The Intangible Economy

Here is an interesting study on corporate reporting: "Factors explaining the level of voluntary human capital disclosure in the Brazilian capital market". The study used content analysis of corporate annual reports to measure the level of "Human Capital Disclosure" based on 30 indicators. This work builds on the previous work of C.B. Macagnan on the voluntary disclosure of information on intangibles by Spanish companies. I consider the findings of both studies as preliminary - but hint at interesting thoughts. For example, the level of debt seems to be a significant reason for additional disclosure. The age of the firms as well.

More important to me is the fact that these studies are being undertaken. This is a very fruitful line of inquiry and should help inform changes to corporate reporting, such as the International Integrated Reporting Framework (see previous posting).

Last week I posted an item on the new National Academies' study on on Copyright in the Digital Era: Building Evidence for Policy. Today, I would like to follow up by highlighting one of the studies recommendations: the need for better data. The study notes that "the federal government needs to expand the collection of data on the digital economy as well as on intangible assets such as intellectual property holdings and their use." To do so, they recommend an ambitious course of action:

Agencies such as the Bureau of the Census, Bureau of Economic Analysis, National Science Foundation, U.S. Patent and Trademark Office, and the Copyright Office should form an interagency group that, along with expert advisors, would study the advisability and feasibility of an ongoing and systemic national business survey of intellectual property. Like the Business R&D and Innovation Survey (BRDIS), the IP survey would include samples of businesses in the service and manufacturing sectors. It would probe uses (e.g., licensing) and holdings of intellectual property and costs of acquisition and maintenance. Because of the nature of the production of digital goods, including the prominence of user-generated content, the business survey should be complemented, if at all feasible, by a detailed consumer survey of user-generated content and use. This would include, among other things, measurement of the amount of production and distribution of digital content by non-business entities (i.e., by users), and also measurement of the consumption of such content by both business and the population at large.

Readers of this blog will know that I routinely call for better data on intangibles. As I pointed out recently in our analysis of the federal budget, government statistics are a key intangible asset. The importance of that data was highlighted in a Washington Post story on attempts by conservative activists to kill off a key government data collection activity. It is not just government programs and policy making that is tied to this economy data. Companies, such as Target use the data for key business decision.

Our need for more and better data is even more accute in the I-Cubed (Information-Innovation-Intangibles) Economy. As noted in our 2005 study Reporting Intangibles: A Hard Look at Improving Business Information in the U.S.:

American businesses, investors, regulators and policymakers are flying blind. The United States is now in an intangible economy, but financial reporting and accounting systems can't deal with intangibles. Our business reporting system is, in many ways, not even adequate for the Industrial Age, let alone the Information Age. As a consequence, business, investment and economic policy decisions are being made "in the dark" (to quote the title of a recent study).

The situation has gotten somewhat better--at least in awareness. Starting this summer, the BEA will start counting R&D as an intangible investment rather than an expense in the GDP data. On the company side, a group known as the International Integrated Reporting Council (IIRC) just released their Consultation Draft on the International Integrated Reporting Framework -- which includes specific breakout for intangibles: human, social and intellectual capital (see previous posting).

The National Academies' call for improved data on how companies treat their copyright and other intangible assets is one more step in the right direction.

The April employment numbers are causing some relief among economy-watchers with an increase of 165,000 new jobs and a slightly down tick in the unemployment rate to 7.5%. But, as I pointed out last month (and others have commented upon since), the size of the labor force is not growing and the labor force participation rate is stuck at a 35 year low. The labor force participation rate actually peaked in 2000, long before the Great Recession (although it started its steep decline then).

So I repeat my questions from last month. Are we seeing a reversal of the historic trend of a growing labor force due to greater participation? Is a lower labor force participation rate the new normal? And what does that mean for future economic growth?

The National Academies' Board on Science, Technology, and Economic Policy (STEP) has just released a new report on Copyright in the Digital Era: Building Evidence for Policy. The report takes a step back from the copyright debate to ask the important question about what do we actually know about the implications of copyright policy.
Their answer is not encouraging:

This debate is poorly informed by independent empirical research. Although copyright law's efficacy and second order effects are largely empirical questions amenable to systematically collected data subject to transparent analytical methods, this type of analysis is too rarely conducted. Instead of asking, "What is the research-based evidence?" partisans tend to rely on claims of and evidence marshaled by stakeholders. This situation contrasts with the emerging pattern in patent policy discussions, where empirical research has begun to play an important role in the genesis and resolution of important policy changes and whose support is becoming institutionalized.

