Development of a valuation system of technology for the enhancement of innovation in Indonesia

Abstract

Purpose

Innovation as intellectual capital is the main capital to improve the economy and welfare for developing countries. In this article, the researchers focus on discussing how this Patent valuation system is built in developing countries, In this article, the word technology here is patent-protected technology especially in Indonesia. The primary purpose of the patent assessment in this article is to provide loans, or in Indonesia, it is referred to as a patent fiduciary. This research is also expected to provide a solution to the decline in Indonesia's GII rank in 2021. The researchers describe how this technology valuation relates to fostering innovation in Indonesia.

Design/methodology/approach

This research applies a descriptive analytical method. The researchers analyze existing innovation conditions through an intellectual property management approach and theories in intellectual property. The researchers construct the formation of a valuation system in Indonesia and form a valuation linkage scheme and technology improvement in Indonesia.

Finding

The researchers map a valuation system consisting of integrated subsystems and describe how these subsystems work and are integrated with each other. Furthermore, it is also found that valuation has a positive correlation with the increase in innovation in developing countries, especially for innovation-based startups and small and medium-sized companies in Indonesia.

Research limitation/implication

The limitation of this research is the technology valuation process using three conventional methods. It still allows the emergence of new methods and this research is based on Indonesian characteristics, although this research can be applied in developing countries in ASEAN region which have the same characteristics as Indonesia.

Original/value

The novelty values contained in this article, firstly on the formation of a valuation system that can be adopted by Indonesia which does not yet exist, The technology valuation system can also apply in several developing countries, especially countries in the ASEAN region which will focus on the development of innovation and technology. Secondly, the valuation system and fiduciary implementation can indirectly increase national innovation.

1. Introduction

For developing countries, innovation is highly expected and awaited as it is a precursor to improving the economy and welfare [1]. Policies in developing countries greatly affect the growth of innovation. The Indonesian government is expecting the development of an innovation and entrepreneurship climate in realizing economic growth. Innovation and entrepreneurship are seen as engines that can spur prosperity and improve living standards. The Global Innovation Index (GII) ranks the world's economies according to their innovation capabilities. It consists of approximately 80 indicators grouped into innovation inputs and outputs. The GII aims to capture the multi-dimensional aspects of innovation (see Table 1 ).

Table 1.

[2].

	GII	Innovation inputs	Innovation outputs
2021	87	87	84
2020	85	91	76
2019	85	87	78

The table above shows Indonesia's ranking over the past three years, noting that data availability and changes in the GII model framework have affected the comparison of GII ratings over the years. The statistical confidence interval for Indonesia's ranking in GII 2021 is between ranks 80 and 87. Indonesia is ranked 87th out of 132 economies featured in GII 2021. This indicates a decrease of 3 intervals from 2020 when Indonesia was ranked 84th. When compared with South Korea, which was ranked in the top 10, Indonesia has already been left behind. A reason that South Korea was ranked in the top 10 is its effective innovation system, especially with regard to valuation [3].

A problem in developing countries, especially Indonesia, is the lack of appreciation for inventors or assignee, hence reducing the motivation for inventors to continue to innovate. This is proven by the absence of well-institutionalized and systematic valuation management. If this continues, the number of innovations will keep declining proportional to the decline in the level of the economy.

Almost all companies continue to make efforts to develop R&D because technology [4] and innovation are key factors in determining the company's competitive advantage, which contributes to increasing revenue in various ways, including technology transactions, technology transfer, licensing and seeking funding for commercialization [5]. To estimate the economic value of technology, especially one that is granted a patent, it is necessary to have definite arrangements, systems, institutions and estimation processes to calculate the patented technology. In this article, the word technology here is patent-protected technology.

Innovation and technology from companies, particularly small enterprises, have become essential in reviving companies’ economies [6]; therefore, special and professional valuation is needed to encourage the business industry, especially small and medium enterprises, to advance and develop using intangible assets, such as patents and technology. Patent-protected technology must be utilized as a source of capital for small innovation-based companies and can provide sustainability in technological developments [7]. With additional capital for a company and its inventors, the company will develop and create new, more novel innovations that will affect innovation sustainability in Indonesia. Technology valuation is also a form of appreciation for inventors; based on reward theory, this is critical for innovation sustainability because it will stimulate inventors to continue to invent [8].

From the literature review that was carried out, significant technology valuation research was conducted and focused on ensuring the reliability and objectivity of the results, such as value, the economic life of technology, and the cash flow of entities that will commercialize patents. In this article, researchers conducted a different discussion, namely, focusing on how this valuation system is built in developing countries, especially Indonesia. The technology valuation system can also apply in several developing countries, especially countries in the ASEAN region which will focus on the development of innovation and technology. The purpose of this research is to create a technology valuation system to increase innovation, especially in Indonesia. This research is also expected to provide a solution for the downgrade of Indonesia's GII rating in 2021. The researchers describe how this technology (patent) valuation relates to enhancing innovation in Indonesia, as well as how the technology valuation system can be applied in Indonesia to ensure sustainability and increase innovation in Indonesia. Through this article, the researcher offers an institutionalized valuation system starting from the establishment of valuation regulations, the formation of a valuation institution, and the linkage of valuation institutions with financial institutions to be able to realize a fiduciary patent that will later lead to fostering innovation in Indonesia.

2. Materials and methods

This is a qualitative research study providing analytical descriptions; in this research, the authors describe the existing findings in the field and present an analysis using an empirical juridical approach and an intellectual property management approach from institutional and administrative perspectives. This Research is based on science literature analysis and international financial reporting standards. And Systematization method and scientific modelling are used. The researchers construct a valuation system in Indonesia and form a valuation linkage and technology improvement scheme in Indonesia.

