PIRATES OF GLOBALIZATION International Business Management

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image4.jpg image5.jpg image6.jpgCHAPTER 3 • POLITICS, LAW, AND BUSINESS ETHICS 103

image7.jpg Practicing International Management Case

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Pirates of Globalization

I t pays to remember that old Latin phrase. cm·eat empror (“‘let the bu yer beware”). when tackling the production of counterfeit prod­

ucts on a global scal e. Sophisticated pirates routinely viola te pat­ ents, trademarks, and copy righ ts t o churn out hi gh-qu al it y fakes of the best-kn own brands. Trademark co unterfe iting amount s to between 5 and 7 percent of world trade, or around $500 bil­ li on a year. Phony products appea r in many indust ries, including computer softwa re, films, books, music COs, and pharmaceutical drugs. Fake computer ch ips, broadba nd routers, and computers cost the electronics indust ry alone u p to $1 00 bi ll ion annually.

Tradition ally peddled by sidewalk vendors and in back-street ma rkets, coumerfeiters now employ the latest technology. Ju st as honest businesses do, they are using the Internet to sl ash the cost of distri buting their fake goods. All merchandise on some Internet sites is counte1feit, and even legitimate website operators, such as eBay (www.ebay.com), have difficu lty rooting out pirates.

New York retailer Tiffany & Co mpany (www.tiffany.com)

sued eBay when counterfeits of its prod ucts appeared on e Bay’s websi te. I n the complaint, Tiffany said th at, of the 1 86 jewelry pieces bearing the Ti ffany name that it ra ndoml y purc h ased on eBay, 73 percent were pho n y. Tiffany argues that, because eBay profits significantly from the sale of fake merchandi se. provides a forum for su ch sales. a nd promotes it, the com pany “shoul d bear responsibi lit y for the sal e of cou nterfeit mercha ndi se o n its site.” Others d isagree, sayi ng it is impractical to require online auction­ eers to verify the authentici t y of every product sold on its site.

Pirates h ave not i gnored t he market for automotive parts, wh ich loses a rou nd $12 billion ann ually to phony goods. Car ma n­ ufacturers li st harmful fakes such as brake l inings made of com­ pressed sawd u st and transm i ssion fluid that is nothing more than cheap oil with added dye. Boxes bearing legiti mate-looking labels make i t difficult for con sumers to tell the difference between a fake and th e real deal. The problem i s causing fears of l awsui ts because of malfunctioning coun terf eits and concerns of lost rev­ enue for prod ucers of the genuin e articles. For example, i f some­ one i s in an accident because of a counterfei t product, l egi ti mate ma nufacturers need to prove the product i s not their ow n.

Lax anti piracy regul ati on s and booming economies in emerg­ ing m arkets m ea n potential intel l ectual -prope rt y traps awai t compa nies doing bu si ness there. For exa mple. Indian law g i ves international ph a rmaceu tical firms five- to seven-year paten ts on processes used 10 ma11ujacture drugs-but 1101 on the drugs them­ selves. This lets Ind ian compa nies modify the patented production processes of internat i onal pharmaceutical companies to create drugs that are onl y slightly different.

In China. political protection for pi rates of in tellectual prop­ erty remai ns fairly common . Government officials. people work­ ing for the government, and even the People’s L i beration A r my (China ‘s na tional army) operate factories that churn ou t pirated goods. An international com pany has difficu l ty fighting piracy i n China because filing a lawsuit can severel y damage i ts business relations there.

Yet, opinion i s d i vided on the root ca u ses of int ellectual

propert y viola ti on s in China. Some argue that Ch i nese legisla­ tion is vaguel y worded and difficult to enforce. Others say Chi­ na ‘s i ntellectual property l aws and regulations are fine, but poor enforcement is to blame for high rates of piracy. Amazingly, Chi­ na’s regulatory body sometimes allows a cou nterfeiter to remove an infringing trademark and stil l sel l the su bstandard good. Tec hnology companies said t o have been harm ed by China’s weak intellectua l property laws include Microsoft (www. microsof t.com), w hich claims that its software i s widely pi rated, and Cisco Systems (www.cisco.com), wh i ch sued a Ch in ese hardware maker for alleged l y copying and using Cisco network­ ing sof tware.

