Case Study: It's a Knockoff World. Please read the case study carefully and respond to the following: • Research China's current policies on IP protection. Discuss the impact of the current IP policies to an MNE doing business in China. • How does China rate against other Countries in protecting IP of an MNE? • How is the legal environment in China dealing with IP protection for an MNE? The analysis is to be completed in current APA format with references.
Case It’s a Knockoff World Companies are dogged by piracy—the illegal imitation, copying, or counterfeiting of their registered products. It’s a tense issue given that it cuts to issues of innovation, history, culture, politics, and prosperity. Making matters worse is that pirates, besides being everywhere, come in every form: individuals making unauthorized copies at work, imitators laboring in dingy sweatshops, and hardened criminals running global networks.
The problem, basically, is straightforward: intellectual property (IP) in the form of books, music, product designs, brand names, process innovations, software, film, and the like is tough to conceive but ridiculously easy to copy.151 Moreover, notwithstanding moral shortcomings, pirates do not lack initiative or imagination. In our knockoff world, if it’s being made, it’s being faked. Fair game includes virtually everything—from the humble aspirin to the flashy Ferrari.152 And, for the kicker, knockoffs sell for a fraction of the price of the real thing to eager buyers worldwide.
Big Money, Big Risks IP theft is big business. Globalization and the Internet fuel the perfect storm, the former moving much of the world’s manufacturing to countries with poor IP protection, the latter providing cheap, easily accessible marketing platforms and distribution channels. The costs of counterfeit IP, from lost sales, eroded consumer confidence, diminished brand reputation, dangerous products, enforcement expenses, and legal costs, is staggering. The International Anti-Counterfeiting Coalition (IACC) estimates that international trade in illegitimate goods runs more than US$1.75 trillion a year—approximately 7 percent of world merchandise trade. To top it off, piracy has grown more than 10,000 percent in the past three decades—it was a paltry $5.5 billion in 1982.153
Piracy grows because counterfeiting is astoundingly profitable; gross margins of 500 to 5,000 percent are common.154 Counterfeit medicines are more profitable than heroin, copywatches may run a couple of bucks to make but sell for $20 in Beijing’s Silk Market and $250 on Internet sites, and sales of high-end counterfeit software rival the return from cocaine trafficking.155
The lucrative rewards of piracy entice even notorious drug cartels to diversify. Mexico’s La Familia and Los Zetas, for example, generate hundreds of millions of dollars selling counterfeit DVDs. Their expanding operations have made Mexico the piracy capital of Latin America. The cartels export so many bootleg movies to Central America, for example, that some studios have stopped shipping their products there. Also, whether buying it in Cancun, Cozumel, Monterrey, or Tijuana, the bootleg DVD more than likely bears a stamp indicating it was distributed by La Familia (a butterfly) or Zetas (a stallion).156 Similarly, the cartels pirate software. La Familia sells counterfeit Microsoft software through kiosks, markets, and stores in the Michoacán region. Adding insult to injury, it stamps counterfeit Office discs with its “FMM” logo.157
Microsoft’s predicament in China highlights common problems. Copies of its Office and Windows programs are peddled in market stalls for a few dollars, a fraction of their retail price. Rampant software piracy means Microsoft’s revenue in China is a small fraction of its U.S. sales—even though personal-computer sales are higher in China. Early on, explained its former CEO, Microsoft’s total revenue in China, with its population of 1.34 billion, was less than what it collects in the Netherlands, a country of fewer than 17 million.158 This situation is not Microsoft’s particular problem; thousands of companies in dozens of countries struggle with the same challenge.
Nothing Is Off-Limits Many think piracy is the problem of snobbish, expensive brands. Certainly, counterfeits target high-end brands—the top 10 brands counterfeited include Microsoft, Nike, Adidas, Burberry, Louis Vuitton, and Sony. Luxury fakes, however, account for about 5 percent of the problem. The remaining 95 percent include copies of everyday products. Nothing is off-limits; “If it’s making money over here in the U.S., it’s going to be reverse-engineered or made overseas.”159
The pharmaceutical supply chain is a pirate’s paradise and counterfeiting threatens global health and safety; counterfeit medicines annually kill tens of thousands and it’s anyone’s guess how much fake medicine is floating around the world today. The Food and Drug Administration estimates that counterfeits account for 10 percent of all drugs sold in the United States. Studies of anti-infective treatments in Africa and Southeast Asia peg up to 70 percent as fake.160 The United Nations estimates that half of the anti-malarial drugs sold in Africa are counterfeits. Imitations of Pfizer’s best-selling drugs show up in legitimate supply chains in more than 50 countries.161
Waging a Multifront War Companies, industry associations, and governments use a battery of weapons to wage war on pirates. An enduring approach relies on dispatching squads of lawyers on search-and-destroy missions. Big companies lawyer-up to lobby officials, monitor the web, prod Internet providers to take down copycat sites, and file injunctions against illegal sellers. UGG Australia began enforcing its IP upon realizing the prevalence of counterfeit boots. It has shut down thousands of websites selling fake UGGs and blocked many thousands more online listings. Liz Claiborne, owner of the Juicy Couture and Kate Spade brands, fights legions of websites selling counterfeits; it removed 27,000 auction listings of counterfeits in just a few months.