3. Literature review

3.1. Patent as intangible assets and intellectual capital in Startup/SMEs

Intellectual property is complex subject. The rights in intellectual property are an important, even vital, asset in many businesses. The modern business executive has a responsibility to manage these intellectual property assets just like any other in the business. The challenge to the executive specially in startup and SMEs is effectives management of intellectual capital. The purpose of managing intellectual capital is to develop and to remain competitive.

An intellectual property right arises as a form of appreciation (reward) for intellectual activities or people in realizing something new or original in the field of technology, literature and science, as well as in the industrial sectors [8]. According to the Reward Theory proposed by Robert Sherwood, an acknowledgement of intellectual work has a deep meaning; thus, inventors/assignee or designers must be ewarded for their creative efforts in finding or conducting intellectual or artistic works. Second, Recovery Theory states that inventors/assignee/designers who have spent time, money, and energy in producing their intellectual works must recover what has been spent. Third, Incentive Theory links creativity development with providing incentives for inventors/creators or designers. According to this theory, incentives are required to stimulate useful research activities [8]. Valuation is a form of Reward Theory to recognize the economic value of an invention, while in terms of Recovery Theory, valuation can replace all the time and costs that have been spent by the inventor through an accurate calculation, while in terms of Incentive Theory, the inventor is entitled to incentives in the form of funding and equivalents.

Patents as part of intellectual property rights are property rights. It is the right to human work, work with ratios, and the result of human reasoning work [9]. The results of human work can be in the form of immaterial objects or intangible objects [10]. Intangible assets are defined as non-financial assets that do not have a visible physical form, but it is beneficial in the future as a resource of economic value [11]. Intangible assets, such as innovation, become a major factor in today's industry. In some of the literature, innovation plays a major role in a company. Many experts posit that a company's competitive advantages lay in intangible assets, such as innovation [12].

The intellectual capital literature has identified and measured many new forms of intangible assets. The intellectual capital literature also shows several motives for measuring intellectual capital: internal management, external reporting, and transactional law. Intangible assets provide information on future economic benefits. Failure to recognize intangible assets generated from internal companies increases information asymmetry on future performance [13]. Objections to the capitalization of intangible expenses center on uncertainty on the economic benefits of intangible objects.

The key enabling criteria in IP management are a clear strategy with appropriate resource allocation and a good management plan. Amongst IP creation, protection, monitoring and enforcement, the internal IP management functions, available knowledge and management skills should be clear. IP management involves all activities, including defining and executing the IP strategy, generating and commercializing new IP, licensing, valuing, buying and selling IP, and monitoring third-party IP as part of business intelligence [14].

Similar to tangible assets, intellectual capital, which includes patent-protected innovations, must also be managed properly [15]. Intellectual property is a complex object, and many companies are unable to manage intellectual property (patents) properly. Managing the intellectual property of each company will vary depending on how the company values it [11]. A principle of intellectual capital management is knowing the value of the owned intellectual capital. Conducting a valuation of intellectual property is the most difficult aspect of managing intellectual property [16] because the intellectual valuation must be systematic and institutionalized, and the results of the valuation must be issued by the government.

3.2. Technology valuation

Intangible assets are commonly used for transactional purposes, as well as notational purposes. In transactional analyses, the assignee/operator relies on the analyst's advice and opinion in order to negotiate, structure and consummate actual commercial transaction.

The engagement documentation is the first procedure in the valuation process. The procedure is performed before any quantitative or qualitative valuation analyses are prepared, before any data are collected or analyzed and before the analyst conducts any due diligence investigations.

Calculations of the value of technology have existed since the 2000s following the development of intellectual property (IP) protection that is available for technology. Meanwhile, the value of technology generally develops rapidly in developed countries, such as the United States and European countries; only thereafter, the development reaches Asian countries, such as Korea, China and Japan. As such, these countries are already very familiar with technology assessment. Among the variety of methods and ways to value intangible assets, 3 approaches are the most widely used, namely, the cost, market and income approaches. One must choose the approach depending on the purpose of the valuation, since they have many basic functions aside from commercialization (see Table 3); shows the reasons for valuation (see Table 2).

Table 3.

This is a table of valuation for Patent identification [30].

IP/technology Asset	Information	Power (low–high)
Does the organization own these assets?
Are they development assets or newly acquired assets?
If acquired, is that the main key for the company?
Can it be transferred independently?
Are there any identifiable costs?
Have the assets ever been transferred or not?
Are the assets in dispute or not?
Are the assets protected by law or regulation?
Are the assets included in the company's balance sheet?

Table 2.

Valuation function [17].

Usage	Activities
Planning Strategy	The basis for decision making, capital allocation, revenue sharing
Financial Report	Required based on the International Financial Reporting Standard (IFRS) or for most of the Generally Accepted Accounting Principles (GAAP) in sales
Support of Sales Transaction and Licenses	Basis for IP exploitation, such as in the negotiation involving sales, licenses, or the exchange of IP
Fiduciary	For fundraising and securing financing, and collateral
Calculation of a Company's Assets	Liquidation, merger, spin-off or insolvency
Calculation to Compensation	To valuate claims of damages in dispute, violation or violation of rights, and to quantify damages
Transfer of Pricing	Relevant in cross-border transactions since the tax authority is involved in this kind of transaction

There are basic economics that underlie each of these types of analyses. The analyst should understand the analysis objective before accepting the client engagement to ensure that the analyst has the appropriate experience and expertise to perform the assignment. The analysis objective may affect the following aspects [18]:

• a.The data gathering and due diligence procedures;
• b.The appropriate approaches, methods and procedures;
• c.The content and format of the engagement work product.

