| Abstract: |
Counterfeiting activities target companies in various sectors, including
digital technology companies, defined as companies that produce and/or
commercialize at least one physical product that incorporates a digital
technology, excluding the merchandising related to the company brands.
Counterfeiting is a fraudulent activity that potentially damages the economic
and innovation performance of companies and can pose major threats to global
competition and economic growth. However, the actual impact of counterfeiting
on the performance of companies has not been tested empirically, due to
methodological problems, including the lack of data on counterfeiting at the
firm-level. Furthermore, prior theoretical studies have speculated that
counterfeiting could have in part a beneficial effect on the performance of
companies, due to indirect advertising, calling for empirical investigations
to shed light on the issue. The goal of the present study is to provide
empirical evidence on the impact of counterfeiting on both the economic and
innovative performance of digital technology companies at the firm-level and
on the global scale. To this aim, a new database was created combining data on
counterfeiting activities during 2011-2013 (OECD-EUIPO, 2016) with financial
information and patent data from 2009 to 2015. The result is a firm-level
database that enables unprecedented analyses on the impact of counterfeiting
on performance of digital technology companies. About 9% of the seizures of
counterfeits that were illegally traded across borders during 2011 2013
involved goods commercialized by digital technology companies, equivalent to
about the 9.1% of the total value of seizures. Collectively, about 11% of
companies affected by illegal international trade of counterfeits are digital
technology companies. The majority of these (58%) are big corporations with
Operating Revenues greater than USD 1 bn. These account for 77% of the number
of total seizures, and 84% of the value of seizures related to the digital
technology companies. SMEs, defined as those with Operating Revenues up to USD
50 million, represent 21% of digital technology companies targeted and account
for 5% of total seizures and 6% of the total value of seizures. The industries
mostly targeted are electronics (both consumers’ electronics and electronics
for industrial use), automotive and digital media. The digital technology
products commercialized in frauds of IPRs include computer hardware and
electronic components, batteries, sensors, autoparts, optical instruments,
videogames, and recording of movies and motion picture. About 34% of digital
technology companies affected by international trade of counterfeits are
located in the EU28 or EFTA, 41% are located in North America, 23% are located
in Asia. Within the EU28, UK, Germany, France and Italy are the countries
hosting the largest number of targeted digital technology companies. Within
the EU28, Germany and UK, followed by Belgium and Ireland, are the most-common
country of destination of seized counterfeits. The overwhelming majority of
seized goods related to digital technology companies is imported from Asia.
51% of these are imported from China, 41% comes from Hong Kong, China, 3% from
Singapore. Other economies of provenance account each for less than 1% of the
seizures. The vast majority (93%) of seizures affecting digital technology
companies are due to violations of trademarks, and only a minority are due to
violations of design models (4%), and copyrights (2%). Less than 1% of the
seizures are due to violations of patents. However, seizures enacted in
defence of patents are those that have the highest mean value. The analysis of
infringed companies with respect to a control samples of non-infringed
companies indicates that counterfeiting targets specifically highly profitable
companies, with high propensity to innovate. Indeed, digital technology
companies are more likely to become target of counterfeiting when they have
larger Operating Revenues, and when they perform at a higher level in terms of
profitability (return on total assets), prior to the window of observation.
Target companies also have on average larger patent portfolios, prior to the
observation of counterfeiting activities. Digital technology companies located
in EU28 are on average less likely than companies located outside of EU28 to
be the target of counterfeiting activities. Results from impact analyses
indicate lower growth rates of operating profits for digital technology
companies targeted by counterfeiting with respect to control samples of firms
not affected by counterfeiting. In particular the econometric models provide
evidence of a negative impact of counterfeiting on both EBITDA (Earnings
before interest taxes depreciation and amortisation) and EBIT (Earnings before
interest taxes). This result is robust across different estimation methods,
model specifications and time windows. The data reveals only a weak negative
impact on operating revenues, with limited statistical confidence. Conversely,
there is no significant evidence that counterfeiting affected the investment
in Fixed Assets of targeted firms with respect to the control sample. The
results about the negative impact of counterfeiting activities on operating
profits are in line with reports of greater costs incurred by these companies
to enact anti-counterfeiting strategies, reported in prior descriptive
literature. These practices include the broadening of product ranges, with
fewer scale-economies and the enactment of anti-infringement procedures, such
as ‘conspicuous packaging’, more screening and origin certifications,
development of licensing downstream retailers and direct self-enforcement
aimed at limiting the circulation of counterfeits. Results do not provide
support for the existence of indirect positive spillover effects, as
hypothesised by the theoretical literature, according to which infringed
companies might benefit from an advertising effect due to the greater
diffusion of brands from the counterfeiting activities. Indeed, at least for
what concerns digital technology companies, there is no evidence of any
positive effect of infringement on sales of original products. The digital
technology companies that were affected by counterfeiting on average increased
their patent portfolios during the observation period, but less than the
digital technology companies that were not affected by counterfeiting.
However, the result is not robust to the inclusion of control variables and to
the adoption of alternative measures of innovation performance (Intangible
Assets). It certainly merits further research, once more data on
counterfeiting become available. Overall, the results indicate that
counterfeiting activities harm the economic performance of targeted digital
technology companies, by eroding their operating profits. The effect on
innovative performance is negative, but still inconclusive due to insufficient
dataset, and cannot exclude that counterfeiting may harm the propensity to
innovate of digital technology companies. The analysis rules-out the existence
of any positive spillover from counterfeiting. |