Intellectual Property: Insights Gained from Efforts to Quantify the Effects of Counterfeit and Pirated Goods in the U.S. Economy
Published: 2013-07-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States is an acknowledged global leader in the creation of intellectual property. According to the Federal Bureau of Investigation, IP theft is a growing threat which is heightened by the rise of the use of digital technologies. IP is any innovation, commercial or artistic, or any unique name, symbol, logo, or design used commercially. IP rights protect the economic interests of the creators of these works by giving them property rights over their creations. Cyber attacks are one way that threat actors--whether nations, companies, or criminals--can target IP and other sensitive information of federal agencies and American businesses. While bringing significant benefits, increasing computer interconnectivity can create vulnerabilities to cyber-based threats. GAO was asked to testify on efforts to estimate the economic impacts of theft of intellectual property. Accordingly, this statement discusses (1) the economic significance of intellectual property protection and theft on the U.S. economy and (2) insights from efforts to quantify the economic impacts of counterfeiting and piracy on the U.S. economy. This statement is based on products GAO issued from April 2010 through June 2012 on the economic impacts of theft of intellectual property and on cyber threats and economic espionage.
section_title: What GAO Found
paragraphs: In April 2010, GAO reported that intellectual property (IP) is an important component of the U.S. economy and IP-related industries contribute a significant percentage to the U.S. gross domestic product. IP-related industries also pay significantly higher wages than other industries and contribute to a higher standard of living in the United States. Ensuring the protection of IP rights encourages the introduction of innovative products and creative works to the public. According to experts and literature GAO reviewed, counterfeiting and piracy have produced a wide range of effects on consumers, industry, government, and the economy as a whole. The U.S. economy as a whole may grow more slowly because of reduced innovation and loss of trade revenue. To the extent that counterfeiting and piracy reduce investments in research and development, companies may hire fewer workers and may contribute less to U.S. economic growth, overall. Furthermore, as GAO reported in June 2012, private sector organizations have experienced data loss or theft, economic loss, computer intrusions, and privacy breaches. For example, in February 2011, media reports stated that computer hackers had broken into and stolen proprietary information worth millions of dollars from the networks of six U.S. and European energy companies.
Generally, as GAO reported in April 2010, the illicit nature of counterfeiting and piracy makes estimating the economic impact of IP infringements extremely difficult. Nonetheless, research in specific industries suggests that the problem is sizeable, which is of particular concern as many U.S. industries are leaders in the creation of intellectual property. Because of the difficulty in estimating the economic impact of IP infringements, assumptions must be used to offset the lack of data. Efforts to estimate losses involve assumptions such as the rate at which consumers would substitute counterfeit for legitimate products, which can have enormous impacts on the resulting estimates. Because of the significant differences in types of counterfeited and pirated goods and industries involved, no single method can be used to develop estimates. Each method has limitations, and most experts observed that it is difficult, if not impossible, to quantify the economy-wide impacts.
section_title: What GAO Recommends
paragraphs: GAO is not making any new recommendations in this statement.

section_title: Letter
paragraphs: Thank you for the opportunity to testify at today’s hearing on cyber  espionage and the theft of U.S. intellectual property and technology.
Intellectual property (IP) plays a significant role in the U.S. economy, and  the United States is an acknowledged leader in its creation. IP is any  innovation, commercial or artistic, or any unique name, symbol, logo, or  design used commercially. IP rights protect the economic interests of the  creators of these works by giving them property rights over their  creations. The federal government grants IP protection through patents,  copyrights, and trademarks, and takes enforcement actions that range  from seizing IP-infringing goods to prosecuting alleged criminals.