For valuations performed for taxation, financial accounting, regulatory or litigation purposes, the analyst considers whether certain valuation approaches and methods are required and whether certain valuation approaches and methods are prohibited [19]. The purposes and objectives of intangible asset valuation may influence the selection of valuation approaches and method. The various components of the valuation objectives include the description of intangible assets, the description of bundle of legal rights, the standard of value, the premise of value and the valuation date [20]. The various components of the valuation purpose include the reason for conducting the valuation, the intended audience for valuation and the decision of how many will be influenced by the valuation [21].

Analysts who are members of certain professional organizations comply with the promulgated standards of those organizations [19]. The institute of business appraisers or professional associations have statements on standards for valuation services guidance and generally accepted approaches and methods, as well as the factors that the analyst should consider in the selection of the approaches and methods [13]. The professional judgment, practical experiences and common sense of the analyst affect the selection of valuation approaches and methods [18]. The analyst should be able to explain why the selected valuation methods were used and why the rejected valuation methods were not used. The selection of valuation methods should be replicable and transparent, and the selection process should be documented in the valuation working paper or the valuation report [16].

Technology valuation has actually been proven to comprehensively encourage economic value in technology and boost the value of company assets, especially in small enterprises. Moreover, several countries have further developed a financing system based on IP [22]. Valuation is divided in 3 approaches, the income, cost, and market approaches [23].

3.2.1. Cost-based approach

There are several types of costs that can be qualified in a cost approach analysis. These are related to regular costs, including new reproduction and replacement costs. New reproduction costs are the costs to remake or reproduce an intangible asset with current costs at the time of analysis, using the materials, standardized production, design, layout and quality of labor that are equal to the quality of the actual intangible assets.

The new replacement cost is the cost to construct or build at the most recent price on the date of analysis, an intangible asset with a function and utility equivalent to the actual intangible asset. Replacement intangible assets are developed using modern materials, production standards, designs, layouts and human resource quality.

The formula that is generally applied to estimate the new intangible asset replacement cost is as follows [18]:

New reproduction cost new–incurable functional and technological obsolescence = new replacement cost.

The following formula is often utilized to estimate the value of the valuation of the new replacement cost [18].

New replacement cost new–physical deterioration–economic obsolence–curable functional and technological obsolescence = value.

An intangible asset deficiency is considered incurable when the current costs to upgrade or modify the asset are greater than the future economic benefits and the average cost of deterioration is 10–20%.

3.2.2. Market-based approach

The market approach is used to estimate a value, damages or transfer price conclusion based on an analysis of the sales or licenses of guideline intangible assets. There are three primary intangible asset market approach valuation methods [18]:

• (1)The sales comparison

This method is most applicable to intangible assets that are sold in the marketplace as separate intangible assets. In other words, such assets are transacted as naked intangible assets (without any other tangible or intangible assets). This method is also applicable when there are sufficient arm's length transactions of the subject intangible asset type. Such transactions often include the transfer of fee simple interest in terms of intangible assets. Therefore, this method is most applicable when the subject is free simple interest in the action assets.

• (2)Relief from royalty

The method is applicable when the analysis objective is a royalty rate. For this reason, this method is applicable when the analysis objective is an intercompany transfer price, a third-party license royalty rate, or a reasonable royalty rate damages measure, as well as a value estimate. This method is particularly applicable for the type of intangible assets that are typically licensed between a licensor and a licensee, including patents, proprietary technology, and other intellectual property [24].

• (3)Comparable profit margin

This method is most applicable when the assignee/operator has one extraordinary intangible asset and other ordinary (or routine) intangible assets. In other words, one intangible asset stands out as the reason for the assignee/operator's success. These intangible assets may include a patent, copyright, trademark, trademark, product design or formula. This method is most applicable when the assignee/operator can identity one intangible asset as the reason for their excess profitability.

3.2.3. Income-based approach

In the income approach, the formula commonly used for the Discounted Cash Flow (DCF) method is as follows [16]:

$$PV=\sum _{t=1}^n\frac{CF(t)}{{(1+r)}^t}$$

PV = Present Value.

CF = Cash Flow

r = Risk

t = Time.

Aside from the result of commercialization that will be obtained in the future, the business viability determined through the calculation of the possible amount of future cash flow relevant to many items and financial ratios will also determine the intermediate value by reflecting the qualitative evaluation factor of the business entity [22].

Modern valuation analysis of DCF is effectively applied to the business enterprises under consideration; the formula derived from classic compound interest is as follows [7,16]:

If FV = Future Value.

FV= PV ${(1+r)}^n$

PV = Present Value

r = periodic rate of interest expressed as a decimal and representing risk

n = number of periods.

Present Value of a Stream of Cash Flow.

PV = $\frac{C1}{1+r}$ +$\frac{C2}{{(1+r)}^2}+\frac{C3}{{(1+r)}^3}$ + … …..+ $\frac{Cn}{{(1+r)}^n}$

C = Future Periodic Cash Flow.

There are several ways to calculate DCF that still refers to the income resulting from the commercialization of technology. Whichever formula and method are used, the bottom line is still whether a calculation is suitable and sufficient to evaluate the technology produced (see Table 4). However, all calculations require a reference, a handbook to summarize the formulas in a written guide issued by an authorized institution, to ensure that the calculations are under a definite basis and are backed up by an authorized institution [25].

Table 4.

Income-based valuation simulation [37].

