Watch Your Secrets: Industrial Espionage and Loss of Intellectual Capital
04 Tuesday Oct 2011
The loss of intellectual capital to competitors has long been a concern for companies involved in high-tech and IT. In recent years, American industries with cutting-edge technologies have increasingly become targets of foreign industrial espionage. The Chinese government, a partner in many Chinese companies, has often been accused of aggressively and illicitly pursuing industrial trade secrets, particularly those with military-civilian applications.[1, 2, 3] But Beijing is hardly alone, as evidenced by DuPont’s recent $900 million legal victory over South Korea-based Kolon Industries, which was found guilty of stealing trade secrets related to Kevlar® aramid fiber.
How much are companies losing to intellectual theft and industrial espionage? Estimates are in the tens of billions of dollars, but it is impossible to pin down precise figures, in part because many companies prefer to keep embarrassing security breaches private, while others never realize their loss.
So, what’s a company to do? The first step is to put the threat in its proper context by understanding its magnitude, scope and relative contributing causes. Traditionally, the loss of intellectual capital has been framed in terms of illegal hacking of information systems and the theft of designs, specifications and manufacturing methods. Much of a company’s intellectual assets, however, reside not in computer information systems, but in the minds of its workers, managers and executives, and in the corporate culture that promotes creativity and technological advances. Economically, those assets are often what matter most because they are what drive research, innovation, design and commercialization.
From this perspective, much of the loss of intellectual capital experienced by corporations over the past quarter century has been largely self-inflicted. The down-sizing, right-sizing and related fluidity in corporate employment—along with the effects of telecommunications and the Internet—have promoted a highly mobile, less institutionally connected workforce that expects to change employers many times during a typical career.[5, 6] The extensive use of temporary consultants and contractors in critical research, design and production areas also contributes to the migration of knowledge. Thus, it is the fluidity of intellectual capital within our modern, highly mobile knowledge workforce that virtually guarantees the dissemination of valuable data, experience, methods and, most critically, mindsets across the global economy.
Mitigating the effects of intellectual capital loss
The private and public sectors have employed many strategies and technologies to limit the loss of intellectual capital and mitigate its effects. Network security systems, knowledge capture and retention, employee training and, as in DuPont’s case, aggressive legal action have been used to protect copyrights, patents and trade secrets. In addition, the Federal government investigates suspected acts of espionage and pursues criminal sanctions against foreign and domestic intelligence operatives, particularly when defense and dual-use technologies are involved. For example, InfraGard, a cooperative alliance between the Department of Justice, the FBI and the private sector, assists corporations through information sharing, training and direct support in preventing domestic and foreign industrial espionage.[8, 9]
It is unlikely, however, that defensive efforts alone will effectively address the loss of intellectual capital in the long run. Why? Because, as previously pointed out, most of the migration and dispersion of ideas, methods and innovations occurs legally as employees change jobs, taking what they know to their latest workplace. As shortages of key talent grow, companies will be competing for a smaller talent pool relative to growing global needs, a trend that likely will contribute to knowledge migration.  Finally, Internet technologies and the ability to telecommute are facilitating the geographic dispersion of knowledge by allowing foreign companies to access local talent without the need for long-term co-location or relocation.
The role of innovation
Innovation is an important component in the strategy for mitigating the effects of intellectual capital migration. By replacing and evolving products, services, methods and systems faster than competitors can copy them, innovation limits the damaging effects of intellectual capital flight, both legal and illicit. Geopolitically, greater reliance on innovation has the additional benefit of moving the competitive playing field closer to the United States and the West, the traditional centers of industrial, technological and military innovation over the past two hundred years. In other words, innovation limits the damage from the loss of intellectual capital by making much of it obsolete before competitors can realize significant economic, political and military advantage. In this context, the ability to innovate and drive those innovations has tremendous strategic value, and the freedom to create is of crucial economic, military and political importance.
While innovation is not a cure-all, when combined with strategic talent retention and proven security strategies, it becomes an indispensable component in tempering the effects of intellectual capital loss, particularly for companies in highly competitive, technology-driven industries. These are lessons that many of today’s CEOs increasingly appreciate, as reflected in a variety of management surveys. Beyond industry, these lessons also carry important implications for policy makers, who would do well to avoid actions that undercut aggressive innovation or drive it off-shore.
Coming soon: Decision-making traps that can undermine innovation, and strategies that can help small and medium businesses sustain their competitiveness.
Have you seen this kind of intellectual capital loss at work? Please share your experiences.
 Kabay, M.E. “Industrial Espionage.” Mekabay.com. Updated 2008.
 Robinson, Shane, W. “Industrial Espionage 101.” SANS Institute. 2003.
 “Annual Report to Congress on Foreign Economic Collection and Industrial Espionage—2005.” Office of the National Counterintelligence Executive (NCIX). August 2006.
 “DuPont Wins Trade Secret Case Against Kolon Industries.” Dupont press release published by Daily Markets. September 14, 2011.
 Bureau of Labor Statistics. See “Number of Jobs Held in a Lifetime” in National Longitudinal Surveys – Frequently Asked Questions. July 22, 2011.
 Petrecca, Laura. “Employee Loyalty at a Three-Year Low.” USA Today. March 28, 2011.
 Federal Bureau of Investigations. “Economic Espionage.” FBI.gov.
 InfraGard. “About InfraGard.” InfraGard.net. Accessed September 15, 2011.
 Full disclosure: I have been a member of InfraGard for a number of years and currently serve as the Denver chapter’s Chemical Sector Chief. InfraGard Denver – Leadership – Sector Chiefs.
 See “Can the Global Skill Gaps Be Bridged?” in the 14th Annual CEO Survey: Growth Reimagined. PricewaterhouseCoopers International Limited. 2011.