"Good" Imitation and "Bad" Imitation: Tropicalisation and the Risk to IP

One of the most vexing subjects in the area of innovation is the interrelationship between innovation and imitation, and its implications for intellectual property. More particularly, at least since 1986, when David Teece published his classic article,"Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy", the question was, and is, who is more likely capture value from innovation -- the innovator, the imitator, or the downstream providers of so-called "Complementary Assets", such as manufacture, distribution and marketing? Teece focused on intellectual property under the rubric of "Appropriability Regime" and asked this question: is the innovator's appropriability regime strong or weak? If the former, and if the innovator did not need to share a material portion of the value in the complementary assets, it was more likely to reap the lion's share of the benefits.

Teece's analysis came out of a different industrial era, standing, as he was, at the cusp of the digital age. While it is not stated explicitly, his analysis rests on the notion that there are sufficient incentives for the innovator that under the right circumstances, i.e., if his IP is sufficiently robust, he will be likely to capture significant value from his inventions and creations. In such a situation, with ample potential reward for the innovator for creating valuable IP, the imitator serves his classic role, exploiting IP rights by design around in a manner that doesnot infringe existing IP rights, together with successful utilization of the complementary assets necessary to commercialise the development. In such a circumstance, IP is central to the Teece framework, both for the innovator and the imitator.

How different is the role of IP and the imitator in today's world. One need look no further than a article that appeared in the June 2nd issue of The Economist. Entitled "VC Clone home: Venture capital in emerging markets" here, the article describes the phenomenon of "tropicalisation", which is defined as "the practice of backing start-ups that take an established business model and adapt it to an emerging market." The article refers inter alia to Peixe Urbano, described as Brazilian clone of Groupon, Baidu, characterized as "Chinese interpretation of Google", and Trendyol, a Turkish version of Vente-privee.com here, tweaked for the local market. Perhaps the most interesting scalable attempt of imitation in this regard is Rocket Internet here, which reportedly operates a " 'cloning' factory" that apes successful US and European businesses and then seeks to find entrepreneurs to export these clones to the developing world.

One motivation for this phenomenon seems to be the diminishing track record of success for VCs in the developed world. The search for returns is driving them to seek returns further afield. What is interesting is that the focus of these investments seems to be less, indeed far less, in innovation of the kind described by Teece, and more in the imitation of successful business models in the social media and online commerce space. In considering the examples given in the article, one is hard-pressed to find even instance in which breakthrough technology and supporting strong IP rights is the driver of the adapted business model.

In fact, the trade mark and brand of the businesses being imitated may be the most valuable IP asset of those companies and it is the IP asset that is the least likely to be copied. Thus, it may be true, as Eric Archer of Monashees Capital states,"w]ith innovation, you have a global side, but with copycat innovation you have geographical limits." However, change the name of the local copycat and adroitly implement the business model within the requirements of the local market, and the so-described "global side" of innovation, embodied in the company's trade mark and brand, may not be enough.

Perhaps of most concern in the developments described in the article is the nature of the innovation being imitated. In comparison with the innovation contemplated by Teece, these kinds of VC-sponsored activities in the developing world appear IP-lite, resting almost entirely on successful exploitation of complementary assets in the local jurisdiction. Indeed, the closing words of the article should give pause to all those who wrestle with the challenge of engendering innovative IP in the developing world. The article concludes: "It will not be long before emerging markets spawn their own innovations that can be trotted out on a global scale. That would be closer to the spirit of venture capital, which is supposed to ferret out and fund new ideas, not imitations. Until then, however, tropicalisation is set to become an ever more popular strategy. Copy that."

While that sounds uplifting, there is nothing in the article that supports this conclusion. It is equally plausible that troplicalisation will merely beget more tropicalisation. If Teece described the conditions for "good" imitation, the circumstances that surround tropicalisation suggest the opposite: "bad" imitation with little or no prospect for innovation, at least some of which will be supported by strong and robust IP rights.

IP Rights and Chinese Producers: You Live and Die by the Jump Shot

If readers will please forgive me, I want to begin these comments with another sports saying, this time from basketball. It is a basketball truism that "you live by the jump shot, you die by the jump shot." In other words, you can work harder to try and get that safe shot close to the basket, or you can prefer the easier route of shooting at the basket from further away. If it works--fine, but if your shot is off, your are courting disaster.

This saying came to mind when I read a view that appeared in the May 16th issue of The Economist of the book by Paul Midler, "Poorly Made in China: An Inside Account of the Tactics Behind China's Production Game." The title well-describes the contents of the book as reviewed. One paragraph of the review particularly caught my attention:

"In a further effort to create a margin, clients from with strong intellectual-property protection and innovative products are given favorable pricing on manufacturing, but only because the factory can then directly sell knock-offs to buyers in other countries where patents and trademarks are ignored. It is, Mr. Midler says, a kind of factory arbitrage."

With all due respect, I find this comment a bit puzzling. In particular, it seems to me that the observation confuses the issue of strong or weak IP protection with the industrial organization framework in which IP is deployed. I have little doubt that the current IP regime in China falls woefully short of the IP regime in other, particularly developed countries. But to say so, no matter how true the statement is, misses the point. After all, even in the countries with the most "advanced" IP protection systems, there is a long history of manufacturers being challenged for unauthorized over-production which is then sold by the manufacturer for its own account.

Once we recognize this point, then we can see that the problem described by the reviewer is not precisely an issue of strong or weak IP protection, but rather the extent to which the owner of the IP rights chooses to rely on third parties to translate the IP into a competitive product. As David Teece of U-Cal Berkeley famously instructed us over 20 years in his classic article, "Profiting from Technological Innovation" (Research Policy 15(6), pp. 285-305), innovation can be divided into two components--the appropriability regime, roughly identical with IP rights, and complementary assets, roughly the some total of manufacturing, design, distribution and other assets that enable an innovative development to be translated into a competitive product.

At the margin, an extraordinarily strong IP right could simply trump a consideration of complementary assets capabilities (in which case the strong IP/weak IP dichotomy might be relevant). In practice, however, IP rights usually need effective complementary assets to create a competitive product. While the owner of the IP right could in principle vertically internalize its complementary assets position, this is a rare situation. More typically, complementary asset capabilities require turning to third parties, sometimes to the ultimate advantage of the third party. This is the case even in a developed country with strong IP protection.

With this in mind, one can view the rush to the so-called "China price" as a risk, sometimes more calculated, sometimes less calculated, taken by the owner of the IP rights that he can minimize the ultimate threat posed by the foreign (here: Chinese) provider of the complementary assets. Seen in this light, reliance on "China's Production Game" is akin to the basketball saying which opened this blog posting. Like his basketball counterpart, as long as he continues to enjoy the price advantage of Chinese production, he and his corporate team can enjoy competitive success. But it is also possible that he will ultimately be done it by his reliance on his Chinese producer. After all: "you live by the jump shot, you die the jump shot", in basketball, and also in the production commercialization of IP rights.

FIND THE COMPLEMENTARY ASSETS