My International Business Paper.

The response from my professor was hilarious:

“Hot Stuff Mike.”

The Relation between Intellectual Theft
and International Growth

Michael DiDonato

November 30, 2007
Wemba 19

The theft of information and copying of equipment by undeveloped countries, while disruptive to the innovation process, increases the overall betterment of mankind.

Information is typically considered alongside material goods as something to trade and use as leverage to expand one’s business. As the ability to pass information and equipment across international boarders has eased, so too has the process of copying equipment designs and patented materials. Despite the hardships that this causes to innovative companies, the copying of equipment in undeveloped countries by unlawful entrepreneurs increases the overall betterment of mankind by increasing the drive for knowledge in developing countries and sparking innovation.

The Paper.

International business has been growing steadily over the past several decades. As countries find themselves forming more and more business relationships with nations of varying economic strength, they will undoubtedly be confronted with significant ethical and social dilemmas. One such dilemma is the use and abuse of intellectual property. Intellectual property refers to novel ideas, creative products, and trade secrets, both tangible and intangible. This property is typically considered alongside material goods as something to trade and use as leverage to expand one’s business, and regularly exchanges hands across international borders. Importantly, the direction of this exchange is largely from highly developed, technologically advanced countries to lesser developed, expanding nations. It is not uncommon to find products of intellectual property being produced on a mass scale by businesses within countries that to do not hold property rights. The social/economic dilemma emerges when developing countries choose to infringe upon intellectual property rights, which, with today’s technologies, is becoming an increasingly complex international issue.

Technology has had a direct impact on the rate at which equipment is copied. Before the printing press, copyrights were unnecessary as the copying of literal works required such effort and initial capital investment that anyone willing to expend the effort was welcomed to do so. The creation of the printing press made copying simple and forced people to reconsider the handling of unique literal works. Likewise, the advancement of global communication and copying of ideas makes it easier for developing countries to reproduce original works accurately. Intellectual property infringements have been pushed into the spotlight as a critical issue needing to be addressed.

According to PR Newswire, intellectual property infringements result in a yearly loss for the United States of a total of $58 billion, 373,375 jobs, and $16.3 billion in earnings. These losses show the significant risks that developed countries face when their intellectual property rights are violated. High potential for financial loss motivates businesses to take action to safeguard intellectual property. Because the governments of undeveloped countries have much to gain from intellectual property theft, the motivation to improve protection is not shared globally.

Without incentives to protect intellectual property, many developing countries have not established laws and regulations nor adopted international standards regarding the use of patented or copyrighted material or, if the laws exist they are weakened by a general disregard for them. For example in China it is difficult to obtain patents to protect one’s unique ideas. This, along with the multi-billion dollar market for illegitimate and counterfeit products, demonstrates the country’s lack of support for international patent law. The obvious and most common infringements of intellectual property can be seen in Rolex or Omega watches and pirated DVD sales, which can be easily found by walking the streets in China. The illegal reproductions, however, extend to high-end industrial equipment as well.

While the theft of high-end intellectual property is costly for the original developer and manufacturer, cheaply produced copies are highly advantageous to the foreign buyer, or thief, of the equipment. Furthermore, cheap industrial equipment can have a major impact on the rate at which an undeveloped country can improve its infrastructure and society. As with many social dilemmas, the issues are a balance between financial gain for the owners of the patent and the general well-being of the populous. The theft of information and copying of equipment, by undeveloped countries, while disruptive to the innovation process, increases the overall betterment of mankind.

To fully understand the relationship between ideas and ownership, we must first determine what claim companies have over ideas. Justin Hughes in his essay “The Philosophy of Intellectual Property” begins to address the benefit of property and its relationship with rewards or payments for its use. As Hughes explains, there are two basic interpretations of John Locke’s ‘Two Treaties of Government’ which provide a foundation for an understanding of intellectual property. The first states that in order to motivate laborers society must compensate them with rewards. The second interpretation suggests that rewarding labor is just, but not a prerequisite for creating a work environment.

