Software Piracy and Intellectual Property Rights Protection

Article excerpt

INTRODUCTION

This study relates intellectual property rights protection, cultural factors, and wealth, to software piracy rates by country. Intellectual property protection is of major importance in modern economic affairs. A strong component of economic growth can be attributed to advances in intellectual property, particularly in the most advanced countries. Intellectual property comes in a variety of forms, and can be thought of as a type of knowledge good. Pharmaceuticals, for example, are much more than the specific chemical compounds. Pharmaceuticals are valuable due to the tremendous research and development work of determining which compounds are effective and safe, and under which conditions. Likewise products such as computer software and motion pictures are valuable for the knowledge work that went into developing these products.

The economic factors affecting knowledge goods can be somewhat different than traditional goods. Knowledge goods often share the properties of high fixed development costs coupled with low marginal production costs. For example average capitalized cost estimates per approved biopharmaceutical of over $1.2 billion (DiMasi & Grabowski, 2007). Developing new software products are similarly tremendously costly and time dependent. Microsoft employs approximately 35,000 people in research and development and spent $8.2 billion in 2008 (2008 10-K statement). On the other hand, the incremental production costs of knowledge goods are often quite low. The incremental production cost of computer software is negligible with the advent of the Internet, since software products can be distributed over the Internet at little or no incremental cost. This creates a problem for the software developer: consumers can share products with each other free, leaving the developer without income. The same phenomenon occurs with other knowledge products. Bootleg versions of Hollywood films can be found, particularly in less developed countries. The Motion Picture Association of America (MPAA) estimates that the world-wide film industry in 2005 lost about $8.2 billion in revenue do to piracy (http://www.mpaa.org/piracy_WhoPiracyHurts.asp, 2/11/09). A political movement is taking place to legitimize compulsory licensing of pharmaceuticals. Compulsory licensing is when a country grants the rights to a local pharmaceutical company to produce a patented drug without permission of the patent holder. The argument advanced is that the value of the medicine to the population is more important than the rights of the patent holder to monopoly rights to this medicine. In summary, there are a variety of forces acting to limit the ability of developers to generate returns from investment in knowledge goods. The purpose of IP rights protection is to encourage new inventions by granting these monopoly rights; therefore the reduction of these rights in practice has the potential to curtail future advances in knowledge. Additionally, the reduction in profits due to the piracy of software and other knowledge goods may also preclude the investment into future research and development activities.

The purpose of this study is to advance the understanding of one particular aspect in IP rights protection, software piracy. This study expands on prior work in this area (Shin, Gopal, Sanders, & Whinston, 2004). Shin et al. (2004) proposed a model of software piracy that incorporated a country's wealth, as measured by gross domestic product per capita and the national culture dimension of collectivism as the factors in explaining the level of software piracy within the country. While this approach explained a high level of the variation in software piracy rates observed between countries ([R.sup.2] of 74% in the full model), the paper was able to generate only a limited range of suggestions regarding the appropriate actions organizations should undertake concerning the piracy.

Prior to the Shin et al. …