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Harry Cassin
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Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Eric Carlson
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Is corruption a root cause of trade secret thefts?

Even by today’s larcenous standards, last week’s indictment of a former Apple software engineer for theft of trade secrets is shocking. The DOJ accuses Weibo Wang of stealing the heart and soul of Apple’s self-driving car technology, including the architecture for an autonomous system and the “entire autonomy source code.”

Wang, 35, allegedly became a secret employee of a Chinese self-driving car company four months before he resigned from Apple. After he resigned and Apple’s backcasting detected his unusual access patterns, a law enforcement search of his home in Mountain View, California turned up “large quantities” of Apple’s data.

During the search, Wang, 35, said he had no intention of traveling. But that night he allegedly used a one-way ticket to board a flight from San Francisco International Airport to Guangzhou, China. He’s now a fugitive.

I often write about corruption in China, and there are so many stories about industrial espionage linked to China — at least one in five U.S. companies say China has stolen their IP. So I wonder: Could there be a connection between trade secret theft and corruption?

I think there is. Here’s why.

Corruption impedes innovation. First, when companies become prey to rent-seeking officials, bribes typically come at the expense of innovation, which requires long-term investment with only the hope but not the guarantee of future profits.

Second, in corrupt economies, companies with deep pockets protect their positions not through innovation but through graft. They use bribery to keep competitors away. For the competitors, corruption blocks their market access and thereby reduces their opportunities to be innovative.

Third, a deeper reason corruption impedes innovation is the “culture effect.”  Where graft flourishes, business people don’t trust the government for obvious reasons, and don’t trust each other much either. This leads to less collaboration, an essential ingredient for most innovation.

So we’re coming to the fundamental question: If companies can’t or won’t innovate, what do they do instead? They steal innovation from others.

It’s far cheaper than developing their own technology, even if they could somehow do that. And in corrupt countries, there’s often no penalty for stealing IP from foreign sources. Sadly, corrupt regimes might even confer tangible or intangible rewards on the thieves and their beneficiaries.

An economics researcher at the Federal Reserve Bank of Chicago, Marcelo Veracierto, posited what he describes as the “basic corruption scenario” and how it stymies innovation.

There’s an innovator, an incumbent producer, and a corrupt government official.  “The innovator wants to enter business by potentially paying a bribe; the incumbent producer wants to preclude the entry of the innovator by potentially paying a bribe; and the corrupt official decides on allowing the entry of the innovator based on the bribes received,” according to Veracierto.

In this scenario — where all the actors are crooked — bribe demands keep escalating as long as the bribes remain hidden or they’re known but go unpunished. “Since the resources devoted to innovation are continuously and inversely related to the bribes that producers must pay, this means that the amount of resources devoted to innovation is a discontinuous function of the probability of detecting corruption and of the penalties imposed,” Veracierto said.

In other words, when there’s more corruption and less enforcement, the rising cost of graft eventually puts innovation out of reach for everyone. Companies that must develop new products to survive turn to stealing the technology that’s needed.

Incidentally, China (#65 of 180 countries on the latest corruption perceptions index) isn’t the only country that comes to mind. U.S. trade officials at various times have also flagged poor IP protection in Indonesia (#110), Algeria (#116), Russia (#137), and Venezuela (#177), among others.

A lesson from all this? Fighting corruption through enforcement of the FCPA and laws like it is one way to reduce bribery’s supply side. That in turn frees resources for innovation and reduces incentives to steal trade secrets. At least in theory.

I know. There are loose “theoretical” connections here that need empirical support. But as a purely practical matter, the alternative to enforcement — letting graft flourish — is certainly bad for innovation. And whatever is bad for innovation must also be bad for those trying to protect their hard-earned IP. Just ask Apple.

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