑙𝑛𝐴

𝛼𝑙𝑛𝐾

𝛽𝑙𝑛𝐿 （2）The level of productivity (A) is considered to be dependent on the knowledge stock andviii

intangible assets in a broad sense. In empirical studies, R&D expenditure, number of patentapplications, human capital investments such as training, and IT capital investments (or the stock
variables thereof) are often used as the proxy for various types of intangible assets. With reference
to Greenhalgh and Rogers (2012), we assume the relationship of equation (3) for (A).
𝑙𝑛𝐴

𝑓 𝑅, 𝑃, 𝐷, 𝑇𝑀（3）(R) means R&D activities, (P) is patent activities, (D) is design activities, and (TM) shows
trademark activities (the proxy variables for each factor are described below). These activities areclosely related to the act of putting new products on the market, that is product innovation. New
products are expected to realize a higher price premium than that of previous products and thus would
lead to increase in the added value. In addition, when process innovation is achieved through R&D or
patented inventions, the production cost per unit will be reduced leading to a gain in productivity. Next,
Equation (4) is obtained when the specification of (3) is assumed and assigned to (2).
𝑙𝑛𝑌

𝛼𝑙𝑛𝐾

𝛽𝑙𝑛𝐿

𝛾 𝑅 ⁄𝐿𝛾 𝑃 ⁄𝐿𝛾 𝐷 ⁄𝐿𝛾 𝑇𝑀⁄𝐿（4）

We use financial data and IP data, namely patents, designs and trademarks. Financial data ofJapanese listed companies (except for companies in the finance and insurance sector) was obtained
from the data contained in the “Corporate Finance Data Bank” published by Japan Economic
Research Institute, Inc. Patent data was obtained from the “IIP Patent Database” by the Institute ofIntellectual Property (IIP) while design data was obtained from “NISTEP Design Database” by
National Institute of Science and Technology Policy (NISTEP). Trademark data was extracted fromthe “Standardized Data” (Seiri Hyojunka data, in Japanese) offered by the Japan Patent Office(JPO). The sample period is from 2003 to 2010. The number of sample companies was about 1,600
to 1,800 a year and slightly less than 14,000 companies in total. Companies in the manufacturingindustry accounted for 62% of total companies while companies in the service industry (including
utility companies) covered 30%.
Dependent variables are natural logarithm of the added value (V). The added value wascalculated by summing up the operating profits, personal expenses, rental expenses, taxes and dues,
paid patent fee, and depreciation expenses.
As explanatory variables, total tangible fixed assets were used for capital (K) and the numberof employees at year end was used for labor (L). Both (K) and (L) are natural logarithm as of theend of the preceding term. The level of productivity (A) was assumed to be affected by R&D
activities (R), patent activities (P), design activities (D), and trademark activities (TM). Since theixknowledge and ability generated by these activities are considered to be accumulated andcontribute to productivity, they might be treated as stock variables. However, we employed flow
variables in light of the availability of long-term design and trademark data as well as theconsiderations made in existing literature (e.g., Hall, 2000; Greenhalgh and Longland, 2005).
Specifically, as the factors assumed to affect productivity, the figures obtained by dividing thefollowing elements by the number of employees were added to the explanatory variables: [i] R&D
expenditure; [ii] number of patent applications; [iii] number of design registrations; and [iv]number of trademark applications.
Moreover, the variables mentioned in [ii] to [iv] above aggregated at the market level (whichis equivalent to the minor industry level of the Japan Standard Industrial Classification) areintroduced as the variables indicating the competitive situation in the market faced by the relevant
company. Specifically, they are defined as the variables obtained by dividing the total number of
trademark applications filed by all of the companies in the market except the relevant company
itself by the total number of employees of such companies (the same method is used for patents anddesigns). It was expected that if trademarks were used in a strictly competitive environment, like a
zero-sum game, the relevant variable will have a negative coefficient and that a market-stealing
effect of trademarks will be detected.
2. Estimation results
The following results were obtained by the panel estimation including the firm fixed effects
and year dummies to absorb the macro-shock that affects output of the firm targeting all sample
companies, manufacturing companies and service companies in a broad sense.
The coefficient of the labor was consistently significant and positive. The coefficient of
capital saw a decrease in the significance in the regression on manufacturing companies but
generally showed a positive effect against the added value. Accordingly, a basic relationship was
confirmed that the increase in capital and labor expands output.
The variables concerning R&D and intellectual property rights introduced as the factor
determining productivity (A) showed a significant positive coefficient only with respect to thenumber of patent applications. This effect was observed regardless of industry, suggesting that themore actively patent applications are filed the more productivity increases. However, the effect ofactivating applications for designs or trademarks could not be confirmed.
Next, variables reflecting the competitive situation within the market faced by the relevant
company were added. Each variable is measured by the intensity of IP activities at the market level.
Although no significant effects could be found in the estimation covering all industries, the variablexshowing the competitive situation measured by trademark applications had an almost significantly
positive coefficient (p = 0.105) in the regression on manufacturing companies.
The results related to trademarks can be summarized as follows from the abovementioned
results and the results of pooled OLS estimation conducted in a supplementary manner (using theindustry dummies equivalent to the middle classification instead of the firm fixed effects).
Companies actively filing applications for trademarks can be observed as having constantly put
new products on the market and making efforts to accumulate goodwill and brand strength basedon trademarks. Accordingly, price premium is generated for the goods or services of such a
company and it will show high productivity in comparison with other companies. However, on
average, the effect of intensifying trademark activities does not exist. With respect to thecompetitive situation related to trademarks, it was assumed that the relevant company’s share
would be taken away in the short-term if competitors actively put new products on the same market
with trademarks (market-stealing effect). However, the estimation results did not support such an
hypothesis, and rather it was revealed that increased competition pressure expands the company’s
output when other conditions are constant. This suggests that there are externalities such that theincrease in the variation of products with trademarks led to an increase in the awareness of the
product (or a product group including it) and thereby led to efficiency improvement mainly indownstream processes such as sales and distribution.

