Risks of Illicit Trade in Counterfeits to Small and Medium-Sized Firms

1. Introduction: The Threat of Counterfeiting

The importance of intellectual property

Industries relying intensively on intellectual property (IP) play a significant role in the modern, advanced economies, and serve as a primary driver of economic growth and competitiveness. The IP-intensive industries rely on the recognition and effective enforcement of a variety of intangible assets and products of the mind and human intellect, which we refer to collectively as “intellectual property”.

The story of IP is a story of economic growth, high-paying jobs, economic competitiveness, innovation and creative expression. In a globalised and competitive economic world, the protection of IP is crucial and firms may benefit from it in different ways such as improved reputation, higher turnover, access to new markets, and strong and sustainable growth. In addition to being a major driver of economic growth, IP provides the incentive to create, invest in and commercialise new inventions, products and services, while helping artists and authors to disseminate their works, be they literary, artistic, musical, cinematic or other creative forms of human expression.

Intellectual property and small and medium-sized enterprises

Small and medium-sized enterprises (SMEs) are the backbone of the economy of many modern countries. For example, in the European Union (EU), SMEs employ two out of every three workers and provide 57% of added value. However, it is estimated that only around 30-60% of SMEs survive longer than five years of trading (EUIPO, 2022[1]).

Intellectual property plays a vital role in promoting innovation among SMEs as it provides those that invest time, effort and money in innovation with a mechanism to protect and benefit from it. Even though only a small share of SMEs register their IP, most of those that do so have seen a positive impact as a result. Most commonly, SMEs with registered intellectual property rights (IPR) reported that registration improved their reputation or image (mentioned by 60%), that it provided them with better IP protection (58%) and that it gave them better long-term business prospects (48%) (EUIPO, 2022[1]).

Despite these benefits, small companies tend to be less inclined to register IPRs. Data from the Community Innovation Survey reveal that, in the EU, smaller firms were less likely to apply for IPRs than larger firms, regardless of the type of IPR (Figure 1.1). In 2018, small firms were only one-third as likely to apply for trademarks than large firms and one-quarter as likely to apply for patents and industrial design.

Figure 1.1. Enterprises applying for intellectual property rights, by type and firm size, 2018

Source: Eurostat, Community Innovation Survey.

The threat of counterfeiting

Alongside this positive evidence of the benefit that IP has for economic growth, ingenuity and creativity lies the less positive story of IP theft and the harm it does. The growing importance of intellectual property in knowledge-based economies has generated concerns about the potential adverse effects of illicit trade in counterfeit and pirated goods on rights holders, governments and consumers. Today, trade in counterfeits gives rise to significant challenges to effective governance, efficient business and the well-being of consumers, while simultaneously being a key source of income for organised criminal groups.

It is essential to understand the threats and the impediments to effective enforcement in order to develop and implement effective strategies to tackle IP theft. This means understanding both at the macro level –the global scope and magnitude of the issue – and at the micro level – the nature of the complex schemes used by illicit actors to accomplish IP theft on a commercial scale.

Information on the magnitude of, scope and trends in counterfeit and pirated trade is critical to understanding the nature of the problem and how it is evolving. Such information is also essential for designing and implementing effective policies and measures to combat illicit operations.

This report describes an analysis conducted by the OECD and EUIPO of the economic impact of illicit trade in counterfeit goods on small and medium-sized enterprises. It also provides a deeper dive into the data on nature of this threat in the EU context. This report is structured as follows. The remainder of this chapter outlines the data and the general methodology applied in this report. Chapter 2 summarises the economic role of SMEs, and uses the SME Scoreboard Data for EU SMEs (EUIPO, 2022[1]) to examine their innovation and their use of intellectual property rights. Chapter 3 uses global customs seizure data to compare the impact of counterfeiting on SME and non-SMEs. Chapter 4 then returns to the SME Scoreboard data to investigate the impact of and responses to IPR infringement from the perspective of EU SMEs. It also presents a novel econometric analysis of the impact on SME survival rates of infringement of their IPR. Chapter 5 concludes with a roundup of the findings and their implication for policy makers.

Our data

Global customs seizures data

Data on customs seizures originate from national customs administrations. This report relies on customs seizure data from the World Customs Organization (WCO), the European Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD) and from the United States Department of Homeland Security (DHS). The latter submitted seizure data from the US Customs and Border Protection, and from the US Immigration and Customs Enforcement.

