Counterfeiting as an Externality Imposed by Multinational Companies on Developing Countries

by Daniel Chow ~ May 01, 2011

Although multinational companies (MNCs) often complain about enormous financial losses from counterfeiting, they are not really harmed by counterfeiting. MNCs cannot substantiate their claims of massive losses through credible evidence; instead, they use methods for calculating losses based upon dubious and spurious assumptions. MNCs make claims about massive economic losses in order to divert attention from the real harms of counterfeiting and their role in perpetuating these harms. While counterfeiting may not truly harm MNCs, counterfeiting does create serious social harms to the countries in which it occurs. The MNCs' introduction of technology and intellectual property into developing countries with weak governments and legal systems creates a predictable and irresistible opportunity for lucrative economic crimes in which criminal organizations and corrupt government officials play a significant role. Counterfeiting provides a significant source of new revenue that strengthens organized crime and further encourages and deepens government corruption. These social harms retard developing countries' progress in the development of the rule of law, human rights, and transparency in government, which combine to intensify a mistrust of government and awareness and fear of crime.

These harms from counterfeiting are externalities for MNCs because the bulk of these harms do not fall upon MNCs themselves but on developing countries. So long as counterfeiting is an externality, MNCs have no incentives to take the full costs of counterfeiting into account; MNCs continue to provide access to commercially valuable intellectual property rights by investing in developing countries and feed the steady rise of the global trade in counterfeit goods.

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