The ip coalition report I

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Software Piracy

Trends in Piracy

Software piracy in the Philippines had been declining for the five consecutive years, 1996 to 2000, based on data in Table 8. Indeed, the Philippines recorded the largest rate decline among the countries in the Asia/Pacific region in 1999-2000. For reasons that are explained below, piracy has been rising at least for the period from 2001 to 2003.

According to the Business Software Alliance (BSA), the decline in piracy rate in 1997-1998 was primarily attributed to the enactment of the new copyright law23 and the improved awareness on IPR in the country among the members of the judiciary (Computerworld, 1999)24. The intensified enforcement of the law and improving Intellectual Property protection also contributed to this decreasing trend. From 8,944 firms being monitored by government agencies for IP Code Violations in 1998, the number increased to 14,876 in 2000. However, the number dropped by 1,192 from 13,684 in 2001, the year when the piracy rate in the country started to increase.

Effects on Investments

ased on BSA and BOI data, there is an apparent high negative25 correlation26, of -0.87162, between the levels of piracy and new investments in software development in the Philippines. Level of new investments quadrupled in 2000, when the piracy rate posted a 7 percentage point decline in 1999. Similarly, investments in 2001 climbed by 38.2% when piracy rate dropped by 9 percentage points in 2000. On the other hand, the investment level decreased in 2002, when the Philippines posted a higher piracy rate in 2001, of 63%, from its 61% rate in 2000. It further declined by 28.5% in 2003 as the rate of piracy further rose to 68% in 2002 (Figure 4).27

Similarly, the level of new employment in the software sector rose as the software piracy rate dropped, although at a decreasing rate. In 1999, it climbed by 117.3%; 2000, 89.7%; and 2001, 0.3%. Meanwhile, the number of new hiring was cut by more than half in 2002, when piracy rate climbed to 63% in 2001 from 61% in 2000. Likewise, a drop in 2003, of 65.2%, in new employment was registered when piracy rate further rose to 68% in 2002.

The same reaction to the piracy rates was observed for the total28 IT services new investment and employment levels during the years analyzed. From 1997-2000, when the piracy rates were decreasing, total levels of new IT investments and employment continued to increase. The reverse occurred in 2002-2003 when the piracy rates rose to 63% and 68% in 2001 and 2002, respectively. This means that the whole IT industry, and not only the software development and service sub-sector, is affected by the infringement in software copyright. However, correlation analysis showed that the intensity of the influence of piracy rates on the level of investments is greater in the software sub-sector, at -0.81726, compared to its effect on the whole IT industry where the correlation value is lower at negative 0.5224.

The said observations are consistent with the study29 conducted on the software sector in Mexico, which stated that:

Looking across numerous countries, we find that as software piracy rates decline, IT investment increases. Every 10 percent decline in the software piracy rate, e.g. from 70 percent to 63 percent, increases the IT investment share of GDP 13.4 percent, e.g. from 2 percent to 2.26 percent… Even modest success in providing stronger protection of IPR can have a sizeable impact on IT investment and GDP.

The importance of effective IPR protection as a determinant to foreign direct investments is highlighted in a recent study by Correa.30 The study examined the investment and IPR chapters of several bilateral investment treaties (BITs). The author observed that these agreements have provisions that even go beyond international standards such as those in the WTO’s TRIPS agreement. They incorporate the "national treatment" principle without the exceptions provided for under international treaties. Interestingly, the "most favored nation" clauses in BITs contribute to a global elevation of IPR protection standards. These bilateral treaties are setting the standards for the highest protection of IPR. They highlight how sensitive investors are to the protection of IPRs. Indeed, if negotiations on investment were initiated in the framework of the WTO, for instance, pressure to replicate the highest levels of investment protection for IPRs, as currently found in the bilateral treaties, can be expected, the study observed.

With the observed reaction of the IT market to the levels of software piracy, a framework on the relationship between intellectual property protection and investment decisions is thus formulated (Figure 5).

The framework shows that the creation of IPR laws is a tool by which the Intellectual Properties of economic agents are protected from infringements. Condition or extent of IPR protection31, in turn, provides economic entities with information regarding the probabilities of return or forecasts of their activities.

One of the major concerns of IT investors is the rate by which their investments are protected. IPR protection builds the investors' confidence on the country's market and the government's dedication and capabilities toward the cause. Economic decisions, such as the levels of IT demand and investments are affected by speculations that arise from forecasting the psychology of the market. A low market confidence can lead to lower capital inflows and labor demand. Therefore, the primary agenda for IPR protection in IT is the building of investor confidence in the Philippine IT market.

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