The States and IP

On May 23, the U.S. Chamber of Commerce Global Intellectual Property Center (GIPC) published a new report titled “IP Creates Jobs for America.” The analysis breaks out the impact of intellectual property on jobs, output, wages, and exports by state.

Mark Elliot, executive vice president of the GIPC, explained, “Recent research by the Department of Commerce has shown that innovation and creativity are key drivers for economic growth and prosperity, with intellectual property-intensive industries driving America's jobs and economic growth. Our study expands this data to capture the economic value of intellectual property outside the supply chain. This report makes the benefits of IP tangible, demonstrating that a wide cross-section of industries employing tens of millions of Americans reaching every corner of the U.S. hinge on intellectual property rights and enforcement thereof.”

The GIPC study found that, nationally, IP-intensive industries accounted for 55.7 million direct and indirect jobs, generated more than $5 trillion in GDP, and produced 74 percent of total U.S. exports.

In terms of the states, consider what IP means to the four largest states.

• In California, 7.38 million jobs, or 55 percent of private sector employment, are supported by IP, while 58 percent, or $922.8 billion, of economic output is created by IP-intensive firms. In addition, 76.8 percent of exports are IP exports. Average wages in IP-intensive companies are higher than non-IP businesses – $65,171 and $47,571, respectively.

• In Texas, 4.61 million jobs, or 49 percent of private sector employment, are supported by IP, while 54 percent, or $541.3 billion, of economic output is created by IP-intensive firms. In addition, 85.4 percent of exports are IP exports. Average wages in IP-intensive companies are higher than non-IP businesses – $55,148 and $41,320, respectively.

• In New York, 2.78 million jobs, or 36 percent of private sector employment, is supported by IP, while 49 percent, or $385.8 billion, of economic output is created by IP-intensive firms. In addition, 63.7 percent of exports are IP exports. Average wages in IP-intensive companies are higher than non-IP businesses – $69,581 and $53,660, respectively.

• In Florida, 2.05 million jobs, or 28 percent of private sector employment, is supported by IP, while 36 percent, or $225.5 billion, of economic output is created by IP-intensive firms. In addition, 75.3 percent of exports are IP exports. Average wages in IP-intensive companies are higher than non-IP businesses – $49,550 and $36,366, respectively.

To get details on your state, visit the study’s website at www.IPCreatesJobs.com.

Once again, we have overwhelming evidence of how important intellectual property is to the U.S. economy, including for jobs, wages and exports.

That, of course, reinforces the importance of the government’s responsibility to protect and enforce intellectual property rights. And that is both a domestic and an international responsibility. As the global economy expands, including with stronger growth in developing nations, the U.S. must be at the forefront of advancing free trade, while making clear that such trade, and economic prosperity in general, cannot expand robustly if property, including IP, is not properly protected.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

Keeping an Eye on International IP Rights

More than ever before, protecting intellectual property is a global undertaking. So, how are other nations faring in this endeavor that is so critical to entrepreneurs, small business and their employees, and the U.S. economy in general?

On April 30, the Office of the United States Trade Representative (USTR) released its annual "Special 301" Report. That publication examines how effective our trading partners are in protecting and enforcing IP rights (IPR).

In a statement, U.S Trade Representative Ron Kirk noted, "This year's Special 301 Report is more significant than ever in light of recent U.S. government data showing that IP-intensive industries support as many as 40 million American jobs and up to 60 percent of U.S. exports. When trading partners don't protect IPR, they threaten those critical jobs and exports.

The report looked at 77 countries, and 13 are placed on the Priority Watch List. That list includes the nations that "present the most significant concerns regarding insufficient IPR protection or enforcement, or otherwise limited market access for persons relying on IPR protection."

The 13 Priority Watch List nations are: Algeria, Argentina, Canada, Chile, China, India, Indonesia, Israel, Pakistan, Russia, Thailand, Ukraine, and Venezuela.

The two names that particularly jump out are Canada and China, since they rank first and second in terms of U.S. trading partners. For example, in 2011, total goods trade (exports and imports) between the U.S. and Canada came in at $597 billion and between the U.S. and China, it registered $503 billion.

It's not a surprise, of course, that China is on the Priority Watch List, given their ongoing struggles with enforcing intellectual property rights. While noting some improvements by China, the Special 301 Report, in part, stated: "A wide spectrum of U.S. rights holders reports serious obstacles to effective protection and enforcement of all forms of IPR in China, including patents, trademarks, copyrights, trade secrets, and protection of pharmaceutical test data. Compounding these obstacles is the troubling direction that China s policies in the IPR area have taken recently. These policies include China s efforts to link eligibility for government preferences to the national origin of the IPR in products. In addition, many companies are concerned that Chinese government agencies are inappropriately using market access and investment approvals as a means to compel foreign firms to license or sell their IPR to domestic Chinese entities. Further, for many industries, sales of IP-intensive goods and services in China remain disproportionately low when compared to sales in similar markets that provide stronger environments for IPR protection and more open market access. These concerns, coupled with the size of China both as a consumer marketplace as well as a globally significant producer of a wide array of products, mean that China's protection and enforcement of IPR must remain key priorities for U.S. trade policy."

That's a daunting and troublesome list, to say the least. China remains a land laden with opportunity, along with tremendous IP risks.

But Canada? Why is our neighbor to the north on the list?

The issue largely is about copyright protections. As noted in the Special 301 Report: "Canada remains on the Priority Watch List in 2012, subject to review if Canada enacts long- awaited copyright legislation. The Government of Canada has given priority to that legislation. The United States welcomes that prioritization and looks forward to studying the legislation once it is finalized, and will consider, among other things, whether it fully implements the WIPO Internet Treaties, and whether it fully addresses the challenges of piracy over the Internet."

It's important to keep in mind, though, that while both are on the Priority Watch List, the difference between China and Canada on protecting intellectual property is like night and day. Consider, for example, that on the "2012 Index of Economic Freedom," published by the Heritage Foundation and The Wall Street Journal, Canada ranked second best on the globe in terms of protecting property (both real and intellectual) rights, while China came in 153rd.

Most nations, including the U.S., have gaps in protecting intellectual property, and therefore, need to make improvements that are important to innovation, investment and economic growth. It s just that some nations, like China, have a heck of a lot more to do when compared to other countries like, for example, Canada.

