Counterfeiting and piracy are illicit activities in which criminal networks and organised crime thrive. The economic gains that some consumers experience by knowingly purchasing lower-priced counterfeit or pirated products need to be considered in a broader context; many consumers do not experience such gains, they are worse off. The effects of counterfeiting and piracy are more pronounced in developing economies, which is where infringing activities tend to be highest, due, in part, to relatively weak enforcement.

Counterfeiting and piracy have economy-wide effects: 

Innovation and growth.

Innovation has long been recognised as a main driver of economic growth, through the development and exploitation of ideas for new products and processes. Innovators protect these ideas through patents, copyrights, design rights and trademarks. Without adequate protection of these intellectual property rights, the incentive to develop new ideas and products would be reduced, thereby weakening the innovation process. The risks are seen as particularly high for those industries in which the research and development costs associated with the development of new products are high compared to the cost of producing the resulting products. Pharmaceutical products are a case in point. Counterfeiting and piracy, to the extent that they undermine the efforts of innovators, can therefore have important adverse effects on research and, eventually, growth.

Criminal activities.

Counterfeiting and piracy transfer economic rents to parties which are often engaged in a variety of illegal activities, including tax evasion and drug trafficking. It can be assumed that a portion, possibly a large portion, of the rents is eventually used to sustain further criminal activity, in a corrupt and organised manner. 

Environment.

Counterfeiting and piracy can have negative effects on the environment. Firstly, the growing volume of seized goods raises environmental issues since destruction can be a costly process that creates considerable waste. In 2005, for example, the European Union alone seized 76 million articles. Secondly, substandard counterfeit products can have environmentally damaging consequences. A case in point is the chemical industry, which has documented cases where the use of counterfeit fertilizers caused serious damage to the environment. The destruction of harvests in large areas in China, Russia, Ukraine and Italy has been cited as examples.

Employment. 

Counterfeiting and piracy affect employment at two levels: economy-wide and in affected sectors. Economy-wide, jobs shift from rights holders to infringing parties. The shift has implications for the welfare of employees as working conditions in clandestinely run illicit activities are often far poorer than those prevailing in recognised firms that value their employees higher and adhere to health, safety and other regulatory norms. The pharmaceutical industry provided compelling evidence of the appalling conditions under which some counterfeit products were being manufactured. At the sectoral level, a number of assessments 

have been made of the jobs lost due to counterfeiting and piracy or, alternatively, the 

jobs that would be created if piracy levels declined. 

Foreign direct investment (FDI).

The situation with respect to intellectual property rights is one of many factors considered by firms who are investing abroad. For some industries, the level of counterfeiting and piracy may be relatively important, whereas in others it may be a minor consideration. The relationship was tested in an econometric analysis carried out by the OECD. It found that FDI from Germany, Japan and the United States was relatively higher in economies with lower rates of counterfeiting and piracy. However, additional results of the econometric test suggest that counterfeiting and piracy serve only a limited role in explaining FDI behaviour.

Trade.
The relationships between counterfeiting and piracy and the volume and structure of international trade were examined econometrically. The results found no correlation with respect to trade volumes, but there were indications that counterfeiting and piracy influenced the types of goods imported and exported: economies with relatively high counterfeiting and piracy rates tended to export lower shares of products where health and safety concerns could be high. This was in particular the case for pharmaceutical products. As above, the results should, however, be treated with caution as they are based on limited data. 



Rights holders experience:

Sales volume and price. 
Counterfeit and pirated products crowd genuine products out of the market, lowering the market share of the rights holder, putting downward pressures on prices. In the case of trademark- and copyright-infringing items, the loss in market share has two components (i) sales lost to consumers who purchase a counterfeit or pirated product believing it is genuine and (ii) sales lost to consumers who knowingly purchase a lower-priced counterfeit or pirated product instead of a genuine article. 

Brand value and firm reputation.
Counterfeit or pirated products may damage the brand image and reputation of firms over time. For instance, those consumers who believed they were buying a genuine article when in fact it was a fake, will be likely to blame the manufacturer of the genuine product if the fake does not 
fulfil expectations, thus resulting in a loss of goodwill. If consumers never discover that they were deceived, they may be reluctant to buy another product from that manufacturer and may communicate dissatisfaction to other potential buyers. The proliferation of counterfeit versions of luxury goods can make the genuine articles less desirable to their traditional consumers. These effects were reflected in responses to the OECD industry questionnaire by respondents from the consumer electronics, information and computer, electrical equipment, food and drink, luxury goods, sportswear, automotive parts and accessories and pharmaceutical industries.

Royalties. 
Royalties are the proceeds gained by IPR holders for permitting other parties to exercise such rights. Infringement deprives the rights holders of these proceeds. 

Investment. 
High levels of counterfeiting and piracy could reduce the incentive of some firms to invest in the development of new products and processes. However, only limited empirical work has been carried out on this. 

Costs of combating counterfeiting and piracy.
As indicated below, rights holders incur a variety of costs when combating counterfeiting and piracy. It should be noted that, because these costs are remedial in nature, these do not translate into higher quality products, product innovation or other enhancements and can therefore be considered pure social loss.

Scope of operations.
Counterfeiting and piracy can affect the scope of a firm’s activities. Respondents to the OECD industry survey mentioned instances where reduced profitability and losses in brand value had driven companies out of business or reduced their scale of operations.






(source: http://www.oecd.org/industry/ind/38707619.pdf)