Business Horizons (2010) 53, 305-314

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Country matters: Executives weigh in on the causes and counter measures of counterfeit trade

Stephen A. Stumpf, Peggy Chaudhry*

Villanova School of Business, Villanova University, 800 Lancaster Avenue, Villanova, PA 19085, U.S.A.

KEYWORDS Counterfeiting; Counterfeit trade; Intellectual property rights (IPR); Consumer complicity; Executive perspectives

Abstract In this article, we present the findings of a study examining the exploding problem of counterfeit trade via the opinions of U.S. executives as compared to their counterparts from Australia, New Zealand, South Africa, and Tahiti. Their responses provide insight as to how companies in different countries are attacking piracy and consumer complicity with counterfeit products. Per our study, executives in Australia, Tahiti, and the U.S. had similar perspectives: they viewed the seller as the main driver of counterfeit trade for reasons of profit. These executives perceived the demand for counterfeits as being driven by desirable product attributes and the ease of obtaining them. Likewise, they cited two anti-counterfeiting actions—site licenses and reduced price/rebates—as being able to reduce the demand for i l l icit products. In contrast, South African executives observed the main reason for piracy as weak enforcement of intellectual property (IP) and the lure of exorbitant profits, with little value in any anti-counterfeiting actions other than special packaging. These executives put forth that South African consumers are complicit due to limited education and low disposable income, and the ready availability of counterfeits. Executives from New Zealand were the most optimistic, believing that piracy and complicity can be reduced by many anti-counterfeiting actions, including special packaging, reduc­ing price, emphasizing product benefits/warranties, stressing the harmful effects of using fake products, offering site licenses, and listing of authorized sellers, r 2010 Kelley School of Business, Indiana University. Al l rights reserved.

1. Executive perspectives on counterfeit trade

Much of our under s tand ing of c o u n t e r f e i t t r ade focuses on the s ize of t he p rob lem by p roduct and country, co rpo ra te and gove rnment act ions

taken to reduce i l l i c i t t r ade , i n t e l l e c t u a l p roper ty r ights v io la t ions as a highly pub l i c i zed e xamp l e , and reasons for consumer c o m p l i c i t y w i t h c o u n t e r f e i t products (Bal four et a l . , 2005; Chaudhry, 2006a, 2006b; Chaudhry, Z i m m e r m a n , Peters , 6t C o r d e l l , 2009; Hopkins, Kontnik, a Turnage, 2003; Ph i l l ip s , 2007). A r ch i va l da t a and med i a news on piracy, research studies on s tudent and consumer a t t i t ude s t oward c oun te r f e i t products , and government reports on i l l i c i t t r ade and c o m p l i c i t behav ior are the p r imary basis of t he pub l i c ' s knowledge of the

* Corresponding author. E-mail addresses: steve.stumpf@villanova.edu (S.A. Stumpf),

peggy.chaudhry@villanova.edu (P. Chaudhry).

0007-6813/$ - see front matter ç 2010 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2010.01.004

306 S.A. Stumpf, P. Chaudhry

p r ob l em. Rarely addressed are the per spect i ves or m e n t a l models (Senge, 1990) he ld by the leaders of business o rgan izat ions regard ing the causes of i l l i c i t t r ade , consumer c o m p l i c i t y w i t h c o u n t e r f e i t p rod­ucts, and v i ab le so lut ions to t he p r ob l em.

Chaudhry et a l . (2009) provide an in -depth un­derstanding of the mount ing p rob lem of counte r fe i t t rade by indent i fy ing 33 act ions to combat counter ­fe i t i ng , w i th d i f fe rent act ions to target consumers, host/home country governments, d i s t r ibut ion channels, i n te rna t i ona l organizat ions, p i rates, and organizat ion-spec i f ic i n te rna l en fo r cement . Using this l ist of an t i - counte r fe i t i ng act ions, they gauge the l ike ly e f fect iveness of each act ion based on U.S. execu t i ve s ' insights into this g loba l p rob lem. Given the improbab i l i t y of a company or government tak­ing a l l the ant i - counte r fe i t i ng act ions i dent i f i ed , some act ions w i l l be emp loyed and others w i l l not. In the absence of research on the perce ived ef fect iveness of each act ion in d i f fe rent countr ies , the act ions taken w i l l re f lect the v iews of the leaders ' in-country. To exp lo re this issue, we pursued a c reat i ve i n te rcept approach to i n te r v i ew 252 business execut i ves across f ive country markets — A u s t r a l i a , New Zea land, Tahit i , South A f r i c a , and the Un i ted S ta te s—so as to ident i f y the i r menta l models of the causes of i l l i c i t t rade and the counter measures they see as most promis ing.

As part of the i r success, execut ives deve lop use­fu l men ta l models of what dr ives l eg i t imate con ­sumer and compe t i t o r behavior, genera l i z ing the i r models across s i tuat ions, cu l tures, and cont inents un t i l d i sconf i rming in fo rmat ion suggests o therwi se (Lord, Ross, & Lepper, 1979; Ratey, 2001; Senge, 1990); they then adjust the i r menta l models to re f lect the new in fo rmat ion . Execut ives ' under­standing of i l l i c i t behavior is much less c l ea r than the i r understanding of the conduct that has led t hem to personal and f irm success; this is e spec ia l l y t rue s ince business execut ives may not be of the generat ion or cu l t u ra l background of counter fe i te r s and the i r comp l i c i t consumer counterpart s . Because menta l models are o f ten based on nat iona l or l oca l s i tuat ions and reco l lect ions of past personal expe­r iences, the men ta l models execut ives s ha re—and any d i f fe rences based on d i f f e ren t countr ies and c u l t u r e s — w a r r a n t examinat ion (Gi lbert , 2006; Senge, 1990; Tavris Et Aronson, 2007). In this a r t i c l e , we exp lo re :

• The ex ten t to wh ich execut ives in d i f f e ren t countr ies observe product counte r fe i t i ng as se l ler or buyer d r i ven;

• The bel iefs of execut ives in d i f f e ren t countr ies as to the key dr ivers that lure sel lers into i l l i c i t t rade

and support consumer comp l i c i t y w i th counter ­f e i t products; and

• The percept ions of execut ives as to the e f f e c t i v e ­ness of d i f f e ren t counter measures or an t i -counter fe i t ing actions in tended to reduce product counter fe i t ing in thei r country.