_________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Small Business and World Intellectual Property Day

In recognition of April 26 being “World Intellectual Property Day,” the Small Business & Entrepreneurship Council (SBE Council) published the “Top 10 Reasons Intellectual Property Rights Matter to Small Business.”

The Top 10 is:

10. Small Businesses Are Robust Innovators.

9. Small Business Tend To Be At the Cutting Edge of Innovation.

8. The Self-Employed Represent a Big Chunk of U.S. Copyright Businesses.

7. Key Copyright Industries Are Overwhelmingly About Small Businesses.

6. Strong Intellectual Property Rights Are Positive for Self-Employment Globally.

5. Patent Systems Are Particularly Important for Small Businesses.

4. IP Theft Is Economically and Individually Destructive.

3. The Evidence Overwhelmingly Shows That Innovation is a Key Driver of Economic Growth.

2. Economic History Confirms That Intellectual Property Protections Matter for Innovators and Development.

1. Ultimately, Intellectual Property Rights Incentivize Innovators to Innovate.

To get the details on each of these, please go to http://www.sbecouncil.org/news/display.cfm?ID=4898.

For example, on item #7, the analysis in part notes, “Based on Census Bureau data (2009 most recent), these core copyright industries are dominated by small firms: a) 83% of newspaper, periodical, book, and directory publishers had fewer than 20 employees; b) 70% of software publishers had less than 20 workers; c) 93% of firms in the motion picture and sound recording industries had less than 20 employees; and d) 76% of firms in the radio and television broadcasting business had less than 20 workers.”

SBE Council chief economist Raymond J. Keating noted, “Celebrating intellectual property means celebrating entrepreneurs and small businesses, who are the innovators in the economy. Make no mistake, intellectual property rights and protections matter most to the entrepreneurial sector, given the big role small firms play in innovation and IP industries, how IP rights spur self-employment, the importance of patent protections for smaller firms, and the overall importance of IP to economic growth.”

The Numbers on the Value of Intellectual Property

I’m a big believer that, when used properly, numbers can help drive home important points. Of course, as an economist, I might be a bit biased.

 

Consider the role of intellectual property in our economy.

 

As defined by the New Oxford American Dictionary, intellectual property is “a work or invention that is the result of creativity, such as a manuscript or a design, to which one has rights and for which one may apply for a patent, copyright, trademark, etc.”

 

Most economists note the importance of protecting intellectual property in order to spur invention and innovation, and along with them, driving economic growth, productivity, incomes and employment higher. But given the intangible nature of intellectual property, some people have a more difficult time understanding the need to enforce intellectual property rights compared to the protection against theft or infringement of physical property.

 

Perhaps the best example of this in recent years has been a widespread willingness to download music in violation of copyright protections, but an unwillingness to break into a retail establishment in order to steal music CDs. There is no substantive moral, ethical or economic difference; nonetheless, people feel very differently about the two acts.

 

At the same time, while intellectual property has long been central and critical to the economic development of nations, that probably has never been more so the case than during the twenty-first century. That reality is driven home by the numbers in a new report titled “Intellectual Property and the U.S. Economy: Industries in Focus,” published by the U.S. Department of Commerce, and prepared by the Economics and Statistics Administration and the United States Patent and Trademark Office.

 

So, what’s examined in this study? Namely, it identifies “IP-intensive industries” (75 industries among a total of 313) and estimates their contributions to the U.S. economy.” Among some of the key findings:

 

• In terms of the overall economy, IP-intensive industries “contributed 34.8 percent to gross domestic product (GDP), with total value added of $5.06 trillion in 2010.”

 

• “Direct employment in the subset of most IP-intensive industries identified in this report amounted to 27.1 million jobs in 2010, while indirect activities associated with these industries provided an additional 12.9 million jobs throughout the economy in 2010, for a total of 40.0 million jobs, or 27.7 percent of all jobs in the economy.”

 

• “Due primarily to historic losses in manufacturing jobs, overall employment in IP-intensive industries has lagged other industries during the last two decades… [However,] copyright-intensive industries provided a sizeable employment boost, growing by 46.3 percent between 1990 and 2011.” That was more than twice the rate of non-IP-intensive industries.

 

• IP-intensive industries, though, have been ahead of general job creation recently. “Between 2010 and 2011, the economic recovery led to a 1.6 percent increase in direct employment in IP-intensive industries, faster than the 1.0 percent growth in non-IP-intensive industries. Growth in copyright-intensive industries (2.4 percent), patent-intensive industries (2.3 percent), and trademark-intensive industries (1.1 percent) all outpaced gains in non-IP-intensive industries.”

 

• What about earnings in IP-intensive industries? “Average weekly wages for IP-intensive industries were $1,156 in 2010 or 42 percent higher than the $815 average weekly wages in other (non-IP-intensive) private industries. This wage premium nearly doubled from 22 percent in 1990 to 42 percent by 2010. Patent- and copyright-intensive industries have seen particularly fast wage growth in recent years, with the wage premium in patent-intensive industries increasing from 66 percent in 2005 to 73 percent in 2010, and the premium in copyright-intensive industries rising from 65 percent to 77 percent.”

 

• IP proves to be critical to U.S. trade, with 60.7 percent of U.S. merchandise exports coming from IP-intensive industries in 2010, and despite limits on data, it’s reported that 19 percent of U.S. private services exports came from IP-intensive service-providing industries in 2007.

 

• Finally, in terms of self-employment, while the share of employment is roughly the same in IP-intensive industries as non-IP-intensive industries overall, that was not the case in copyright industries. As reported: “The highest self-employment share, however, was in the copyright-intensive industries, in which the 0.8 million self-employed workers filled 16.5 percent of all jobs. This high share is not surprising as many jobs in the creative and performing arts are contract rather than payroll jobs, usually related to the completion or performance of a specific authored work.”

 

As impressive as all of this is, it is important to understand that it is not the full IP story. As noted in the study: “Because all U.S. industries rely on IP to some degree, the statistics reported here for the sectors that use IP most intensively may tend to under-represent the broad impact of IP in the American economy. Moreover, the statistics reported here may not fully reflect the long-run economic benefits and costs of IP in promoting innovation and productivity growth. For example, while this report shows that employment in trademark-intensive industries is almost six times as great as employment in patent-intensive industries, it may be that the kinds of innovation protected by patents play a larger role in driving the long-run growth of productivity throughout the economy.”