Idea generation and the execution of these ideas are considered a single event that requires labor. As such, both interpretations of John Locke’s essay justify a company’s claim of ideas as property. The first interpretation suggests that without proper payment, man will lose the motivation to come up with new ideas. The second idea suggests that man will continue to innovate regardless of rewards, but that providing rewards to the deserving is just. Both interpretations will be addressed in this paper, but it is the second concept that is fundamental for theft to be a productive for mankind. Richard Epstein, a professor of law at the University of Chicago, points out in a letter to Hughes that rewards for property are deserved because the labor “increases the common stock of mankind.” This, as Hughes states, creates a clear problem: “If the new wealth remains the private property of the laborer, it does not increase the common stock.” This is a fundamental ethical problem facing today’s governments. As highly developed countries make technical advances and declare claims of intellectual property, the governments of undeveloped countries are torn between following the law and doing what is best for their people. What good are intellectual innovations if the expensive price tag prevents those most needing the ideas from accessing them?

In cases where the health of individuals is at risk, the line between financial gain and spread of knowledge becomes a bit clearer. Take, for example, the difficulty pharmaceutical companies face in the distribution of drugs at extremely reduced costs to the suffering people of undeveloped countries. In 1997, the major American pharmaceutical companies needed to address the production of patent protected AIDS drugs in India and South Africa. With the lives of thousands of South Africans at risk the companies were ‘forced’ to provide products at a financial loss or risk damaging their brand name under the onslaught of the public’s outcry. The moral issues helped fuel a spread of intellectual property.

For industrial equipment, where lives are not in jeopardy, it is harder to morally justify the theft of intellectual property. This is especially true if the theft noticeably increases the profitability of the developing country. Bradford De Long and Lawrence Summers show a positive correlation between a country’s investment in industrialization and a significant increase in economic growth. From 1960 to 1985, countries that increased their investment in industrial equipment saw Gross Domestic Product (GDP) increase per worker 1.02 percent per year. This notable growth rate, when presented against the cost of the stolen equipment, is justification for payment to the owner of intellectual property. For example, if a business in China were to steal the designs for a $300,000 industrial welder for tube and pipe products, they could easily expect financial gains of millions of dollars from the equipment. Recent complementary research by H. Dellas and V. Koubi shows that investment in industrial employment is more critical than equipment at the beginning stages of a country’s industrial growth. This suggests that there are significant start up costs that would confront an organization entering industrialized markets. For the example above, $300,000 for equipment might seem trivial given a company’s long term gains but, in actuality, the start up capital presents a significant obstacle. Without that initial equipment, companies may not enter the market where millions of gains are possible. Cheap industrial equipment greatly increases the motivation of these companies to enter that market.

The potential for economic improvement helps explain why governments might turn a blind eye to the theft of intellectual property within their borders. While they may see the value of following international laws, so too do they see the favorable social and economic benefits within their own country when they choose to ignore intellectual property rights. Undeveloped countries lack the infrastructure to compete with developed countries independently. By stealing intellectual property, these countries can boost their economies to the point where they can contribute to the global market. This shift in economic strength does not come specifically from the theft of the equipment so much as the theft of the technology and ideas inherent in the stolen goods. The governments of today’s developing countries recognize that knowledge acquisition is the key to productivity within their state.

Peter Drucker made great advances in economic theory by developing the idea that knowledge is the property of the future. No longer is land or physical capital the key to success; instead, knowledge is growing as the critical source of wealth. Take, for example, the fashion industry. New fashion ideas are unable to be patented and, within hours of major fashion expositions, sweat shops in undeveloped countries are churning out copies of the newest and greatest fashions. This, however, is not detrimental to the fashion industry. Surowiecki makes reference to the ‘The Piracy Paradox’ a theory that piracy of ideas will actually have a positive influence on the industry. He points out a few major advantages to the theft: the copied products mean that new ideas will reach the population more quickly and greater spreading of ideas will help encourage more innovation.

Another example where sharing ideas has become the norm is the magic entertainment industry. Magicians have a unique problem: once an original idea becomes public it immediately loses all value. Furthermore, like fashion, there are no laws that exist to protect a magician’s trade secrets; copyrights do not apply and patents require the magician to reveal the methods behind his trick. Unfortunately, secrecy between magicians does not expand the rate at which magicians can develop new tricks. Because of this, magicians have developed a system by which they can share information with each other but keep the public out. This is done predominantly through organizations with strict membership requirements. As magicians improve their professional and social rank they have the opportunity to prove their faithfulness to the magic industry and their skills as a magician. Once the elite magician community feels that an individual is no threat to their secrets, the new magician is invited into the tight social circle where ideas are shared and innovation prospers.

