The Effects of Software Piracy on Economic Development

Literature Review Matt Leap COR-310-01: Technology and Development ovem!er 1"# $01$

%iracy& The word con'ure( image( o) armed ro!!ery on the high (ea(&

Modern piracy (till involve( the procurement o) good(* however# it ta+e( place through electronic channel(& One indu(try hit particularly hard !y piracy i( the (o)tware indu(try& ,o)tware piracy i( !roadly de)ined a( the unauthori-ed reproduction or di(tri!ution o) computer (o)tware .Ro!ert(on et al&/& Thi( de)inition include( !oth the copying o) internally developed company (o)tware and duplication o) commercially availa!le (o)tware .Ro!ert(on et al&/& The (o)tware indu(try ha( !een incredi!ly vulnera!le to piracy due to the acce((i!ility o) (o)tware and the ea(e o) duplication .Ro!ert(on et al&/& The illegal u(e o) (o)tware can !e (egmented into (everal categorie(* end-u(er piracy occur( when cu(tomer( u(e unlicen(ed (o)tware or duplicate a legally purcha(ed copy* client-(erver overu(e occur( when companie( permit more u(er( than licen(ed to u(e (o)tware* hard-di(+ loading happen( when (o)tware i( loaded on multiple hard drive( )rom one original* 0nternet (wapping i( when commercial (o)tware i( uploaded and downloaded through the 0nternet* and commercial counter)eiting occur( when (o)tware i( copied and re(old .Ro!ert(on et al&/& %iracy can al(o !e di))erentiated !a(ed on (cale& The level( o) piracy range )rom petty piracy 1 (imple unlicen(ed copying 1 to grand piracy and commercial grand piracy .Ro!ert(on et al&/& The higher-level in)ringement( o) grand piracy and commercial grand piracy involve !road (haring !eyond per(onal networ+(# and in the ca(e o) later# the re(ale and di(tri!ution o) pirated wor+( .Ro!ert(on et al&/& Leader( in the cru(ade again(t glo!al (o)tware piracy are the 2merican-!a(ed 3u(ine(( ,o)tware 2lliance .3,2/ and ,o)tware %u!li(her

2((ociation .,%2/ .Ro!ert(on et at&/& On a glo!al level# the 2greement on Trade-Related 2(pect( o) 0ntellectual %roperty Right( re4uire( protection and en)orcement o) intellectual property right( )or mem!er( o) the 5orld Trade Organi-ation .Ro!ert(on et al&/& 2dditional guidance come( )rom the 5orld 0ntellectual %roperty Organi-ation# a (u!(idiary o) the 6nited ation(#

promoting protection o) intellectual property# admini(tration o) treatie(# and development international norm( .Ro!ert(on et al/& 7ew would argue the prevalence o) piracy around the world and the )act that piracy ha( a (igni)icant glo!al economic impact* however the con(en(u( end( there& 7rom thi( point# viewpoint( diverge in one o) two way(& The )ir(t i( the traditional view that piracy i( a direct drain on the (o)tware indu(try through reduced (ale(# thu( it lead to lower inve(tment# di(couraged innovation# and dimini(hed !ene)it( 0n)ormation Technology .0T/ (ector& The oppo(ing view i( that properly managed piracy increa(e( demand through networ+ e8ternalitie( and word o) mouth# encourage( innovation# and !ene)it( (mall companie( and developing nation(& ,o)tware piracy i( argued to have !oth detrimental and !ene)icial in)luence( on economic development& The )ir(t (chool o) thought i( that (o)tware piracy ha( a negative impact on economic development .,cott and 3rown# %ar+# 9oel and el(on#

2ndre(# 3anar'ee et al&/& The 3u(ine(( ,o)tware 2lliance conducted a (tudy into :0 countrie( in an e))ort to calculate the impact o) (o)tware piracy .,cott and 3rown# 3anar'ee et al&/ The piracy rate( o) the countrie( varied )rom