	New Product Sales
	2020	2021	2022	2023	2024
Sales	121.400	121.400	120.000	120.000	120.000
Sales Increase		75%	50%	0	0
New Product Sales	200.000	2.000.000	100.000	50.000	50.000
New Sales Increase		1000%	–	–	–
Cost of Sales	85.000	85.000	85.000	85.000	85.000
Cost of Sales %	70%	70%	70%	70%	70%
Cost of New Sales	0	0	0	0	0
Gross Profit	36.400	36.400	35.000	35.000	35.000
Depreciation Expense	3.276	3.276	3.150	3.150	3.150
Depreciation Increase		6%	6%	6%	6%
Adm, Overhead	25.000	25.000	25.000	25.000	25.000
Operating Income	8.124	8.124	6.850	6.850	6.850
Taxation 25%	2.031	2.031	1.712	1.712	1.712
Net Income	6.093	6.093	5.138	5.138	5.138
Add Back Depreciation	3000	3000	2800	2800	2800
Total Cash Flow	9.093	9.093	7.938	7.938	7.938
Less Add Working Capital	1000	1000	1000	1000	1000
Less Capital Expenditure	2.500	2.500	2000	2000	2000
Net Cash Flow	5.593	5.593	4.938	4.938	4.938
PV Factors 15% Discount	0,8695	0,756144	0,657516	0,571753	0,497177
Present Value	4.993	4.993	4.338	4.338	4.338
Total Present Value		23.000

3.3. Fiduciary patent

Fiduciary guarantees are collateral rights over movable objects, tangible and intangible, and immovable objects. A patent is an intangible movable object. The object that will be used as a fiduciary guarantee is a patent certificate. The patent fiduciary can be categorized as patent commercialization because it is a process of series of patent commercialization processes that inventors can carry out to maximize the economic function of their patents [26].

The fiduciary is an accessory or follow-up agreement from the main agreement, namely the loan agreement and in determining bank loans. Within the framework of a patent fiduciary, intangible movable objects such as patents become collateral for the loan, the results of the patent commercialization will be paid in debt instalments, and if there is a default, the patent as a guarantee will be executed [27].

Although some intellectual property rules, such as patents and copyrights, have been normalized, in fiduciary practice, intellectual property cannot be implemented, one of which is because the fiduciary guarantee arrangement needs to be regulated for guaranteeing intangible assets. Third, from the valuation aspect, there is no applicable valuation guide made by financial institutions or the Directorate General of Intellectual Property to regulate and guide the implementation of valuation, so banks still feel free to implement intellectual property-based fiduciary.

4. Technology valuation system and innovation enhancement in Indonesia

4.1. Establishment of a technology valuation system in Indonesia

The processes mentioned might be illustrated with a diagram flow chart as follows:

Based on the concept of the valuation scheme in Fig. 1, the inventor who has a patent submits a calculation to the valuator; then, a preliminary examination is carried out by the valuator, and which if the results can be continued, it will proceed to the valuation process using 3 approaches, after which the value of the patent will be generated.

Fig. 1.

Flow of the valuation process scheme.

In Indonesia, the valuation must be well-systematized to ensure that it is applicable. The valuation system consists of subsystems that are integrated with each other and are expected to run in harmony. As a system, valuation has subsystems; based on the scheme in Fig. 1, it can also be grouped into several subsystems, including the following.

• 1. Man: valuation institution and technology valuator

The institution aspect has always been fundamental in a state of law, especially in Indonesia. A clear institutional aspect will lead to an assured and straightforward implementation. The institution will be a basis to build systems and ecosystems. Therefore, the institution is a critical aspect subsequent to the legal aspect of establishing the norms for technology valuation in Indonesia [24].

In practice, it is not easy to establish an institution in a state of law. It requires legal norms in the form of legislation that underlies the formation of these institutions. Starting from this point, the researchers suggest the formation of norms in patent law that contain the process of valuing technology. The norm in this patent law mandates the establishment of a presidential regulation related to technology valuation because technical arrangements are formed based on a presidential regulation related to valuation and the establishment of an technology valuation institution in Indonesia. A regulation that contains technical matters makes this arrangement more precise; the presidential regulation can establish an technology valuation institution including the establishment of an technology valuation guide.

Institutionalization is the second most important matter after the establishment of norms for technology valuation in Indonesia. Aside from ensuring the fluency and certainty of the implementation of these norms, institutionalization will also build a system and ecosystem. As a state of law, Indonesia will require the institutionalization of technology valuation as one of the main components to achieve such mentioned purpose [28].

From the institutional aspect, the researchers suggest that the institution will also cover the commercialization, valuation, and management of technology. If from an institutional perspective, the establishment of a new directorate is deemed too difficult, for the time being, the presidential regulation will establish it as a sub-directorate in the Directorate of Intellectual Property Cooperation and Empowerment. This is because the valuation and IP management include IP empowerment. However, the task of the Directorate of IP Cooperation and Empowerment will become increasingly heavier because the technology valuation practice and the IP management continuation require coordination with other institutions. For example, the continuation of a valuation aspect is carried out through building a system with banks based on how the technology value can be used as the basis for granting loans or fiduciary patents [19].

The authors further advise that the institution covers other aspects, such as the commercialization, valuation and management of the technology. If, for instance, the manifestation of a new directorate under the Ministry of Law and Human Rights is considered to be difficult, for the time being, the Presidential Regulation on the institutionalization may serve as a sub-directorate under the Directorate of Cooperation & Empowerment of Intellectual Property, since the valuation and management of the IP are under their authority. However, this will surely increase their responsibility burden. The practice of valuation and management of the IP will involve a large amount of coordination with other institutions. For instance, in terms of the technology valuation, its next level of development will include the development of a system linked to banking institutions to enable the resulting technology value to be used as the basis for approving loan applications or fiduciary patents [29].

The new sub-directorate or directorate may also be in charge of supervising the technology valuator or even responsible for their certification and conclusion of their code of ethics. If appropriate, the valuators may lose their certification in the case of a violation of the code of ethics. In addition to arranging guidelines for the technology valuation [17], they can also establish an institutionalization system and technical practice.