Some companies prefer high-tech assault. One approach embeds radio frequency identification (RFID) chips in the product packaging to allow precise tracking; IBM, 3M, and Abbot Laboratories are pacesetters. Others provide software programs that track products from factories to consumers. In Ghana, mPedigree lets consumers use their mobile phones to confirm the product is genuine; buyers call in a special code embossed inside the package to the vendor, who then verifies its authenticity.162 Moving forward, some anticipate weaving microscopic markers into a product’s packaging.
Governments, fearful of losing tax revenues and pressed by legitimate businesses, devise aggressive protection programs. The European Union ranks IP theft as a high priority.163 The United States has elevated software piracy from a misdemeanor to a felony and boosted enforcement efforts by threatening to sanction notorious pirates with records of “onerous and egregious” IPR violations (including countries such as China, Russia, Argentina, India, Thailand, Turkey, and Ukraine). Likewise, its Federal Drug Administration has opened offices in China, India, South Africa, and Mexico, among others, in effect taking the fight to the frontier. On other fronts, rhetoric escalates. The U.S. Trade Representative, for instance, declared, “We must defend ideas, inventions, and creativity from rip-off artists and thieves.”164
MNEs, officials, and trade associations lobby transnational institutions to apply stronger tools. Industry associations, like the IACC, spearhead efforts to toughen laws. Governments worldwide provide global services in public policy, business development, and consumer education. The World Intellectual Property Organization (WIPO) fortifies IP treaties and spurs members to bolster antipiracy programs. Likewise, the WTO applies the Trade-Related Aspects of Intellectual Property Rights (TRIPS) program to regulate enforcement, which requires member nations to protect and enforce IPRs according to global, not local, standards.
A barrage of legal assaults, novel technologies, smarter investigations, diplomatic efforts, industry initiatives, consumer education, stronger IP policies, aggressive law enforcement, and concerted political, commercial, and institutional action, one would think, should prove more than sufficient. Then, to make things a bit more interesting, add in the firepower of the global reach of vigilant MNEs, high-profile legal proceedings, increased government cooperation, criminalization of piracy, and tougher trade agreements. Such a shock-and-awe campaign should devastate the pirates, right? Surprise, surprise: Piracy continues to grow at an increasing rate. For instance, in 2009, Pfizer found counterfeit versions of 20 of its medicines in 81 countries. In 2012, Pfizer found 60 fakes in 106 countries. In 2015, Pfizer found 78 fakes in 109 countries.165
“The Bandits Are Everywhere” The global cat-and-mouse game between MNEs and pirates, far from winding down, escalates. Booming piracy in big, fast-growing emerging markets like China and India spells big, fast-growing trouble. As more people enter the global market, many of them are eager to consume Western brands despite income constraints. Experts warn that the resulting quest for low prices turbocharges piracy.
In addition, crafty pirates quickly overcome IP defenses. They crack licensing codes, duplicate holograms, falsify e-mail headers, and utilize crypto-currencies. Staying one step ahead of the IP police is a widespread competency. “Like drug trafficking, the counterfeiting problem is so massive [that] you don’t know how to get a handle on it. The bandits are everywhere.”166 Worrisomely, successful pirates evolve into sophisticated entrepreneurs. “When you are dealing with high-end counterfeits, you are talking about organizations that have a full supply chain, a full distribution chain, a full set of manufacturing tools all in place and it is all based on profits.”167 Lamented one analyst, “Counterfeiting is like a balloon filled with water. You push it on one side, but when you remove your hand, it bounces back even stronger.”168
Piracy gets a huge boost from the increasing availability of counterfeit goods through Internet channels, such as P2P file-sharing sites, mail order sites, or auction sites. Outgunned and outfoxed, some companies surrender. Foley & Corinna, a high-end handbag maker, explained that as it saw more Internet fakes, it stopped looking altogether. “It’s just too frustrating. You can try to do something, but it’s so big and so fast.”169 Then again, there are those who treat IPR as the price of doing business. Despite everyday piracy of his products in the Chinese market, an executive reasoned that the profitability of his legal sales more than offset the losses due to counterfeits.170
Is Piracy Inevitable? The pervasiveness of piracy, in the face of aggressive lawyering, sophisticated tracking and tagging technologies, database software, and security controls, poses profound questions for protecting IPRs. Some worry that different legal legacies and political ideologies among countries complicate basic issues. TRIPS, by standardizing codes and norms, should have settled such troublesome issues. Legal and operational boundaries have limited its impact.
Others fear that the antipiracy war may already be lost. Evidently, a not-too-small number of consumers and businesses around the world have few ethical qualms about using counterfeits. Take software, for instance. Global software piracy is rampant. In 2013, the worldwide PC software piracy rate hit 43 percent. Put differently, of all the packaged software installed on PCs worldwide, 43 percent was obtained illegally, at a cost of US$62.7 billion in lost revenue (up from losses of $29 billion in 2003). For many nations, such as Armenia, China, Indonesia, Nigeria, Thailand, Ukraine, Venezuela, and Vietnam, software piracy rates top 70 percent. Even the best-behaved nations, like France, Japan, and the United States, report software piracy rates north of 18 percent.171 Consequently, Microsoft’s biggest rival is not another software company—it is counterfeiters.
Ultimately, the quest to live prosperous lives on tight budgets pushes people to seek counterfeits. Similarly, some in collectivist cultures reason that IP holders should honor society by abandoning their profit-maximizing business models. Sharing knowledge to benefit all, not protecting it for personal gain, is the moral imperative. But, counter others, without protection, ultimately there will be no IP to share or, for that matter, steal.
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