According to the Federal Bureau of Investigation, IP theft is a growing  threat which is heightened by the rise of the use of digital technologies.  The increasing dependency upon information technology systems and  networked operations pervades nearly every aspect of our society. In  particular, increasing computer interconnectivity—most notably growth in  the use of the Internet—has revolutionized the way that our government,  our nation, and much of the world communicate and conduct business.  While bringing significant benefits, this dependency can also create  vulnerabilities to cyber-based threats. Cyber attacks are one way that  threat actors—whether nations, companies, or criminals—can target the  intellectual property and other sensitive information of federal agencies  and American businesses. According to the Office of the National  Counterintelligence Executive, sensitive U.S. economic information and  technology are targeted by intelligence services, private sector  companies, academic and research institutions, and citizens of dozens of  countries.
While we have not conducted an assessment of the economic impact of  cyber espionage, our work examining efforts to quantify the economic  impact of counterfeited and pirated goods on the U.S. economy can  provide some insights on estimating economic losses. Specifically in my  testimony today, I will discuss (1) the economic significance of intellectual  property protection and theft on the U.S. economy and (2) insights from  efforts to quantify the economic impacts of counterfeiting and piracy on  the U.S. economy.
My remarks are based on two previous GAO products issued from April  2010 through June 2012. For our April 2010 report assessing the  economic impacts of theft of intellectual property on the U.S. economy,  we interviewed officials and representatives from U.S. government  agencies, industry associations, nongovernmental organizations,  academic institutions, and a multilateral organization, and we reviewed  documents and studies quantifying or discussing the impacts of  counterfeiting and piracy on the U.S. economy, industry, government, and  consumers. We conducted a literature search of studies and estimates of  the economic impact of IP infringements published since 1999 to examine  various aspects of the economic impacts of counterfeiting and piracy, and  to identify other insights about the role IP plays in the U.S. economy. We  also interviewed subject matter experts from a range of governmental,  nongovernmental, academic, and industry sources, and Organisation for  Economic Cooperation and Development (OECD) officials to discuss  efforts to quantify the economic impacts of counterfeiting and piracy and  to obtain their views on the range of impacts of counterfeits and piracy,  insights on counterfeiting activities and markets, and the role of IP in the  U.S. economy. For background information on cyber threats, we relied on  GAO’s June 2012 testimony on cyber threats and economic espionage.We conducted all of this work in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Both government and private entities increasingly depend on  computerized information systems to carry out operations and to process,  maintain, and report essential information. Public and private  organizations rely on computer systems to transmit sensitive and  proprietary information, develop and maintain intellectual capital, conduct  operations, process business transactions, transfer funds, and deliver  services. In addition, the Internet serves as a medium for hundreds of  billions of dollars of commerce each year.
Cyberspace—where much business activity and the development of new  ideas often take place—amplifies potential threats by making it possible  for malicious actors to quickly steal and transfer massive quantities of   Threat actors  data while remaining anonymous and difficult to detect.may target businesses, among others targets, resulting in the  compromise of proprietary information or intellectual property. In addition,  the rapid growth of Internet use has significantly contributed to the  development of technologies that enable the unauthorized distribution of  copyrighted works and is widely recognized as leading to an increase in  piracy. Digital products are not physical or tangible, can be reproduced at  very low cost, and have the potential for immediate delivery through the  Internet across virtually unlimited geographic markets. Sectors facing  threats from digital piracy include the music, motion picture, television,  publishing, and software industries. Piracy of these products over the  Internet can occur through methods including peer-to-peer networks,  streaming sites, and one-click hosting services.
section_title: Economic Significance of Intellectual Property Protection and Theft
paragraphs: As we reported in April 2010, IP is an important component of the U.S.  economy and IP-related industries pay higher wages and contribute a  significant percentage to the U.S. economy. However, the U.S. economy  as a whole may grow at a slower pace than it otherwise would because of  counterfeiting and piracy’s effect on U.S. industries, government, and  consumers.
subsections: section_title: Importance of IP Has Long Been Recognized in the United States
paragraphs: The importance of patents and other mechanisms to enable inventors to  capture some of the benefits of their innovations has long been  recognized in the United States as a tool to encourage innovation, dating  back to Article 1 of the U.S. Constitution and the 1790 patent law.  Ensuring the protection of IP rights encourages the introduction of  innovative products and creative works to the public. Protection is granted  by guaranteeing proprietors limited exclusive rights to whatever economic  reward the market may provide for their creations and products.