$1; in the 6nited ,tate( to <$; in =ietnam .,cott and 3rown/& The placed the world piracy rate at 3";# meaning that thirty-)ive percent o) all (o)tware u(ed acro(( the world i( pirated .,cott and 3rown# 3anar'ee et al&/& The (tudy e(timate( that glo!al revenue lo(t due to piracy could reach >1?0 !illion !y $010 .@ang et al&/& 0t pro(e( that a ten percentage point reduction in glo!al piracy rate over a )our year period would lead to $&A million 'o!(# >A00 !illion in economic growth# and >B: !illion in ta8 revenue( .,cott and 3rown# @ang et al&/& The (tudy argue( that the(e )igure( can !e achieved through 0T (ector growth& Opponent( o) the 3,2 (tudy are 4uic+ to indicate the upward (wing o) the (tudyC( calculation( .,cott# 2ndre(/& ,cott point( out that the 3,2 a((ume( that one hundred percent o) pirated (o)tware repre(ent( a direct lo(( in (o)tware revenue and that i) availa!ility o) pirated (o)tware wa( decrea(ed# revenue would !e recovered dollar-)or-dollar .,cott/& %iracy revenue num!er( are in)lated !y client-(erver overu(e where companie( un+nowing purcha(e 10; to 100; too )ew licen(e( .,cott/& everthele((# tho(e again(t piracy note that a countryC( piracy rate i( noted a( a +ey di))erentiator( !etween countrie( with (trong 0T (ector( and tho(e with wea+ 0T (ector( .,cott and 3rown# %ar+# @ang et al&/& The eleven countrie( with the worldC( (malle(t 0T (ector( have a com!ined :0; piracy rate# twice the worldC( average .,cott and 3rown/& The eleven countrie( with the world( large(t 0T (ector( average a $<; piracy rate .,cott and 3rown/& ,o)tware compri(e( over B0; o) 0T (ector (pending .,cott and 3rown/& 0)

piracy rate i( reduced# the 0T (ector will grow# creating 'o!( and ta8 revenue .,cott and 3rown# %ar+/& Thi( growth !y limiting the piracy rate .i&e& the (upply o) pirated (o)tware/ )orcing a portion o) pirated (o)tware u(er( to legally purcha(e thi( (o)tware# increa(ing revenue and driving e8pan(ion .,cott and 3rown# 3,2 %iracy 0mpact ,tudy/& The 3,2 calculate( )igure( to (upport thi( conclu(ion !y calculating the di))erence !etween current piracy rate( multiplied !y mar+et (i-e and targeted piracy rate( multiplied !y mar+et (i-e .3,2 %iracy 0mpact ,tudy/& The (tudy then ad'u(t( )or !u(ine(( lo((e( )rom !u(ine((e( wor+ing with pirated (o)tware .3,2 %iracy 0mpact ,tudy/& 7or e8ample# the (tudy )ind( that developing countrie( Ru((ia# 3ra-il# and 0ndia could gain >A&$0 !illion# >3&<0 and >A&BB !illion additional 0T revenue re(pectively with only a ten percentage point reduction in piracy rate .3,2 %iracy 0mpact ,tudy/& 2gain# it i( worth noting that the(e num!er( come )rom the 3,2 and are )ar )rom impartial .,cott/& Opponent( o) (o)tware piracy a((ert that 0T growth through reduction in piracy lead( to many accompanying !ene)it( .,cott and 3rown/& The 0T (ector i( noted )or it( a!ility to grow 4uic+ly and creation o) a!ove-average income 'o!( .,cott and 3rown/& There are al(o a large num!er o) a((ociated indu(trie( that al(o reap the !ene)it( o) 0T development .eg& mar+eting# di(tri!ution# and pac+aging/ .%ar+# ,cott and 3rown/& D8pan(ion o) the 0T (ector add( new (ource( o) company revenue and a!ove-average income 'o!(# reward( (hared with government( through ta8 revenue .,cott and 3rown/& Thi( ta8 revenue can !e applied to in)ra(tructure# pu!lic wor+(#

