Why Protecting Intellectual Property is Critical to our Economy

Innovation is the hallmark of U.S. manufacturing, and it requires a certain mass of interconnected activities, which like a snowball rolling downhill grows in size as it proceeds towards end users. Substantial R&D is required to keep the innovation ball rolling to ensure more successes than failures. 

Manufacturing is an incubator for technology and science, so it is important that R&D be conducted in close proximity to manufacturing plants where innovative ideas can be tested and worker feedback can fuel product innovation.

Innovation and production are intertwined. You need to know how to make a product in order to make it better. “Most innovation does not come from some disembodied laboratory,” said Stephen S. Cohen, co-director of the Berkeley Roundtable on the International Economy at the University of California, Berkeley, told The New York Times. “In order to innovate in what you make, you have to be pretty good at making – and we are losing that ability.

In his book “Great Again: Revitalizing America’s Entrepreneurial Leadership,” Hank Nothhaft, retired CEO of Tessera Technologies, writes: “In our arrogance and our own naiveté, we told ourselves that so long as America did the ‘creative’ work, the inventing, we could let other nations do the ‘grunt’ work – the manufacturing. We did not yet understand that a nation that no longer makes things will eventually forget how to invent them.”

Most cutting edge or break-through technologies are not generated by established, larger companies. They come from the creative innovations of entrepreneurs starting up companies. However, most of these entrepreneurs don’t start up their companies in a vacuum; they are most often started by people who have gained knowledge and experience at existing companies in a technology/product field and leave the company to develop their own innovative new product in that same field.

These entrepreneurs need to have protection for the intellectual property of their new technologies via the patent system in order to raise the investor funds they need to move forward in developing the technology into a marketable, producible end product. Angel investors and venture capital investors invest their monies in a combination of the entrepreneurial team and the innovative, even disruptive technology. If the intellectual property is not secured through a “patent pending” or issued patent, there is nothing in which to invest.

Economist Pat Choate, author of “Saving Capitalism: Keeping America Strong,” emphasized howimportant the protection of intellectual property is to the future of American manufacturing at the “Making California Thrive” manufacturing summit last February facilitated by the Coalition for a Prosperous America. He said the U.S. is the most innovative country in the world and issues more patents than any other country. However, the recent passage of the America Invents Act converting the U.S. from a “first-to-invent” to “first-to-file” is hurting our innovation. Most growth comes from “disruptive” technology developed by inventors/entrepreneurs of small companies, and the “first-to-file” favors large companies that can file a challenge against these small companies in the hopes of bankrupting them to avoid disruptive technology from harming their business.

Emerging Nations Employ IP Theft to Compete

In the last two decades, the competitive status of U.S. manufacturing has been increasingly challenged by the state-of-the-art technologies being developed by established nations such as Japan, Germany, Korea and Taiwan. While emerging economies, such as China, are acquiring advanced manufacturing capability through R&D tax incentives and incentives for direct foreign investment, they still rely heavily on counterfeiting, pirating and the theft of American intellectual property to compete unfairly.

In a July 12th article in The Hill, Stephen Ezell, a senior analyst with the Information Technology and Innovation Foundation, wrote: “IP-intensive industries are foundational to the U.S. economy. They contribute over $5.1 trillion in U.S. economic output, accounting for nearly 35% of U.S. GDP in 2010, as the U.S. Department of Commerce found in its report ‘Intellectual Property and the U.S. Economy: Industries in Focus.’ At the same time, IP-intensive industries exported more than $1 trillion worth of goods and services in 2011, accounting for approximately 74% of total U.S. exports that year, and supported at least 40 million jobs, or 20% of all U.S. private sector employment.”

He criticized the testimony that the Government Accountability Office (GAO) provided to the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations regarding “Insights Gained from Efforts to Quantify the Effects of Counterfeit and Pirated Goods in the U.S. Economy” because it ignored previous reports of the International Trade Commission and the IP Commission. Instead of providing new data, the GAO report laments the fact that “quantifying the economic impact of counterfeit and pirated goods on the U.S. economy is challenging primarily because of the lack of available data on the extent and value of counterfeit trade.”

He pointed out that the ITC report, “China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy,” estimated that in 2009 alone Chinese theft or infringement of U.S. intellectual property cost almost 1 million U.S. jobs and caused $48.2 billion in U.S. economic losses due to lost sales, royalties or license fees. The report found that, ‘Of the $48.2 billion in total reported losses in 2009, approximately $36.6 billion (75.9%) was attributable to lost sales, while the remaining $11.6 billion was attributable to a combination of lost royalty and license payments.’”

He added that the more recent “IP Commission Report, a report from the Commission on the Theft of American Intellectual Property, found that the impact of international IP theft on the U.S. economy exceeds $320 billion annually, comparable to the level of U.S. exports to Asia.”

On June 20, 2013, the White House released the 92-page 2013 Joint Strategic Plan on Intellectual Property Enforcement. The press release states, “Since the first Joint Strategic Plan was released in 2010, the administration has made tremendous progress in intellectual property enforcement. Coordination and efficiency of the federal agencies has improved; U.S law enforcement has increased significantly and we have successfully worked with Congress to improve our legislation. We have increased our focus on trade secret theft and economic espionage that give foreign governments and companies an unfair competitive advantage by stealing our technology. We have pressed our trading partners to do more to improve enforcement of all types of intellectual property.”

It’s outrageous that the plan takes 92 pages to describe actions that are either the same as actions in the 2010 plan or are so ridiculously vague or redundant that they are virtually worthless, such as:

• Support small and medium-size enterprises in foreign markets.
• Coordinate international capacity-building and training.
• Improve transparency in intellectual property policymaking.
• Examine labor conditions.
• Assess the economic impact of intellectual property-intensive industries.
• Use legal software.
• Educate authors on “fair use” copyright doctrine

What inventors and entrepreneurs need most is enforcement of current laws. Thus, the most useful actions in the new plan are:

• Improve IPR enforcement efficacy by leveraging advanced technology and expertise.
• Increase focus on counterfeits shipped through international mail and work with express carriers.
• Evaluate the enforcement process of exclusion orders issued by the U.S. International Trade Commission (ITC).
• Promote Enforcement of U.S. Intellectual Property Rights through Trade Policy Tools

I seriously question whether this plan will enhance protecting America’s intellectual property. In addition, how will we know if it is successful if we don’t have current data on the extent of intellectual property theft and the damage it is causing to the American economy?

I agree with Ezell that the above plan “must be effectively implemented and the federal government needs to make it clear that it will no longer tolerate foreign entities counterfeiting or pirating U.S. goods, stealing trade secrets, copying digital content, or otherwise taking U.S. property without paying for it.”

Since innovation and creativity are part of the foundation of our country’s economy, we need to have effective enforcement of intellectual property rights to promote economic growth, ensure our global competitiveness, and protect the health and safety of our citizens. If we want to remain at the cutting edge of technology and innovation and maintain the critical mass of our manufacturing industry, we also need to protect the key to our future security as a nation and keep the R&D that fuels innovation and the subsequent manufacture of products within the United States.

Michele Nash-Hoff is president of ElectroFab Sales. She is the author of "Can American Manufacturing Be Saved?"