January 2015 trade in intangibles - and annual revisions

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Some more partially good news in this morning's trade data from BEA: January's trade deficit dropped by $3.8 billion to $41.8 billion. The not so good news port is that export were down $5.6 billion while imports were down $9.4 billion. The drop in both imports and exports is a troubling indicator of the state of the US and global economy. In addition, the good news is that the deficit in petroleum goods declined while the bad news is that the deficit in non-petroleum goods continues to increase.

In another piece of minor bad news, our surplus in pure intangibles declined slightly in January as exports dropped while imports grew. The surpluses in maintenance & repair services and in financial services declined as exports went down in both industries. The deficit in insurance services was slightly lower as imports declined. Net revenues from the use of intellectual property dropped slightly as revenues from foreign sources (exports) were basically unchanged while charges for the use of intellectual property paid out to foreign sources (imports) increased. The good news is that the surplus in business services finally increased after a long string of declines (revised data shows that the string of declines actually stopped in December with a slight increase).

Revised data shows that on an annual basis our intangibles surplus was up by 5.5% in 2014. All areas showed improvement except telecommunication which managed, however, to remain in surplus.

Our Advanced Technology deficit once again improved dramatically in January, dropping to $5 billion from $8 billion in December and $11.4 billion in November. And once again the improvement was due an $3 billion improvement in the Information and Communications Technology (ICT) deficit as imports dropped by $4 billion while exports were down $1 billion.

Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of $9.9 billion in January compared with $7.0 billion in December. Again, much of this was due to the lower ICT imports.

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Note: I am now reporting the trade data using the new BEA classifications for services trade, which breaks services into more categories. In the past, the intangible trade data was the sum of Royalties and License Fees and Other Private Services. Under the new classification system, intangibles trade data is the sum of the following items: maintenance and repair services n.i.e. (not included elsewhere); insurance services; financial services; charges for the use of intellectual property n.i.e.; telecommunications, computer, and information services; other business services.

Charges for the use of intellectual property n.i.e. is simply a renaming of Royalties and License Fees. This includes 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.

Maintenance and repair services n.i.e., financial services, and insurance services, were previously included in Other Private Services. Telecommunications, computer, and information services is a combination of those two items (telecommunications and computer & information services) that were also previously included in Other Private Services. Three categories previously in Other Private Services -- education-related and health-related travel and the expenditures on goods and services by border, seasonal, and other short-term workers -- were removed and reclassified to travel. The new category of other business services is a continuation of the older category Other Private Services with those components removed.

Thus, other business services includes categories such as advertising services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; and industrial engineering services. It also includes personal, cultural, and recreational services which includes fees related to the production of motion pictures, radio and television programs, and musical recordings; payments or receipts for renting audiovisual and related products, downloaded recordings and manuscripts; telemedicine; online education; and receipts or payments for cultural, sporting, and performing arts activities.

For more information on the changes, see the March 2014 Survey of Current Business article, "The Comprehensive Restructuring of the International Economic Accounts: Changes in Definitions, Classifications, and Presentations."

February employment in intangibles industries

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Good news from today's job numbers from BLS: employment is up by 295,000 in February and the unemployment rate down to 5.5%. Economists had expected an increase of 235,000 jobs. Employment in tangible producing industries grew by 162,600 in January. The biggest gain in percentage was in Repair & Maintenance, followed by Accommodation & Food Services. Manufacturing, Construction & Mining and Tangible Business Services also grew. Intangible producing industries added 132,400 jobs with the biggest percentage gains in Information and Educational & Health Services. (See tables below)

As the charts below shows, U.S. employment in tangible producing industries and intangible producing industries is just about equal. However, since the end of the Great Recession, employment in tangible producing industries has been growing slighly faster than in intangible producing industries. Employment in tangible producing industries increase by 23% in February while employment in intangible producing industries grew by 19%.

For more background on this data, see my earlier posting.

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Updated 4Q GDP

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This morning BEA came out with its second estimate of 4Q GDP. As expected, the growth rate of the economy was revised downward slightly to 2.2% from the earlier advanced estimate of 2.6%. Economist had expected a growth rate of only 2%.

However, business investment was revised upwards, especially in R&D investment. The growth in business investment in intellectual property products (IPP) was revised upward to 10.9% from the earlier estimate of 7.1%. Software investment was revised upward to 10.1% from the 9.4% growth rate in advanced estimate and compared with a 8.9% growth rate in 3Q. Contrary to the previous estimate, R&D investment grew by 14% compared to a 10.6% increase in 3Q (the advanced estimate had it slipping somewhat to 6.1% in 4Q). Growth in investment in entertainment, literary, and artistic originals remained steady at 2.6% in 4Q.