 

This report from the Commerce Department provides additional information – courtesy of some important numbers – about the major role IP plays in the U.S. economy. It follows that policymakers need to take very seriously their governmental responsibilities to protect property, including intellectual property in all its forms and venues, including in the digital universe and across international borders.

 

_______________

 Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is“Chuck” vs. the Business World: Business Tips on TV.

Stopping Botnets

Just how secure is your firm's information, from intellectual property and trade secrets to financial data?

Well, a major online threat that has been around for a few years just received stepped up attention due to focus from the Federal Communications Commission, various Internet service providers, and the world's leading software maker.

The threat? Botnets. And it's a war against criminals at home and around the globe, in defense of both businesses and consumers on the Internet.

As described in March 22 recommendations from the FCC's Communications, Security, Reliability, and Interoperability Council (CSRIC) to combat botnet attacks, domain name fraud and IP route hijacking, "The growth of bot-infected end-computers poses a threat to the vitality and resiliency of the Internet and to the online economy. Botnets are networks of computers infected with bot malware, which can be controlled remotely. Criminals often use botnets to crash or deny access to a target website, and botnets can be used to steal passwords and financial information."

In a March 25 press release, Microsoft offered a further explanation of how the botnet threat works: "The computers that make up a botnet are usually conscripted without the knowledge of their owners, who unwittingly infect their machines after clicking on links in legitimate-looking e-mails for things like security updates from Microsoft and notices of tax refunds from the Internal Revenue Service. Clicking those links takes users to Web sites that exploit security holes in their browsers or other programs on their computers. Criminals use the holes to install malicious programs that siphon personal information from the infected computers, like online bank account passwords and credit card numbers. They can also harness the infected machines to send millions of e-mail messages to other users on the Internet, including scam messages that help propagate the botnet. Sometimes botnets are rented to clients to send spam messages advertising products like counterfeit pharmaceuticals."

These present serious worries for both personal and business information. So, what have been the recent actions and announcements?

On the FCC and ISP front, the San Jose Mercury News reported on March 22 that "eight large ISPs in an industry working group told the FCC on Thursday that they would not only work to detect botnets on their networks, but would also help affected customers find resources to clean up their computers." The eight firms are AT&T, Comcast, CenturyLink, Cox , Sprint Nextel, Time Warner Cable, T-Mobile and Verizon Communications.

On AT&T's policy blog, Bob Quinn, senior vice president-federal regulatory and chief privacy officer, pointed out: "AT&T has a long history of working to address both physical and cyber threats and has actively participated in the CSRIC process, including having representation on all three working groups. We view cybersecurity to be a cornerstone of the network management functions that we perform in the United States and worldwide. To that end, AT&T is already fulfilling the recommendations in the reports... [T]he Chairman's statements about the need for continued innovation in cybersecurity are probably the most important part of his message today. Effectively addressing cybersecurity is going to require the various stakeholders experimenting and innovating with different solutions and learning from one another."

Indeed, this is very much an ongoing battle fought on different fronts and by varying means. That is, by those various stakeholders.

For example, in that March 25 release, Microsoft announced that "in collaboration with the financial services industry - including the Financial Services - Information Sharing and Analysis Center (FS-ISAC) and NACHA - The Electronic Payments Association - as well as Kyrus Tech Inc., ... it has successfully executed a coordinated global action against some of the most notorious cybercrime operations that fuel online fraud and identity theft."

The May 26 New York Times reported it this way:

"Microsoft employees, accompanied by United States marshals, raided two nondescript office buildings in Pennsylvania and Illinois on Friday, aiming to disrupt one of the most pernicious forms of online crime today - botnets, or groups of computers that help harvest bank account passwords and other personal information from millions of other computers. With a warrant in hand from a federal judge authorizing the sweep, the Microsoft lawyers and technical personnel gathered evidence and deactivated Web servers ostensibly used by criminals in a scheme to infect computers and steal personal data. At the same time, Microsoft seized control of hundreds of Web addresses that it says were used as part of the same scheme."

Again, Microsoft noted: "This disruption was made possible through a successful pleading before the U.S. District Court for the Eastern District of New York, which allowed Microsoft and its partners to conduct a coordinated seizure of command and control servers running some of the worst known Zeus botnets. Because the botnet operators used Zeus to steal victims' online banking credentials and transfer stolen funds, FS-ISAC and NACHA joined Microsoft as plaintiffs in the civil suit, and Kyrus Tech Inc. served as a declarant in the case. Other organizations, including F-Secure, also provided supporting information for the case."

Microsoft's involvement in this law enforcement endeavor is seen as unique. According to the Times, Richard Boscovich, who is "a former federal prosecutor who is a senior lawyer in Microsoft's digital crimes unit," is the one who "devised a novel legal strategy to underpin the growing number of Microsoft's civil suits against bot-herders. Among other things, he argued that the culprits behind botnets were violating Microsoft's trademarks through fake e-mails they used to spread their malicious software."

Given the malicious intent, criminal incentives and technological skills, the botnet problem has been and will continue to be an ongoing battle, requiring action by law enforcement, legislators, courts, and private entities. Make no mistake, the government's role to protect property stands, whether offline or online, as a primary duty. At the same time, private businesses with the knowhow will need to be part of the effort, working with government and advancing their own safeguards, in order to make the Internet a safer realm in which opportunity, business and consumer choices can continue to fully flourish.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

China's IP Challenge for U.S. Small Business

The protection of intellectual property is important to all entrepreneurs, investors, innovators and businesses. And of course, the encouragement that such protection provides for these creators benefits consumers in terms of new and improved products and services.

It follows that if a government wants to maximize opportunity and economic development, then the protection of intellectual property is critical. And while IP protections have been important dating back to the dawn of the Industrial Revolution, it is more so now than ever before given the vast technological changes and opportunities in the twenty-first century.

For good measure, the role that government plays in terms of establishing the rule of law whereby contracts are enforced, and strong rights, protections and enforcement are established in terms of patents, copyrights and trademarks, is more important to small businesses, given the limited resources that smaller enterprises possess. And this goes for domestic and international protections of intellectual property.

That international aspect was highlighted in an interesting article about China in the March 19 USA Today. The piece, titled "Chinese copycats challenge U.S. small businesses," focuses on a U.S. firm, SylvanSport, that has a patent for a recreational camper trailer that "folds to a trailer that can be used to carry boats and bikes on top then converts to a camper with a self-inflating mattress and a tent that sets up in minutes."