As we reported in April 2010, intellectual property is an important  component of the U.S. economy, and the United States is an  acknowledged global leader in the creation of intellectual property.  According to the United States Trade Representative, “Americans are the  world’s leading innovators, and our ideas and intellectual property are a  key ingredient to our competitiveness and prosperity.” The United States  has generally been very active in advocating strong IP protection and  encouraging other nations to improve these systems for two key reasons.  First, the U.S. has been the source of a large share of technological  improvements for many years and, therefore, stands to lose if the  associated IP rights are not respected in other nations. Secondly, a  prominent economist noted that IP protection appears to be one of the  factors that has helped to generate the enormous growth in the world  economy and in the standard of living that has occurred in the last 150  years. This economist pointed out that the last two centuries have created  an unprecedented surge in growth compared to prior periods. Among the  factors attributed to creating the conditions for this explosion in economic  growth are the rule of law, including property rights and the enforceability  of contracts.
section_title: The U.S. Economy May Experience Slower Growth Due to Lost Sales and Reduced Incentives to Innovate
paragraphs: The U.S. economy as a whole may grow at a slower pace than it  otherwise would because of counterfeiting and piracy’s effect on U.S.  industries, government, and consumers. As we reported in April 2010,  according to officials we interviewed and a 2008 OECD study, to the  extent that companies experience a loss of revenues or incentives to  invest in research and development for new products, slower economic  growth could occur. IP-related industries play an important role in the  growth of the U.S. economy and contribute a significant percentage to the  U.S. gross domestic product. IP-related industries also pay significantly  higher wages than other industries and contribute to a higher standard of  living in the United States. To the extent that counterfeiting and piracy  reduce investments in research and development, these companies may  hire fewer workers and may contribute less to U.S. economic growth,  overall. The U.S. economy may also experience slower growth due to a  decline in trade with countries where widespread counterfeiting hinders  the activities of U.S. companies operating overseas.
The U.S. economy, as a whole, also may experience effects of losses by  consumers and government. An economy’s gross domestic product could  be measured as either the total expenditures by households (consumers),  or as the total wages paid by the private sector (industry). Hence, the  effect of counterfeiting and piracy on industry would affect consumers by  reducing their wages, which could reduce consumption of goods and  services and the gross domestic product. Finally, the government is also  affected by the reduction of economic activity, since fewer taxes are  collected.
In addition to the U.S. economy-wide effects, as we reported in April  2010, counterfeit or pirated products that act as substitutes for genuine  goods can have a wide range of negative effects on industries, according  to experts we spoke with and literature we reviewed. These sources  further noted that the economic effects vary widely among industries and  among companies within an industry. The most commonly identified  effect cited was lost sales, which leads to decreased revenues and/or  market share.
Lost revenues can also occur when lower-priced counterfeit and pirated  goods pressure producers or IP owners to reduce prices of genuine  goods. In some industries, such as the audiovisual sector, marketing  strategies must be adjusted to minimize the impact of counterfeiting on  lost revenues. Movie studios that use time-related marketing strategies— introducing different formats of a movie after certain periods of time—  have reduced the time periods or “windows” for each format as a  countermeasure, reducing the overall revenue acquired in each window.  Experts stated that companies may also experience losses due to the  dilution of brand value or damage to reputation and public image, as  counterfeiting and piracy may reduce consumers’ confidence in the  brand’s quality.
