Brands, Trade Deficit and Intellectual Property

In his latest speech, ITC chairman beautifully explained the role of brands and branding in a country’s economic development. The point he made is that India’s growth prospects are hindered by unsustainable current account deficit (CAD). This implies that Indian industry is not able to export as much as it should have. India’s trade basket is comprised of imports of high value added items whereas exports are made lower value added products. The Indian industry not competitive, our products and services are pulled by markets abroad whereas our markets pull variety of products from foreign manufactures. The only escape route out this difficulty lies in building competitiveness in higher value added goods and services.

Future belongs to economies and businesses which create intellectual property. Intellectual property is a better basis of creating and sustaining competitive advantage. Large CAD stems from imports of products (based on intellectual property of exporting firms for which we do not have substitutes) which lead to outflow of precious foreign currency. Many products are that made and consumed in within India also lead to outflows because Indian firms use intellectual property of foreign companies in the form of patents, copyrights, design and industrial processes. This over reliance on intangible property owned by foreign companies leads to CAD. The challenge for India is how to reduce foreign exchange outflows and increase inflows. It is in this background intellectual property assets is the key to achieving competitiveness in the international markets.

Indian companies pay to their foreign counterpart royalties for using their intellectual assets. This amount stood at 35000 crore rupees in FY12 (306 listed companies). Another analysis revealed that 75 of BSE 500 companies paid royalty equivalent to 32% of their net profits in FY12. It is legitimate right of a company to demand royalty for the use of their intellectual property but this it is also perfectly valid for a country to plot its own strategy to reduce these outflows and create stream of inflows. Every time a consumer picks up a foreign brand name, a part of the paid price ends up in some MNC’s coffers. The consumption basket of an ordinary citizen is now inhabitated by foreign brands. These categories do not belong to high end complex technology areas rather these include ice creams, soaps, shoes, confectionery, chocolates, batteries, cosmetics, burgers, pizzas, mobiles, refrigerators, and sanitary napkins.

So what is the way out? How can our companies increase their participation not only in domestic consumer’s consumption story rather make inroads into foreign consumer’s consumption basket? The way out that Mr Daveshwar suggests is that Indian need to create world class brands. Truly world class brands transform products and services by huge intangible value addition which allows them to charge premium and foster loyalty. The appeal of true brands cuts across cultural, geographical and physical boundaries of the countries.

The brand creation should not be limited to the boardrooms of a few companies. Rather it must become national agenda. The government must focus on creating an appropriate ecosystem for intellectual property development.



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