The indicators are all over company balance sheets: counterfeiting and piracy are siphoning off incredible amounts of revenue from legitimate businesses.
The Organization for Economic Co-operation and Development (OECD) in The Economic Impact of Counterfeiting and Piracy, released in 2007, estimated that international trade in counterfeit and pirated products could have reached as high as $200 billion in 2005. The estimate does not take into account the number of domestically produced and consumed counterfeit products nor does it include music, video, software, games, and printed materials increasingly being distributed online. The United States Chamber of Commerce estimates that Intellectual Property (IP) makes up more than one-half of all U.S. exports, driving 40 percent of the country’s growth. Clearly, as manufacturing jobs move to developing countries, intellectual property becomes more critical to the economic survival of developed countries. The FBI estimates that the theft of IP costs the U.S. economy $250 billion per year and has resulted in the loss of 750,000 jobs.
The loss of jobs and both tax and corporate revenues results in less money for critical research and development and funding for much needed government programs and is especially harmful during the current recession. Unfortunately, the economic impact is only part of the problem: counterfeiting discourages innovation and undermines good governance, provides real risks to consumers in the form of dangerous and unregulated products, and generates profits that go directly to fund organized crime and terrorism.
The Argument for Strong IP Enforcement
Security managers need to provide a business justification to develop a brand protection program in any company, so the broader arguments in favor of enforcement are worth considering.
Public perception and attitudes towards piracy pose a challenge in that piracy and IP infringement are often perceived as victimless crimes. However, international research and the 2007 report by the OECD provides evidence to the contrary and shows that the negative effects of piracy are broadly distributed among rights holders, consumers, and government. In addition to the legal considerations reflected in copyright and trademark laws, counterfeiting and piracy have economic and social consequences in that they discourage innovation and inhibit economic and technological growth. Innovators are less inclined to devote time, money, and intellectual capital to developing new products if their ideas are likely to be stolen or copied by someone else. Investment funds will not be forthcoming if the business climate doesn’t protect IP, resulting in little or no return on investment. Ironically, developing countries that are often the source of counterfeits are hardest hit in the long run by failure to enact and enforce IP protection laws.
Research and historical trends show that countries with effective IP protection regimes enjoy stronger and more rapid economic development than those that do not. Furthermore, counterfeiters do not pay taxes, are often connected to criminal organizations, and operate in underground economies. When IP is not adequately protected, rights holders suffer from decreased sales and diminished brand value resulting in a loss of consumer confidence and commercial viability. Consumers have fewer choices and often must choose between either very costly authentic products or cheap and inferior knock-offs that not only perform poorly but also carry inherit risks to health and safety. The ever-expanding list of counterfeit products that ranges from pharmaceuticals to car and airplane parts has increased consumer risk with the rise of the globally integrated economy. After-market car or airplane parts manufactured in China, often without appropriate quality control, can end up in the U.S.
The U.S. Department of Homeland Security reported an 83 percent increase in the number of seized items for 2005-2006 and a total value of $196.5 million for 2007 seizures representing a 27 percent increase over 2006. Between 2000-2006, the European Union reported an 88 percent increase in the seizures of counterfeit goods. The World Health Organization estimates that 7-10 percent of all pharmaceutical products sold in the world are possibly counterfeit, with a rate as high as 30-40 percent in some African countries. The Business Software Alliance’s 2008 Annual Report asserts that the worldwide PC software piracy rate was 38 percent in 2007. Clearly the trend is toward more counterfeiting which poses higher risks to the public and has a significant impact on legitimate commerce. Lastly, the impact of counterfeiting, often controlled by organized crime, on governments in the form of corruption and weakened public institutions disrupts global commerce and erodes public confidence in government.