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Abstract
The epic case of Lexar's trade secret misappropriation by Toshiba (2005) is analyzed. Event study methodology is applied to assess the effect of intellectual property (IP) misappropriation by Toshiba on the value of Lexar. Both parametric tests and non parametric tests are applied to examine the statistical significance of the litigation event on Lexar. It is found that one extant parametric test cannot reiect the null hypothesis: Start of litigation event had no effect on Lexar returns. In contrast, non parametric test suggests significant negative impact on Lexar stock price. Both parametric and non parametric tests reiect the hypothesis: End of litigation had no effect on Lexar returns. While Lexar stock price fell during the trial commencement, later as Lexar won the litigation, investors updated their belief regarding the validation of its IP. While Lexar continued with supply chain outsourcing strategy, it combated the IP theft problem by producing differentiated products, continuously investing in innovative designs and establishing strategic marketing partnership with Kodak. Companies willing to outsource might invest in product differentiation strategies when it is difficult to protect their IP from theft by outsourcing partners in the presence of weak legal enforcement of contracts.
Keywords: Event study, outsourcing, trade secret misappropriation, non-parametric test, product differentiation.
JEL Classification: K20, L24, O31.
(ProQuest: ... denotes formulae omitted.)
Introduction
Companies engage in outsourcing to reduce cost of production and/or access specialized expertise's that are not available in-house. For instance, companies in electronic goods and semiconductor industry establish strategic relationships with independent foundries to access their manufacturing capacity. While doing so, the companies are able to concentrate on core competency areas like product design and development. Lately, however, several firms have been facing the risk of losing their intellectual property (IP) while engaged in outsourcing. In order to maintain the confidentiality and ownership of their trade secrets firms typically require their employees, foundries, suppliers to execute confidentiality and invention assignment agreements upon commencement of a relationship and even extending for a period of time beyond the termination of the relationship. Unfortunately, such agreements may not always be relied upon in the absence of legal enforcement. In such a scenario, what kind of strategies can business organizations take to combat IP loss problem? How serious can be...