The functions of this institution include:

• a.Coordinating with other institutions related to the application of the valuation results (banks and other relevant ministries);
• b.Supervising valuators in making valuation results;
• c.Developing technology valuation guidelines;
• d.Producing technology valuation tools;
• e.Conducting warnings and penalties to valuators who violate the guidelines/rules.

There are several developed countries that have valuation institutions, such as China, South Korea and Singapore. In the aforementioned countries, institutions, systems and the implementation of technology valuation have been established. Furthermore, these institutions will initiate the formation of a financial system in collaboration with the ministry of finance in providing IP-based loans [3].

Discussions of the valuation process will always involve its valuator and the assessment of their competence. A technology valuator is a person who assesses a technology; as a result, they have to fully understand the significance of property rights, as well as the difference between intangible and tangible objects. Additionally, they must also understand IP, both in terms of the difference among the 7 regimes of the IP rights and in terms of their registration process. The purpose of grants of IP from the state to inventors is also an important factor that must not be taken lightly.

A technology valuator should ideally have skills in technology management, negotiation and contract drafting for technology commercialization, as well as in-depth knowledge on licensing agreements. They may be an Indonesian citizen or a foreign national, but either way, they must have integrity and must have attended specific training for the valuation of intangible assets.

In some countries, such as China and Singapore, technology valuator usually have side professions as consultants or lawyers specializing in IP; as such, the valuation process will take place at their office. However, there can be no conflict of interest; if a valuation or assessment is required compensation for damages incurred in civil action, then the relevant law office handling the dispute may not conduct a self-assessment or valuation. This matter may be regulated under an technology valuation certification regulation, if necessary [22].

• 2. Method: formulation of a valuation manual

The manual is needed as a guide in the technology valuation of valuators to ensure conformity/consistency in technology valuation conducted by valuators. The valuation manual is prepared by the valuation institution and contains technical details of the valuation implementation. The valuation manual contains the following:

• a.How to identify intangible asset valuation problems

Different types of property, ownership interest, legal rights and privileges, as well as intended uses, can have an impact on the valuation process and value conclusion. The client and the valuator must fully understand the outcomes of the technology valuation. The client's honesty and openness also play an influential role; thus, a pre-valuation consultation is needed to determine the condition of the assets to be calculated. The manual states which things to look for prior to conducting the valuation process. It will later have an impact on the value of the calculated asset.

In practice, technology valuation needs guideline: references reflected through the introduction of peculiarities, variables and objectives of an technology valuation. The World Intellectual Property Organization (WIPO) defines an technology valuation as “a process of determining the monetary value of an IP subject, which must be separately identifiable”. One of many ways to measure the value of an asset is to estimate the expected future economic benefits that it will generate in the future [30].

It is important to note that IP assets do not have an absolute value; they will have different valuation results depending on their commercial usability. Furthermore, valuation may also be subjective; there are several key factors in this regard: First, the expected economic benefits from the valuation are usually influenced by legal factors (e.g., whether the assets will be granted with IP rights from the patent office or not); second, the technological uncertainty (e.g., whether the technology is ready for commercialization or not); and third, the market power (e.g., how competitors develop in their respective IP). The technology valuation is also strongly influenced by many variables; aside from the reasoning context behind the valuation, the generated benefits expected (e.g., entry into the market, access to technology, and cost savings), and who will reap the most benefits at the end (e.g., assignee of the IP rights and licensors), there are also following variables:

• 1)Time: the timing of when the assessment is made and how long the IP rights will be held (taking into account, e.g., the life of the technology or the terms of the license agreement);
• 2)Characteristics of intellectual property (patent) type of patent (ordinary patent, simple patent, national registered patent and international application for patenting), A Simple Patent is any invention in the form of a new product or tool and has practical utility values due to its shape, configuration, construction or components, whereas patent is an exclusive rights granted by the states to the inventor of the result of his invention in the field of technology, which for a certain period of time carries out his own invasion or gives his consent to other parties to implement it.
• 3)patent class, the presence or absence of bacterial storage and other factors affecting the intellectual property value;
• 4)Legal status: Due diligence of legal document, the strength of IP rights, which will be related to the issue of violation;
• 5)External variables: the presence of legal uncertainty, whether disputes exist or not, technology, and markets when estimating the future economic benefits of the IP assets;
• 6)Geographic reach: where the IP asset will be exploited and where it is protected;
• 7)Others: tax issues and interest rates.

From the above-mentioned characteristics, it is apparent that an initial analysis is necessary to determine whether a technology can be valuated or not. First, the IP assets must be identifiable separately from other assets, even they have not yet been formally registered. Second, there must be explicit evidence of the IP's presence, whether in the form of a trademark registration, patents, license agreements, or even well-documented technical knowledge. Third, in the case of technology in the form of internally generated software, it must be listed in a financial statement complying with international accounting standards. Fourth, the IP rights generate a revenue stream with separate contributions from other assets used in the relevant business.

b. Data collection, due diligence and analysis.

The valuation process is conducted by a professional and certified valuator for intangible assets, based on which a detailed discussion is provided in the institutional section of this chapter. In short, to assess the assets owned by the inventor, they must visit an accredited valuator's office appointed by the bank where they intend to apply for a loan, together with the Directorate General of IP. They must also bring all files related to the technology that will be evaluated, namely:

• a)Inventor's ID/company holding the patent;
• b)Inventor's tax ID/company holding the patent;
• c)Patent certificate agreement on transfer of rights/license/patent commercialization cooperation agreement (if any);
• d)Proof of license registration (if any);
• e)Proof of expenditures (balance sheet and receipts/bills);
• f)Income balance;
• g)List of comparable products.

