Rationale for Theft Of Intellectual Property…

In light of the economic sanctions – tariffs imposed on China for theft of U.S. businesses intellectual property…I chose to re-read a paper titled ‘Rationale For Economic Espionage’.

The paper, authored in 1999 by Merrill E. Whitney and James D. Gaisford…(then) of the University of Calgary, delivers various premises, whether one ‘buys into them or not’, I believe, are worthy of bringing to the attention of this blogs’ readers.

Admittedly, I am hard pressed to suggest there is any rationale…economic or otherwise, for engaging in theft of intellectual property (IP), particularly as we have come to witness how it has morphed today into, very likely, a 100+ country business.  https://kpstrat.com/wp-admin/post.php?post=2688

One reality that I should think requires no persuasion whatsoever, is that…industrial (economic) espionage, of this type, and its close cousins, product piracy and counterfeiting, are certainly not particularly new activities, as each have been consistent challenges almost since ‘man’ began writing on the walls of caves.

Espionage, as this, and the numerous aspects related to its’ evolution and execution…are subjects which I have had consistent interest since the late-1980’s, well before the Economic Espionage Act (EEA) was passed into law in the U.S. on October 11, 1996, (Pub.L. 104–294, 110 Stat. 3488)

During this time I independently developed and undertook multiple and often, simultaneous investigative research initiatives…on the subject of (domestic) economic espionage. My primary research interests then, and remain largely focused today, on university-based research and the various types of research-based startups that emerge and endeavor to monetize – commercialize a product or service.  https://kpstrat.com/wp-admin/post.php?post=154

I commenced my research into theft – infringement – misappropriation of proprietary information and IP by respectfully cultivating numerous trust-based relationships…with knowledgeable (public, private sector) practitioners and leaders.  Most, upon recognizing the authenticity which I was approaching this important research, would discuss some of their experiences and routinely exhibit further trust by pointing me in particular-directions, so to speak, but, never ‘crossing the line’ of breaching their oaths or security clearances.

In many instances, their guidance included…introductions to knowledgeable others whom I would then seek more conversation and insight independently.

Collectively, this allowed me to examine economic espionage, i.e., theft of intellectual capital, ala intellectual properties in unclassified contexts that often progressed well beyond the scope of what other researchers had, thus far, been able.

I remain variously intrigued by the audacity of the aforementioned authors; Whitney and Gaisford…to have titled their book ‘Rationale For Economic Espionage’ which, in that context, every country and company I am familiar, intuitively finds repugnant.

Whitney and Gaisford’s basic argument…presented in their paper, considers how economic espionage can – may yield desirable strategic affects, and cost savings, that favor firms within the spying country. Duh! No argument here. That, obviously occurs.  But one important question is ‘which firms benefit’?

The spying country, the authors suggest…will typically gain, even though countering information asset safeguards, will, almost certainly be in place. That’s aside from conventional IP enforcements, i.e., registered patents, copyrights, trademarks, and trade secrecy, by countries and companies which are the targets.  Of course, any assumption that a victim business (of IP theft) will ‘return to whole’ following a breach, is wishful thinking at best.

When technologically advantaged (targeted) countries engage in ‘economic espionage’ against each another…not terribly unlike what has been occurring for hundreds of years, it is possible, Whitney and Gaisford point out, that both (countries) may ultimately – eventually be better off. The ‘better off’ in this instance, translates as the ‘transfer of technology’ which, as most know occurs routinely and often illegally. Generally, then, Whitney and Gaisford suggest, more prospective consumers may become beneficiaries to acts of economic espionage or technology transfer!

In the classic sense, economic espionage consists of activities initiated and/or conducted by…government sponsored-supported-guided entities, generally to benefit one or more of their domestic-based firms, i.e., achieving far less costly competitive advantages. More specifically, in many instances economic espionage represents a strategy of sorts, to obtain marginal-cost reducing production ready technology. To take this perspective further, Whitney and Gaisford suggest economic espionage may constitute a form of strategic (competitive advantage) trade policy, that is…

  • 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 firm recipients – end users of the spying.
  • in such instances, there are clear and ‘direct benefits’ accruing to the domestic firm recipients headquartered in the spying country, but there may be few, if any, ‘strategic benefits’ accruing to those firms because their business behaviors in global markets may not change. (In other word, the ‘direct benefits’ may not be leveraged beyond ‘internal use only’.)
  • on the other hand, economic espionage that gleans insights to a targeted company’s contract bids, marketing plans, strategic planning, or costs vis-à-vis foreign – global 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 (recipient) firms, and
    • strategic effect on global markets, due to lower marginal (production) costs.