A company in China copied the trailer, and now threatens the firm's growth and, ultimately, its survival. According to SylvanSport founder Thomas Dempsey, as noted in the article, "‘Our politicians, when they describe the companies that are necessary for the economic recovery, (they are talking about) companies like ours' ... But because of SylvanSport's lost sales, ‘There's a very real chance that the Chinese company could be the survivor here and we could go out of business.'"

A few important takeaways can be found the piece:

• "Yet in Asia, ‘The Western idea of intellectual property seems not yet fully established,' says Peter Zec, the founder of the Red Dot Institute for Advanced Design Studies in Essen, Germany, and a former president of the International Council of Societies of Industrial Design. The severe copycat problem in China and other Asian nations exposes foreign companies, big and small, to copyright, patent and trademark infringement issues, legal experts say."

• "In the past, it was ‘fairly common' for Chinese factories that produced legitimate products to be used at night to make counterfeit goods using the same raw materials, says Leon Perera, chief executive of Spire Research and Consulting, a Singapore firm that specializes in emerging markets. Today, what's more common is for Chinese companies to reverse engineer a product, or take it apart to figure out how it's made, then order parts to produce a similar product, according to Perera."

• "Only 15% of small companies that do business overseas realize that U.S. patents and trademarks protect them only within the U.S., according to the U.S. Patent and Trademark Office. Companies should file patents and trademarks in countries where their products will be made and sold, as well as where they're based..."

The story and points raised in this article point to the responsibility that the U.S. government has in terms of pushing for strong IP protections in the global marketplace, as well as the potential pitfalls and opportunities that entrepreneurs have to be aware of in that same international market.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

France Fights to Protect IP

The great early 19th century, French economist Jean-Baptiste Say noted the importance of property rights: "Political economy recognises the right of property solely as the most powerful of all encouragements to the multiplication of wealth."

On protecting private property as a necessary role of government, Say wrote: "Without this protection of each individual by the united force of the whole community, it is impossible to conceive any considerable development of the productive powers of man, of land and of capital; or even to conceive the existence of capital at all; for it is nothing more than accumulated value, operating under the safeguard of authority."

While the technological state of our economy is light years ahead of where it stood two hundred years ago, the protection of private property - including intellectual property - remains a critical duty of government, and central to economic development and growth.

On February 20, The New York Times ran an interesting article titled "A Piracy Law in France Appears to Curb File-Sharing and Lift Digital Music." The main point of the story was that two years ago France approved a measure to fight digital piracy, and the result has been a sharp decline in file-sharing piracy, growth in digital sales, and a stabilization of music industry revenues.

The article described the process under the French law: "The agency that administers the three-strikes system, known by the French abbreviation Hadopi, had sent 822,000 warnings by e-mail to suspected offenders as of the end of December. Those were followed up by 68,000 second warnings, issued through registered mail. Of those, 165 cases have gone on to the third stage, under which the courts are authorized to impose fines of €1,500, or nearly $2,000, and to suspend Internet connections for a month."

The piece also quoted Éric Walter, the secretary general of Hadopi, explaining: "Our work is to explain to people why piracy is a bad thing and why they should stop... When the people understand that, they stop. Of course, some people don't want to understand. Then we have to transfer their dossiers to the justice system."

A study on the impact of Hadopi by researchers from Carnegie Mellon University and Wellesley College was referenced in the article. That study, conducted by Brett Danaher, Michael D. Smith, Rahul Telang and Siwen Chen, summed up its key findings this way: "Our results suggest that increased consumer awareness of HADOPI caused iTunes song and album sales to increase by 22.5% and 25% respectively relative to changes in the control group. In terms of robustness, we find that these sales changes are similar for each of the four major music labels, suggesting that our results are not driven by one particular label. We also find that the observed sales increase is much larger in genres that, prior to HADOPI, experienced high piracy levels (e.g., Rap and Hip Hop) than for less pirated genres (e.g., Christian music, classical, and jazz). This tends to strengthen the causal interpretation of our results given that if HADOPI is causing pirates to become legitimate purchases, its effects should be stronger for heavily pirated music."

So, credit France for taking a significant and apparently powerful step to protect intellectual property. Jean-Baptiste Say would be pleased, and U.S. policymakers should take note.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Steve Jobs' IP Grammy

The 54th Grammy Awards on February 11 claimed boffo ratings. Some 44 million viewers tuned in, up from 27 million people watching last year.

Perhaps that was not surprising given the salute to Whitney Houston after her untimely death, along with a reuniting of the Beach Boys, the comeback of Adele, and Paul McCartney taking the stage, among other top performers.

But one of the most interesting Grammies awarded this year did not go to a singer or musician. Instead, it went to a businessman. The late Steve Jobs, co-founder of Apple Computer Inc., received a Trustees Award.

At the Recording Academy's Special Merit Awards Ceremony on February 11, as noted on the Grammy's website, "Jobs' Trustees Award was accepted by Eddy Cue, Apple's senior vice president of Internet software and services, who made note of Jobs' love of music. ‘Music shaped his life and made him who he was,' said Cue. ‘When he introduced the iPod in 2001, people asked, "Why are you doing this?" He said, "We love music and it's always good to do something you love.'"

If anyone deserved being honored by the music industry, it would be Jobs, who, arguably, saved the industry.

It's worth reminding ourselves that online theft of music took off in the late 1990s, in particular with the creation of the Napster file sharing business in 1999. Jobs responded with the iPod and iTunes in 2001, which made online purchases of songs affordable, easy and appealing.

Music theft online continues, of course. Indeed, it remains a major problem. The RIAA, for example, reports: "While the music business has increased its digital revenues by 1,000 percent from 2004 to 2010, digital music theft has been a major factor behind the overall global market decline of around 31 percent in the same period. And although use of peer-to-peer sites has flattened during recent years, other forms of digital theft are emerging, most notably digital storage lockers used to distribute copyrighted music." The RIAA numbers show how daunting music theft is: "Since peer-to-peer (p2p) file-sharing site Napster emerged in 1999, music sales in the U.S. have dropped 53 percent, from $14.6 billion to $6.9 billion in 2010. From 2004 through 2009 alone, approximately 30 billion songs were illegally downloaded on file-sharing networks."

The RIAA also notes a striking correlation between the decline in music sales and a decline in the number of people working as "musical groups and artists" according to Bureau of Labor Statistics numbers (see the analysis here.) The RIAA analysis sums up: "Selling music is an important motivator to creating music, and ... the decline in sales has correlated with fewer people making a living in music."