education# and other )orm( o) development .,cott and 3rown/& 0n)ormation Technology growth i( propelled !y )oreign inve(tment and trade .%ar+/& %rotection o) intellectual property i( nece((ary in order to en(ure innovator( pro)it )rom their innovation and thu( have an incentive )or )uture innovation .2ndre(/& 0) return( are too low )or innovation# innovator( may lac+ the re(ource( to continue innovation .2ndre(# ,cott and 3rown/& 0) there are in(u))icient reward(# re(earch and development will not !e underta+en .2ndre(/& ,imilarly to innovator(# an inve(tor mu(t have incentive to a((ume the ri(+ o) inve(ting& 0nve(tor( )ace( the ri(+ that earning( will !e le(( than development co(t( .%ar+/& 2 high piracy rate increa(e( the ri(+ o) inve(ting in a particular area and thu( divert( inve(tment to an area with le(( ri(+& 5hen there i( a higher level o) ri(+# inve(tor con)idence i( reduced# meaning even tho(e inve(tor( are willing to inve(t do (o in (maller amount( .%ar+# 9oel and el(on/& 5ith lower !udget cap(# the overall 4uality o) (o)tware

(u))er( .%ar+/& Legally purcha(ed (o)tware i( o) higher 4uality and !ene)it to con(umer( !ecau(e o) update( to content# cu(tomer (upport and patche( to prevent maliciou( attac+( .,cott and 3rown/& %ar+ conclude( that intellectual property protection (timulate( economic growth indirectly !y (timulating inve(tment and innovation(& Li+e inve(tment# trade i( al(o (ti)led !y high piracy rate .%ar+/& Companie( may )orgo trading in a area with a high piracy rate due to increa(e ri(+ o) illegal di(tri!ution o) the traded good .%ar+/& The data i(

generally in )avor o) thi( (tance .Lee and Man()ield/& 0n a (urvey o) patent attorney(# international operation( (peciali(t(# and top e8ecutive( )or <A ma'or companie(# ?0; o) re(pondent( 1 in variou( indu(trie( 1 claimed that piracy rate wa( an important )actor in con(idering )oreign inve(tment in re(earch and development .Lee and Man()ield/& 0ndu(trie( with re(earchinten(ive product( that are ea(ily replica!le .e&g& (o)tware# drug(/ # the num!er( are even more (taggering .Lee and Man()ield/& Over )i)ty percent o) the(e )irm( indicated that they would not tran()er their newe(t or mo(t e))ective product 1 even to a wholly owned (u!(idiary 1 in high piracy countrie(# including 0ndia# =ene-uela# igeria# Thailand# and 3ra-il .Lee and

Man()ield/& Thi( )actor can lead to productivity and development delay( in countrie( with high piracy rate( .%ar+/& ,o)tware %iracy i( a detriment to economic development through prevention o) 0T (ector growth# decrea(ed return( on innovation# and higher ri(+ )or inve(tment and trade& 2lternatively# many argue that with proper management# (o)tware piracy provide( an opportunity )or po(itive in)luence on economic development .%ra(ad and Maha'an# 5on# Ta+eyama# ,undarara'an# 3e-men and Dep+en# ,hin and 9opal# %ar+# 3agchi et al/& 0n addition to 4ue(tion(

concerning the value o) reducing piracy# proponent( argue that managed piracy can (timulate demand .%ra(ad and Maha'an# Ta+eyama# ,undarara'an/& One way piracy can (timulate demand i( through (imple word o) mouth .%ra(ad and Maha'an/& 2 u(er o) pirated (o)tware may recommend or demon(trate the (o)tware to another pro(pective u(er# who