VI. Conclusion
In this study, trademark applications and applicants’ behaviors in Japan were examined
whether or not trademark data can be used as an innovation indicator that complements patent data.
We confirmed the veracity of this notion, as also suggested by Mendonça et al. (2004). The
complementarity between patents and trademarks as innovation indicators is attributed to theirdifferences vis-à-vis markets, innovation process stages and applicants. Thus, trademark data canbe justifiably and widely applied for the purposes of innovation policy-making. In addition, as aresult of an empirical analysis into the relation between trademark applications and corporate
outcomes (productivity), it was revealed that there was no effect of intensifying trademark activities(intensity of the number of trademark applications to the number of employees), but productivity
improved when competitors launched more new products with trademarks in the same market. Thissuggests an externality such that the increase in the product variations led to an increase in product(or product group) recognition, thereby leading to efficiency improvements mainly in downstream
processes such as sales and distribution.
Here, we discuss the remaining issues. First, there is a problem of trademark data andxiconnectable data. It is thought that trademark data will demonstrate potential when connected withother economic data. For example, if it is an application that analyses innovation activities of small
and medium enterprises (SMEs) that are difficult to capture with patent data, the attributeinformation on who is the trademark applicant is crucial. However, data on such SMEs is extremely
difficult to obtain. It is important to this research field that corporate data that can be used in
combination with intellectual property (IP) data are systematically collected and easily available.
Second, in light of this and existing studies, it is appropriate to a certain degree that companies
filing trademark applications are achieving innovation successes. However, it is not always clear
whether companies achieving innovation successes are filing trademark applications. As a result of
the regression analysis employed herein, it was found that there was no effect to make suchcompanies intensify trademark activities. However, the cause therefore remains unclear, i.e.,
whether it is caused by lack of contribution of trademarks on firm performance or lack of filingtrademark applications for innovation. Nevertheless, it is extremely important to identify suchcauses in considering the significance of trademark applications.

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