Economic Espionage Outcomes: A Different Perspective…

This post represents a deeper dive into…Whitney and James D. Gaisford (then) of the University of Calgary, publish paper titled ‘ Why spy? : An inquiry into the rationale for economic espionage’.

Let me say at the outset…I am confident their conclusions would, very likely, be deemed absolute ‘gibberish’ to most, but nevertheless, intriguing in a perfect world.

Perhaps, peculiarly to some, the who, what, when, where, how, and the lossesattributed to economic espionage, along with related subjects, have been my consistent interest for 25+ years, and certainly remain so today.

Over the years, I have initiated and conducted, what I refer to as ‘go to ground’ investigative research projects…directed primarily to three types of entities which are routinely the targets of economic espionage, i.e., (1.) university-based research startups (RBSU’s), (2.) recent launches of small-medium sized enterprises, (SME’s) and (3.) large, usually  Fortune-ranked private sector corporations.

Of course, the specific business type – sector, as broadly described above…that (a.) may be targeted, and (b.) the intensity of their targeting – acquisition efforts, by (c.) globally diverse economic and competitive advantage adversaries, has (d.) multiple variables influencing the who, what, when, where, why, and how.

Professionally, I am hard pressed to buy into…Whitney and Gaisford’s rationale for governments – companies to arbitrarily engage in economic espionage, particularly as we witness the aggressivity and predatoriality which it manifests today.

One reality that I should think requires no persuasion whatsoever, is…  economic (industrial) espionage and its various ‘close cousin’ derivations, i.e., product piracy, counterfeiting, etc., are certainly not new phenomenon. Each have been consistent challenges almost since man-woman began ‘posting’ charcoal stick figures on cave walls.

Admittedly, I remain variously intrigued by the boldness of Whitney and Gaisford to…have engaged in the study of economic espionage in this manner, especially in a context which most countries – governments 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 the important questions are (a.) which firms benefit, (b.) why, and for what purpose, and (c.) doing so is categorically illegal.

The initiating (economic espionage) country, they suggest…will typically gain, even though counter-espionage (information asset protection) practices-procedures will generally be in place and practiced by the targeted companies.

When technologically advantaged (targeted) countries spy on one another… it is possible, Whitney and Gaisford suggest, both may ultimately – eventually be better off.  The ‘better off’ in this instance, translates, through the lens of Whitney and Gaisford as a form of ‘technology transfer’. Thus, Whitney and Gaisford claim, consumers may become the beneficiaries to economic espionage, ala the illegal transfer of other parties’ technology.

In the legal – statutory sense, and, I suspect there is no other, economic espionage represent…activities initiated, but not necessarily (always, directly) conducted, by a foreign entity, ala the end user – beneficiary. The outcomes – benefits – products of ‘successful’ acts of economic espionage may be a foreign government, or, either a ‘private or state sponsored company’ within or associated with a foreign government which happens to be an economic – competitive advantage – national security adversary, or some variation thereof.

It’s important to recognize the benefits – outcomes – products of – to acts of economic espionage…may be variations and/or intertwined combinations of the tangible and intangible.  The acquisition and application of which provide an economic and/or defense-military (competitive) advantage.

In other words, it may also be an economic strategy of sorts…that is, to obtain cost reducing – efficiency creating, or simply new, state-of-the-art technologies.

To take this perspective multiple steps further…Whitney and Gaisford suggest their view of economic espionage conceivably constitutes a form of strategic (competitive advantage) trade policy!

  • if, for example, spying unearths the blueprints of a product or source code for software, etc., the fixed costs associated with either can be reduced for the domestic firms, i.e., the recipients – end users of the spying.
  • in such instances, there may be direct-near term benefits accruing to the recipients located in the spying country, however, there may be few, if any, strategic-long term benefits because the behavior of the (recipient) domestic firms in their respective, no doubt, global markets may remain unchanged.
  • on the other hand, economic espionage (industry spying) that gleans information about contract bids, marketing plans, or strategic  planning, or business costs of foreign competitors,
    • this information may give rise to (some) strategic benefits in specific global markets, even though there are no direct-near term benefits.
  • lastly, if proprietary intellectual and structural capital (ala intangible assets) i.e., information about production technologies and processes of foreign firms, is obtained, (through economic espionage) there will likely be a…
    • direct and near term benefit in the form of lower total costs for the domestic firms (recipients) and
    • strategic – longer term effect on global markets, due to lower marginal costs.

True enough, it is difficult to (objectively, factually) assess-determine…the intensity and/or effectiveness of economic espionage activities directed toward U.S.-based businesses and universities.

In large part that’s due to the…stealthy, asymmetric, and often times long term – strategic nature – aspects of even conventionally conducted economic espionage, notwithstanding more current cyber components….

  • that said, any leadership team that assumes that conventionally conducted economic espionage, i.e., human intelligence, has wholly given away to the cyber side, will be vulnerable to very rude and very costly awakening.

Too, determining whether or how much expansion of economic espionage has occurred…presents other sets of challenges due, in no small part to a general reluctance of victim companies to ‘go public’.  Collectively, this factor, unless duly accounted for, all, but precludes systematic empirical verification.  But, as readers know, anecdotal accounts abound, which I routinely attach considerable credibility.

Whitney and Gaisford also suggest government (national) spying…may have advantages over corporate (industrial – economic) espionage, i.e.,

  • national spy agencies may be able to reap economies of scale and/or scope…
  • intellectual-structural capital that is obtained 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 sponsored – encourage – conducted economic espionage may yield positive social benefits even if the private benefit of corporate espionage to an individual firm is not specifically so positive…
  • conceivably, the (national spying entities) government would be able to utilize – exploit some of the favorable effects of national spying to domestic consumers.
    • whereas, the same would (may) be ignored in the case of corporate sponsored economic espionage.
  • in some countries though, such as the U.S., the business cultures’ arms-length relationships between private companies and government would likely make economic espionage by governments even 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 counter-espionage 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

NOTE : 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’ . 

Michael D. Moberly [email protected] St. Louis (originally posted) March 25, 2014 the ‘Business Intangible Asset Blog’ since May 2006, 650+ posts, ‘where intangible assets, business, and effective solutions converge’.

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