In a speech at the Export-Import Bank’s annual conference on March 11 of this year, President Obama said, “Our single greatest asset is the innovation and the ingenuity and creativity of the American people…There’s nothing wrong with other people using our technologies. We welcome it. We just want to make sure that it’s licensed and that American businesses are getting paid appropriately.”

The President was referring to a huge and growing problem for American holders of Intellectual Property Rights (IPR) such as patents, copyrights, Trade Marks, etc. The importance of IPR to American interests and the US economy is staggering. Consider some of the following facts:

  • American exports equaled $1.57 trillion in goods and services in 2009.
  • More than 50% of US exports depend on some form of Intellectual Property (IP) such as software or complex technology.
  • Small and Medium Sized Enterprises (SMEs) are 97% of US exporters and account for 29% of US export value.
  • IP equals 20% of the US GDP and 40% of its economic growth.
  • According to the US Commerce Department, the value of the theft of US IP is estimated to exceed $250 billion annually and has cost the US economy 750,000 jobs.
  • The International Chamber of Commerce puts the annual loss from theft at $600 billion.

Clearly, IPR is an essential element to our prosperity and competitive advantage in the world market. Any such advantage, however, is squandered if others can steal an idea, duplicate it with cheaper labor and material, and displace the legitimate holder of the IPR. If the US is to continue its leadership in IPR and meet President Obama’s goal of substantially increasing both exports and investments, investors and exporters will need more protection and assurances than presently available. To make US investors comfortable they will expect to see evidence of the Rule of Law, enforcement of the laws, and the ability to recoup any financial losses sustained when laws and enforcement don’t work. Accordingly, the President went on to say, “That’s why the US Trade Representative is using the full arsenal of tools available to crack down on practices that blatantly harm our businesses, and that includes negotiating proper protections and enforcing our existing agreements, and moving forward on new agreements, including the proposed Anti-Counterfeiting Trade Agreement (ACTA).”

Without question, enforcement is critical to the protection of Intellectual Property rights and yet enforcement is never a completely adequate mechanism because it usually follows rather than precedes a loss. Since it rarely prevents a violation or a crime, enforcement should be augmented with mechanisms for making investors whole when a financial loss is actually sustained. This would seem to present a prime opportunity for an insurance program and, in fact, such insurance protection has been available from a few Property & Casualty insurers for a long time. For much of that time, however, the product has not been very profitable—mostly because of very high legal costs and some very large losses. Over the past 15-20 years, this has translated in the US market to fewer companies offering less coverage for more money. In many emerging markets, there isn’t sufficient legal protection or enforcement of IPR for insurance companies to feel comfortable offering any coverage at all. That’s unfortunate in many ways, not the least of which is that it then inhibits the use of advanced technologies and ideas in the very countries that could benefit the most. This point is not lost on US foreign policy makers and developmental agencies that are actively working to develop not only stronger and more broadly accepted international protocols for improvements in the legal and enforcement environments but also for some kinds of risk mitigation or insurance protection. This would include my own agency—the Overseas Private Investment Corporation (OPIC)—that sees a significant opportunity to help investors move forward with the decision to permit their ideas and technologies to be used in emerging markets in the knowledge that the US government will be with them in a meaningful way.

OPIC’s mission is to facilitate and mobilize US investment in emerging markets through risk mitigation instruments like Political Risk Insurance (PRI). PRI, however, is normally associated with “wrongful” actions by a sovereign government—actions that deny an investor the benefits of those investments; actions that have changed the rules applying to their investment so substantially that the investor cannot continue to operate in that environment. Such actions are usually overt and deliberate. They are, therefore, directly attributable to the foreign government. If, for instance, an investor has a contract or guarantee from the host government, he could be indemnified by OPIC PRI coverage in the event that the government wrongfully defaulted on or abrogated such contract or guarantee. The same would be true if the government’s actions were a clear violation of their own internal licensing or IP laws. Such actions would be wrongful and directly attributable to the host government—again, the subject of PRI.

The more likely circumstance, however, is that the investor/exporter does not have a government contract or guarantee and that losses cannot be clearly attributed to a wrongful action by the government or its authorities. In that case, PRI in its current form would not be the proper vehicle to mitigate the risk. It is possible—at least in some countries—that private market insurance might be available. Unfortunately, however, investors in many emerging markets would find the private market to be unavailable, unaffordable or inadequate. Emerging markets falling into this category would see less foreign direct investment and interest in investment. Professor Mike Ryan, Director of the Creative and Innovative Economy Center at The George Washington University Law School, has studied the correlation between IPR protections and FDI. So has the World Bank. Both conclude that there is a direct and substantial benefit to countries that enact protections and enforce IPR. It should also follow that risk mitigation tools like PRI would further stimulate and enhance FDI opportunities for those countries that recognize investor concerns. Countries that have signed onto the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) have at least made a start and yet many of these countries remain very difficult environments for effective IPR protections.

TRIPS is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for IP regulations as applied to nationals of other WTO Members. Member countries are required to enact protective laws and enforcement procedures. IP laws may not offer any benefits to local citizens which are not available to citizens of other TRIPs signatories. The Agreement also provides for remedies, dispute resolution and disciplinary procedures. When such protocols, laws, regulations, and obligations have been voluntarily adopted by member countries, are not investors entitled to some reliance on them as a condition precedent and inducement to their investment? What, then, if it is discovered that these protocols are useless and not enforced? Investors can be victimized and suffer financial loss not just from overt and deliberate actions by a government but also by those failures of governments to act or protect. Either way, an investor has, in a sense, been duped. Isn’t it at least arguable that a lack of enforcement, the absence of protections or any reasonable attempt to protect investors is, in fact, a political risk and, therefore, an appropriate subject for PRI? Providing such protection is fraught with some difficulties for OPIC and the US government, but the matter is worth considering. It is also worth considering the applicability of some form of investment guarantee—a product not tied to the structure and limitations of PRI.

In conclusion, I believe that the protection of IPR is a critical component to the mobilization and facilitation of US investment in emerging markets. It is, therefore, incumbent upon OPIC to come to grips with the problem—what the investor needs in order to be incentivized to invest. The President has recently expressed a strong desire to increase exports, fight cybercrime, and fight for the protection of US IPR. Those are lofty goals that will require international cooperation and agreement at the highest level. But, in the meantime, the need is clear and immediate, and OPIC is dedicated to leading the market into a solution. ■


Rod Morris, Vice President for Insurance at the Overseas Private Investment Corporation (OPIC), has held senior executive positions in the private insurance industry, with responsibility for international property and casualty lines, risk management, captive insurance, and other industry matters. We invited him to discuss the need and prospects for political risk insurance products to protect intellectual property in markets abroad.