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The US and other developed nations tend to

have a tremendous advantage inventing and

innovating. Less-developed nations struggle

to eep up technologically and occasionally

resort to unscrupulous methods to maintain pace

with their industrial counterparts. One of thepreferred tactics is imitation, and the imitation is

not always flattering. Such imitations are usually

of a lower quality than the original, and usually

remain so for an extended period. Imitation of

intellectual property is, simply, stealing, and the

industrialized world does not tae this well. The

condemnation of imitation, and the defense of

intellectual property, has become a crusade of

corporations and politicians. It is a simple and

seemingly non-debatable argument: developed

economies suffer from the imitation and de facto

theft of intellectual property.

It is not quite so simple. Intellectual propertyrightsIPin the less developed world can be

more relaxed than in the developed world, and

this may benefit the developed nations in the

long run. Granted, theft is theft, and the typical

corporation may not feel so conflicted, or be

interested in the long term effects of imitation and

wea IP r ights. But maybe they should be.

What is Innovation?

Innovation can be thought of as the process of

applying creative and differentiating properties

to an existing technology at a high level of qua

and design. Imitation is the creation of a lower

quality product with many of the same qualita

aspects as the innovation.

Stealing is Good

How could imitation be a good thing for the

developed world? How could the blatant copyi

of innovative products be a posit ive? The notio

that lower protections of IP in less-developed

countries is important, or at least not devastati

to the developed world is at best counter-intuit

Nonetheless, there is a case for the long-termbenefits of lower IP protections and allowing

ignoringimitations. As less-developed count

strive to eep up with the developed world, the

temptation to short cut the necessity to innova

is overwhelming. The short cutting leads to

imitation of products, software, services, and

everything in between.

Economically, this engenders the necessity t

innovate continuously on one side of the equat

and the lac of incentive to innovate on the oth

Countries that have a tendency to imitate and

do not need to have a culture of innovation. Th

can simply create a lower quality reproductionbring it to maret.

There are some problems with the imitate-

to-profit transition, however. The most glaring

is that it is unliely the imitation products will

be allowed into the marets of the innovating

country, and many of the other countries with

significant IP protections in place. The imitato

restricted to its own domestic maret, whereas

innovator can still sell its product or service in

less developed country. The quality of imitatio

is typically lower. And, as imitation leads to

Let Them Steal ItSamuel Rines

A PUBLICATION OF CHILTON CAPITAL MANAGEMENT

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August 2

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the lower rates of innovation in the imitating

countries, a larger gap in innovation emerges

between the two.

The loss to the innovator is the sale of a few

marginal units to the imitator. The benefit is the

necessity to innovate continuously. Why? Because

at some point the imitations begin to reach aquality level similar to the original, and evolve

enough from the original innovation that they are

liely to be allowed into the developed marets.

Essentially, there is a cycle of innovation to

imitation and bac again. The lac of protections

accelerates this cycle, and forces the innovators to

chase, ceaselessly, the next innovation.

Lower IP protections and high levels of

imitation create disincentives for the imitators to

innovate, and create incentives for innovators to

continue innovating. In the long-run, economies

with an emphasis on innovation have the

advantage in quality and in industry creation.

Stealing is Bad

While wea IP and the existence of unpunished

imitators do have the effect of creating a larger

innovation gap between the countries, stronger IP

also creates a better climate for innovators. Since

developing nations do not start from a tabula rasa,

countries are liely to begin with wea IP and

later move slowly and only incrementally towards

a stronger regime. This movement is never

seamless, because it requires an entirely different

set of economic drivers. Weaer IP countr ies

tend to have a high level of imitation driving

their economies, and find it difficult to adapt as

stronger IP begins to tae hold.

Moving from a lower to a higher IP stance

is a boon for innovators. The incentives for the

innovators to accelerate innovation are high:

they have a monopoly in selling in the previouslyimitating countries, and therefore higher

expected profits. This energizes the innovators

to turn out innovations more quicly in an

attempt to capture profits from larger, more

protected marets.

Imitators will find themselves unable to

continue their previous imitation cycle. They

are forced, instead, to attempt to innovate on

their own. But it is not a fast shift to this different

mindset. It taes time to create a culture of

innovation.

More than aligning incentives to benefit the

innovators, there is an awaening to the necess

of innovation in the long run. Since most

countries with low IP protections cannot typic

sell their imitations in the developed world, the

incumbent innovators are unliely to have face

competition from these imitators. This createscompetition in innovation in the long run, and

drives a higher rate of innovation in the short

run as incumbent innovators attempt to maint

their lead.

Does It Really Matter?

Whether or not IP is enforced, innovators from

the IP protected economies have an advantage

In the case of the persistently low IP regimes, t

innovators are forced to innovate continuously

to avoid the quality of the initial product being

imitated. It also reduces the incentives of the

imitator to innovate and create new industriesand products. This is a competitive advantage,

and it eeps competition from entering the

innovative, higher IP marets. However, there

are also benefits to the innovator if an imitatin

country begins to switch from low to high IP

protection. It creates a larger maret for their

innovations, increases the expected profits for

innovations, and therefore incentivizes innovat

The downside is the eventual competition from

the previous imitators after they have adjusted

the higher IP protection climate.

Developed countries may find that enforcing

higher IP is simply not worth the headache, an

that imitators are not true competitors in thebroad maret. Imitators do not easily become

innovators. In many ways, it maes sense to let

them steal it.

Sources: Marchetti, Society as a Learning System:

Discovery, Invention, and Innovation Cycles Revisited;

Edwin Lai, International Intellectual Property Rights

Protection and the Rate of P roduct Innovation; Amy

Jocely n Glass, Product Cycles and Maret Penetration

SAMUEL RINESisan analystand Economistat

chilton capital managEmEntin houston, tExas.dirEctquEstionsorcommEntsto:

srinEs@chiltoncapital.com

ZACH BECkisthE Editorof chilton currEntsand

opErations spEcialistat chilton capital managEmEn

houston, tExas.

forfurthErinformationon chilton capital

managEmEntstratEgiEsandsErvicEs, plEasEcontact

christophEr l. Knapp, cKnapp@chiltoncapital.com

forrEprintscontactsrinEs@chiltoncapital.com

ww w.chiltoncapital.com/currEnts

The notion that lower protections of IP inless-developed countries is important, or atleast not devastating, to the developed world

is at best counter-intuitive.