A f e w studies have addressed manager ia l perspec­t ives on i n t e l l e c t ua l property concerns (Chaudhry et a l . , 2009; McGaughey, L iesch, a Poulson, 2000; Yang, 2005; Yang, F ryxe l l , a Sie, 2008). Yang (2005) i n te r v i ewed six U.S. and seven Chinese managers to d i scern the e f f e c t that cu l t u ra l e l ement s had on the i r a t t i tudes toward i n t e l l e c t ua l property rights. Yang looked at the po l i t i c a l system (pr ivate vs. publ ic ownersh ip), economic system (e l i te vs. an t i - e l i t e ) , legal system, bel iefs and eth ics , soc ia l s t ra t i f i ca t ion , language, and educat ion to d i scern the causes of i n t e l l e c t ua l property conf l icts be­tween the two d i s t inct cu l tures . Yang et a l . (2008) quer ied 128 managers in Ch ina about the e f fect iveness of an t i - counte r fe i t i ng strategies in th ree categor ies : admin i s t ra t i ve (e.g., seeking government support), j ud i c i a l (enforcing c r im ina l or c i v i l penalt ies) , and corporate (e.g., monitor ing its d i s t r ibut ion channel) , and found that a f i rm- led t a c t i c — s u c h as hir ing pr ivate eyes and investigators — w a s e f fec t i ve in China. McGaughey et a l . (2000) conducted a case study of managers invo lved in a ship bui ld ing Austra l ian/Chinese jo in t venture to garner new manager ia l insights regarding the supervision of i n te l l e c tua l property f rom a technology transfer perspect ive. Chaudhry e t a l . (2009) i n te rv iewed U.S. managers to gain the i r insight into the ef fect iveness of an array of ant i -counter fe i t ing tact ic s ta rgeted at both pirates and consumers in the company ' s two largest markets confront ing this i l l i c i t t rade and found several tact ics to be unsuccessful, espec ia l ly in curb ing consumer demand.

Whi le these studies provide ideas on how i l l i c i t t rade is perce ived, larger samples of execut ives f rom d i f fe rent countr ies are requis i te to be t te r under­stand the manager ia l bel iefs of the causes o f — a n d counter measures needed to r e d u c e — i l l i c i t t rade. For example , to what ex ten t is counter fe i t ing v iewed as more suppl ier dr iven than buyer mot ivated in d i f fe rent countries? When execut ives judge counter­f e i t t rade to be pr imar i ly suppl ier dr iven, they are more l ikely to pursue legal actions against the sup­pl iers, conduct add i t iona l investigations, lobby for s t r i c ter l aw en fo rcement or c rea te the i r own en ­fo rcement staff, and/or seek legis lat ion to enact and enforce higher c i v i l and c r im ina l penalt ies for those conv ic ted (Chaudhry a Stumpf, 2007; Chaudhry a Z immerman, 2009; Chaudhry et a l . , 2009).

Country matter s : Execut ives weigh in on the causes and counter measures of counte r fe i t t rade 307

In contrast , when execut ives judge product coun­te r fe i t i ng to be substant ia l ly buyer d r i ven, they are more inc l ined to target consumers and buyer behav­ior, in forming them of the i l l ega l nature of the act , increas ing packaging p ro tec t i on , and/or making consumers aware of the i r company ' s legal act ions that make it less des i rab le for them to purchase or use a counte r fe i t (Chaudhry & Stumpf, 2007; Chaudhry & Z immerman , 2009; Chaudhry et a l . , 2009). Because business execut i ves have l i t t l e con­t ro l over whe re a counte r fe i t of the i r product w i l l become ava i l ab le in the g lobal marke tp l ace , the i r menta l models of counte r fe i t i ng behavior are l ike ly to lead to s imi lar an t i - counte r fe i t i ng act ions in most markets and count r ie s—un le s s they have d i f f e ren t models for d iverse countr ies . If t he re are country-speci f ic causes for counte r fe i t t rade, counter mea ­sures that do not address these causes are l ike ly to f a i l to reduce p i rat ing and consumer compl ic i ty .

2. Background on counterfeit trade in selected countries

For our study, countr ies we re se lec ted that cou ld have s imi lar be l ie f systems to those of U.S. e xecu ­tives regarding the causes and counter measures of consumer comp l i c i t y ; however, d i s s imi la r i ty cou ld exist due to the i r d i s ta l prox imity to the U.S. (and each other), country cu l tu re , and the soc io-economic we l l -be ing of consumers. C r i te r i a for se lect ion inc luded the predominance of English-speaking execut ives and country cu l tures l inked to western e th i ca l ideologies. Four of the count r i e s—Aus t ra l i a , New Zealand, South A f r i c a , and the Un i ted S t a t e s -are rated as highly p ro tect i ve markets for i n te l l ec ­tua l property by the Economist Intel l igence Unit (2008). Tahiti represents an undeveloped country wh ich derives much of its GDP v ia tour i sm f rom the four other countr ies s tud ied. The lack of emp i r i ca l ev idence in these countr ies regarding execut i ve perspect ives on piracy and consumer compl i c i t y to purchase counter fe i t s was also a f ac to r in the i r se lect ion.

