The Economic Impact of Counterfeiting

Counterfeit products are a serious problem that has piqued the attention of governments, economists, and business leaders. The overall value of counterfeit and pirated items is pegged between $2.5 Trillion to $4.7 Trillion globally, (USPTO), with pharmaceuticals accounting for about a third, particularly during the 2020 pandemic and post-pandemic years.  Counterfeit items are commonly found in a wide range of consumer goods, pharmaceutical goods, the food and beverage business, medical equipment, the machine and car replacement parts industry, as well as chemical and even electronic goods.

Counterfeiting has a negative impact on not just customers but on the economy of any country.  One of the primary reasons our society suffers from the flourishing of counterfeiting is the significant financial loss that businesses and hence economies experience. Counterfeiting was once considered a minor offence. However, it has now become a serious threat, with fraudulent items made and marketed in large quantities, taking over whole marketplaces in certain situations. Most of the companies that manufacture these counterfeit goods do not report their revenues to the government and consequently do not pay taxes. Most governments are funded by taxpayers; therefore, they lose tax income. A spiralling of this across numerous industries generates large financial losses for governments, consequently affecting the economy.

Aside from lost tax revenues, counterfeiting has a negative impact on the economy by reducing foreign investment. Foreign manufacturers increasingly grow hesitant to manufacture their products in nations where counterfeiting is common because they cannot rely on intellectual property rights enforcement. They are concerned about their reputation and opt not to enter places where counterfeiting is prevalent. As a result, such nations not only lose direct foreign investment, but also foreign know-how in a certain industry.

Furthermore, the presence of a legal framework to safeguard the rights of entrepreneurs and firms provides the cornerstone for new business development in a country. Only in this way can fair competition be promoted. If a market, such as India’s, is a breeding ground for counterfeiters, it hinders innovation in the country by discouraging legitimate producers from entering the market. The discouragement felt by local manufacturers, along with that felt by international enterprises, fully erodes a country’s financial income, resulting in economic losses.

Counterfeiting has also been linked to anti-social groups, including terrorist groups throughout the world who gain their funding from unscrupulous means in the grey market.

Counterfeiting taints a brand’s image, which may have taken years to create. The distinctions between fake and authentic items are becoming increasingly blurred in the realm of e-commerce and online buying. Unscrupulous elements have a greater success rate since they can simply steal a company’s designs and branding using sophisticated technologies. Consumers are finding it more difficult to distinguish between genuine and counterfeit goods. As a result, firms’ reputations suffer greatly. Consumers blame the original brand when the goods do not match their expectations since they cannot tell that the “item”, they ordered and are using is not authentic. They blame the original brand for the failure of the product or its poor quality. Customers also provide unfavourable feedback. Customers also publish unfavourable reviews online and engage in word-of-mouth or social media posts to spread the word about the brand and its poor product quality. A lot of troubleshooting and image cleansing is required for a brand to inform a client that they have been using a counterfeit product. And if the fraudulent product has been sold in bulk quantity, it is a large and time-consuming process for an organization to restore its ruined reputation, which also comes with costs.

Counterfeiting also stifles innovation in a variety of areas and enterprises. The selling of counterfeit goods impedes the sale of real goods, discouraging innovators. A significant number of organizations earn enormously from the creation and sale of counterfeit or imitation goods, all at the cost of real manufacturers. This inhibits legitimate manufacturers from investing in product development since they will not reap the full advantages of their investment. This undercutting of innovation has a negative influence on a country’s economic growth, and hence on global growth.

Product counterfeiting has grown in breadth, scale, and threat on a worldwide scale, becoming a monster trillion-dollar sector that is eating into the global economy. If the counterfeiting problem is not addressed, it has the potential to undermine the economic and societal stability of governments all over the world. Due to inadequate law enforcement and corruption, India is one of the most afflicted countries. To reduce trademark counterfeiting and copyright infringement, it is critical to strengthen IP enforcement regulations. As governments struggle to allocate resources across many public policy concerns, a greater knowledge of the nature, scale, costs, and impact of counterfeiting is required to guarantee that adequate resources are allocated to tackling this problem.

This article is authored by Mr. Lokesh Harjani, Founder & CEO, OnSpot Solutions – a Cloud-based Digital Platform for Anti-Counterfeiting, Brand Protection and Product Authentication. 

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