The report lays out a series of research questions and data collection efforts. Importantly, it spells out the benefits to all parties of an evidence-based policy approach:

With respect to changing incentives for creators, distributors, and users, research could help determine
    •  how the expenses involved in creative expression and distribution differ across sectors and the role of copyright in generating revenues to offset those expenses;
    •  under what circumstances sources of monetary and/or non-monetary motivation outside of that provided by copyright are effective in motivating creative activity;
    •  the motivations of various types of users and potential users of creative works, including both infringers and lawful users; the effects of enhanced enforcement remedies on promoting creativity, technological innovation, and freedom of expression; and
    •  how the costs of distributing creative content are affected by social media and other new technologies.

With respect to the enablers of and impediments to voluntary licensing transactions in copyrighted works, research would help determine
    •  the significance of transaction costs as barriers to utilization of copyrighted works;
    •  the extent of problems involving orphan works (whose owners cannot be identified), user-generated, content, and collaborative and iterative works;
    •  what are successful arrangements for managing transaction costs;
    •  the roles of public and private institutions in facilitating licensing;
    •  the relationship of transaction costs to legal rules such as compulsory licenses; and
    •  changes in transaction costs with new technological and business developments.

With respect to the enforcement challenges, research could help determine
    •  how much is spent by governments and private parties on copyright enforcement;
    •  against whom enforcement efforts are targeted and what remedies are sought and granted;
    •  the results of enforcement efforts in terms of compensation, prevention, education, and deterrence;
    •  how the effectiveness of enforcement efforts is changing with the expansion of digital networks;
    •  the costs and benefits of current enforcement methods vis-à-vis those associated with proposed new enforcement methods;
    •  the relative vulnerability of different business models to infringement; and
    •  the costs and benefits of fair use exceptions and the Digital Millennium Copyright Act (DMCA) safe harbors.

In assessing the balance between copyright protection and the statutory exceptions and limitations to copyright, research could help determine
    •  the costs and benefits of copyright exceptions and limitations in terms of the economic outputs and welfare effects of those individuals, businesses, educational institutions, and other entities that rely on them;
    •  how copyright and the various categories of limits and exceptions interact with innovative and/or disruptive technologies and platforms; and
    •  what adverse effects, if any, exceptions and limitations have on copyright holders and their potential to generate economic outputs and welfare effects.

Eventually, research will help inform decisions about key aspects of copyright policy, including
    •  the appropriate scope of copyright protection;
    •  the optimal duration of the copyright term;
    •  the best arrangements for correcting market imperfections that inhibit voluntary licensing;
    •  appropriate safe harbors and fair use exceptions to copyright;
    •  effective enforcement remedies for infringing use and the best arrangements for correcting deficiencies in enforcement mechanisms;
    •  the advisability of reintroducing a formal registration requirement; and
    •  the advantages and disadvantages of reshaping the copyright regime with different rules for different media.

In a time when much of our policy debate seems to be driven by ideological stances, the report's arguments for policy grounded in empirical research is a welcome change. I expect many of the partisans in the copyright debate will take issue with the National Academies' recommendations. That should not stop the rest of us from supporting the report's findings.

On the surface, the news from BEA's trade data for March sounds good. The deficit dropped $4.8 billion to $38.8 billion. Economists surveyed by Bloomberg had expected a $42.3 billion deficit. However, a look at the details provides some not-so-good news. Exports were down by $1.7 billion while imports dropped by $6.5 billion. Exports were down in every category (except "other goods") and imports were down in all but "food, feeds, and beverages" and "other goods." As the chart below indicates, the deficit improved in both petroleum and non-petroleum goods -- with imports and exports declining in both categories.

Thus, the data suggests a general and overall slowdown of economic activity in March. However, because the deficit declined in March, this should push the 1Q GDP number up in the next revision (as the deficit is a negative in the GDP calculations).

Just the opposite was true for our trade in intangibles, with economic activity expanding as both import and exports grew. But the intangibles surplus grew by only $29 million in March. Exports of business services rose slightly more than imports and royalty receipts (exports) rose slightly more than royalty payments (imports).

The story was also a little difference for Advance Technology Products - where the deficit declined by almost $1.6 billion with both exports and imports growing. The improvement in the deficit was due largely to a rise in aerospace exports. Exports also surged somewhat in electronics and in information and communications technology (ICT). The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.