On January 1, 2005, a b i l a te ra l f r ee - t r ade agree­ment was establ i shed be tween Aust ra l ia and the Un i ted States. A country report by the Economist Intel l igence Unit (2008) descr ibes that this agree­ment aligns Austra l ia ' s IP laws more c lose ly w i t h those of the Un i ted States. Trademark law in Aust ra l ia has been s igni f icant ly bo l s tered w i th the enac tment of the In te l lectua l Property Laws Amend ­ment Act of 2006 and the Trade Mark Laws Amend ­ment Act of 2006 ( "Changes , " 2007). Yet, when fo rmer U.S. Trade Representat ive Susan Schwab f i led two d i spute se t t lement s w i t h Ch ina w i th in

the World Trade Organizat ion (WTO) over f a i l u re to p ro tec t and en fo rce U.S. copyr ights and t rade­marks on various products and barr iers to t rade in books, music, v ideos, and movies, Aust ra l ia de­c l i ned to j o i n the U.S. as a co -compla inant in this i n t e l l e c t u a l p roperty d i spute (United States Trade Representat ive, 2007).

New Zealand ' s obl igat ions s tem f rom the WTO agreement on Trade-Related Aspects of In te l lectua l Property (TRIPs) and the Bern Convent ion for the Protect ion of L i terary and Ar t i s t i c Works. In add i t ion to its a l leg iance to these mu l t i l a t e r a l t rade agree­ments, the fo rmer Bush admin i s t ra t ion sought a pact w i th the European Union, Canada, Mex ico, Japan , South Korea, Sw i t ze r l and , and New Zealand to pro­mote the improvement of the an t i - counte r fe i t i ng procedures of each country to the leve l imposed w i th in the Un i ted States. Why did the U.S. target these countries? Accord ing to The Kiplinger Letter:

These nations are potent ia l transshipment points for fakes f rom China, Russia, Braz i l , and e l sewhere. By having the EU and others singing f rom the same songbook as the U.S., i t is easier for Unc le Sam to apply pressure to China and other counter fe i t ing culpr i ts . ("Bush Try ing , " 2007, p. 1)

In June 2007, The Wall Street Journal reported that the Co lgate-Pa lmol ive company issued a warning to its consumers about counter fe i t toothpaste labe led "Manu fac tu red in South A f r i c a , " s ince the f i rm does not import f rom this country ( " Co l g a te , " 2007). By the next month, state inspectors f rom the Connect i cut Department of Consumer Protect ion had se ized over 430 such tubes (Baruzzi, 2007). The fake toothpaste, which was l inked to China and South A f r i ca , conta ined the chem ica l d iethy lene g lyco l , wh ich can cause l iver and kidney fa i lu re.

A re lat ionship be tween China and organized c r ime in South Af r i ca has been documented . Since the mid-1980s, Chinese c r im ina l groups s imi lar to the t r iad societ ies of Hong Kong and China have been act i ve ly invo lved in South A f r i ca in the areas of f raud, drug t raf f ick ing, f i rearm smuggling, ex to r t i on , money launder ing, prost i tut ion, i l l ega l gambl ing, the smuggling of i l l ega l immigrants, tax evasion, and the large-scale import ing of counter fe i t products. The South Afr ican Pol ice Service is aware of seven major Chinese organized c r im ina l groups that have a presence in both Cape Town and Johannesburg (Gastrow, 2007).

In the i r book, The Economics of Counterfeit Trade: Governments, Consumers, Pirates, and Intellectual Property Rights, Chaudhry and Z immerman (2009) assert that counter fe i t t rade is increasing in most markets and that ef forts to stem this rising t i de are

308 S.A. Stumpf, P. Chaudhry

f ragmented and largely unsuccessful. Agreements between countr ies are not easi ly enforced and consumers seem to be obl iv ious to a moral obl igat ion or economic responsibi l i ty to the IP owner. Yet, the Business Software A l l i ance (2008) issued a report en t i t l ed The Economic Benefits of Lowering PC Software Piracy, wh ich states that reducing piracy rates by 10% in any given country w i l l generate lucrat ive emp loyment (e.g., Austra l ia 3,900 new jobs; U.S. 32,000 new jobs), bolster tax revenues (e.g., Austra l ia $438 mi l l i on ; U.S. $6.7 b i l l ion) , and cont r ibute to a country ' s GDP (e.g., Austra l ia $2 b i l l ion; U.S. $41 b i l l ion) .

3. Discerning executive perspectives across country markets

By admin i s ter ing a s t ructured survey w i th i n an in ­f o rma l interv iew, w e we re ab le to assess execu t i ve s ' perspect ives of the coun te r fe i t t rade business in the i r country, and then use this i n fo rmat ion to compare the insights of execut i ves f rom d i f f e ren t countr ies . The execut i ves i n te r v i ewed were in l ead­ership or profess ional serv ice posit ions, and cur rent ­ly emp loyed in one of the f ive se lec ted countr ies : Aus t ra l i a , New Zea land, South A f r i ca , Tahit i , Un i ted States. The execut i ves we re personal ly i nv i ted to pa r t i c i pa te by a scholar f rom the U.S. Two i n i t i a l quest ions we re asked of 252 execut ives : (1 ) In what ways, if at a l l , is product counte r fe i t i ng a top ic of in teres t to you and your organizat ion? (2) How has your in teres t i n , or understanding of, product coun­te r fe i t i ng changed over the past 5 years? Of the 252 execut i ves i n t e r ce p te d , 212 execut i ves i nd i ca ted ac t i ve interest in i l l i c i t t rade and ta l ked openly about product counte r fe i t i ng .

Interviews we re conduc ted in Aust ra l ia (Melbourne, n = 42), New Zealand (Auckland, n = 49), South A f r i c a (Johannesburg, n = 29; Cape Town, n = 15), Tahiti (n = 33), and the U.S. (Ph i lade lph ia, n = 32; New York City, n = 12). Specif ic locat ions were chosen based on the l i ke l ihood of there being a suf f ic ient number of i n te res ted exec­utives to be i n t e r cep ted during the 2-3 days of data co l l e c t i on at each s ite. These execut i ves we re pre­dominant l y ma le (72%), co l lege educa ted (93%), and had an average of 21.6 years of work exper i ence . Most worked in business organizat ions (89%); others we re profess ional serv ice providers (e.g., lawyers, hea l thcare) , government execut ives , or leaders w i th in NGOs.