Some basic initial steps must be taken to identify IP assets [31], which will require the consideration of several elements. There is no single right method in identifying IP assets [30]; one must first consider the main variables that may help the identification process and other variables that may boost the strength of the IP assets. The following table provides an example of the variables used for the IP asset identification process [32]. The use of different categories will help the valuators to develop an in-depth analysis of various stakeholders, and to identify other factors that may affect the valuation [30], as shown in the table below.

Some asset valuation methods include the determination of the strength of the IP/patent assets by taking into account a number of relevant attributes, for instance, the Brand Finance valuation method [33], which considers emotional connections, financial performance, and sustainability of value IP/patent assets [34]. There is no set of rules capable of identifying IP assets; however, it is an accepted rule that IP assets must be identified, since not all investments in investigation or other areas will be result in IP assets [9].

Initial identification will declare whether an asset can be appraised or not; if it can, then the asset will continue to undergo the valuation process. However, if the identification declares otherwise, then the valuators will provide a formal statement declaring the result and the reasons behind it [35].

In terms of the former, the valuator may use basic valuation based on the cost approach [20]. It is important to note, however, that the cost-based approach will only determine the minimum value of the asset, and thus should not be included in the result of the asset valuation [24].

An asset will need a further valuation process using an income-based approach by analyzing several data, e.g., balance sheets, contracts (if any) and/or license agreements (if any). Afterwards, the valuator will calculate the numbers acquired from such documents through a formula specifically intended for the income-based approach [15]. The valuator will then be able to issue a result, unless the relevant asset has a comparable or substitute item in the market. In that case, the value signified then will then have to be compared with its substitute using the market-based approach to create a final value of the IP [36].

• c.Method of Valuation Approach

The manual describes the methods that are commonly used. The types of technology valuation approaches that can be applied in practice must be identified. This detailed identification of the valuation approach used and examples will make it easier for both the valuator and the client to understand the methods and the reasons for choosing them.

As explained in the literature review section, there are 3 commonly used approaches in technology valuation, namely, the cost-, market- and income-based approaches. The valuator should choose the most appropriate according to the needs and approval of the client. If the valuation is to compensate for losses, certainly, there must be a reason for using the income-based approach because it usually applies a cost-based approach, and vice versa: if it is used to apply for a fiduciary, it will be inappropriate to apply a cost-based approach. Therefore, in the technology valuation process, a pre-valuation process is needed.

The income-based simulation approach is an IgY rapid test with a new patent from a university research study that was marketed during the pandemic. The simulation technology valuation of the IgY rapid test with patent protection involves raw material in the form of imported IgY with a cost of production of IDR 85.000, a sales price of IDR 121.400, an estimation of 19 years, 3% royalty, a 15% discount rate, and 25% tax.

If the total present value is IDR 23,000 and the amount of sales is 250,000 in 5 years, then the total income value is IDR 5,750,000,000, inventors can apply for a patent-based loan from the bank and get a loan of a maximum of 70% of the asset value, and the maximum loan that can be obtained by the inventor is IDR 4,025,000,000. This loan can be used as capital and further innovation development, which is studied in the next section.

• 3. Machine

Machines are needed to speed up the process, shorten accuracy, low cost and run according to the rules. As well as technology valuation, machines are required to simplify the valuation process, speed up the valuation process and make the valuation cost cheaper.

In some developed countries such as Korea, machines in the form of information systems using data-driven valuation processes have been developed. An automatic information system in technological and economic assessment has been created using patent data stored in the valuation system carried out by the KIBO, Klsti and KIPA institutions. Character and situation [7].

In the case of KIBO, a technology valuation model developed by extending and advancing the KTRS (KIBO Technology Rating System) based on the qualitative evaluation of experts, called KPAS I, has been proposed to promote an IP assurance strategy at low-cost evaluations [7].

In Indonesia and several developing countries, this system will become a futuristic project after the technology valuation system runs well and the technology valuation has been implemented. The machine or system usage model in the technology valuation will be developed after the system technology valuation is running and data is collected. In other words, Indonesia has yet to implement it using an information system such as Korea, which can now be done using a manual calculation system by entering valuation formulas and calculating using a calculating machine such as Excel or others.

• 4. Money

Money is an element in the valuation process. From money, it can be divided into two: the patent system, the valuation borne by and the technology valuation used by the inventor. Firstly is establishing a valuation system for valuation institutions by the government. Establishing an assessment system, including establishing institutions, making assessment guides, developing simple tools and determining valuators, is the responsibility of the state whose money or funds use state funds.

Secondly, After the technology valuation system is established, the inventor or the party conducting the assessment must pay a fee for each technology valuation process. The biggest obstacle, however, is often your budget. If the inventor has the money available, the inventor can hire a professional valuator, who may be an accountant, to produce an valuation of your technology. These costs, however, can be prohibitive for many early-stage businesses. If using a machine, then using a machine is expected to be cheaper.

4.2. Fostering innovation for startup and SMEs in Indonesia through technology valuation

Based on Reward Theory, as a legal subject, inventors in SMEs and Startup must be sufficiently rewarded as a form of appreciation for their works. In this sense, they must be able to take full advantage of the economic rights attached to the relevant inventions. The absence of a definite mechanism for the valuation means that the inventions, albeit patented, have an unclear value. Since there is no uniform valuation procedure, which can cause people to doubt the invention itself, the inventor is in a disadvantageous position when commercialization is conducted in such a condition [38].

Rewards should not have only been applied to the protection process; they must also be applied to the measures related to an invention after it has been registered, namely, the valuation, commercialization, and fiduciary, as well as other processes supporting its economic use. The grant of this reward must be under the task of the government; it may be in the form of regulations necessary for the inventors to be rewarded for their inventions. Since the issuance of patent rights along with a certificate is already under the government's authority, the granting of a reward will complete the government's responsibility in this regard, as well as reflecting its appreciation of the relevant inventors [39].

