Prosperity Unbound

Guest Contribution by Rachel Beach

Per a recent article in the Washington Post:

China provides an interesting case, where hundreds of U.S. companies have chosen to do business inside the Great China Wall, even when threatened by insecurity of Intellectual Property Rights and financial assets. It is understood in financial markets that the threat of expropriation of property requires a risk premium on investments in such an environment, but even given this, when so much is at stake, businesses continue choosing to operate in the country. And many are getting stung in the process. Ebay, Google, and Time Warner number among those that have either pulled out of the market or are reconsidering, locked in legal battles to protect their interest and investments in the market.

Is it worth it? Over a billion potential customers should offer a resounding yes! But when there is potential for those same billions to steal your business concepts and intellectual property rights, your customer base, and a government to change its laws once again, acquiring much of your assets or restricting your mode of operation, the answer becomes a little more blurry. As stated by Kevin Smith, head of General Motors in China, “there are different rules in China”.

The question arises: how are companies to deal with theft of Intellectual Property Rights in a country of a billion plus people? A Washington Post article suggests that China is a “very unique country” in this regard, and attacking every violator is not the best strategy. Should it be? Shouldn’t a company strive to protect its Intellectual Property Rights wherever it does business? The question returns us to the considerations of government provisions of security of property. Where the government does not provide security, how much are private businesses and how much should private businesses invest to protect their rights and property by other means? To an extent, in a country like China, where this means any number of its billion citizens could be violating your intellectual property rights, it is a futile effort. It’s almost like chasing a flock of chickens: chase one and exhaust yourself catching it, only to find that all the others have scattered far beyond your reach. In a country like China, a business with broad potential for theft of IPR, its energies would be better devoted in lobbying the government to strengthen IPR regulations and enforcement. If this is true, how does this make China a “unique country”? The greater the market size, the greater the potential for loss (in parallel with the potential for profits).

Grabbing the perfect opportunity to reform and revive a country’s growth capacity… through a tough economic crisis!

I have been mired in the Greek economic crisis in my new capacity with the Greek government. Once again I observe a country that has been suffering from the vast permeation of informality resulting in a sluggish growth and endless leakages in public finances. Once again I notice the great opportunity to align the incentives of all parties in the Greek society for a fundamental reform that will transform the informal sector to the formal secure growing economy – based on secure rules and rights to assets.

Greece provides us with an excellent example of a country where the strength of the informal economy signals the weakness of existing rules in terms of predictability and enforcement. Combating informal property rights, establishing secure and predictable process and rules will allow the country to move not only ahead but revive its latent assets and wealth.