Based on personal experience, it is difficult to (objectively, factually) determine the level – cost of economic espionage to U.S. based companies…there are numerous reasons for this. The more obvious one’s is the stealthy, asymmetric, and often-times long term aspects-components necessary for effective economic espionage. Similarly, determining whether or how much growth – expansion of economic espionage has occurred is challenging due again to its clandestine nature, but also various reluctance by targeted-victim companies to ‘go public’ with admissions of loss which may trigger reputation risk, among other adversities. Collectively, these factors, unless duly accounted for, generally preclude systematic empirical verification of the volume of economic espionage and/or theft of intellectual properties beyond the anecdotal, which readers of this blog know, anecdotal accounts abound.  https://kpstrat.com/wp-admin/post.php?post=2675

Whitney and Gaisford go on to suggest government initiated – sponsored IP theft, may have some advantages over corporate (private sector) spying, i.e.,

  • government spy agencies may be able to reap economies of scale and/or scope.
  • information that is obtained by means of government sponsored economic espionage-spying may be non-competitive in the sense that what government (agency) sponsored economic espionage can (conceivably) gain, can be variously dispersed to all relevant companies located in the spying agency’s country.
  • economic espionage conducted by a government agency may yield – drive positive social benefits even if the benefits emerging from (private sector) company-to-company economic espionage produces little, or no benefits.
  • conceivably, government agency spying could deliver – disperse favorable effects to domestic consumers, whereas, such benefits may be wholly ignored in instances of private sector company-to-company economic espionage.
  • in some countries though, such as the U.S., the long-standing arms-length relationship between private and government sectors would make dispersal of any benefits of economic espionage gleaned from – initiated by our government problematic.

From a business model perspective, economic espionage often pays well, because…

  • ‘…the penetration rate is the probability that another country’s government agents will successfully penetrate and acquire the (targeted) new technology and/or intellectual property.
  • ‘…the marginal cost of engaging in economic espionage generally increases as the probability of penetration is increases, thus, the average variable cost of economic espionage generally increases in proportion to the probability of (successful) penetration and acquisition of technologies and/or intellectual property.
  • ‘…the extent of another country’s government directed economic espionage is inversely related to the difficulty of penetration and acquisition because an upward shift in the marginal cost of the economic espionage function would lead to a lower optimum penetration rate.
  • ‘…it could be that increased expenditures by governments to engage in some form of economic espionage, especially following the Cold War, has led to significant increases in economic espionage because of unusually low marginal costs of doing so.
  • ‘…the consistency in a volume of domestic consumers (beneficiaries of economic espionage) would likely weaken arguments for a country to impose a strategic export subsidy, because such a subsidy would (likely) raise domestic prices, therefore, domestic consumers stand to gain from effective and persistent economic espionage.
  • ‘…if the optimum penetration – acquisition rate for economic espionage is positive, then economic espionage must generate a favorable strategic effect as well as direct cost savings to its beneficiaries.

So, how about negotiating a no-economic espionage treaty, in lieu of sanctions…yea, this sounds silly doesn’t it?, because some sort of economic espionage will likely remain a reality. And, even if economic espionage were sufficiently transparent, by-virtue of a ‘no-spy’ treaty, there would very likely be issues of time inconsistency and possibly reparations that must be dealt with in negotiating such a treaty.

Initially though, a no-economic espionage treaty might be advantageous to all parties, and may stimulate R&D activities respectively, but once the R&D costs were sunk, each technology producing country would (likely) have an incentive to renege on the no-spying treaty.

Michael D. Moberly St. Louis March 22, 2018 [email protected] ‘The Business Intangible Asset Blog’ since May 2006 https://kpstrat.com/blog  where one’s attention span, intangible assets, and solutions converge!

Readers are invited to explore other papers, books, and blog posts I have published at https://kpstrat.com/blog/papers

The paper cited in this blog post was authored in 1999 by Merrill E. Whitney and James D. Gaisford (then) of the University of Calgary and is published in the International Economic Journal, Volume 13, Number 2, Summer, 1999)

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