Keep in mind that the music business is overwhelmingly about small firms. For example, in that industry category of "musical groups and artists," 93.6 percent of firms with employees had less than 20 workers, and 99.9 percent (i.e., all but five firms) had less than 500 employees (according to the latest Census Bureau data from 2009).

Jobs' love of music, combined with his business common sense, led him to understand the need to protect intellectual property if the music business were to survive.

In another recent SBE Council Technology & Entrepreneurs analysis, we quoted the recent biography Steve Jobs by Walter Isaacson, when the author wrote about Jobs, piracy and protecting IP. That is worth highlighting here once more:

"At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:

"‘From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we'd be out of business. If it weren't protected, there'd be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there's a simpler reason: It's wrong to steal. It hurts other people. And it hurts your character.'

"He knew, however, that the best way to stop piracy - in fact the only way - was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting."

Steve Jobs combined an understanding of the importance of IP with an incredible talent for innovating, and the result allowed the music industry to have a fighting chance in competing with "free," that is, online piracy.

Depending on your music tastes, you can always debate who did or did not deserve a Grammy. But whatever kind of music you happen to favor, there's no debating the Grammy honor awarded to Steve Jobs.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Top 10 Reminders of Importance of IP

As legislation and issues such as piracy get discussed and debated, sometimes it can become easy to lose focus on why intellectual property rights and their protection matters to businesses of all types and sizes, and to the economy as a whole.

The World Intellectual Property Organization, or WIPO, is an international organization established in 1967. It's stated purpose is "developing a balanced and accessible international intellectual property (IP) system, which rewards creativity, stimulates innovation and contributes to economic development while safeguarding the public interest." In November, WIPO published its "2011 World Intellectual Property Report: The Changing Face of Innovation."

The report offers analysis on assorted IP-related topics, with this annual particularly focused on issues of collaboration and competition, as well as the role of public research. But it's worth highlighting key foundational points from the report that address IP in terms of the broader economy, international markets, and the individual firm.

I've boiled this down to a "Top 10 Reminders on the Centrality of IP to Prosperity."

1) The role of innovation cannot be overestimated: "Innovation is a central driver of economic growth and development. Firms rely on innovation and related investments to improve their competitive edge in a globalizing world with shorter product life cycles."

2) The data make clear that innovation is a driver of economic, productivity and income growth. "As early as the mid-1990s, the economic literature suggested that innovation accounted for 80 percent of productivity growth in high-income economies; whereas productivity growth, in turn, accounted for some 80 percent of gross domestic product (GDP) growth. More recent studies at the country-level demonstrate that innovation - as measured by an increase in R&D expenditure - has a significant positive effect on output and productivity."

3) The importance of intellectual property rights for firms and the economy in general is driven home by the international growth in patents: "Turning to the IP system, there is every indication that IP ownership has become more central to the strategies of innovating firms. IP policy has, therefore, moved to the forefront of innovation policy. Demand for patents has risen from 800,000 applications worldwide in the early 1980s to 1.8 million in 2009. This increase has occurred in different waves, with Japan driving filing growth in the 1980s, joined by the United States (US), Europe and the Republic of Korea in the 1990s and, more recently, by China."

4) International integration regarding IP is further emphasized: "Dividing in patenting worldwide in to so-called first filings - approximating new inventions - and subsequent filings - primarily filings of the same invention in additional countries - shows that the latter explains slightly more than one-half of that growth over the last 15 years... Patent applicants increasingly seek to protect their patents abroad and, indeed, in a larger number of countries, reflecting greater economic integration."

5) Along with patents, other areas where are IP rights and protections matter have expanded as well: "Demand for other IP rights - which firms often use as a complement to patents - has also seen marked growth. Trademark applications worldwide increased from 1 million per year in the mid-1980s to 3.3 million in 2009. Similarly, industrial design applications worldwide more than doubled from about 290,000 in 2000 to 640,000 in 2009. Greater internationalization is also an important factor behind the rising demand for protection of these forms of IP."

6) How much of a difference do IP protections make when it comes to relative competitiveness in the international marketplace? "Differences in innovative activity and related technological gaps between countries are a significant factor in explaining cross-country variation in income and productivity levels. According to several studies, roughly half of cross-country differences in per capita income and growth can be explained by differences in total factor productivity, a measure of an economy's long-term technological change or dynamism."

7) Indeed, being at the cutting edge of innovation matters: "In addition, the variation in the growth rate of GDP per capita is shown to increase with the distance from the technology frontier. Countries with fewer technological and inventive capabilities generally see lower and more diverse economic growth than do richer countries."

8) The reality for individual businesses conforms to broader economic realities on IP: "At the firm-level, there is emerging but increasingly solid evidence that demonstrates the positive links between R&D, innovation and productivity in high-income countries. Specifically, these studies imply a positive relationship between innovative activity by firms and their sales, employment and productivity. Innovative firms are able to increase efficiency and overtake less efficient firms. Firms that invest in knowledge are also more likely to introduce new technological advances or processes, yielding increased labor productivity. In addition, a new stream of research stresses the role of investing in intangible assets for increased output and multifactor productivity growth."

9) As for the views of economists, while research continues to explore the finer details of IP and IP protections, the main point of intellectual property rights being a central driver of innovation and growth remains clear. It is noted in the report: "Understanding how IP protection affects innovative behavior has long been a fertile field in economic research. Important insights from the past still shape how economists view the IP system today. Above all, compared to other innovation policies, IP protection stands out in that it mobilizes decentralized market forces to guide R&D investment."

10) Finally, the bottom line: "Innovation is a driver of economic growth and development. Importantly, innovative capability is no longer seen only in terms of the ability to develop new inventions. Recombining existing inventions and non-technological innovation also counts."

These realities hold at the firm level, for the domestic economy, internationally, and online or offline. IP stands as a main ingredient to innovation, productivity and growth, which is why policymakers must be sure that intellectual property is properly protected.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Piracy not a big problem??

A January 30 headline at TheHill.com caught my attention: "Report minimizes online piracy impact." Really?

The article was about a new study from the Computer and Communications Industry Association (CCIA), authored by Mike Masnick who writes about technology policy for Techdirt, which focuses on the growth of entertainment choices and opportunities that have emerged in recent times due in large part to the Internet and broadband.