Companies are affected in additional ways. For example, to avoid losing  sales and liability issues, companies may increase spending on IP  protection efforts. In addition, experts we spoke with stated that  companies could experience a decline in innovation and production of  new goods if counterfeiting leads to reductions in corporate investments  in research and development. Another variation in the nature of the  effects of counterfeiting and piracy is that some effects are experienced  immediately, while others are more long-term, according to the OECD.  The OECD’s 2008 report cited loss of sales volume and lower prices as  short-term effects, while the medium- and long-term effects include loss  of brand value and reputation, lost investment, increased costs of  countermeasures, potentially reduced scope of operations, and reduced  innovation. Finally, one expert emphasized to us that the loss of IP rights  is much more important than the loss of revenue. He stated that the  danger for the United States is in the accelerated “learning effects”— companies learn how to produce and will improve upon patented goods.  They will no longer need to illegally copy a given brand—they will create  their own aftermarket product. He suggested that companies should work  to ensure their competitive advantage in the future by inhibiting undesired  knowledge transfer.
In addition, private sector organizations have experienced a wide range of  incidents involving data loss or theft, economic loss, computer intrusions,  and privacy breaches, underscoring the need for improved security  practices. The following examples from news media and other public  sources illustrate types of cyber crimes.
In February 2011, media reports stated that computer hackers had  broken into and stolen proprietary information worth millions of  dollars from the networks of six U.S. and European energy  companies.
In mid-2009 a research chemist with DuPont Corporation  reportedly downloaded proprietary information to a personal e- mail account and thumb drive with the intention of transferring this  information to Peking University in China and also sought Chinese  government funding to commercialize research related to the  information he had stolen.
Between 2008 and 2009, a chemist with Valspar Corporation  reportedly used access to an internal computer network to  download secret formulas for paints and coatings, reportedly  intending to take this proprietary information to a new job with a  paint company in Shanghai, China.
In December 2006, a product engineer with Ford Motor Company  reportedly copied approximately 4,000 Ford documents onto an  external hard drive in order to acquire a job with a Chinese  automotive company.
section_title: Quantifying Economic Impacts Is Difficult, However Industry Research Suggests the Impacts Are Sizable
paragraphs: Generally, as we reported in April 2010, the illicit nature of counterfeiting  and piracy makes estimating the economic impact of IP infringements  extremely difficult, so assumptions must be used to offset the lack of data.  Efforts to estimate losses involve assumptions such as the rate at which  consumers would substitute counterfeit for legitimate products, which can  have enormous impacts on the resulting estimates. Because of the  significant differences in types of counterfeited and pirated goods and  industries involved, no single method can be used to develop estimates.  Each method has limitations, and most experts observed that it is difficult,  if not impossible, to quantify the economy-wide impacts. Nonetheless,  research in specific industries suggests that the problem is sizeable.
subsections: section_title: Lack of Data Is the Primary Challenge for Quantifying Economic Impacts of Counterfeiting and Piracy
paragraphs: As we reported in April 2010, quantifying the economic impact of  counterfeit and pirated goods on the U.S. economy is challenging  primarily because of the lack of available data on the extent and value of  counterfeit trade. Counterfeiting and piracy are illicit activities, which  makes data on them inherently difficult to obtain. In discussing their own  effort to develop a global estimate on the scale of counterfeit trade,  OECD officials told us that obtaining reliable data is the most important  and difficult part of any attempt to quantify the economic impact of  counterfeiting and piracy. OECD’s 2008 report stated that available  information on the scope and magnitude of counterfeiting and piracy  provides only a crude indication of how widespread they may be, and that  neither governments nor industry were able to provide solid assessments  of their respective situations. The report stated that one of the key  problems is that data have not been systematically collected or evaluated  and, in many cases, assessments “rely excessively on fragmentary and  anecdotal information; where data are lacking, unsubstantiated opinions  are often treated as facts.”