In both these examples, the sharing of ideas, whether occurring through theft of new fashion or done willingly between elite magicians, spurs new innovation. According to Drucker’s arguments, an increase in innovation through new ideas and knowledge in today’s world will ultimately improve the wealth of the world. This resembles how the discovery of new supple land helped societies of the past increase their economic potential. New innovation leads to considerable advancement for the industry as a whole, despite the fact that individuals within the system may be losing potential profits. In the cases above, innovative clothes manufacturers find themselves competing with those manufacturer’s who stole the new fashion concepts. The added competition, while it may reduce profitability by flooding the market with knock-off designs, ultimately drives the industry forward. Likewise, the magicians’ practice of sharing knowledge within tightly knit circles can reduce the profitability of lesser known magicians. These second rate performers, without access to the secret innovation factory of the elite, may fall victim to stagnant magic routines. Without the sharing of ideas on the elite level however, magic as a whole may lose its captivating novelty. In this case the public’s demand for magicians would drop and the industry as a whole would suffer from reduced profitability. The fashion and magic industries, while unique, serve as a model to help us understand the potential gains that can arise from sharing information.

Theft of equipment by businesses within undeveloped or developing countries can produce some of the same benefits that are evident in willful sharing. For situations of both stolen ideas and shared ideas, a larger group of individuals are focused on accomplishing the advancement of a product than would be if only a single company were working on a project. ‘Peer production’ is a phrase used to describe the efforts of a community on a single project. Yochai Benkler, in his essay “Coase’s Penguin” discusses some of the major benefits and requirements for peer production projects. Increased innovation, like that witnessed in the fashion and magic industries, is one such benefit. Improved innovation arises from the collaboration of multiple creative minds. Since each individual has a unique skill set, added personnel resources improve the productivity and quality of peer-produced projects. One notable difference between rival and non-rival scenarios (i.e. those with stolen ideas or willfully shared ideas) is that in rival situations those companies working on the advancement of a product are not sharing information with one another. As a result, rival situations do not produce the same level of productivity or efficiency as would perfect non-rivalries where teams share all information.

Jared Diamond discusses an alternative perspective that diverse teams, in fact, improve the quality of innovation. In early global development, European governments found added success in their expansion because their continent was divided between multiple small governments as opposed to the huge governments of the Far East. Diamond suggests that the Europeans discovered the new world before the Chinese because Columbus was able to go to multiple governments seeking funding for his trip. Conversely, the Chinese monarch stopped all development in overseas exploration. Because of the single government structure, any Chinese adventurers would not be able to find enough funding to explore. In this analogy, the multiple independent countries represent unique teams of developers.

Both peer-production projects and capitalistic projects have seen dominating success. For example, GNU Backgammon is peer-produced backgammon software that improves through open source development. Before GNU Backgammon became the premier freeware, SNOWY, a competing organization, controlled a majority of the backgammon market. SNOWY was a $400 software that allowed players to play backgammon against a computer. Once GNU Backgammon was started, the open source peer production platform quickly overtook SNOWY in the quality of its backgammon algorithms. Conversely, Linux, despite its success as a peer-production test-bed, still does not control nearly the same market share as Microsoft. The success of Microsoft demonstrates the power that monetary rewards can have in certain environments. Benkler makes reference to three motivating factors for labor: Monetary, intrinsic-hedonic, and social-psychological rewards. Peer production projects function largely off of the passions of the participants or the desire for notoriety in a field. Capitalistic companies function predominantly off of monetary rewards.

Peer production endeavors are as much an example of coopetition as they are competition. Coopetition, a blend of the words cooperation and competition, describes an example of game theory where two competing parties, when they work together, produce better results overall than if they were to both struggle in pure competition. The Automotive industry has seen great benefits from this strategy. Ford, Toyota, GM, and other car companies have been making partnerships in order to increase each of their ability in reaching new markets and new technologies. This allows individual companies to focus on what they do best and help each other through difficult times. For example, Toyota and Honda have teamed up to globally standardize their products. This allows them to outsource manufacturing if the need arises. When production was disrupted at Toyota due to an earthquake in Japan, the company was able to rely on Honda to help them through. Honda, in exchange, received payments for the manufacturing from Toyota. Through their partnership, both companies were able to prosper. The advancement of any industry is beneficial to all competing parties. If competitors are able to use coopetition to fill technology gaps within their own product lines, more time can be spent researching and developing new ideas and improving the product for the customer.