The study highlights, for example, that consumer entertainment spending as a share of household income grew by 15 percent from 2000 to 2008; the entertainment sector employment grew by 20 percent during that last decade, including 43 percent growth among those identified as independent artists; box office revenues, according to the MPAA, rose by 25 percent from 2006 to 2010; music concert sales in the U.S. tripled from 1999 to 2009; and the value of the entertainment industry, according to data from PricewaterhouseCoopers and iDATE, grew from $449 billion in 1998 to $745 billion in 2010.

That's great news, and given the obvious expanded opportunities due to Internet and broadband advancements, it's not a surprise.

The study also offers the following summary on the challenges and opportunities at hand: "For the traditional middlemen, the internet represents both a challenge and an opportunity. There is no doubt that the internet has eaten away at some traditional means by which these businesses made money. But, as the data shows, there is more money going in to the overall market, more content being created, and many new ways to make money. That shows that there is a business model challenge -- and a marketing challenge -- but much more opportunity in the long run. The key challenge for business is in figuring out how to capture more of the greater revenue being generated by the wider entertainment industry. Legacy players certainly face a lot more competition (and fewer reasons that artists have to do deals with them) -- which can explain some of the public complaints about the ‘death' of various industries -- but overall, it's clear that by embracing new opportunities, there are plenty of ways to succeed."

That assessment is basically on the mark. But none of this should minimize the impact of piracy, and the need to counter such theft.

Unfortunately, though, the minimization of piracy appears to be the main purpose of this CCIA report.

CCIA President & CEO Ed Black declared: "The numbers paint a quite a contrast from the vision of doom and gloom the entertainment industry has pointed to lately. Having a more clear picture of the economic successes and challenges of the content industry will help lawmakers around the world as they consider policies like increased copyright enforcement." As TheHill.com reported, "Both Masnick and CCIA were strong critics of the Stop Online Piracy Act and Protect IP Act, which were championed by the entertainment industry as vital cures for the epidemic of online piracy."

The line of thinking in the CCIA report seems to be that since new opportunities exist, then the very real losses experienced due to IP theft do not matter, and stronger IP rights and protections do not matter. That's absurd.

Internet and broadband technologies have vastly expanded opportunities for creators, consumers and businesses. That's not really in dispute. At the same time, this does not mean that real and significant losses due to IP theft are not occurring. The full potential of the Internet obviously is being restrained due to widespread stealing of intellectual property, as has been made clear by countless studies and analysis on, for example, losses to the entertainment and software industries.

Stronger IP protections are not bad for consumers, or for small businesses and independent artists. To the contrary, beefing up IP rights will only further expand choices for consumers, and increase opportunities for independent creators and the business community.

Acknowledging new opportunities should not serve as an excuse for ignoring IP theft.

______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Megaupload and Protecting IP

The anti-intellectual property forces on the Internet are upset, as various governments around the world are doing exactly what they should be in protecting private property from theft.

On January 19, the U.S. Justice Department and FBI announced one of "the largest criminal copyright cases ever brought by the United States." The target? As described by the DoJ, it's "an international organized criminal enterprise allegedly responsible for massive worldwide online piracy of numerous types of copyrighted works through Megaupload.com and other related sites."

All entrepreneurs and businesses that rely on and build value through IP, and the consumers that enjoy and want more IP-based products and services, should strongly approve of, even celebrate, such actions by law enforcement.

To say that this was an international effort is a bit of an understatement, as in addition to the U.S., law enforcement from New Zealand, Hong Kong, the Netherlands, the United Kingdom, Germany, Canada, Australia and the Philippines were involved to varying degrees.

The seven people charged in the indictment - four originally arrested in New Zealand - are charged with "engaging in a racketeering conspiracy, conspiring to commit copyright infringement, conspiring to commit money laundering, and two substantive counts of criminal copyright infringement."

Federal authorities estimate that the harm to copyright holders is far in excess of $500 million, with $175 million in illegal profits being earned.

The DoJ explained: "According to the indictment, for more than five years the conspiracy has operated websites that unlawfully reproduce and distribute infringing copies of copyrighted works, including movies-often before their theatrical release-music, television programs, electronic books, and business and entertainment software on a massive scale... The indictment states that the conspirators conducted their illegal operation using a business model expressly designed to promote uploading of the most popular copyrighted works for many millions of users to download. The indictment alleges that the site was structured to discourage the vast majority of its users from using Megaupload for long-term or personal storage by automatically deleting content that was not regularly downloaded."

Again, if you operate a business or have a job in the movie, television, publishing and software industries, this case is a positive step forward.

Unlike lawful online storage sites, Megaupload is commonly known as allowing widespread and easy access to unauthorized copies of video and music. Large files can be accessed, shared and/or downloaded anywhere by anyone.

In a January 20 report, the New York Times highlighted the difference between Megaupload, for example, and legitimate services: Aaron Levie, chief executive of Box.net, a popular online storage company, "noted that his company and Dropbox, as well as the services from Google and Microsoft, were less likely prosecution targets because they depended to a large extent on legitimate corporate purchases of their storage. These services are more focused on sharing within organizations and small groups. While this can make it more difficult for an outsider or the authorities to see who is storing what, it makes it less likely that huge copyright violations are taking place. Lori Shen, a spokesman for YouSendIt, said any comparison between that site and Megaupload would be inaccurate. ‘YouSendIt is a private and secure business collaboration tool for business users. It provides a secure vehicle to share, send, sign and sync business content online,' Ms. Shen said."

And on January 23, another Times article pointed out steps being taken in response to these actions, including: "Filesonic, Fileserve, FileJungle and UploadStation now forbid users from downloading any content they did not upload themselves."

The Wall Street Journal also explained the recent shift in pirating and its international aspects: "Sites such as Megaupload, known as cyberlockers, have grown in popularity and shifted the technology and business of stealing content. Cyberlockers-so called because they offer virtual storage homes for files that can be accessed from any device with a Web browser-are often foreign sites that offer a smorgasbord of pirated movies, TV shows, music and e-books that people can download with a few clicks, say media companies, and now account for about half of all online pirate activity."

Unfortunately, nations like China and Russia serve as ideal hosts for such services given that government enforcement of intellectual property is weak, at best, in those nations. And that's exactly where assorted IP thieves are increasingly turning to operate.