A synopsis of the most impor tant issues ident i f ied by execut i ves in the f ive country markets is summa­r ized in Table 1. Each row is the imp l i c i t menta l mode l a r t i cu l a ted by execut i ves f rom each country

based on the i r responses to questions about: (1 ) the indigenous consumer being aware a product is a counte r fe i t , (2) the ex ten t to wh i ch supply and demand spur growth in coun te r fe i t t rade , (3) the main reasons under ly ing the sale and purchase of i l l i c i t products, and (4) the an t i - counte r fe i t i ng act ions pe rce i ved to be most e f f e c t i v e in reduc ing coun te r fe i t t rade. Execut ives have both conver­gence and d ivergence perspect ives of what factors spur growth of counte r fe i t t rade and the counter measures that can address the prob lem.

3.1. Increased product counterfeiting due to pirates, complicit consumers, or both?

The supply side of counter fe i t t rade is o f ten discussed as a p i rate act i v i ty ; assessments are made based on the leve l of i n te rnat iona l and host country enforce­ment of i n t e l l e c tua l property rights and i l l ega l t raf f ick ing of physical goods (Chaudhry, 2006a, 2006b; Chaudhry & Walsh, 1995, 1996; Chaudhry a Z immerman, 2009; Green a Smith, 2002). In terms of consumer compl ic i ty , execut ives in Austra l ia and the U.S. general ly be l ieve that consumers know when they are purchasing a counte r fe i t good; execut ives in New Zealand, South A f r i ca , and Tahiti are equ ivoca l on this point. The major i t y of execut ives f rom each country except South A f r i ca consider counter fe i t t rade more se l ler dr iven than buyer dr iven. As ex­pec ted , execut ives perce ive prof i tab i l i ty to be an important e l ement of counter fe i t ing behavior, gen­era l ly f o l l owed by ease of sale due to weak i n te l l ec ­tua l property (IP) en fo rcement . Of lesser impor tance are a jus t i f iab le supply of counter fe i t products (st i l l somewhat important in Austra l ia , South A f r i ca , and Tahiti), l im i ted c r im ina l and c i v i l penal t ies (some­what important only to U.S. execut ives) , leg i t imacy of protect ing i n te l l e c tua l property rights for deve l ­oping countr ies (somewhat important to execut ives in South A f r i ca and Tahit i), and the v iew of counter­fe i t ing as e th ica l l y acceptab le by its consumers (somewhat important in South Afr ica) .

The sel lers of fake products reap large profits, and the lack of adequate c r im ina l penalt ies imposed for this type of c r ime provides l i t t l e dete r rent to such profit rea l i zat ion. In add i t ion , pirates usually do not carry the burden of many t rad i t i ona l business ex­penses such as research and deve lopment , advert is ­ing, and taxes. As stated by Balfour e t a l . (2005, p. 54):

Fake Mar lboros that cost just pennies a pack to make in Ch ina cou ld end up sel l ing for $7.50 in Manhat tan . Phony New Balance shoes can be s t i tched together for about $8 a pair and re ta i l for as much as $80 in Aust ra l ia , wh i l e rea l ones cost be tween $11 and $24 to make, and sel l for up to $120.

Country matters : Execut ives weigh in on the causes and counter measures of counte r fe i t t rade 309

Table 1. Summary of executive perspectives of counterfeit trade

Consumers knowingly purchasing counterfeit goods (%)

% Seller % Buyer driven

Seller reasons* (rank order of reasons above 10%)

Buyer reasons* (rank order)

Anti-counterfeiting actions* (rank order)

Australia 95%

72% Seller

27% Buyer

Profitable Justifiable Supply Weak Enforcement

100% 33% 19%

Product Attributes Convenient Low Disposable Income or Education Acceptable

97% 92% 80%

50%

Special Packaging Reduced Price/Rebate Offer Site Licenses Emphasize Benefits Stress Harmful Effects Emphasize Warranties Lists of Sellers

78% 76% 60% 60% 52% 48% 24%

New Zealand 4 5 %

66% Seller

33% Buyer

Profitable

Weak Enforcement

94%

71%

Convenient Product Attributes Low Disposable Income or Education Acceptable

98% 94% 65%

61%

Special Packaging Reduced Price/Rebate Emphasize Benefits Emphasize Warranties Stress Harmful Effects Offer Site Licenses Lists of Sellers

100% 100% 100% 78% 77% 71% 25%

South Africa 32%

46% Seller

54% Buyer

Weak Enforcement Profitable Justifiable Supply IP Not Applicable Is Ethical

89% 66% 27% 18% 14%

Convenient Low Disposable Income or Education Acceptable Product Attributes

100% 100%

59% 41%

Special Packaging Offer Site Licenses Emphasize Benefits Reduced Price/Rebate Stress Harmful Effects Lists of Sellers Emphasize Warranties

100% 36% 34% 23% 21% 9% 0%

Tahiti 40%

82% Seller

17% Buyer

Profitable Weak Enforcement Justifiable Supply IP Not Applicable

100% 54% 24% 15%

Product Attributes Convenient Low Disposable Income or Education Acceptable

94% 70% 58%

21%

Lists of Sellers Special Packaging Emphasize Warranties Offer Site Licenses Reduced Price/Rebate Stress Harmful Effects Emphasize Benefits

97% 79% 79% 73% 70% 44% 42%

U.S. 89%

73% Seller

26% Buyer

Profitable Weak Enforcement Limited Penalties Justifiable Supply

100% 20% 16% 12%

Product Attributes Convenient Acceptable Low Disposable Income or Education

98% 93% 45% 34%

Special Packaging Emphasize Benefits Reduced Price/Rebate Offer Site Licenses Emphasize Warranties Lists of Sellers Stress Harmful Effects

87% 79% 68% 63% 32% 27% 25%

Reasons listed are in rank order based on executive stating a reason was important or very important, or an anti-counterfeiting action as being effective or very effective.