Taking into account to the objective side, the application of Reward Theory to the issuance of patent rights for inventions will view the valuation process as the relevant object. Without clear, accountable and transparent procedures under the responsibility of accredited professionals, the application of this system will lessen the appreciation that a state should have for a patented invention. This point of view raises the urgency in terms of the government as the authority within the state of law that is in charge of establishing an appropriate institutionalization process and valuation system.

An institutionalized valuation of a patent will also support an inventor's in SMEs and Startup legal acts in exploiting their own economic rights. In a state of law, a legal act must have either a legal basis or grounds to enable a legal subject to validly execute such act. This includes the valuation of a patent; without a clear legal basis or underlying right, an inventor will face hardship in establishing it. In addition to having a legal basis, a legal act must be supported by system, a structured process and a clear operational system. A valuation must also be conducted by experts with a certification and accreditation from an authorized institution, to protect accountability and transparency, and ensure compliance with the assessment guidelines [28].

Another supporting theory in the technology valuation process is the Recovery Theory of Robert Sherwood, where the resources used by an inventor in the inventing process must be compensated. Similar to the cost-based method, this theory is another example of a minimum calculation basis for technology valuation; at the very least, the inventor was reimbursed for what they had spent. The similarity, however, extends to the fact that this method cannot stand alone to determine adequate valuation in the case of commercialization. It must be complemented by the calculation of a reward attached to the technology value [20].

In this regard, technology valuation must show a higher value [40] compared to the cost incurred by the inventor to invent it; the value gap will then signify the reward they will receive as their economic right. The authors hypothesize that this margin, so-called economic benefit, will stimulate inventors to continue to find new innovations and improve the existing ones; this process can be illustrated by the following diagram:

This section will focus on the valuation function related to commercialization and the valuation of IP as an asset that can be used as collateral for financing. In Fig. 2, it can be seen that valuation can indirectly affect innovation enhancement. In the aforementioned figure, an IP-based financing process is required to generate additional capital to be able to produce new innovations or develop previous innovations. In the patent system, this is called patent development. In the scheme in Fig. 2, synergistic coordination is needed between valuation institutions and banks to realize IP-based financing in Indonesia.

Fig. 2.

The interconnectedness between Technology Valuatioon and improvement of innovation.

The ease of technology valuation is a reward for inventors to stimulate them to continue to develop sustainable innovations. A simple reward in the form of easy valuation is utilizing inventors’ economic function to carry out patent-based financing. Fig. 2 illustrates that the valuation results will be the basis for the IP-based financing provision provided by the bank. If the IP-based financing functions well, the inventor will receive additional capital to redevelop or create new innovations. With this cycle, it can be seen that the valuation of patent can motivate inventors to produce new and sustainable innovations so as to increase the number of innovations that are beneficial to the wider community and will further improve the Indonesian economy.

Recovery Theory ensures that the value of an invention will be no less than the cost incurred by the inventor to invent it. On the contrary, Reward Theory extends the value to an inventor's economic rights, to help them reap the benefit of their own invention [8].

Additionally, Recovery Theory also prevents the patent of an invention from being valuated at less than an inventor should obtain at the time of commercialization. This minimum value can be used later by banks as a reference to grant credit applications, where the banks will provide a minimum credit of the same value as the cost incurred by the inventor for their invention [8].

Similar to Reward Theory, Incentive Theory goes beyond the minimum value of the invention through granting incentives to the inventor for all of their inventions. Again, it aims to motivate inventors to produce more new inventions. In the valuation process flow, this theory might be implemented at the time of affixing additional value to the patent's final value.

Similarly, theories from Robert Sherwood [8] mainly also include rewarding the inventors for what they have produced. However, in its development, scholars use it to collaborate on creating a supportive and conducive climate for the inventors to exercise their economic rights and to foster people's creativity in giving birth to other innovations. The climate in this regard includes the regulations and policies from the government promulgated with the aim to promote commercialization, with no exception to valuation. Inadequate appreciation will, in turn, kill people's creativity. In the authors' opinion, these theories need improvements, notably, by inserting macro-interests as part of the endeavor to encourage people's creativity. In this way, people will stop thinking that the reward is the only effort for inventors to reap benefits; rather, it is an effort to cultivate national creativity. Thus, patent rewards may be considered as a concrete contribution to the state, in technological and economic development. This concept is commonly known as the macro-interest theory.

Since the exclusive rights from a patent are actually granted by the state to the inventor, the government has the responsibility to fulfill them—either through the promulgation of regulations on the technology valuation or the realization of a fiduciary patent practice. Since there are no policies regulating technology valuation, the unclear value of the patent makes it difficult for parties in commercial cooperation to determine the equivalent object for their contract. This prevents the intellectual assets in concern from having a definite value on a company's balance sheet, and also makes it impossible for the inventor to submit the same fiduciary patent to banks. The banks will have difficulties in determining the correct loan amount for the inventor for their invention. Additionally, a fiduciary will need a registration process through a notarial deed, which must stipulate the definite value of the fiduciary guarantee, as mandated by the fiduciary law [13].

An example of this is the affirmation of norms in Law Number 13 of 2016 concerning patents (patent law). Fiduciary duty has actually been mentioned in patent law and is stated specifically in Article 108; however, the provision only states that a patent “may” be used as a fiduciary guarantee; in other word, the banks may also choose not to accept it. From the authors' point of view, this redaction does not provide legal certainty; to rectify this, the word “may” must be replaced with “must” to affirm a patent's position as a fiduciary guarantee.

