Fact of the Week: The Cold War Productivity Gap Between East and West Germany Would Have Been More Than 13 Percent Larger if the East Had Not Engaged in Industrial Espionage

Luke Dascoli February 22, 2022
February 22, 2022

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

Source: Albrecht Glitz and Erik Meyersson, “Industrial Espionage and Productivity,” American Economic Association, April 2020.

Commentary: Cold War tensions fueled national concerns of falling behind in the race for new technology. Countries fearing relative underperformance in the innovation economy financed espionage programs to identify and ultimately steal foreign technology, intellectual property, and other information that could bolster domestic innovation. Espionage programs also gave countries that struggled to afford investments in research and development (R&D) a lower-cost, but higher-risk approach to illicitly spur innovation. While covert efforts provided fewer breakthroughs than direct R&D efforts, a 2020 paper from the American Economic Association finds that industrial espionage has had clear effects in narrowing technology gaps between nations, as evidenced by productivity improvements in East Germany.

Econometric analysis using scientific records from East German intelligence informants versus measurements of total factor productivity showed a statistically significant negative relationship between industrial espionage and the gap in productivity between East and West Germany. The authors estimate that a one standard deviation increase in the illicit flow of information reduced the productivity gap between West and East Germany by 7.3 percentage points. Counterfactual modeling based on their econometric evidence shows that without the East German Stasi’s industrial espionage between 1972 and 1989, the difference in productivity between the two economies would have been more than 13 percent larger than its empirical difference. Expanding on research the authors conducted in 2017, the new findings further underscore the degree to which industrial espionage disrupts of the returns to R&D and of comparative advantage that innovating countries invest in. Today’s increasingly digitalized global economy makes industrial espionage a growing threat once again due to concerns of cyber-attacks making illicit technology and IP transfers cheaper and more widespread. Nations seeking to protect their returns to innovation investment should also make investments in cybersecurity to thwart the present wave of industrial espionage.