There are meaningfu l d i f fe rences by country in

execut i ve v iews regarding the impor tance of weak

en fo r cement of IP rights as cont r ibut ing to piracy;

Austra l ian and U.S. execut ives rated this f ac to r

lower than other countr ies, w i t h only 19% and 20%

respect ive ly perce iv ing i t as an impor tant reason for

piracy. Wi th in an execut i ve ' s understanding of coun­

te r f e i t t rade , a point l i ke ly cons idered is the high

cost of l i t igat ion to p ro tect the i r company ' s IP rights

even in p ro tec ted markets. The jou rna l Asialaw

reports that :

Cost-effect iveness can also be a fac tor in

more deve loped jur isd ict ions, such as Austra l ia,

espec ia l ly given the re lat ive ly light penalt ies

somet imes lev ied. The lack of prosecutions for

counter fe i t ing and unreal i st ic penalt ies being

imposed, in the context of the high cost of c i v i l

options, is one of the major chal lenges in IP,

says Richard Gough, a partner at Baker St

McKenz ie in Sydney. (Russell, 2007, p. 1 )

Execut ives prov ided the i r v iews of the main incen­

tives that shape consumer demand for i l l i c i t prod­

ucts; conven ience of f inding a counte r fe i t product

and product a t t r ibutes are the two key var iab les in

most country markets. The country d i f fe rences re­

garding consumer comp l i c i t y were very interest ing.

310 S.A. Stumpf, P. Chaudhry

South Afr ican execut ives fe l t that conven ience and low income and/or educat ion were more sal ient reasons for the purchase of counter fe i t s than desir­ab le product at t r ibutes ; the des i rab i l i ty of product at t r ibutes was rated lowest (41%) by t hem. Tahit ian execut ives rated the lack of e th i ca l concerns and overa l l acceptab i l i t y of its consumers purchasing counter fe i t products s ignif icantly lower than execu ­tives f rom the other country markets. U.S. execut ives and Tahit ian execut ives perce ived low income or educat ion as less important than the other th ree countr ies. A study reported in Psychology and Marketing descr ibed a typology of consumers who purchase counter fe i t s as e i ther " s l y shoppers , " who buy to demonst rate the i r shrewdness to get a good dea l , or " e c onom i ca l l y concerned shoppers , " who are mot i va ted by f inanc ia l reasons (Gai l , Bar iba ld i , Zeng, & Pilcher, 1998). However, the execut ives f rom these country markets perce ive the economic rat io­nale qu i te dist inctly, as noted by d i f ferences in the perce ived sa l ience of i ncome and/or educat ion as a pr imary mot ive to support demand for fakes.

3.2. Is country perceived to affect the efficacy of anti-counterfeiting actions?

Unless execut ives have exper t knowledge of the e f fect iveness of d i f f e ren t counter measures to p i ra ­cy and consumer comp l i c i t y w i th respect to pa r t i c ­ular products in a va r ie ty of country markets, they are l ike ly to act on the i r tac i t knowledge: that wh ich they be l ieve based on the i r exper iences (Wee, Tan, & Cheok, 1995). None of the execut ives i n te r v i ewed i nd i ca ted that they had cur rent exper t knowledge of i l l i c i t t rade in the i r country; a l l revea led that they had tac i t knowledge and w e r e e xpec ted to act on this knowledge unt i l research was done to be t te r in fo rm them of appropr ia te act ions. The perce ived e f fect iveness of seven an t i - counte r fe i t i ng act ions i n tended to reduce product counte r fe i t i ng were examined across the five countr ies .

In contrast to the results reported regarding in ter ­v iews conducted by Chaudhry et a l . (2009) w i t h U.S. managers on the lack of successful ant i - counter fe i t ­ing actions ta rgeted at consumers, execut ives i n ­vo lved w i th the f ive-country study d id be l ieve there are e f fec t i ve counter measures wh ich can be emp loyed . Using spec ia l packaging, such as a holo­gram, was perce ived as an important dete r rent to l im i t demand for fakes in each country market. Stressing harmful e f fect s of using the fake product is be l ieved to be va luab le by execut ives in Austra l ia (52%) and New Zealand (77%). However, the execut ives in South A f r i ca (21%) and the U.S. (25%) have a less favorab le v iew of using this type of demarket ing concept .

As highl ighted in The Economics of Counterfeit Trade: Governments, Consumers, Pirates, and Intel­lectual Property Rights (Chaudhry 6t Z immerman, 2009), business associations w i th g loba l m a r k e t s -such as the Mot ion P icture Associat ion (MRA), the Business Software A l l i ance (BSA), and the Recording Industry Associat ion of Amer i ca (RIAA)—use demar­ket ing advert i s ing concepts to discourage comp l i c i t consumer behavior. Tactics inc lude employ ing role models to persuade the consumer not to purchase counter fe i t s , inst i l l ing a fear of prosecut ion, imply ing a negative associat ion of fake products by way of l inkages to organized c r ime, and using peer pressure to decrease demand for counter fe i t products. Based on the results reported in Table 1, execut ives dis­agree as to whethe r a demarket ing approach w i l l provide the appropr ia te message to reduce consumer demand.

There was s ignif icant var ia t ion in execu t i ve per­spect ives on the benefits of establ i sh ing au then t i c i ­ty of the product in the supply cha in through lists of author i zed dealers. The sa l ience of this t a c t i c ranged f rom the top reason in Tahit i (97%) to a d i sbe l ief in South A f r i ca (9%). Not one South A f r i can execu t i ve be l ieved emphas iz ing war rant ie s of gen­uine products to be an e f f e c t i v e way to de te r con ­sumer demand, whereas over 70% of the execut i ves in New Zea land and Tahit i have a very pos it ive perspect ive of consumers ' using war ran tee in fo rma­t ion to reduce the i r in terest in i l l i c i t goods. Wi th the except ion of South A f r i can execut ives , others fe l t that o f fer ing a s i te l icense was a useful ant i - coun­te r fe i t i ng strategy.