then in turn purcha(e( the (o)tware legally .%ra(ad and Maha'a/& 2 (econd way thi( (timulation o) demand can occur i( through networ+ e8ternalitie( .%ra(ad and Maha'an# Ta+eyama# ,undarara'an/& etwor+

e8ternalitie( are value added to the product !y the num!er o) u(er( o) the product .5on# Ta+eyama/& 7or e8ample# Micro(o)t 5ord i( !y )ar the mo(t popular word proce((ing (o)tware& Micro(o)t 5ord i( not inherently !etter than any other (o)tware# !ut due to it( popularity# the &doc .or &doc8/ )ile )ormat ha( !ecome the accepted (tandard o) mo(t indu(trie(& @ou can (end a Micro(o)t 5ord document with the rea(ona!le e8pectation that the receiving party ha( the mean( to open it# wherea( thi( i( generally not the ca(e )or Open O))ice Document( .&odt/& Ta+eyama (ugge(t that networ+ e8ternalitie( can lead to greater pro)it( than tho(e made without piracy& etwor+ e8ternalitie( play a particularly +ey role in (peed o) adoption )or new (o)tware .%ra(ad and Maha'an# 5on/& 5hen new (o)tware i( introduced# it need( to meet a certain Ecritical ma((F in term( o) pro)it .5on/& Thi( critical ma(( i( a point at which the (o)tware ha( made enough money to (u(tain it(el) through update( and continued development .5on/& %ra(ad and Maha'an recommend that management !alance piracy 1 a( a mean( to (peed adoption 1 with the num!er o) paying cu(tomer( to reach (peci)ic chec+point( .eg& 5onC( critical ma((/& Digital Right( Management .DRM/ paired with dynamic pricing allow( companie( to ma+e the mo(t out o) piracy .%ra(ad and Maha'an# ,undarara'an/& ,undarara'an note( that DRM (trategie(# or e8ce((ive copyright protection in general# can deter legitimate

(o)tware purcha(er .ie& Re(triction( on legal u(e (everely limit the u(e)ulne(( o) the product/& Ge (ite( the e8ample o) iTune(& iTune( placed )ewer re(triction( on the legal u(age o) their mu(ic 1 at the ri(+ o) higher piracy 1 giving iTune( an advantage over competitor( (uch a( Rhap(ody .,undarara'an/& %roponent( al(o argue the (ocial good element o) piracy in that it can (peed innovation through wider acce(( to (o)tware and the a!ility to !uild on pa(t program( .%ar+# 3arton and Malhotra# 3e-men and Dep+en/& Thi( i( e(pecially true in developing nation( .,hin and 9opal# %ar+# 3agchi et al&/& 3y (upplying an alternate (upply o) (o)tware# piracy drive( price( down and can actually )o(ter more legal u(age !y enticing u(er( who would have !ee otherwi(e una!le to a))ord the (o)tware .,undarara'an/& %iracy can help a product (urvive in a developing country !y en(uring a large enough u(er !a(e .5on/& %iracy can al(o help to protect developing countrie( )rom the royaltie( and licen(ing )ee( that would prevent timely acce(( to (o)tware .3e-men and Dep+en# %ar+/& 0ntellectual property right legi(lation tend( to )avor developed nation( .3e-men and Dep+en# %ar+/& Developed nation( tend to hold copyrighted wor+( and the royaltie( or )ee( are not (uch a !urden )or more e(ta!li(hed# developed economie( .%ar+/& 0) developing nation( did not have acce(( to pirated material# the would !e )orced to u(ed outdated (o)tware# thu( lowering productivity and prolonging development& 0t i( (imilarly argued that (trict 0%R regulation !ene)it( large companie( a( oppo(ed to (mall companie( .3arton and Malhotra# ,cott/& The Duropean