The data on global customs seizures are available for the period 2011-19. They are usually provided for three-year time periods with the most recent data being two years old. Overall, the unified database of customs seizures of IP-infringing goods used in this report includes almost one million observations, with more than 100 000 seizures reported by customs agencies each year.

A detailed analysis of these data revealed a number of limitations. Some of them are to do with discrepancies between the datasets, others with product classification levels or outliers in terms of seized goods or provenance economies. All these limitations were thoroughly discussed in two reports by the OECD and European Union Intellectual Property Office (EUIPO) (OECD/EUIPO, 2016[2]); (OECD/EUIPO, 2019[3]), and a methodological way forward was proposed for each limitation. This report relies on the methodology presented and discussed in these studies, and it employs the same solutions to the seizure data limitations.

Despite its limitations, the global customs seizures dataset is very rich and contains detailed information on each seizure made by customs, including the monetary value, the provenance and destination countries of counterfeit goods, the conveyance methods, and even the identity of the infringed brands. This last point is crucial for the purpose of analysing infringements of SMEs’ IPR, as discussed in the section below.

Applying seizures data to small and medium-sized enterprises

In this context, the customs seizures data have specific characteristics that it is important to highlight. First, the identity of the infringed company is not always available, depending on the source of the data. This information is missing for the data coming from the US DHS. These data are therefore excluded from the scope of this report, meaning that the quantitative analysis presented here relies solely on global customs seizures data from the WCO and DG TAXUD for the period 2011 to 2019. Second, the data may suffer from bias because applications for actions (AFAs)1 are often the origin of a customs seizure. The use of AFAs is more common among large companies with the financial and human resources to track and fight against violations of their IP rights. Third, it is easier for customs agencies to identify famous big brands than smaller and less well-known ones.

Because the infringed brand identity may be missing from the data, the analysis distinguishes between seizures of fake branded goods for which the trademark was identified and those for which the trademark is unknown.2 Put it differently, whenever possible identification of an SME is done through the identification of a relevant counterfeited trademark that was owned by the SME concerned. Where the trademark has been identified, the companies affected have been divided into two categories: SMEs and non-SMEs (or large companies). Small and medium-sized enterprises are those with between one 1 and 250 employees, and large companies are those with over 250 employees. In this report, therefore, the terms "non-SMEs" and "large companies” are equivalent.

SME Intellectual Property Scoreboard data

The 2016 SME Scoreboard survey was conducted between June and September 2015 in 28 EU Member States (EUIPO, 2016[4]). It surveyed 8 970 SMEs using computer-assisted telephone interviews (CATI). The 2022 SME Scoreboard (EUIPO, 2022[1]) survey was conducted in 27 EU Member States. CATI interviews were conducted between March and May 2022 and 8 374 SMEs took part in the survey.

The sample preparation process for both surveys – 2016 and 2022 – followed similar procedures so, for brevity, we only describe how the 2022 sample was developed. The Bureau Van Dijk Orbis database, containing information on companies across the world, served as a sample frame.3 The sample consisted of two subsamples:

• a randomly drawn sample of EU SMEs, representative of the overall population of SMEs in the EU

• a sample of firms that were previously matched with IPR registers.

The latter subsample needed to be included to achieve a sufficient number of observations of IPR owners, as they make up only around 10% of SMEs. The entire sample was stratified on company size, with the desired distribution of 25% micro, 50% small and 25% medium-sized companies per Member State. The definition of company size followed the official definition of European Commission (EC, 2003[5]). The size of the gross sample in each Member State approximated the size of the SME population. However, each observation was reweighted after the final sample was obtained to achieve results that were representative of the population of EU SMEs. The analysis in this report relies on various questions in the survey that are described in the Sections below.

Notes

← 1.  An application for action (AFA) is a preventive measure designed for companies that want to protect their business from counterfeiting. The information provided by a company in an AFA helps customs authorities to identify IP infringing goods. An AFA filed by a company also allows customs authorities to temporarily impound goods suspected of violating the company's IP, giving them some time to launch a legal action and to defend their rights.

← 2.  Information of trademark infringed is included in the dataset.

← 3.  See: https://orbis.bvdinfo.com/.