4. Consensus and divergence of executive perspectives

New Zea land and Tahit ian execut ives are more op t i ­mist ic about the e f fect i veness of an t i - counte r fe i t ­ing act ions as compared to the i r more pess imist ic Aust ra l ian, South A f r i can , and U.S. counterpart s . Wh i le the use of spec ia l packag ing/ label ing is thought to be the most va luab le counter measure ove ra l l , execut i ves in Tahit i regard most act ions as equa l ly e f f e c t i v e , and New Zealand execut i ves per­ce i ve emphas iz ing the benefits of genuine products to be of g reater va lue than packaging d i s t inct ions. The South Af r i can execut i ves were the most pessi­mis t ic ; they perce i ve just spec ia l packag ing/ labe l ­ing as a c lea r best an t i - counte r fe i t i ng act ion and i nd i ca te l i t t l e opt imi sm for other act ions. Aust ra l ian and U.S. execut i ves are in ag reement that the top an t i - counte r fe i t i ng act ions are spec ia l packaging, reduced p r i ce/rebates , and site l icenses. It is ap­parent that the counter measures pe rce i ved to be

Country matters : Execut ives weigh in on the causes and counter measures of counte r fe i t t rade 311

the most sal ient vary across the countr ies s tud ied, due at least in part to the d i f fe rent menta l models of the causes of counte r fe i t i ng held by execut ives in these countr ies.

Execut ives in Aus t ra l i a , Tah i t i , and the U.S. have somewhat s im i l a r m e n t a l models . They v i ew the se l l e r as the main d r i ve r of c oun te r f e i t t rade for reasons of prof i t , weak en f o r cemen t , and the f ac t tha t i l l i c i t goods are sold to a consumer who wou ld not purchase the au then t i c p roduct ( just i f iab le supply). They v i ew the demand for coun te r fe i t s to be d r i ven by p roduct a t t r i bu te s and conven ience . Two of t he i r most favo red an t i - c oun te r f e i t i n g act ions, s i te l icenses and reduced p r i ce/ reba te s , focus on reduc ing the demand fo r i l l i c i t products by lessening the savings as soc iated w i t h buying a coun te r f e i t .

New Zealand execut ives have a d i s t inct manage­r ia l percept ion of counte r fe i t t rade, w i th more weight given to suppl ier mot ivat ions to prope l this i l l i c i t t rade, and its consumers perce iv ing both con­ven ience of obta in ing a counte r fe i t and its favorab le a t t r ibutes (e.g., low pr ice) as the main dr ivers of demand. However, they unanimously favored three ant i - counte r fe i t i ng tact ic s ta rgeted at the consum­er: au thent i ca t ing genuine goods by way of spec ia l packaging, reducing the manufacturer ' s p r i ce/ re ­bate to narrow the savings on counter fe i t s , and emphas iz ing the benefits of authent i c goods v ia consumer -d i rected advert i sements .

South A f r i can execut i ve s focus equa l l y on the p i ra te and the consumer as t he p r imary p layers in c oun te r f e i t t r ade in t he i r count ry marke t , not ing tha t the p i rates p rov ide a p roduct tha t is easy to f ind and that low i ncome or l e ve l of educa t i on is a sa l ient demograph ic of the c o m p l i c i t consumer. L ike the ma jo r i t y of execut i ve s in a l l count ry markets , they support spec ia l packag ing as v i ab le an t i - c oun te r f e i t i n g a c t i on . In cont ras t to the i r fore ign counte rpa r t s , however, they pe r ce i ve t he o the r an t i - c oun te r f e i t i n g s t rateg ies as be ing of l i t t l e use.

The d i s seminat ion of e x e c u t i v e v i ewpo in t s on this t op i c is c r i t i c a l to deve lop ing a more compre ­hensive unders tand ing of how firms can bo l s ter enhanced g loba l p ro tec t i on of i n t e l l e c t u a l prop­e r t y r ights. Just as many compan ies i m p l e m e n t business and market ing s t rateg ies spec i f ic to t he cond i t ions of each count ry in wh i ch they c o m p e t e (often emp loy i ng count ry managers to take re­spons ib i l i ty for ach iev ing f i nanc ia l results), coun­t ry - spec i f i c c oun te r f e i t t rade models , a n t i -c oun te r f e i t i n g plans, and i m p l e m e n t a t i o n tac t i c s may be es sent ia l . To curb t he rise in c oun te r f e i t t r ade , execut i ve s w i l l need to t a i l o r t he i r a n t i -c oun te r f e i t i n g act ions to the p i racy and consumer

demand dynamics of d i f f e r en t count ry market s using a mu l t i - domes t i c approach .

5. Tackling the counterfeit trade problem: Going beyond a U.S.-centric list of recommendations

Based on this compara t i ve country study, we suggest the fo l lowing steps wh ich may be taken by compa­nies in order to address i l l i c i t t rade, through under­standing the prob lem and p rotect ing i n t e l l e c t ua l property rights.

5.1. Create a better dialogue with other firms on counter measures by country

Only a f ew studies have sought to establ ish a con­sensus on which ant i - counte r fe i t i ng act ions are suc­ces s fu l/e f fect i ve at deter r ing growth in counte r fe i t t rade w i th in the Un i ted States. As regards U.S. manager ia l v iewpoints , Chaudhry et a l . (2009) found that execut ives f e l t an as soc ia t ion—such as the Internat ional Ant i -Counte r fe i t i ng Coa l i t i o n— i s the best way to keep abreast of the most e f f e c t i ve country-spec i f ic strategies to p ro tect i n t e l l e c tua l property rights. The results of this cross-country study show that there is no universa l ly -held consen­sus as to whether the market is se l ler or buyer dr iven, and the main reasons for e i the r comp l i c i t y or piracy. Even the perce ived ef fect iveness of an t i -counte r fe i t i ng maneuvers changes by country mar­ket. There appears to be no s tandard ized way of f ighting the pirates and/or decreas ing consumer compl ic i ty . Whi le counte r fe i t t rade is a g lobal prob­lem, the perce ived solutions are domest ic ; add i t i on ­a l studies are needed to uncover these d i s t inct manager ia l concerns. A be t te r discourse is war ­ranted on g lobal solutions that ac tua l l y work to de te r both the pirates and the buyer behaviors that sanction the consumpt ion of counter fe i t s .

