Piracy in China and U.S. Businesses

If a huge firm like Microsoft cannot stop piracy - that is, theft of its intellectual property - in China, then what chances do small businesses have?

As noted in several media reports, Microsoft CEO Steve Ballmer addressed the firm's employees in its Beijing offices late last month.

As reported by the San Francisco Chronicle: "In a speech to employees in China today, Steve Ballmer said that the number of PCs sold in China is about equal to the number in the U.S., but ‘our revenue in China will be about a twentieth of our revenue in the United States.'" It's worth noting that "Ballmer also said that the company earns six times as much per PC sold in India as it does in China, thanks to India's stricter piracy controls."

The Wall Street Journal noted: "In China, copies of Microsoft's core Office and Windows programs are still available on street corners for $2 or $3 each, a fraction of their retail price, despite efforts by the company to curb theft."

And what about the price argument often brought up, i.e., that the price of software generates piracy? Microsoft's Ballmer isn't buying it. The Journal quoted the Microsoft CEO saying, "I'm not saying everybody in China could afford to buy a PC... but if you can, you could afford the software."

Microsoft's strategy to get the government engaged also involves investment in the country. As noted in the Chronicle, Microsoft has invested in joint ventures and local R&D under the strategy "that China will be more likely to enforce piracy laws if it has a domestic software industry to protect."

China, of course, has been promising U.S. officials and companies like Microsoft that it is serious about fighting piracy and making strides in such efforts. But enforcing and protecting property rights - especially intellectual property rights - is a challenge, to say the least, with a communist government and in a nation that has been communist for over six decades - even with the considerable market reforms in recent decades.

The U.S. government has pressured, and needs to continue to do so, the government of China to make real changes on the property rights front. For U.S. businesses, the massive potential of the Chinese market - for example, China's PC market is expected to surpass the U.S. market next year to become the world's largest - must be weighed against the ability and costs of protecting one's intellectual property.

Looking ahead, this is not just a critical issue for U.S. firms - very much including small entrepreneurial businesses - but for Chinese enterprises and for the Chinese economy. Despite its considerable achievements in recent times, without the establishment and full protection of private property, the Chinese economy will never reach its full potential.

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Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council.