How counterfeiters stifle research and innovation

Innovation is key to strong economics, but where there is a lack of intellectual property rights and a high risk of counterfeiting, there is a reluctance to invest and innovate and, as a result, huge potential losses to a country’s economy.

• Strong IPR has a clear positive impact on innovation and economic growth
• Investors don’t trust countries with weak IPR
• Pharmaceutical companies are especially damaged by infringements

We often talk about the immediate and short-term economic impact of counterfeiting which includes huge losses of revenue for brands and businesses, lower taxes paid to governments, and the loss of legitimate jobs contributing to higher unemployment.

The effects of counterfeiting are complex and far reaching though. The illegal counterfeit trade also stifles research and innovation which is not just important for creativity, cultural diversity and the availability of better products and services for consumers, but also for the long-term growth of economies.

Innovation vital to strong economies

According to the International Chamber of Commerce, intellectual property protection actively promotes innovation. Research and development and other innovations flourish where there are strong intellectual property rights and companies realise there is more value from innovations protected by IPR than those which are not.

A report published by the group, which looked at the impact of IPR on innovation and economic growth, highlights the significant contributions of copyright-based industries to a country’s gross domestic product. In the EU for example, copyright-based industries and interconnected sectors account for 6.9% of the GDP while in the United States of America they account for 11.09% of the GDP.

These figures were based on just nine sectors which are involved in the development, production and sales of copyright-related material and including music, theatrical productions, film and video, radio and television, software and database, visual and graphic arts, and advertising services.

Less research has been done into what are known as ‘patent-intensive industries’ – pharmaceuticals, chemicals, aerospace, motor vehicles and electrical engineering – but these sectors are also thought to play a similarly significant role in propping up a country’s economy. Therefore the absence of businesses and entrepreneurs operating in these industries would leave a significant dent in the GDP.

Small and medium-sized enterprises can be particularly put off by the the risks of IPR abuses and left reluctant to engage in business activities or invest in research and development. The International Chamber of Commerce’s research into the impact of counterfeiting on EU SMEs highlights that counterfeiting stifles innovation, entrepreneurship and business initiatives as honest entrepreneurs are discouraged from investing in product and market development, particularly in knowledge-based industries.

The previously mentioned report by the ICC explained further that counterfeits stifle innovation by reducing the legal and economic framework for market-based incentives and rewards that then pay for research and development, make technologies more widely available through licensing mechanisms, increase society’s overall knowledge through the dissemination of information in patents applications and publications, and broaden the dissemination of government funded research and development.

However in protecting the profits of legitimate businesses, strong IPR allows for further investment in new ideas and product development. This incentive for development of and competition across new inventions, products, services and business models then encourages localisation and improves the quality and choice of products and services available to consumers. Research by World Trademark Review into the global economic and social impacts of counterfeiting and piracy backs this up. It concluded that as the weakening of IP rights reduces the incentives to innovate, this actually has a direct impact on consumer well being by limiting the range of products and services available to them as well as, in the long run, affecting economic growth.

Innovation and investment forced to go elsewhere

Weak IPR laws can actually damage a country’s ability to attract foreign direct investment and build hubs of business and innovation – why would companies invest in a country where their intellectual property can be more easily stolen.

The potential losses of this are huge. In the US alone, it is estimated that counterfeiting and piracy have caused the country to lose out on more than $100 billion in foreign direct investment. As a result,counterfeiting hurts societyas it loses out on the knowledge and innovation ‘spillovers’ that come with foreign direct investment.

Ensuring strong IPR laws and fostering innovation is arguably more important to lower and middle income countries as it is critical to their economic growth. The OECD carried out research into the technology transfer and economic implications of the strengthening of intellectual property rights in developing countries and found that IPRs can directly spur local innovation as well as stimulate the transfer of technologies that foster local innovation. This study found that stronger levels of patent protection was also positively associated with inflow of high-tech products such as pharmaceutical goods, computer services, and telecom equipment.

Certain sectors which are particularly IP-sensitive, such as pharmaceuticals, are far less likely to set up business in a country where intellectual property rights are not well enforced.

Fewer research resources

Pharmaceutical and biopharmaceutical industries are particularly threatened by the effects on counterfeiting on their ability to invest in research and development. According to a journal on the health and economic costs of counterfeit drugs, these industries spend an average of 15-17% of their revenues on research which is significantly higher than the spending of other industries. In 2006, the US pharmaceutical industry actually spent 22% of their sale profits on research and development.

However, pharmaceuticals is one of the most lucrative counterfeit industries and, while exact numbers vary from $75 billion to more recent industry estimates that put the sale of counterfeit pharmaceuticals between $163-217 billion (€150 – €200 billion), this represents significant losses in revenue for pharmaceutical producers. Counterfeiters are siphoning billions of dollars away from legitimate pharmaceutical companies each year leaving them with fewer resources and less incentives to invest in research and development. Long term, this could see consumers missing out on improved and more accessible drugs on the market.

Impact on creative industries and culture

The creative industries are also taking a hit. Creators rely heavily on copyright laws to produce culture content such as music, film and photographs so a lack of protection for their works and preventing subsequent imitations reduces the incentive for any creativity.

We have already seen how piracy is killing creativity across the music industry as labels increasingly move towards a production model which guarantees them chart success. The availability of free music content online, whether through sites like Spotify or illegal download sites, has removed the incentive to deviate from this ‘hit formula’ and left the industry less willing to take risks and with fewer resources to invest in nurturing new and diverse talent. The movie and television industry is arguably headed for a similar fate as studios increasingly rely on franchise productions to bring in box office takings.