5.2. Use more than labeling techniques to reduce consumer demand

The study results we re mixed regarding whether execut ives fe l t that loca l consumers perce ived the consumpt ion of fake goods as accep tab le behav­ior: more execut ives reported that specif ic product a t t r ibutes (e.g., lower pr ice), conven ience, and lower levels of educa t i on/ income were pr imary reasons for dr iv ing demand. A l l part ic ipants in this study i nd i ca ted spec ia l packaging as one of the th ree most e f f ec t i ve deter rent s to inh ib i t consumer demand. Ironically, more of the recent an t i -counte r fe i t i ng label ing techn iques—such as radio

312 S.A. Stumpf, P. Chaudhry

f requency ident i f i cat ion (RFID) t ag s—are employed to discourage in f i l t rat ion by pirates, rather than consumer compl ic i ty .

With the except ion of e th i ca l behavior, execut ives tend to consider counter measures that support consumer demand for thei r leg i t imate product, and do not necessari ly deter demand for its counter fe i t . Perhaps we are looking at this issue f rom a single perspective? The latest arsenal of consumer-dr iven counter measures center on demarket ing ideas that o f ten employ fear, peer pressure, s tatements referenc ing the low qual i ty of fake products, role models, and a negative association to organized c r ime, to change a consumer ' s percept ion of the acceptab i l i t y of purchasing counterfe i t s . Some South Afr ican (21%) and U.S. execut ives (25%) f e l t that demarket ing maneuvers, l ike stressing the harmful ef fects of counter fe i t s in advert i sements, were ben­ef ic ia l in decreasing demand; even more of the i r Austral ian (52%), New Zealand (77%), and Tahitian (44%) counterparts embraced this as a plausible counter measure.

Wh i l e research has exp lo red the consumer eth ics of down load ing fake music, v ideos, and so f tware (Gupta, Gou ld , a Po la, 2004; N i l i & Shultz, 2009; Nunes, Hsee, & Weber, 2004; Swinyard, Rinne, & Kau, 1990; Wang, Zhang, Zang, â O u y a n g , 2 0 0 5 ) , w e need to go beyond eth ic s and look at speci f ic demarke t i n g i dea s—such as generat ing a fear of p r o s e c u t i o n — t o d i scourage compl i c i t y . One cour t case that is being wa t ched c lose ly involves a Boston Un ivers i ty g raduate s tudent who is being sued by t he RIAA for copyr ight i n f r i ngement ; the de fendant i l l ega l l y down loaded more than 800 songs. The RIAA is seek ing a pena l ty of $150,000 for seven of the 800 songs, wh ich cou ld also result in a f ine of more than $1 m i l l i on (V i jayan, 2009). In a un ivers i ty c lass room env i ronment , we have found that c i t i n g recent prosecut ions by the RIAA for i l l e ga l down load ing of music c reates a he ightened awareness of both c i v i l and c r im i na l pena l t ie s , such as misdemeanors wh i ch may a f f e c t f u tu re emp l o ymen t background checks . In te rms of recent leg i s l a t ion , the U.S. Co l lege Oppor tun i t y and A f f o rdab i l i t y Act of 2007 proposes an an t i -p i r acy r equ i rement tha t un ivers i t ies l ink the i r f u tu re fund ing w i t h t he " p u r c h a s e of DRM-based, indust ry - sanct ioned down load serv ices, and the dep loyment of network snoopware that spies on and d i sconnects s tudents if found to be v i o l a t i ng any copyr ight l a w s " ( " T r o u b l i n g , " 2008, p. 1). Fo l low-up consumer behav ior research is needed to d e t e r m i n e f irst whe the r such demarke t i n g e f fo r t s are pe rce i ved as e f f e c t i v e de te r ren t s by consumers, and second whe the r the messages have ac tua l l y decreased c o m p l i c i t y w i t h coun te r f e i t products .

5.3. Increase the salience of the topic in the media: Provide a realistic counter­attack for pro-piracy support

There may be a growing misconcept ion that coun­te r fe i t i ng is no longer the beat in the med ia : why report on such an age-old problem? We be l ieve that the strong associat ion of counter fe i t t rade to high-end fashion appare l needs to be updated to c rea te a rea l i s t ic dep ic t i on of the range of products that pirates are producing for today ' s marke tp lace , i n ­c lud ing foodstuffs, pharmaceut ica l s , and personal hygiene products. The Internat ional Ant i -Counter -fe i t i ng Coa l i t ion provides this type of data by highl ighting that the Food and Drug Admin i s t ra t ion c la ims counte r fe i t drugs account for 10% of a l l drugs sold in the Un i ted States. The Federa l Aviat ion Admin i s t ra t ion also es t imates that 2% of the 26 mi l l i on a i r l ine parts ins ta l led each year are coun­te r fe i t , wh ich equates to 520,000 parts (Interna­t iona l An t i counte r fe i t i ng Coa l i t i on , 2008).

Consumers must be made aware of the strong linkages between counter fe i t products and organized c r ime, v ia real i st ic appeals that prevent further advocacy of piracy. A report d i s t r ibuted by Interpol concludes that the supply of counterfe i t s has evolved f rom a " sma l l - s ca le act i v i ty conducted in i l lega l workshops in the 1990s, to an industry using costly, modern fac i l i t ie s . Counterfe i ters no longer work in isolat ion on an ad hoc basis; they have become internat iona l entrepreneurs w i th connect ions to highly organized ne twork s " (Interpol, 2009).