The Megaupload case should not be a cause for concern or protest by IP creators or consumers. Instead, it should be highlighted as an example of government exercising its proper role of enforcing property rights, and international cooperation protecting IP in the integrated, twenty-first century economy.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Combating Rogue Websites

The following Technology & Entrepreneurs analysis addresses the issue of Internet piracy by foreign rogue websites. As widely reported, some websites today are "going dark" or protesting the Protect IP Act and the Stopping Online Piracy Act (SOPA) through other means. But as noted below, this legislation is about protecting IP, and those who say it infringes upon free speech or will shut down the Internet are simply toying with the truth. Rogue foreign websites are stealing American IP and raking in billions of dollars from such theft. So why do some U.S.-based Internet companies want to protect them?

Establishing and protecting intellectual property rights has been central to economic growth since the Industrial Revolution. And its importance has only been magnified in today's international, knowledge-based economy - especially with the vast advancements in telecommunications, digital technology and the Internet.

At the same time, new avenues of opportunity for entrepreneurs, businesses and consumers have opened more doors to criminal activity, and created new challenges for government to meet its critical obligation of protecting intellectual property. The latest step being considered by Congress is stepped up combating of Internet piracy by foreign rogue websites.

First, let's consider why this is so important to the U.S. economy.

In terms of the economic contributions made by intellectual property industries in general, a January 2011 study by NDP Consulting titled "Employment and Gross Output of Intellectual Property Companies in the United States" found:

• "IP companies in the manufacturing and non-manufacturing sectors generated more than $7.6 trillion in gross output in 2008, accounting for 33.1 percent of total U.S. gross output. IP companies in the manufacturing sector alone generated $3.9 trillion in output, constituting 75.2 percent of total U.S. manufacturing output. IP companies in the non-manufacturing sector generated $3.7 trillion in output, accounting for 20.8 percent of U.S. non-manufacturing gross output."

• "Based on the latest U.S. official data, we estimate that, in 2008, IP companies in manufacturing and non-manufacturing sectors employed more than 19 million full- and part-time (headcounts) workers and accounted for 16.3 percent of U.S. full- and part-time employment. Nearly 70 percent of U.S. manufacturing jobs and 9.3 million workers (full- and part-time) were in IP companies and less than 10 percent of U.S. non-manufacturing jobs and 9.8 million workers (full- and part-time) were in IP companies."

And focusing on copyright industries in particular, the 2011 edition of the "Copyright Industries in the U.S. Economy," prepared by Economists Incorporated for the International Intellectual Property Alliance, and released in November, reported that in 2010, the value added by total copyright industries registered at 11.1% of GDP, and total copyright industries accounted for 9.9% of private sector employment in 2010.

So, intellectual property ranks as a key driving force of U.S. economic growth and employment.

Second, IP protections are crucial to small businesses specifically. The bulk of enterprises in IP industries are small firms. Consider the following examples of employer firms based on the latest (2009) data from the Census Bureau in terms of the percentage that have fewer than 20 employees:

• Telecommunications industry: 84%

• Internet publishing and broadcasting and web search portals: 89%

• Newspaper, periodical, book, and directory publishers: 83%

• Software publishers: 70%

• Motion picture and sound recording industries: 93%

• Radio and television broadcasting business: 76%

It should be clear that enhancing IP protections are necessary for the well-being of small business and their employees, and again, for innovation and the overall economy. IP protections are critical for a range of sectors where small businesses are dominant - from manufacturing to fashion; retail to health care; technology to consumer goods, and many more.

Therefore, bipartisan support exists in Congress for legislation providing enhanced tools to counter and disrupt the efforts of foreign rogue websites that steal the intellectual property of U.S. entrepreneurs, businesses and workers. Using professional-looking website, consumers get lured in, and wind up with counterfeit and pirated products, as well as being placed at risk of identity theft and exposure of computer viruses. While tools are in place to prosecute domestic piracy, countering foreign piracy remains far more elusive.

In the U.S. Senate, the PROTECT IP Act (S.968) has 40 cosponsors and received unanimous Senate Judiciary Committee support, and is scheduled for floor debate later this month. Meanwhile, in the House of Representatives, the Stop Online Piracy Act (HR 3261) has been introduced, and received strong bipartisan support during the House Judiciary markup process.

With proper checks and balances and due process protections, and without risks to domestic sites, this legislative effort is focused on foreign Internet sites dedicated to infringing activities, that is, as described in the S.968 summary, sites that have "no significant use other than engaging in or facilitating copyright infringement, circumventing technology controlling access to copyrighted works, or selling or promoting counterfeit goods or services;" or are "designed, operated, or marketed and used to engage in such activities."

Scaremongering among certain groups in opposition has tried to gin up opposition, declaring, for example, that this legislation would somehow strangle the Internet with over-regulation. Any kind of regulatory overreach obviously is a concern of small businesses. After all, no group suffers more from excessive and misguided regulation than small enterprises.

But that's clearly not the case here. Instead, this is about government exercising its proper role of stopping criminal activity - in this case, online piracy from foreign sources - and protecting IP so that small businesses, the Internet and the economy can thrive.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Copyright Industries and their Importance to Economy

It's not unusual for intellectual property rights to be treated in cavalier fashion. I even see it when teaching MBA students, many of whom, upon entering my class, fail to grasp the importance of IP protections in the broader economy, and see few problems in personally subverting intellectual property through, for example, illegal downloading of their favorite music.

The attitude is summed up in assorted questions. Why get so hung up on protecting intellectual property? How do IP protections actually and substantively translate into the real-world economy? And isn't this all about big businesses that will prosper no matter what?

To help communicate and/or reinforce how important intellectual property is to the U.S. economy, consider the key findings in the 2011 edition of the "Copyright Industries in the U.S. Economy," prepared by Economists Incorporated for the International Intellectual Property Alliance, and released this past November.

In 2010, total copyright industries contributed significantly to the overall economy, with added value equal to 11.1% of GDP.

For good measure, during recent tough economic times, copyright industries grew at a much faster pace than the broader economy. From 2007-10, total copyright industries grew at an average annual rate of 1.47%, compared to 0.05% for the overall economy.

As for employment, total copyright industries accounted for 9.9% of private sector employment in 2010. In addition, average annual compensation in total copyright industries topped the U.S. average by 15%, with compensation in "core" copyright industries beating the national average by 27%.

Those are significant economic contributions and differences brought about by copyright industries.

