Trade Marks – An Amplifier or a Shock Absorber for Exporters?

A recent report from IP Australia’s Office of the Chief Economist has considered the role of trade marks on the export behaviour of 9,000 Australian manufacturers spanning the period 2005 to 2017, when faced with sudden changes to market conditions.

Three export behaviours including entry to an export market, export revenue and the diversification of products offered to the export market were measured in relation to the influence of tariff reduction, changes to real exchange rate, market demand and the incidence of trade mark filings in the countries where the goods were exported.

Tariff Reduction

It is generally accepted that tariff reductions typically induce an increase in exports because foreign buyers in the export market may select the cheaper version provided by the exporters over the local goods. But tariff reductions may also encourage rival exporters to commence entry into the market, thereby increasing overall competition and reducing the average profitability of the market.

While tariff reductions may provide a sudden change in market conditions, they generally mark a sustained change, allowing exporters to adapt their mid-term and long-term export strategies. On the one hand, some firms may use tariff reductions as an opportunity to export a more diversified product range. On the other hand, in response to increased competition, more conservative firms may narrow their product range, cutting back on low value and novel products.

Exchange Rate Changes

Domestic real exchange rate changes, however, are more volatile. Appreciation of domestic real exchange rates against an export market will likely reduce the demand for foreign-produced goods in comparison to locally-produced goods in the export market because of cost increases. Conversely, depreciation of domestic real exchange rates against export markets will reduce the local cost of foreign-produced goods in the export market, encouraging increased demand.

While tariff reductions and exchange rate fluctuations are external events beyond the control of exporters, the registration of trade marks in a destination country by an exporter is a strategic choice, largely indicative of the exporter’s underlying activity to build a customer base in its export market. Registering a trade mark provides the exporter with an exclusive right to use that trade mark in the export market, allowing it to protect the goodwill in its brand and defend against brand dilution.

The study’s baseline finding with regard to market entry was that the likelihood of entering a new market increases when tariffs fall and when the domestic real exchange rate depreciates against the destination market. As expected, the influence of tariff reductions on the likelihood to enter a new export market is more significant (3 times more) than the influence of exchange rate depreciation.

Trade Marks

So how does ownership of trade marks in an export market influence the likelihood of entering the export market? Not surprisingly, the recent filing of a trade mark in an export market is a good indicator that the firm will enter that market, at nearly 3 times the average entry rate. In the event of a tariff reduction, a firm that owns trade marks in an export market will be 4 to 5 times more likely to enter that market than a firm with no trade mark ownership in that market.

Interestingly, the study showed that owning trade marks may increase the likelihood of entering the export market, even in the face of an exchange rate appreciation. This is in marked contrast to non-trade mark owners where a 10% appreciation of the home real exchange rate will induce a 17% fall in entry likelihood. Consequently, the export strategy of trade mark owners appears to be more resilient to the downsides of exchange rate volatility.

With regard to export revenue, the baseline findings of the study showed that export revenue increases the longer a firm is active in the export market. Revenue increases with tariff reductions and with depreciation of the domestic real exchange rate against the export market, although revenue is more sensitive to tariff reductions than movements in the real exchange rate.

It’s all good news for export revenue for those firms who have filed trade marks in export markets. Filing a trade mark in an export market is positively associated with increased export revenue (about 30%) in the following year. Trade mark activity also predicts an increase in export revenue in the event of a tariff reduction, becoming more pronounced as the number of recent trade mark filings increases. There is also a negative association between exchange rate appreciation and export revenue, with export revenue increasing with the number of trade marks filed. One hypothesis is that exporters will take advantage of the foreign currency depreciation to invest in marketing to grow their foreign customer base, thereby expanding their exports in comparison to the average exporter with no trade mark rights in that export market.

The study also looked at the effects of tariff reductions and exchange rate changes on how Australian exporters diversify their exported goods. Baseline findings showed that manufacturing exporters reduce the diversity of the products they export if there is an appreciation of the home real exchange rate against the destination market.

Tariff reductions are also associated with lower export diversity for Australian manufacturers who don’t own trade mark rights in export markets.

Export behaviour changes significantly in response to these market shocks if the Australian exporter owns trade marks in the destination countries for their goods. They will tend to increase the diversity of their export goods in response to a reduction in the tariff rate, rather than increase export concentration. This response is thought to reflect the ability of trade mark owners to expand their brand across product categories, identifying and seizing new market opportunities as they arise, and capitalising on their marketing investment amongst their established foreign customer base. The study shows that the tendency to diversify the product offering in response to tariff reductions is more marked for SMEs than large firms.

Interestingly, in the face of local real exchange rate appreciation, the ownership of trade marks in the destination country for exports leads to a muted response, where the Australian exporter is less likely to reduce the diversity of goods that it sends to export markets.

The study shows that ownership of trade marks in export markets has a number of very positive benefits for Australian exporters. On the one hand, trade mark owners show increased resilience to exchange rate changes and are less likely to diverge from their strategic plans to enter a market or cut back on the range of goods they export. On the other hand, ownership of trade marks in export markets appears to amplify the likelihood of successfully entering a new market, increasing export revenue, and the range of goods that are exported, particularly in response to tariff reductions.

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