Committee )or 0nteropera!le ,y(tem( .DC0,/# a group o) (maller (o)tware companie(# i( one o) the leading voice( again(t increa(ed 0%R regulation .3arton and Malhotra/& Companie( (uch a( 03M and ,iemen( have pu(hed )or (trict copyright control o) (o)tware 1 including inter)ace( .3arton and Malhotra/& DC0, indicate( that !y en)orcing (uch tight control o) 0%R# it prevent( copying o) e8i(ting inter)ace( or rever(e engineering and thu( hinder( the a!ility to develop program( that are compati!le with e8i(ting hardware and (o)tware.3arton and Malhotra/& 2dditionally the Ecompliance !urdenF i( much greater )or (mall (o)tware companie( .ie& legally licen(ing product( con(ume( a larger percentage o) revenue )or (mall )irm( than )or a large/& 2 )inal point that opponent( o) 0%R regulation note i( that the !u(ine(( re(ource( u(ed toward complicated compliance policie( could !e !etter allocated el(ewhere# including inve(tment and development& %iracy !ene)it( economic development through increa(ing demand# innovation through availa!ility# and leveling the playing )ield )orm developing nation( and (mall !u(ine((e(& ,o)tware piracy i( de!ated a( !oth detriment and !ene)it to economic development& On one hand it i( argued that (o)tware piracy lower( inve(tment# di(courage( innovation# and hinder( 0T growth* while# on the other hand# it i( argued that managed piracy increa(e( demand# increa(e( innovation# and allow( developing nation( and (mall !u(ine((e( to compete& Through thorough (tudy on the (u!'ect# 0t i( clear that opponent( o) managed (o)tware piracy are una!le to 'u(ti)y their claim( with anything

other than !ia(ed 3,2 data& The ma'ority o) data in (upport o) (trict intellectual property regulation i( !a(ed on empirical re(earch and analy(i(& ,cholar( have !een una!le to de)initively prove that 0T growth# )oreign direct inve(tment# and trade growth were re(ult( o) reduction in piracy rate# rather than other )actor( .e&g& moderni-ation# loo(e !u(ine(( regulation# etc&/& %ra(ad and Ma'ahad ta+e the correct approach in regard to (o)tware piracy& %iracy rate i( (imply another )actor )or (o)tware companie( to (trategically manage* there are de)inite advantage( and di(advantage( )or allowing di))erent level( o) piracy& 0) u(ed correctly# (o)tware piracy can lead to a more (ucce(()ul di(tri!ution# implementation and adoption o) (o)tware& 7urther re(earch in thi( area mu(t !e done on method( )or !u(ine(( to accurately and e))ectively manipulate piracy rate(# Thi( type o) tool would allow !u(ine(( )urther incentive to allow controlled piracy and greater !ene)it( )rom manipulated piracy rate(& The )uture o) piracy i( a( a (trategic di(tri!ution model# (imply a good techni4ue )or (ome !u(ine(( plan( and one to avoid )or other(* detailed control( will turn piracy into a choice&

Re)erence(: 3agchi# Hallol# %eeter Hir(# and Ro!ert Cerveny& I9lo!al ,o)tware %iracy&I 2((ociation )or Computing Machinery&Communication( o) the 2CM A<&B .$00B/: :0-"& %roJue(t Central& 5e!& 1B ov& $01$&

3aner'ee# Dyuti# M& Hhalid 2hmed# and Kan-Dg!ert ,turm& I,ocio-Dconomic Development and ,o)tware %iracy& an Dmpirical 2((e((ment&I 2pplied Dconomic( 3:&1? .$00"/: $0<1-:& %roJue(t Central& 5e!& 1B ov& $01$&

3arton# Laurence# and @oge(h Malhotra& I0nternational 0n)ringement o) ,o)tware a( 0ntellectual %roperty&I 0ndu(trial Management L Data ,y(tem( <3&? .1<<3/: $0-& %roJue(t Central& 5e!& 1" ov& $01$&