Because of the lack of data on illicit trade, methods for calculating  estimates of economic losses must involve certain assumptions, and the  resulting economic loss estimates are highly sensitive to the assumptions  used. Two experts told us that the selection and weighting of these  assumptions and variables are critical to the results of counterfeit  estimates, and the assumptions should, therefore, be identified and  evaluated. Transparency in how these estimates are developed is  essential for assessing the usefulness of an estimate. However,  according to experts and government officials, industry associations do  not always disclose their proprietary data sources and methods, making it  difficult to verify their estimates. Industries collect this information to  address counterfeiting problems associated with their products and may  be reluctant to discuss instances of counterfeiting because consumers  might lose confidence. OECD officials, for example, told us that one  reason some industry representatives were hesitant to participate in their  study was that they did not want information to be widely released about  the scale of the counterfeiting problem in their sectors.
section_title: No Single Approach for Quantifying Impacts of Counterfeiting and Piracy Can be Used
paragraphs: As we reported in April 2010, there is no single methodology to collect  and analyze data that can be applied across industries to estimate the  effects of counterfeiting and piracy on the U.S. economy or industry  sectors. The nature of data collection, the substitution rate, value of  goods, and level of deception are not the same across industries. Due to  these challenges and the lack of data, researchers have developed  different methodologies. In addition, some experts we interviewed noted  the methodological and data challenges they face when the nature of the  problem has changed substantially over time. Some commented that they  have not updated earlier estimates or were required to change  methodologies for these reasons.
A commonly used method to collect and analyze data, based on our  literature review and interviews with experts, is the use of economic  multipliers to estimate effects on the U.S. economy. Economic multipliers  show how capital changes in one industry affect output and employment  of associated industries. Commerce’s Bureau of Economic Analysis  guidelines make regional multipliers available through its Regional Input- Output Modeling System (RIMS II). These multipliers estimate the extent  to which a one-time or sustained change in economic activity will be   Multipliers can provide an  attributed to specific industries in a region.illustration of the possible “induced” effects from a one-time change in  final demand. For example, if a new facility is to be created with a  determined investment amount, one can estimate how many new jobs  can be created, as well as the benefit to the region in terms of output  (e.g., extra construction, manufacturing, supplies, and other products  needed). It must be noted that RIMS II multipliers assume no job  immigration or substitution effect. That is, if new jobs are created as a  result of investing more capital, those jobs would not be filled by the labor  force from another industry. Most of the experts we interviewed were  reluctant to use economic multipliers to calculate losses from  counterfeiting because this methodology was developed to look at a one- time change in output and employment. Nonetheless, the use of this  methodology corroborates that the effect of counterfeiting and piracy goes  beyond the infringed industry. For example, when pirated movies are  sold, it damages not only the motion picture industry, but all other  industries linked to those sales.
section_title: Economy-Wide Impact of Counterfeiting and Piracy Is Unknown
paragraphs: While experts and literature we reviewed in our April 2010 report provided  different examples of effects on the U.S. economy, most observed that  despite significant efforts, it is difficult, if not impossible, to quantify the net  effect of counterfeiting and piracy on the economy as a whole. For  example, according to the 2008 OECD study, it attempted to develop an  estimate of the economic impact of counterfeiting and concluded that an  acceptable overall estimate of counterfeit goods could not be developed.  OECD further stated that information that can be obtained, such as data  on enforcement and information developed through surveys, “has  significant limitations, however, and falls far short of what is needed to  develop a robust overall estimate.” Nonetheless, the studies and experts  we spoke with suggested that counterfeiting and piracy is a sizeable  problem, which affects consumer behavior and firms’ incentives to  innovate.
Chairman Murphy, Ranking Member DeGette, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions you may have at this time.
section_title: GAO Contact and Staff Acknowledgement
paragraphs: If you or your staff have any questions about this testimony, please  contact me at 202-512-3763 or offutts@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. GAO staff who made key contributions to  this testimony include Christine Broderick, Assistant Director; Pedro  Almoguera; Karen Deans; and Rachel Girshick.
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