Increase in the value of Intellectual Property Theft
September 2007
A series of recently released reports have identified a huge increase in the global cost of Intellectual Property (IP) theft, and recognise the damage that this can do to the health of both business, and national and global economies.
A conservative estimate puts the cost to just the US economy at $300 billion per year. Gieschen Consultancy, a company specialising in the provision of counterfeit intelligence analysis and security research, estimates that the cost to the Californian economy alone is $33.5 billion per year. The problem is not contained to the US, with the United Kingdom estimated to lose £11 billion per year due to counterfeiting and piracy.
The scale of IP theft is also increasing dramatically. It is estimated that 21% of all software installed in the US is pirated, though this pales in comparison with the 88% piracy rate in Russia. The Business Software Alliance estimates that the global rate of software piracy is currently around 65% of the total global market. The World Health Organisation has estimated that 15% of all pharmaceuticals are counterfeit, with the figure rising to 60% of all drugs in developing nations. The loss to the global music market is estimated to have spiralled to $4.5 billion per annum. The countries with the highest rate of IP theft tend to be developing countries with a more relaxed approach to the rule of law, such as India, Russia, China, Turkey, the Middle East and African countries. Pakistan is usually regarded as one of the worse offenders, with a general piracy rate of over 90%, leading to a conservative estimate of a loss of $1 billion in US tax revenue. India is another leader in piracy, with a general rate of 58% and a market for counterfeit music that is double the size of the legitimate music.
The impact that this has on an economy are significant. According to the World Economic Forum (WEF) Global Competitiveness Report, there is a very significant correlation between national protection of IP rights and national competitiveness. In 2004, the top 20-ranked countries for IP rights protection were all ranked in the top 27 nations in WEF's growth competitiveness index, while in contrast those nations with the weakest IP rights protection were all ranked in the bottom 36. It is clear that a greater focus on the protection of IP rights can have a significant effect on the success of a countries economy. South Korea has placed a huge emphasis on the enforcement of IP rights and development of innovation since the 1960's and has witnessed a subsequent explosion in national GDP from less than US$100 to over US$12,000.
It is estimated that technological innovation has contributed to over half of the annual growth of the US economy. IP dependent industries contribute more than €1.3 trillion to the economies of EU member states, and employ more than 5.2 million people. Consequently, a failure to protect IP rights at a national level can have an extremely damaging effect on a country's economy. Companies are far less likely to invest in production or R&D, or transfer advanced technology to a country where there is a high chance that their technology will be stolen. Domestically, a lack of protection of IP rights can also slow innovation from national companies and discourages internal investment. Companies are unable to compete with the prices charged by IP infringers as they do not have to meet the cost of developing the product sold. The loss of tax revenue can also harm investment in national infrastructure.
Exports are also harmed by counterfeit goods, and safety issues can lead to a dramatic loss of consumer confidence. There is also a significant link between pirated products, and organised crime and terrorism.
Ian Lewis, Chief Executive of SAMIAN Underwriting Agencies, the provider of market leading intangible asset insurance solutions, recognises the dangers posed by this increase. He commented "These new figures indicate what has long been known in the Intellectual Property field as an ever increasing, ever more global, problem. The responsibility is now on the insurance market to ensure that we can deliver an effective affordable solution to these problems to ensure that companies can operate in developing markets, secure in the knowledge that they are protected from the financial cost of litigation to protect their IP. As countries tighten their IP laws, the opportunities for companies to regain some of the losses suffered in recent years to piracy will increase. Our innovative insurance products, GuardTM, ProtectorTM and EnforcerTM allow companies to be sure that, if the need does arise, they will not have to meet the cost of IP litigation. Not only can we protect them from the financial cost of enforcing their IP, but in the event that litigation is begun against their IP we can provide cover for this as well. The vital protection that our products provide enables companies to operate in these vital markets, but gives both shareholders and managers confidence that they will not have to meet the potentially devastating costs that ensure from litigation."
He went on to say that he expected to see the recent increase in demand for this type of product to continue as more companies not only become aware of the value of their IP, but also the true financial cost of enforcing it against a determined pirate.