Aside from the affirmation of norms, the authors also consider that the addition of new norms related to the technical process of a fiduciary patent is required, namely, the establishment of provisions related to the valuation of intangible assets both in patent law and in Law No. 42 of 1999 concerning fiduciary guarantee (fiduciary law). Norms may be legally added for the purpose of harmonization, while provisions may be formed in terms of assessment standards for intangible assets; this will then facilitate the technical implementation of the fiduciary guarantee.

The realization of legal certainty in the implementation of a fiduciary patent [22] will only be possible if the norms stated in the rules and regulations can be put into practice, even though the banks are not familiar with them. This is where the government may help by providing supporting policies; even when the insertion of norms into laws may require a lengthy and complicated process, the government can still implement derivative provisions.

There are many types of derivative provisions; in the context of economic improvement, the government may issue government regulations or presidential regulations. Both may be used to establish rules for the valuation of intangible assets, to establish order for banking institutions to accept loan applications with patents as collateral (fiduciary patent), for the proper functioning of valuation [41], for the determination of valuator agencies, or for the certification of valuators To stimulate inventors and IP owners in the implementation of these policies, the government may also try to inject capital in various manners or provide security guarantees for banking institutions in the execution of a fiduciary patent, in the case of bad credit. Overall, this will help the government to improve its economy. The formation and regulation of these policies will provide improved legal certainty for inventors, which is the main and most important principle for a state of law such as Indonesia.

Aside from the legal certainty of the subjects, it is also important to consider the same for legal objects, in this case, the patent. As the object of the valuation, the rules and regulations must also address the patent. Fiduciary law already mentions patents in Article 108; however, there is no specific provision for the calculation or valuation of patents. The same absence of a more detailed regulation, valuators or guidelines for valuation as the basic standard makes it currently more difficult to implement patent valuation in Indonesia.

Based on the level of urgency, as supported by Article 108 of fiduciary law, the authors consider that the government must insert the following provisions related to valuation in the next article:

• a.The fiduciary patent process must be based on the technology valuation.
• b.The technology valuation is conducted by the valuator, which will be further regulated by government regulations.
• c.The requirement to establish valuation guidelines in accordance with several approaches that have been commonly used in calculating intangible assets.

Aside from the addition of an article related to valuation, it is also necessary to add provisions in Article 143, which states that the amount of material compensation for the patent must be based on the valuation specified in the relevant article. The same will also be necessary for the proper functioning of technology valuation, to ensure that all calculations made for intangible assets will have a clear value and direction.

The addition of norms in patent law is expected to support legal actions related to the valuation and fiduciary guarantee of patents. Current conditions show that there is limited engagement from inventors in such legal actions. Since in a welfare state, legal actions leading to the advancement of people's welfare should be supported by the government, this should urge the government to be more proactive.

The ease of technology valuation and commercialization will serve as a reward granted by the government for inventors, with the hope of encouraging inventors to invent more and promoting sustainable innovations. This is expected to benefit the wider community and, ultimately, the Indonesian economy.

As the key competitiveness indicator in the fourth industrial revolution, IP holds an important role in the financial industry. It is unfortunate that IP-based financing is still currently underdeveloped. In the face of the rapid economic growth of other states, the Indonesian government has an urgent task to promote this growth to the extent of also channeling private funds into this sector. Security and asset management firms need to make greater efforts to identify valuable and promising IP, even including actively investing in innovative companies [24].

Although IP is mostly used to protect patent-based businesses, recently, global companies have developed a variety of business models by utilizing IP, including in the funding and licensing sectors. According to a study on the market value of intangible assets, the share of intangible assets in the market value under the S&P 500 benchmark rose from 17% to 84% between 1975 and 2015, respectively.

5. Conclusions

The development of a technology valuation system in Indonesia begins with the establishment of an integrated valuation subsystem, including Man, which is manifested through the establishment of a valuation institution and a valuator, in which the duties and interrelationships of the two are also described. The second subsystem is Method, which is included in the valuation manual containing applicable valuation methods. The third subsystem is Machine in the valuation process, which in this case, the researcher divides into three, namely, manual, hybrid and using an information system that is connected to the internet (IoT) and calculated using AI. The last subsystem is Money, which is divided into two, namely, the financing of valuation by the state and by the inventor or assignee. The technology valuation process must be carried out in Indonesia by first creating a technology valuation process scheme using a technology valuation subsystem that is strengthened by technological valuation regulations based on the scheme. Ease of doing technology valuations is a reward from the state for inventors in startups and SMEs so that it will stimulate inventors at startups and SMEs to innovate again, which will increase startup and SME's innovation and will be directly proportional to the increase in national innovation. Technology valuation can encourage inventors to innovate more and promote sustainable innovation. Valuation technology will benefit the wider community and the Indonesian economy. This research has limitations, namely the use of the conventional three technology valuation method, not a new method that may have been developed. Another limitation is the scope of this research which focuses on developing countries.

Author contributions

Conception and design of the study, the acquisition of data, or the analysis and interpretation of data, M.R.A. and H.N.M; Drafting the article or critically revising its important intellectual content;MRA and M.A.; Final approval of the version submitted. H.N.M, M.R.A, and M.A.

Funding

This research received no external funding.

Informed consent statement

Not applicable.

Data availability statement

Data included in article/supp. material/referenced in article.

Declaration of competing interest

“The authors declare no conflict of interest.” Authors must identify and declare any personal circumstances or interest that may be perceived as inappropriately influencing the representation or interpretation of reported research results. Any role of the funders in the design of the study; in the collection, analyses or interpretation of data; in the writing of the manuscript; or in the decision to publish the results must be declared in this section. If there is no role, please state “The funders had no role in the design of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript; or in the decision to publish the results”.