The Economic Impact of Counterfeiting and Piracy Madrid – 26 February 2009 Hisashi Yoshikawa Deputy Director Directorate for Science, Technology and Industry

The Economic Impact of Counterfeiting and Piracy

Madrid – 26 February 2009

Hisashi Yoshikawa Deputy DirectorDirectorate for Science, Technology and IndustryOECD

Danny ScorpecciPrincipal Economist, Structural Policy DivisionDirectorate for Science, Technology and IndustryOECD

The views expressed are those of the author in his private capacity and do not necessarily represent those of the OECD or its Member governments.

Impact of innovation processes on growth andsocial welfare • Innovation is an important goal for policymakers

Innovation important as:• a long run objective to stimulate growth• one of the responses in this time of economic crisis

The OECD Project

The OECD Project

Innovation processes are complex and there is a need for trends, evidence, analyses and guidelines.

• OECD Innovation strategy formulates some innovation enhancing recipes.

Intellectual property -- foundation and fuel for innovation in the time of knowledge economy

• Importance of studies on IP infringements; scale, effects, mechanisms

The OECD Project

Economic Impact of Counterfeiting and Piracy

Phase 1: Counterfeit and pirated products

• Tangible products that infringe trademarks, copyrights, patents or design rights, report published in May 2008

Phase 2: Digital piracy

• With Governments for final approval. We hope it will be released shortly. Some preliminary points will be touched on in this presentation.

Phase 3: Other IPR infringements

• To be scoped and funded.

Tangible products that infringe trademarks, copyrights, patents or design rights.

• Magnitude of the problem

• Effects of counterfeiting and piracy

• Market analysis

• Government and industry initiatives

• Sectoral case studies

Phase IThe Economic Impact of Counterfeiting and Piracy

phase I counterfeit and pirated products

Sectors studied in depth

• automotive products• food/drink products• pharmaceuticals• tobacco products• music recordings• motion pictures and other video

content• electrical components (including

batteries)

Other sectors considered

• luxury goods, perfumes and fashion clothes

• chemicals and pesticides• sportswear and other branded

clothing• personal care, toiletry and

household products• books• industrial and consumer motor

lubricants• aircraft components• toys• computer software

Sectoral case studies

Magnitude of the problem

• Measurement needs rigorous methodology, but data is hard to find

• activities are illicit and clandestine

• enforcement and customs data are sparse, incomplete and inconsistent

• enterprises may be reluctant to divulge data

• Analysis showed that international trade in counterfeit or pirated products could have been up to US$ 200 billion in 2005

The figure does not include

– domestically produced and consumed products– non-tangible pirated digital products

If added, the figure could be several hundred billion dollars higher

• Earlier figure of 5-7% of world trade was ill-defined, lacked rigorous foundation and could not be confirmed or disproved


Extent of the problem

• Virtually everything can (and probably has) been counterfeited, and is taking place in virtually every economy

Analysis confirms counterfeiting of

• increasingly complex products

• sophisticated packaging

• security items (i.e. holograms)

• Growing trend towards everyday products intended to deceive consumers, many of which may affect public health and safety, eg

• car parts

• Pharmaceuticals

• food/drink

• Evidence of growing infiltration of legitimate supply chains – an area of interest to organised crime


Seizures of imported counterfeit and pirated products from the top 20 source economies

Region of top 20 source economies

Number of source economies in region

Seizures (% of total)

Asia (excl. Middle East) 12 69.7Middle East 2 4.1Africa 2 1.8Europe 2 1.7North America 1 1.1South America 1 0.8

Top sources 20 79.2

Customs seizures


Driving factors Driving factors

Market characteristics Product characteristicsHigh unit profitability Low pricesLarge potential market size Acceptable perceived qualityGenuine brand power Ability to conceal status

Production, distribution and technology Consumer characteristicsModerate need for investments No health concernsModerate technology requirements No safety concernsUnproblematic distribution and sales Personal budget constraintHigh ability to conceal operation Low regard for IPREasy to decieve consumers

Institutional characteristics Institutional characteristicsLow risk of discovery Low risk of discovery and prosecutionLegal and regulatory framework Weak or no penaltiesWeak enforcement Availability and ease of acquisitionPenalties Socio-economic factors

Counterfeit or pirate supplyKnowing demand for

counterfeit or pirated products

What drives the demand/supply of C&P,?


Main Effects

Counterfeiting and piracy…


• can impact negatively on innovation and growth• may reduce employment where originals are produced• can reduce foreign direct investment (FDI) where C&P takes place• damages sales volume, profits, brand value and capitalisation of rights’

owners, and can lead to unwarranted potential legal liability • can negatively affect consumer confidence• can seriously affect health and safety of users• evidence that legitimate supply lines are being infiltrated• reduces tax revenues to governments• induces high costs on governments and industry to combat C&P• encourages participation by organised crime and corruption

Outcomes: Distribution channels

• Most counterfeited goods are transported through commercial transport services

- often with appropriate documentation (such as Bills of Lading)

• Growing use of transit points;

- especially Free Trade Zones

• The internet has emerged as a new and powerful means to sell via auction sites, stand alone e-commerce and e-mail solicitation


Free Trade Zones (or Economic Processing Zones – EPZs)

