Michael D. Moberly March 25, 2014 ‘A long form blog where attention span really matters’.
I found a 1999 paper authored by Merrill E. Whitney and James D. Gaisford (then) of the University of Calgary, titled ‘ Why spy? : An inquiry into the rationale for economic’ to be very intriguing, sufficiently so to write this post.
Peculiarly, economic espionage has been a topic which I have had consistent interest for 25+ years when I began designing and conducting my own (investigative) research directed to universities, startups, and larger corporations and cultivating ‘trust based relationships’ who would point me in particular directions so I could examine this phenomena from an unclassified position that went well beyond the scope of others.
I am very hard pressed to even suggest, on the most basic level, there is a rationale, economic or otherwise, for engaging in economic espionage, particularly as we have come witness how it has morphed today. One reality that I should think requires no persuasion whatsoever, is that industrial (economic) espionage and its close cousin product piracy and/or counterfeiting are certainly not particularly new activities as each have been consistent challenges almost since ‘man’ began writing on the walls of caves.
Admittedly, I was and remain variously intrigued by the audacity of Whitney and Gaisford to have thoughtfully engaged in the study of economic espionage in this manner, something which most countries intuitively find repugnant.
Whitney and Gaisford however, consider how economic espionage can yield desirable strategic affects as well as cost savings to favor firms within the spying country. No argument here, that does happen, but one important question is ‘which firms benefit’?
The spying country, they suggest, will typically gain, even though counter-espionage (information asset protection) programs and s will almost certainly today be conducted (in place) by the targeted countries and companies. When technologically advantaged (targeted) countries spy on one another, it is possible, Whitney and Gaisford point out, that both may ultimately – eventually be better off. The ‘better off’ in this instance, translates as the ‘transfer of technology’ which has occurred. Generally then, Whitney and Gaisford suggest, consumers may become a beneficiaries to economic espionage.
Perspectives on economic espionage…
In a classic sense, economic espionage is activities initiated – conducted by government entities on behalf of their domestic-based firms. In other words, it may be a strategy of sorts, to obtain marginal-cost reducing production technologies. To take this perspective further, Whitney and Gaisford suggest economic espionage may constitute a form of strategic (competitive advantage) trade policy!
- if spying unearths the blueprints of a product or source code for software, for example, the fixed costs associated with the R&D can be reduced for the domestic firms, i.e., the recipients – end users of the spying.
- in such instances, there are direct benefits accruing to the domestic firms located in the spying country, but there may be few, if any, strategic benefits because the behavior of the (recipient) domestic firms in their respective global markets may remain unchanged.
- on the other hand, economic espionage that gleans information about contract bids, marketing plans or strategic planning in general, or costs of foreign competitors may give rise to (some) strategic benefits in specific global markets, even though there are no direct benefits.
- lastly, if proprietary intellectual and structural capital, i.e., information about production technologies and processes of foreign firms is obtained, (through economic espionage) there will be a…
- direct benefit in the form of lower total costs for the domestic firms, and
- strategic effect on global markets, due to lower marginal costs…
True enough, it is difficult to (objectively, factually) determine the level of economic espionage that actually occurs, in large part due to its stealthy, asymmetric, and often times long term elements. Too, determining whether or how much growth – expansion of economic espionage has occurred is challenging due to the clandestine nature of economic and reluctance by victim companies to ‘go public’. Collectively, these factors, unless duly accounted for, precludes systematic empirical verification. But, as readers know, anecdotal accounts abound.
Whitney and Gaisford suggest government (national) spying may have advantages over corporate (industrial) espionage, i.e.,
- national spy agencies may be able to reap economies of scale and/or scope…
- information that is obtained by means of national government spying is (may be) non-competitive in the sense that it can (conceivably, theoretically) be used by all domestic firms (located in the national spying agency’s country)…
- government conducted espionage may yield positive social benefits even if the private benefit of corporate espionage to an individual firm is negative…
- conceivably, the (national spying agency’s) government would be able to the favorable effects of national spying on domestic consumers into account whereas this externality would (may) be ignored in the case of corporate espionage.
- in some countries though, such as the U.S., the business culture arms-length relationships between private companies and government may (will) make economic espionage by governments more problematic.
A business model for economic espionage, spying often pays well…
- ‘…penetration rate is the probability that a country’s agents will successfully penetrate and acquire the (targeted) new technology
- ‘…the marginal cost of spying always increases as the probability of penetration is increased, the average variable cost of spying is always increasing in the probability of penetration
- ‘…the extent of County X’s spying is inversely related to the difficulty of espionage because an upward shift in the marginal cost of the espionage function would lead to a lower optimum penetration rate
- ‘…it could be that the temporary glut of spying resources in the aftermath of the Cold War has lead to increased economic espionage because of unusually low marginal costs
- ‘…the presence of domestic consumers would weaken the case for a strategic export subsidy, because such a subsidy would (likely) raise domestic prices (therefore) domestic consumers stand to gain from economic espionage
- ‘…if the optimum penetration rate is positive, then espionage must generate a favorable strategic effect as well as a direct cost saving
Introducing counterespionage to thwart economic espionage, some perspectives…
- …the probability that Country X’s spies will be able to successfully penetrate Company B that is located in Country Y is (now) considered relative to the probability that Company B will be able to thwart Country X’ spies.
- …need to factor/calculate Country X’s cost of (their) economic espionage operations and Company B’s governments’ costs associated with counter-espionage.
- …the optimum expenditure on espionage is (usually) positive unless the marginal cost of spying is at least as large as the marginal benefit when both the penetration and interceptions rates are equal to zero.
- …even when Company B’s governments’ counter espionage initiatives are possible, spying remains beneficial to the consuming (spying) countries and County X, but harmful to the country in which Company B is located
Merrill E. Whitney and James D. Gaisford University of Calgary International Economic Journal, Volume 13, Number 2, Summer, 1999.‘ Why spy? : An inquiry into the rationale for economic’ .