Three Faces of Competitive Intelligence
20 Pages Posted: 22 Feb 2007
Date Written: February 19, 2007
If for many the perception that global competition is intensifying reinforces the maxim that business is war, it stands to reason that the acquisition of actionable CI should become a growth industry. Indeed, nearly every Fortune 500 firm and more than one hundred foreign governments have created a CI office tasked to reveal information about competitors. Moreover, when lawful methods of CI, which are restricted primarily to the systematic examination and analysis of publicly available records and other open-source materials, are insufficient, many firms turn to private investigative agencies and other contractors to acquire the trade secrets they desire through corporate espionage [CE], which does not recognize legal boundaries and is thus regarded as the dark side or unlawful subset of CI.
Despite its dubious pedigree, CI is so prevalent circa 2007 that it might fairly be said that everybody spies on everybody. The sheer magnitude of contemporary CI operations is astounding. Theft of proprietary business information costs Fortune 1000 firms approximately $100 billion annually, and a single attempted CE operation against Intel Corp, only narrowly averted, would have deprived the firm of an expected $300 million in future profits. Yet even if CI and CE are ubiquitous, and even if no firm can claim clean hands, the resort to such methods - and in particular CE - imposes externalities on firms that lose information wars and reallocates the benefits of innovation from innovators to firms less skilled in R&D but more capable as criminals. This observation did not escape the attention of regulators, and in 1996, the U.S., responding primarily to the theft of the intellectual property of U.S.-incorporated firms by foreign firms and governments but also to the its domestic variant, passed the Economic Espionage Act [EEA] which imposes 10 years' imprisonment and fines of up to $5 million per form upon conviction of the knowing receipt, purchase, or possession of trade secrets.
However, eleven years after passage of the EEA fewer than forty cases have been filed - far fewer than anticipated. Moreover, most prosecutions have arisen not out of the theft of high-value R&D secrets regulators expected would be targeted by CI operations but from the theft of information regarding low-tech and industrial products. Even when defendants have been convicted, punishment has been rather gentle: courts have imposed sentences averaging under two years' imprisonment and fines averaging less than $50,000 - or about a penny for every $10 of value targeted. If indeed everybody spies on everybody, and if CI/CE potentially quite costly to its targets, is actionable under criminal and civil statutes, then the lack of effective prosecution cannot be explained away solely by reference to the criminal law burden of proof or to the skill of CI/CE operatives.
In fact, the regulated and the regulators oppose strict enforcement of laws governing CI/CE, albeit for differing rationales. For firms, CI is a double-sided blade that cuts through uncertainty to serve either competitive or collusive ends, depending on the manner in which it is wielded. For firms waging price wars, attempting to enter markets, or seeking to deny entry to other firms, CI is an efficient instrumentality that allows firms to anticipate and counter rivals' strategies - in other words, to defect from or avoid cooperation in order to claim private benefits at the expense of their rivals. In contrast, for firms seeking to establish and maintain the high profits available through cooperation and collusion, CI provides a reasonably efficient if imperfect means to verify and stabilize collusive equilibria. Finally, in its third manifestation, CI serves the state as an indirect yet cheap regulatory mechanism that encourages firms to acquire information about their rivals and to use that information as the basis for defecting from price collusion agreements - in other words, in the hands of the state CI is a public good that supports the anti-trust regime and benefits consumer welfare.
Keywords: antitrust law, collusion, competition, game theory, competitive intelligence, private negotiation theory
JEL Classification: A13,C70,C71,C72,C78,D21,D43,D82,K21,K42,L41,L44
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