• FTZs have grown in importance in the context of counterfeiting and piracy

• A definition of FTZs given in an OECD report* shows why:

- “a territorial or economic enclave in which goods may be imported, stored, repacked, manufactured and reshipped with a reduction in duties and/or minimal intervention by customs officials”

* Export Processing Zones: Past and Future Role in Trade and Development, OECD 2007


Counterfeiters use FTZs

• Growing use of free trade zones

- these are used as gateways and way-points where goods can be

• broken down into smaller consignments

• Documents sanitised to disguise point of manufacture

• elaborated and repackaged (often goods only become counterfeits at this point)

• transhipped to disguise actual origin

• The lower intensity of customs surveillance in free trade zones can be to counterfeiters’ advantage


Frequently used transit points for automotive parts

Number of times localities mentioned as transit points for counterfeited goods

Frequency Localities

Frequently Mentioned UAE/Dubai Hong Kong (China)

Moderately Frequently Mentioned Lebanon Singapore Turkey Eastern Europe

Sometimes Mentioned Jordan Chinese Taipei Saudi Arabia Egypt Malta Colombia Canada Bulgaria

Source: OECD Survey of the Automotive Industry.


Laws & regulations often ineffective


• Not properly enforced

• Insufficient public enforcement resources

• Low priority in courts

• Protection of locals

• Courts often lenient because counterfeiting and piracy are not always considered to be serious crimes

• Penalties don’t always deter

Why is organised crime interested in C&P?

• Profitability is high

• Market is large

• Demand is heavy

• Risk of detection and prosecution is relatively low

• Even if successfully prosecuted penalties low

• Bribery, corruption and coercion can facilitate business and

reduce risks


Attributes of organised crime suitable for C&P

• Resources to invest in production facilities

• Can obtain templates, plans and originals for copying

• Can create and maintain complex supply chains

• Experience in smuggling

• Can establish effective distribution/sales networks

• Can infiltrate legitimate supply chains

• Can protect operatives at all levels

• Can use bribery/corruption/coercion


Phase II covers digital piracy of all copyrighted materials.

• Pirate transactions that do not involve the use of physical media

e.g. via Internet, LAN networks etc.

• Numerous industries affected by digital piracy: music, movie, radio, television (including sports broadcasting), software (business and entertainment)

• Many technical ways of market formation; most of them rely on solutions developed for legal purposes:

Peer-to-peer networks (P2P), One-click hosting services, “Warez” sites, streaming services, leech sites, etc.

phase II digital piracy

Why have different Phases to the study?

This reflects very different markets for products covered

• Phase I: addressed physical/tangible goods, hence:– fabrication facilities (hence investment), physical

transportation/distribution, targeted markets, products attacked often mature

• Phase II: addresses digital content, hence:– Virtually zero marginal cost of reproduction, no physical goods,

digital delivery; broad markets, products attacked at point of greatest intrinsic value


Special economic properties:

• Some pirated digital content appears to be offered to customers at almost zero price

perhaps driven by non-monetary supply drivers

• Some customers appear to pay for (pirated or legal) digital content even though they could acquire pirated alternatives for free (demand)

Important role of “transaction costs“ for customers decisions

Markets for pirated digital products


Possible market drivers

Supply drivers• Attitude towards piracy• Reciprocity mechanism• Ease of distribution• Profitability • Legal and regulatory framework

Demand drivers• Attitude towards piracy• Availability• Technical quality• Low security awareness• Ineffective enforcement

Market characteristics of live sports broadcasts

• Internet streaming technology enables pirates to attack the live broadcast; when product has greatest value,

• Potentially legitimate markets may not be covered by broadcasts and these may turn to illegitimate sources,

• Distribution can be located off-shore to minimise detection – which delays/hinders redress,

• Unlike physical fabrication facilities distribution facilities easy to re-establish even if closed down.

phase II - digital piracyCase Study – Sports Rights Owners Sector

Importance vs. Priority


• Most governments have labelled counterfeiting and piracy as important problems.

• However, not always matched by priority. Other illicit activities given first call on resources (drugs, people smuggling, gun running)

• Governments may better respond to these problems if they appreciate the corrosive effects of C&P.

– especially if full account taken of role of organised crime, the effects on health and safety, foregone tax revenue and weakened incentive to innovate

Improving data collection


• This study has highlighted just how poor data really is

• Governments and industry can help by ensuring data is– systematically collected– comparable– Comprehensive

• The reporting framework developed by the World Customs Organization (WCO) offers useful template for law enforcement agencies and industry

For the attention of policymakers

• Improve co-ordination amongst domestic agencies

• Consider having a clear C&P policy

• Have a clear and enforceable legal and regulatory framework

• Ensure effective enforcement

• International co-operation where there are cross-border transactions,

• Increase awareness amongst government officials and education of consumers

• Enhance co-operation with industry

• May be need to embrace new business models – especially in the digital market

Danny ScorpecciDirectorate for Science,

Technology and Industry

For further information>>> Contact us

OECD2, rue André-Pascal75775 Paris CEDEX 16France

Email: [email protected]: (+33) 1 4524 9433Fax: (+33) 1 4430 6257Website: www.oecd.org/sti/counterfeiting