3e-men# Tri(ha L&# and Craig 2& Dep+en& IThe 0mpact o) ,o)tware %iracy on Dconomic Development&I Con)erence %aper# 2cademy o) Dconomic( and 7inance& $00"& 3u(ine(( ,o)tware 2lliance& I%iracy 0mpact ,tudy: Dconomic 3ene)it( o) Reducing ,o)tware %iracy&I BSA Global Software Piracy Study - Home& 3u(ine(( ,o)tware 2lliance# $010& 5e!& A Dec& $01$& Hhou'a# M&# and G& H& Ra'agopalan& ICan %iracy Lead to Gigher %rice( in the Mu(ic and Motion %icture 0ndu(trie(M4ue(t&I Kournal o) the Operational Re(earch ,ociety B0&3 .$00?/: 3:$-3?3& Lee# Keong-@eon# and Ddwin Man()ield& I0ntellectual property protection and 6, )oreign direct inve(tment&I The review of Economics and Statistics .1<<B/: 1?1-1?B& %ra(ad# 2(huto(h# and =i'ay Maha'an& IGow Many %irate( ,hould a ,o)tware 7irm TolerateN an 2naly(i( o) %iracy %rotection on the Di))u(ion o) ,o)tware&I 0nternational Kournal o) Re(earch in Mar+eting $0&A .$003/: 33:-"3& %roJue(t Central& 5e!& 1B Ra'eev# H& 9oel# and 2& ov& $01$&

el(on Michael& IDeterminant( o) ,o)tware %iracy:

Dconomic(# 0n(titution(# and Technology&I Kournal o) Technology Tran()er 3A&B .$00</: B3:-"?& %roJue(t Central& 5e!& 1B ov& $01$&

Ro!ert(on# Chri(topher# M& 9illey H# and 7& Crittenden 5illiam& ITrade Li!erali-ation# Corruption# and ,o)tware %iracy&I Kournal o) 3u(ine(( Dthic( :?&A .$00?/: B$3-3A& %roJue(t Central& 5e!& 1B ov& $01$&

I,cott M ,cott# Llp* 3u(ine(( ,o)tware 2lliance 3,2 %iracy 0mpact ,tudy 0n)late( D))ect on Dconomic 9rowth&I 0nve(tment 5ee+ly 1B3& %roJue(t Central& 5e!& 1B ov& $01$& ew( .$011/:

,cott# 3eth# and Duncan 3rown& ID8panding the 7rontier( o) Our Digital 7uture: Reducing ,o)tware %iracy to 2ccelerate Dconomic 3ene)it(&I 0nternational Review o) Law# Computer( M Technology $0&1 .$00B/: $1:-& %roJue(t Central& 5e!& 1B ov& $01$&

,eung# Hyoon ,hin# Dt 2l& I9lo!al ,o)tware %iracy Revi(ited&I 2((ociation )or Computing Machinery&Communication( o) the 2CM A:&1 .$00A/: 103-:& %roJue(t Central& 5e!& 1B ov& $01$&

,undarara'an# 2run& IManaging Digital %iracy: %ricing# %rotection and 5el)are&I Roche(ter# Roche(ter:# $00?& %roJue(t Central& 5e!& 1B $01$& 5alter# 9& %ar+& IThe Copyright Dilemma: Copyright ,y(tem(# 0nnovation and Dconomic Development&I Kournal o) 0nternational 2))air( BA&1 .$010/: "3-O000& %roJue(t Central& 5e!& 1B ov& $01$& ov&

5on# ,eoung Koun& I etwor+ D))ect(# 0ncome and %iracy&I Roche(ter# Roche(ter:# $00<& %roJue(t Central& 5e!& 1B ov& $01$&

@ang# Deli# Dt 2l& I9lo!al ,o)tware %iracy: ,earching )or 7urther D8planation(&I Kournal o) 3u(ine(( Dthic( ?:&$ .$00</: $B<-?3& %roJue(t Central& 5e!& 1B ov& $01$&