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Articles - How Market Smarts Can Protect Property Rights

How Market Smarts Can Protect Property Rights
By Bharat Anand and Alexander Galetovic
Harvard Business Review – December 2004

It may be that information wants to be free, as technology guru Stewart Brand contends. But when it comes encased in patent and copyright protection, it needs pirates and freelance copyists to facilitate its escape.   In developed nations, it is the pace of innovation that enables the pirates and bedevils the owners of intellectual property: a new technology like file sharing can threaten the viability of an entire industry.  In developing nations, where the incidence of theft is far greater, the problem is halfhearted enforcement, weak sanctions, and laws that are full of holes.  Nintendo estimates that counterfeiting in China alone cost it $720 million in sales last year.  Perhaps five out of six motorcycles sold in China bearing Yamaha nameplates are fakes. And, according to the trade group Business Software Alliance, more than half of all installed software programs in Asia Pacific, Latin America, and Eastern Europe are pirated versions of some company’s legal property. The challenge that owners of intellectual property face is that it’s more expensive for them to produce a first copy than it is for counterfeiters to reproduce it. In the case of digital intellectual property, the expense of reproduction can be minuscule.

Confronted with such hazards in developing countries, many companies hesitate to market their wares or establish plants there, choosing instead to wait until they are extended the legal protections found in the developed world.  China’s accession to the WTO, for example, entails committing itself to safeguarding foreign intellectual property.  And as China’s own companies begin to innovate and turn their innovations into sought-after product lines, it’s conceivable that its government will recognize an element of self-interest in protecting IP generally.  In the meantime, companies that hesitate to do business there are forgoing immense economic opportunities their bolder counterparts have already seized.

Why have some companies ventured where others have feared to tread?  To begin with, they know that even in the best of circumstances legal protections are far from ironclad and that therefore a lack of them isn’t reason enough to hang back.  Litigation is slow, blunt, and costly, and, because of intellectual property’s exclusiveness, a by-no-means-certain way, even in the United States, of establishing that infringement (which may be subtle) has actually occurred.

More fundamentally, the reach of IP laws is limited.  So, for example, patented devices may be reengineered by third parties, which will not be deemed infringers if those devices perform equivalent processes differently.  As for copyright, it protects only the expression of an idea, not the idea itself; infringement hasn’t occurred if the plaintiff cannot prove the defendant’s access to the material in question; and, under the fair use doctrine, users can borrow some indefinable portion of the protected material with impunity.  Many of these “borrowers” are not pirates at all but the injured business’s own customers, who make copies for their own convenience and enjoyment, not in pursuit of illegal profits.

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