As for this all being a "big business" issue, it pays to look at the breakdown of key copyright industries. In the IIPA study, core copyright industries are defined as "those industries whose primary purpose is to create, produce, distribute or exhibit copyright materials. These industries include newspapers and periodicals, motion pictures, recorded music, radio and television broadcasting, and computer software."

Based on Census Bureau data (2008 most recent), consider the make up of key parts of these core copyright industries:

• In terms of newspaper, periodical, book, and directory publishers, 83% had fewer than 20 employees.

• As for software publishers, 70% had less than 20 workers.

• In the motion picture and sound recording industries, it's 93% with less than 20 employees.

• And in the radio and television broadcasting business, 76% of firms had less than 20 workers.

So, copyright industries are both critical to the economy, and are overwhelmingly about small businesses. The data show a very different reality than what is widely presumed about intellectual property. In the end, protecting IP rights enhances economic opportunity, entrepreneurship and jobs.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

The Christmas Season and IP

I stopped by Amazon.com's website on Tuesday night (December 20) to get a feel for the top sellers in various categories. What's unavoidable when taking in all of the top-scoring gifts that are moving this Christmas shopping season is the importance of intellectual property in each case.

The top seller in the book category on Amazon was the recent biography Steve Jobs by Walter Isaacson. Not only does this top tome obviously speak to the importance of copyright in providing incentives for writers to produce works - whether read as a traditional paper book or as an ebook - but the subject of the book speaks to the critical role that IP plays in innovation.

The late Steve Jobs, cofounder of Apple and leading technology innovator, understood the importance of protecting intellectual property. In the biography, Isaacson reported:

"At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:

"‘From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we'd be out of business. If it weren't protected, there'd be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there's a simpler reason: It's wrong to steal. It hurts other people. And it hurts your character.'

"He knew, however, that the best way to stop piracy - in fact the only way - was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting."

Jobs, of course, was spot on in his assessment. And it not applies to the music industry - which many say Jobs and iTunes saved - but to all industries in the twenty-first century.

Think about other areas on the Amazon.com website. The top-selling video games were "Just Dance 3" created by UBI Soft for the Nintendo Wii, Xbox 360 and PlayStation 3; "Kinect Sports Season Two" by Microsoft for Xbox 360; "Dance Central 2 by Microsoft for Xbox 360; and "Call of Duty: Modern Warfare 3" by Activision Publishing for Xbox 360. What would be the state gaming without IP protections for both the hardware and software? Obviously, stagnant compared to what's available to players today.

As for Movies and TV, the top sellers were a film called "The Help," and the next three were all about Harry Potter - "Harry Potter and the Deathly Hallows, Part 1," "Harry Potter and the Deathly Hallows, Part 2," and "Harry Potter: The Complete 8-Film Collection."

Harry Potter provides another powerful example of what creators are capable of accomplishing under a regime of protecting intellectual property rights. Author J.K Rowlings produces a series of masterful books that appeal to children and adults, and Hollywood then takes those books and does a generally good job of bringing those tales to the big screen. Without solid IP protections, Rowlings might still have written her tales - though that's doubtful when one hears her personal story - but they would have had limited distribution, as no one would have made the investments needed to bring the stories to millions of readers and moviegoers around the globe.

Creativity, innovation, and production, especially in a knowledge-based economy, are all about the foundation of protecting IP. This is especially critical for entrepreneurs and innovators, where the growth of their enterprises and success rests upon a framework and culture that honors IP.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

Property Rights and Entrepreneurship

Without strong property rights protections, entrepreneurship, and economic development and growth will, at best, lag or stagnate, or at worst, risk taking and an economy will decline. And this goes for protecting both tangible or physical property, and intangible or intellectual property.

This has been the case throughout economic history.

In a February 2006 SBE Council report ("Innovation and Intellectual Property: The Economics and the History), I highlighted the following regarding the work of Nobel Prize-winning economist Douglass North: "In his Structure and Change in Economic History, Douglass C. North made the case that ‘the Industrial Revolution was an acceleration in the rate of innovation' due to ‘better specified property rights,' which raised ‘the rate of return on innovating.' He later went on to show and explain that "throughout man's past he has continually developed new techniques, but the pace has been slow and intermittent. The primary reason has been that the incentives for developing new techniques have occurred only sporadically. Typically, innovations could be copied at no cost by others and without any reward to the inventor or innovator. The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.' North added that ‘a systematic set of incentives to encourage technological change and raise the private rate of return on innovation closer to the social rate of return was established only with the patent system... More important than patent law per se is the development and enforcement of a body of impersonal law protecting and enforcing contracts in which property rights are specified.'"

The laws of economics have not changed in today's dynamic, digital, knowledge-driven economy. Therefore, the critical role of property rights has not been diminished in any sense. Indeed, it can be argued that they are even more important today. Indeed, when focused on the critical role of the entrepreneur in the twenty-first-century economy, the importance of property rights cannot be overstated.

Therefore, it is not surprising that the "Index of Economic Freedom," published annually by The Wall Street Journal and the Heritage Foundation, which ranks 183 nations based on ten areas, includes property rights as a key measure.

As explained in the study: "The ability to accumulate private property and wealth is understood to be a central motivating force for workers and investors in a market economy. The recognition of private property rights, with sufficient rule of law to protect them, is a vital feature of a fully functioning market economy. Secure property rights give citizens the confidence to undertake entrepreneurial activity, save their income, and make long-term plans because they know that their income, savings, and property (both real and intellectual) are safe from unfair expropriation or theft."

While the U.S. ranked ninth overall, it came in 17th among the 183 nations ranked on the 2011 index. On property rights, it's pointed out: "Property rights are guaranteed. Contracts are secure, and the judiciary is independent. A well-developed licensing system protects patents, trademarks, and copyrights. Government interventions in financial markets and the auto- motive sector have raised concerns about expropriation and violation of the contractual rights of shareholders and bondholders. The individual health insurance mandate passed by Congress in 2010 raised serious constitutional questions regarding whether government could require the spending of private funds."

Some room exists for improvement. That includes the rolling back of ObamaCare, and with it, the insurance mandate noted above. For good measure, the U.S., like most other nations, faces the challenge of protecting intellectual property in this era of online piracy.

But in the end, the U.S. has a solid system for protecting property rights - especially when compared to most other nations - and that keeps us as a global leader in terms of innovation and entrepreneurship.

_______________

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.His new book is “Chuck” vs. the Business World: Business Tips on TV.

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.

_______________

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