Each time a counterfeit product is purchased, a genuine company loses revenue. With anti-counterfeiting enforcements, however, U.S. businesses can maintain both brand asset value and their profit margin, according to a recent analysis by a researcher from The University of Texas at Dallas.
Dr. Umit Gurun, Ashbel Smith Professor in accounting and finance in the Naveen Jindal School of Management, was accepted for publication in the forthcoming issue of the Journal of Financial and Quantitative Analysis. His study, coauthored with Mehmet Canayaz of Penn State University, “Fake Products, Real Effects: Evidence from Special 301 Actions,” details the positive effects anti-counterfeiting measurements can have on U.S. trade.
Share of counterfeiting, the illegal creation of replicas of products, documents, or currency for false gain, in world trade has increased from 1.9% to 3.3% since 2008. The International Chamber of Commerce predicts that sales of counterfeit items could reach $4.2 trillion by the end of this year. Ultimately, corporations face risks when they operate in foreign countries, especially in ones that lack strong enforcement against counterfeiting activities.
In their study, Gurun and Canayaz argue that anti-counterfeiting enforcement actions can make a material difference in the competitiveness and success of U.S. businesses that rely on intellectual property protection in overseas markets. They reviewed brand asset value, brand profit margin, market penetration, customer loyalty, and brand awareness in relation to anti-counterfeiting efforts or the lack thereof. Specifically, Gurun and Canayaz compiled data from the Special 301 Reports of the United States Trade Representative’s written since 1993 to identify the list of countries with varying degrees of counterfeiting-related violations. The two main groups, Priority Watch List and Watch List, are determined by the severity of the violations.
Overall, they found publicly traded U.S. firms exhibited up to 8.39% lower sales in countries that are included on the Special 301 Priority Watch List. To put this finding into perspective, the authors further investigated the relationship between counterfeiting and brand image, finding brand asset value deteriorations ranging from -2.06% to -3.16% . “Stronger anti-counterfeiting enforcement through Special 301 actions is often followed by appreciation in the brand and firm values of publicly traded U.S. firms,” Gurun said.
The effects of counterfeiting do not just impact large corporations – they also impact the average consumer. “Counterfeiters deceive purchasers into believing that they are buying original products. Consumers therefore receive inferior products being labeled as genuine, which can hurt their welfare,” said Gurun. In other instances, consumers purchase identical or noninferior products – such as stolen medicines or unauthorized copies of books – which then hurts the genuine producers of those products.
According to Gurun, there is still much work to be done on anti-counterfeiting enforcement.
“The effects of anti-counterfeit actions on economic activities stretch far beyond those that we document in our work,” said Gurun. In addition to counterfeit currencies, likely the most widely conceived counterfeit product, Gurun argues that the production and distribution of counterfeit medicines, food and beverages pose serious risks to consumer health. “Counterfeit producers also violate basic labor rights and working conditions [because of their lack of] proper regulation.”
Authored by Katie Voss