Chaudhry and Z immerman (2009) c la im ev idence for the support of pirates and piracy can be found in bottom-up med ia channels such as YouTube and personal blogs. Indeed, two v ideo parodies which quest ion the va l id i ty of the sa l ience of the mot ion p ic ture industry using ant i -p i racy t ra i lers to educate consumers are highly v i ewed and highly rated by users ( " I T C r o w d , " 2007; "U .K . Ant i -P i racy , " 2006). The romant ic i sm of p iracy needs to be de-myst i f ied in the med ia : these are cr imina l s that may be con­nected to organized c r ime, reaping exorb i tant profit margins, and the double-d ig i t growth of non-trad i ­t i ona l counter fe i t s (such as pharmaceut ica l s ) is an a larming t rend.

5.4. Work with agencies to immobilize the global flow of funds used for illicit trade

A key issue that has been ignored by most an t i -counte r fe i t i ng studies is money: how to stop the cross-border now of funds needed to make this i l l i c i t t rade solvent. The t rade in fakes requires massive amounts of funds that are f a c i l i t a ted across borders. M idd lemen involved in the money supply chain are

Country matter s : Execut ives weigh in on the causes and counter measures of counte r fe i t t rade 313

po ten t i a l targets to choke the f low of i l l i c i t goods. The cur rency of cho ice is the U.S. do l lar and any i n te rna t i ona l bank transfer must be c lea red through New York, giving U.S. en fo r cement off ic ia ls ju r i sd ic ­t ion over curb ing the f low of monies. A p r inc ipa l p layer in this area is an i n te rgovernmenta l agency, the F inanc ia l Act ion Task Force (FATF), wh ich mon­itors and sets standards for ant i -money launder ing (AML) and counter ter ror i s t f inancing programs. In 1989, the FATF—wi th cur rent membersh ip of 34 coun t r i e s—was designed to conf ront the p rob lem of drug t ra f f i ck ing ; however, it now appl ies its man­date to genera l c r im ina l act iv ity. Other g lobal agen­cies, such as the World Bank, w i l l prov ide country assessments of money launder ing through its F inan­c i a l Sector Assessment Program (World Bank Group, 2009). Firms must deve lop a t a c t i c in concer t w i th AML en fo r cement off ic ia ls to squeeze the funds for pirates. To this end, execut i ves need to ex tend the i r focus beyond conf i scat ing fake goods, as suppl iers may s imply cons ider losing a ce r ta in number of sh ipments as the pr ice of doing business.

5.5. Consider and test different solutions to similar problems

Country d i f fe rences aside, our findings support the perspect ive that supply drives consumer demand: pirates are mot i va ted by profits, coup led w i th lax c r im ina l and c i v i l en fo r cement of laws. Consumer comp l i c i t y w i th counte r fe i t products is dr iven by conven ience, des i rable product a t t r ibutes , and l im ­i ted income and/or low educat i on . Ant i - counter ­fe i t i ng act ions and product cues are v i ab le methods to reduce counte r fe i t i ng ; however, the i r a c tua l e f fect iveness is l i ke ly to vary based on prod­uct type (e.g., movies vs. pharmaceut ica l s ) and country of acquis i t ion (e.g., cu l t u ra l norms that a f f ec t compl ic i ty , such as co l l ec t i v i sm) .

Because the countr ies and execut ives involved in our study were se lected based on a tenta t i ve be l ief that they wou ld share s imi lar menta l models of product counter fe i t ing , the d i s t inct ive country-based findings warrant manager ia l a t ten t i on , pref­erably through appl ied research of d i f fe rent counter measures by product and country. This knowledge needs to be l inked to other in format ion on underly ing factors that may or may not re late to consumer compl ic i ty, such as the core values that shape the eth ics of consumer behavior (e.g., idea l i sm vs. re la ­t iv ism), the at t i tudes of consumers toward fake products (e.g., the e th i ca l concerns and percept ions of the qual i ty of fakes), and the role of re l ig ion/ cu l ture (e.g., co l lec t i v i sm, nat ional i ty) to foster or curb demand. A cumulat i ve knowledge resource could be c rea ted and shared among those companies

doing business i n , or having the i r products counter ­f e i t ed in, d i f fe rent countr ies.

Whi le the country markets exp lo red were signif i­cant in s ize, they are modest in comp l i c i t y and p i rat ing re la t i ve to more d iverse countr ies such as Braz i l , Russia, India, and Ch ina. Research needs to exp lo re the specif ic menta l models shared by exec ­utives w i th i n such countr ies , and then connect these models w i t h country specif ic (1 ) an t i - counte r fe i t i ng act ions that have ac tua l l y reduced p i rat ing, and (2) demarket ing act ions and product cues that have ac tua l l y decreased the consumer comp l i c i t y w i t h counter fe i t s . We must go beyond a desc r ip t i ve list of counter measures to understand wh ich methods rea l ly work to curb piracy across and w i th i n countr ies. When companies share the i r ant i - coun­te r fe i t i ng act ion exper iences w i t h each o the r by country, a comprehens ive understanding of success­fu l counter measures w i l l emerge and prov ide a more e f f e c t i ve way to counter the growth in i l l i c i t t rade. To the ex ten t that companies , governments, and po l icymakers can in form and educa te the i r const i tuents about the legal , f inanc ia l , and product qua l i ty risks associated w i th the purchase of coun­te r fe i t s , consumer demand for fake products should d imin i sh.

Acknowledgment

The authors con t r i bu ted equa l ly to this a r t i c l e and wish to express apprec ia t i on for f inanc ia l support to the Fred J . Springer Chair in Business Leadership Endowment at V i l l anova University.

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Stumpf, Stephen A.; Chaudhry, Peggy

Country matters: Executives weigh in on the causes and counter measures ofcounterfeit trade

Bus Horiz 53 no3 My/Je 2010 p. 305-14

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