Thinking Globally

I. Do you t h ink that the international business commun i ty is being too lax about the abuse of intellectual property rights? Are international companies simply afraid to speak out for fear of jeopardi zing access to attract i ve markets?

2. Increased d igital communication may pose a threat to

intellectual property because technology allows people to crea te perfect clones of original works. How do

you think the Internet i s affect i ng intellectual property

laws?

3. Locate in formati on on the Tiffany versus eBay lawsuit men tioned in the case. Iden tify the arguments of the plaintiff and the defendant and who prevailed. What a re the implications of that l awsui t for the sale of cou n terfei ts in online auctions?

Source: “Counterfeit Drugs: Fake Pharu1a.”Tire Economist (www.cconomist.com ). Febru­ ary 15.2012: Rachael King. “Fighting :t Flood of Counterfeit Tech Products:· Bloomberg Businessll’eek (www.businessweek.com). March I. 2010:Andrew Willi.”Europe Awash in Coumafeit Drugs.” Bloomberg Busiuessll’eek (\”w.busine>sweck.com). December 8.

2009: Rachel Metz. “eBay Beats Tiffan) in Coun Case over Trademarks.” USA Today

(www.usatoday.com) Jul y 14. 2008.

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CHAPTER 4 • ECONOMICS AND EMERGING MARKETS 129

Practicing International Management Case

Cuba Comes Off Its Sugar High

W hen t he Soviet U nion sti ll existed , Cu ba would barter sugar w i th its comm u nist all i es i n return for oil and other goods. B u t when the Soviet Un ion crumbled i n I 989, C uba had to say good­ bye to its preferential barter rates and Soviet su bsid i es. The onl y opti on l eft to Cuba’s leader. Fidel Castro. was to sell the nation’s sugar on the open market. B u t whereas sugar ex ports eamed Cu ba

$5 bil lion in I990, they earned a pal try $20 mill ion i n 2006. Pro­ ducti o n fell from a peak of more than eigh t million ton s in 1 989 to arou nd o ne mi ll ion tons i n 20 I0. Wi th decreasing reven ues on world markets, falling prod ucti on, and i neffici ent sugar mil l s that guzzle expen si ve oil, Castro had no choice bu t to sh u t down abou t half the isl a nd-nati on ‘s mills. Today. Cu ba remai ns a net sugar im­ porteJ; and power is now in the hands of Fidel’s brother, Raul.

With the remaining state-owned industri al dinosa u rs wheez­ ing away and the economy u nder i mmense strain, the governmen t opened up key sta te industries to non-Cuba n in vestmen t. As a result, joi nt ven tures became a key plan k in the effort to prop u p Cuba through limited economic reforms. The money came chiefly from Ca nada. Mexico, and Europe-all of whom benefited from the a bsence of Cu ba·s nei ghbor and nemesi s. the U nited States, which has main tai ned a trade embargo agai nst Cuba since 1960. Much of the invest men t occ u rred in anot her commodi t y that Cuba has to offer t he world-nickel. Cuba holds 30 percen t of the world ‘s reserves of nickel, wh ich is used i n stainless steel and other all oys, and it exports 75 percen t of i ts nickel to Europe. O ne of the biggest mining firms active i n Cu ba today i s Canada’s Sherri tt International Corporation (w ww.sherritt.com). Sherritt’s flag fl ies ou tside t he island’s biggest ni ckel mine, and Sherri tt rigs are revi v­ ing output from old oil fields. After turning arou nd the ai li ng nickel mine at Moa, Sher ritt received governmen t approval to develop beach resorts and beef u p comm u nications and t ransport net works.