Game theory has been used in the past to help visualize the relationship between parties in regards to theft. In situations of theft, both the thief and victim can be seen as strategic players. In the example below, ‘Player 1’ is a highly technical developed society and ‘Player 2’ is a developing country that benefits from stolen technologies. Figure 1 shows the payoffs for each player given different approaches to business.

I don’t really feel like uploading this. If anyone ACTUALLY reads this and gets to this point e-mail me: MikeDiDonato AT Gmail D0T com and I’ll tell you what the figure was.
Figure 1

In this example, scenario a describes pure theft where all stolen products directly remove sale opportunities from the victim company; those sales (5) are gained by the thieving organization. In this case, the idea generating company would invest heavily in protecting their property. These expenses come directly off of that company’s bottom line. This can be seen in some businesses today where large amounts of capital are spent on protecting technology and intellectual property. Scenario b and c describe the cases where either pure capitalism prevails and all customers in both countries buy the cheaper goods, or international property laws prevail and copying parties are prevented from selling the stolen products. Scenario b is the worst case scenario for the patent holders in that all of their effort and knowledge benefit the lesser developed country that, with limited invested capital, can offer a cheaper price. Scenario c is the best scenario for the highly developed country as it returns the highest profit. Scenario d describes the unique case where the owner of the intellectual property stops attempting to control their intellectual property. In this scenario, market share for the patent holding company will likely decrease from a non-theft scenario but investment in property protection decreases to zero.

The non-zero sum game presented in the table above changes dramatically depending on what type of product is being produced. When cheap products or those with limited technology are being copied, scenario c, where intellectual property violation is minimized, is unlikely, as product duplication becomes significantly easier to accomplish. If the products are highly technical or extremely expensive, scenario b, where pirated products overtake the majority of the market, becomes unlikely as product duplication requires heavy initial investment. As stated, improvements in technology can shift products into different segments of complexity.

When looking at the chart, the sum of legitimate and illegitimate products provides a rudimentary understanding of total benefit to society. Even though the numbers in the chart are representative, this analysis still suggests theft of equipment increases the overall benefits to society. In the words of Boston Researcher Jane Barrett “if you just compete for a bigger slice of pie, you’re not making the pie any bigger.”

One intangible benefit not discussed in the game theory example is Drucker’s ideas that knowledge is bankable. As developing countries improve, whether by taking advantage of stolen intellectual property or through internal means, the country’s economic strength will increase. With this increase, more resources can be spent on improving knowledge. India, who openly disobeyed pharmaceutical patents for many years, has recently found the need to abide by intellectual property rights as businesses within the country have started putting out their own claims of intellectual property for new drug developments.

If we adopt the first interpretation of John Locke’s “Two Treaties of Government” the results of this study change dramatically. As discussed, in this interpretation man will only work provided he receives rewards for his labor. In the case of theft, the distribution of payoffs changes dramatically.

Here’s another figure I didn’t feel like uploading. Same deal as above.
Figure 2

Figure 2 describes this alternate possibility. Since idea generation is labor, if there is no reward for idea generation because thieving businesses steal both concepts and profits then innovation will drop off completely in any scenario where intellectual property is not maintained. In this simplified example, the only scenario where the patent holder will continue efforts in a competitive environment is one where patents are protected and rewards are certain.

Realistically, rewards for innovators are possible even when ideas are stolen, so the hypothetical situation presented above is not an accurate representation of how theft destroys innovation and production. In reality, the relationship between theft and innovation is likely a mix between both cases: where innovation and theft can coexist and where theft completely disrupts innovation.

In today’s global economy, intellectual property is extremely difficult to protect. For the foreseeable future, innovative companies and businesses will continue their struggle to stay ahead of those that copy their ideas. The world’s governments that can tolerate violations of intellectual property rights may find that the theft of intellectual property ultimately drives forward the global economy.

The expansion of peer production as a useable tool in business provides hope that new methods of motivating workers may help bring greater productivity and success to networked industries and those companies willing to work with their competition to advance technology.

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