U.S. companies exposed to industrial espionage. (Point of View).

One of the ironies of the post-Cold War world may well be that intelligence operations directed against the United States have expanded.

Just over a decade ago, intelligence collection efforts still focused primarily upon military assets. Now, these have largely shifted to concentrate upon technology, manufacturing processes, and other trade secrets that sometimes have dual use but often only civilian applications.

Recent studies suggest that espionage costs U.S.-based businesses more than $200 billion annually in intellectual property losses, in addition to at least several tens of billions of dollars in related damages. More than 1,000 documented incidents of economic espionage transpired in 2001, and major companies reported at least 500 suspected episodes.

The number of countries actively pursuing economic espionage against the United States is on the rise, regretfully adding political allies to an assortment of long-standing, prying adversaries. The industry magazine Public Administration Review lists France, Germany, Israel, China and South Korea as major offenders.

To be sure, not all economic and financial data collection by competitors or representatives of foreign powers is illegal. Abundant data are available from such open sources as newspapers, the electronic media, books and the Internet. Other legal collection methods include requests under the Freedom of Information Act and the physical copying of patents registered at the U.S. Patent office. Activities involving the acquisition of information by theft, bribery, or coercion are illegal and hence properly termed espionage.

Economic espionage entails the unlawful compilation and use of data with economic consequences, although technological developments can, on occasion, obscure the distinction between economic and military targets.

In addition to foreign intelligence services, other practitioners of economic espionage pose threats to protected information. Among these are foreign corporations, organized crime, extremist ethnic or religious organizations, terrorists, drug syndicates and computer hackers. The September 2001 attacks on the United States underscored the need for companies to safeguard proprietary information that could be of use to terrorists, especially terrorist organizations with global reach. Although the motivation for accumulating data will vary considerably across groups, improper dissemination can have grave consequences for a company and far beyond.

Dual-use technologies impart an important military aspect to economic intelligence, potentially compromising military readiness and capability. Modern warfare, characterized by stunning technological complexity, places ever-greater demands upon the civilian economy. Technology thus forges a closer bond between the state, the military and private enterprise. The dividing line between national security concerns and issues of economic policy continues to blur accordingly. Such developments consign a greater premium to economic espionage.

In a sense, then, state-sponsored economic espionage operates as the handmaiden to a mercantilist revival in national economic policies. The reasoning of the usual suspects is apparent: instead of spending five years and several billion dollars on research and development, bribing a competitor's employees will yield an analogous or even better outcome.

A case this spring in Ohio illustrates the point, while highlighting potential risks to target companies. In May, a Japanese scientist pleaded guilty to stealing biological materials used for studies of Alzheimer's disease from a clinic. The FBI estimated that the purloined items resulted in more than $2 million in direct losses. The theft consequently led to the effective termination of the research.

When economic espionage co-mingles by design with a national industrial policy or an extensive subsidy program for defense-related industries, conspicuous similarities between traditional mercantilism and neo-mercantilism present themselves. By assigning inordinate weight to the productive side of the economy at the expense of consumption, and subsequently of living standards, neo-mercantilist policies are short-sighted and imprudent. Such policies ultimately spawn the emergence of a command economy and, paradoxically, become the source of a systemic incapacity to transmit the technological/military innovations that attracted government interest in the first place.

Granted, an emerging body of American law offers a preliminary recourse for economic espionage. Recognition of the potential magnitude of the international problem is enshrined in the Economic Espionage Act of 1996, and as a result, certain federal resources and remedies are now on offer. More than 30 cases prosecuted under the EEA are pending in federal courts. Yet, legal recourse and appeals to transnational organizations cannot by themselves be effective.

Companies must manage critical economic information in such a way as to reduce the possibility of a security breach. Corporate management must recognize the value of proprietary information and undertake physical steps to safeguard knowledge as a bank protects bullion on deposit. Shrewd information management is an essential component of a comprehensive corporate response to economic espionage. Many companies should also embark on a dynamic program of competitive intelligence, permitting them to legally and ethically collect data on competitors.

As a matter of standard operating procedure, businesses must protect their secrets by developing counterintelligence techniques. Corporate counterintelligence should involve procedures to identify and neutralize the intelligence-collection activities not only of rival companies, but also of foreign government agents and, above all, of terrorist organizations. For starters, businesses need to determine what is most worthy of protection. Keeping all activities under wraps is obviously nor practical, so managers need to recognize and guard proprietary information that is vital to the company.

Then, a company must decide how to protect what is to be kept secret. What exactly would be most damaging were it to fall into the wrong hands? Second, managers should carefully evaluate the company's vulnerabilities. Third, one should evaluate the competition and the nature of potential espionage threats.

The fourth step is to develop and implement countermeasures. These may take the form of simply limiting access to certain materials and technology, or might be more proactive, involving the use of disinformation or outright deception. The former is the product of efforts to disseminate information that is deliberately and evasively constructed. As a rule, disinformation is leaked to the target's communication system. Deception entails furnishing misleading information so targeted as to distract a rival from what one is really doing.

The fifth step is to evaluate the functioning of countermeasures. The final step is to circulate the findings to those people who have a need to know.

David M. Keithly is a professor at the Joint Military Intelligence College, Washington, D.C. Stephen P. Ferris is chairman of the department of finance at the University of Missouri, Columbia.