Although international concerns like Sherritt a re free to invest in Cu ba, they face some harsh realities and restricti ons. Cu ba is burdened wi th com plex and contradictory ru les and regulat ions. And o n ce foreig n ers beg i n to figu re out th e rul es, the govern­ men t ch a nges them. “There are times w hen the Cubans seem to go out of their way to create obstacles,” com pl ained one Eu ropean businessma n . “They need us, we ca n do bu siness here, so Idon’t un derstand w hat th e probl em is.” But it seem ed Cuba ‘s govern­ ment was going to do little to hel p.

Ricardo El izondo came to Cuba f rom Mex ico to hel p man­ age his com pa n y ‘s stake in ETECSA , Cu ba’s na tional tel ecom­ mu ni cat ion s fir m. Elizondo reports that anyone w ho wan ts to do bu si ness i n Cuba m u st accept the real i ty of partnersh ip wit h a socialist state. Cuba Jacks a legal system to enforce com mercial contracts, i t lacks a banki ng system to offer credit, an d there are

no pri va te-property righ ts. One thi ng the governmen t doesn ‘t lack is plenty of l abor laws-a nd those are onerous. Non-Cu ba n part­ ners can not hire, fire, or even pay workers di rectly. They must pay

t he governmen t to provide laborers who, in turn , are paid on ly a fraction of these pay men ts. H u man rights grou p Freedom House (www.freedom house.org) says one com pan y paid the Cu ban gov­ ernment $9,500 per yea r per worker, but the workers received on l y

$120 to $144 per year. Meanwhile, t here are reports that an aver­

age of 1.2 build ings collapse in Cen tral H avana every day.

Why do compan ies i nvesting in Cu ba put u p wi th such restric­ tions? For one thi ng, they are getti ng a great return on their i nvest­ ment. “Cuba’s assets are incredibl y cheap, and the potential return

i s huge,” says Fran k Mersch , VP at Toron to’s Altamira Manage­ men t (www.al tamira.com), w h ich holds I I percent of Sher ritt. Analysts say that Cu ba i s offeri ng ou tsiders deals wit h rates of ret urn u p to 80 percen t a year. Moreover, i nternational investors ack n ow l edge th a t the Cast ro brothers’ regime cannot last for­ ever. ln a post-Castro era, the U n ited States may end its embargo, in which case, property pri ces would soar. Companies such as Sher ritt and ETECSA, who stepped i n first. will have gained a valu able toehold i n w hat could be a vibran t market economy.

Thinking Globally

1. Wh y do you thin k the Cuba n governmen t req ui res non­ Cu ban busin esses to hire and pay workers only th rough the governmen t? Do you thi n k it is ethical for non-Cu ba n businesses to enter i n to part nerships wi th t he Cu ban government? Why or why not?

2. Do some research on Cuba, and descri be a scenario for

economic transition i n the even t that the cu nent regime collapses. How do you t hi nk transition to a market econ­ omy in Cu ba wou ld differ from the experiences of Russia and China?

3. The United States has enacted a law that permits U.S. com­

panies to sue compan ies from other nations that traffic in the prope11y of U.S. firms nationalized by Cu ba. The Jaw also empowers the U.S. government to den y en try visas to the executives of such finns as well as their families. Why does the United States main tain such a hard li ne against doing business with Cuba? Do you thin k this em bargo is i n the U nited States’ best interests? Why or wh y not?

Source: Archibald Riner. ··cuba in the 20 I Os: Creative Reform or Geriatric Paral ysi?’ .. Focal Point. April201 0. pp. 12-1 3: ··u.s. ts $500 Million Supermarket to Cuba:· CNBC website (ww w.cnbc.com). May 28. 201 0; Steve LeVine and Geri Smith, ··New Cuba Poli cy ts No Business Home Run.'” Bloomberg Busines.nreek (www.busi nessweek.com). April 15. 2009: Cuba Blog. Foreign Policy Association. (c uba.foreignpolicyblogs.com).

various reports and data.

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