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IP trade and the 2015 Economic Report of the President

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The 2015 Economic Report of the President came out earlier this week. While it contains a number of statistics and policy proposals (see summary), I want to highlight just one small section on intellectual property:

Box 7-1: Trade in Ideas

In 2013, U.S. companies paid $39 billion in royalties and licensing fees to foreign companies, and were paid $129 billion by foreign companies seeking access to intellectual property held in the United States. While this "trade in ideas" represents just 14.6 percent of all U.S. trade in services, it generates 40 percent of our $225 billion services trade surplus. Figure 7-i shows the level of imports and exports in 2013 for each of the four major categories of trade in intellectual property. Roughly two-thirds of this trade is intra-firm, with a greater share of this intra-company trade occurring in the trademark and franchise fees category (76 percent) than for industrial processes (69 percent), software (58 percent), or audio-visual materials (42 percent).

Trade in ideas is partly influenced by differences in countries' intellectual property laws; as such, harmonizing the international treatment of intellectual property rights has become an important, and sometimes controversial, aspect of international trade negotiations. For example, the WTO Agreement on Trade Related Aspects of Intellectual Property Rights established minimum standards for various forms of intellectual property protection. Several economic studies, such as papers by Branstetter, Fisman, and Foley (2006) and Cockburn, Lanjouw, and Schankerman (2014), suggest that stronger patent protection in destination countries does promote outbound technology transfer, both within and between firms.

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One reason that trade in intellectual property can be controversial is that ideas are non-rival goods that can be used by many parties at the same time, with little or no incremental cost per user. This feature of intellectual property also creates challenges for measuring international technology transfer because it implies that the location of an idea, which determines the direction of trade flows, is somewhat arbitrary. To compound that problem, there is no obvious market price for many intra-company transactions, so both the magnitude and direction of intra-company trade in ideas may reflect corporate tax and legal strategies, as much as they do business or economic realities.

All of these complications can produce some unusual outcomes in the trade statistics. For example, U.S. intellectual property exports to Bermuda were $3 billion in 2013, with 98 percent of that trade occurring between affiliated companies, a trade that largely occurs for tax reasons rather than economic reasons, as discussed in Chapter 5 of this Report. These intellectual property exports are about two-thirds the size of Bermuda's $4.5 billion GDP. In the same year, U.S. intellectual property exports to France, whose GDP is 600 times larger than Bermuda's, totaled $3.4 billion, with only 42 percent transpiring between related companies. Lipsey (2010) shows that foreign affiliates of U.S. multinationals located in a variety of low-tax countries report unusually high levels of intangible assets relative to both employees and physical capital.

While it is difficult to estimate the size of any measurement bias created by geographic reallocation of intellectual property within multinational firms, it is possible to say something about the likely impact on trade statistics. In particular, transfers of intellectual capital abroad at below-market rates and intra-company pricing that shifts income outside the United States will lead the official statistics to underestimate the true size of the U.S. services trade surplus--that is, what would be observed under competitive market prices or in a tax neutral environment. For example, the true value of intellectual property exports in Figure 7-i may be higher, and the value of imports lower, particularly for trade in ideas related to trademark and franchise fees, where the share of intra-company transactions is highest. This type of bias would also make U.S. companies that trade in intellectual property appear less productive, by artificially lowering their revenues and inflating their costs. The continued growth of intra-company cross-border trade within large multinationals suggests that these measurement challenges will only grow in importance for both tax authorities and government statisticians.

And, unfortunately, the measurement challenges are even greater than this description notes. This part of the Report only covers trade in formal intellectual property. That is far from a complete inventory of ideas or how ideas are traded. Nothing about non-IP protected ideas. Nothing about non-technological innovations. Nothing about other forms of intangible capital. Nothing about the value of ideas embedded in advanced technology goods and services. Nothing about non-monetized and non-market mechanisms of information/knowledge exchanges. In other words, the real story is much more complicated and thus more difficult to get our policy response right.

More on design and innovation

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Over on the INSEAD Knowledge blog, Professor Manuel Sosa has an insightful peice on design and innovation: "The Innovative Organisation: Learning From Design Firms". The key, he stresses, is not "design" as an outcome but design as a process.

Samsung and Apple traced out a path to 21st-century success admired and followed by other brands. But too many companies still stash their design in a silo, where it can have little to no overall organisational influence.

A silo approach fails to capitalise on everything designers bring to the table in addition to creativity. Top design firms such as IDEO, Continuum, and Eight, Inc. have not only a well-tooled process for converting innovation opportunities into real innovations, but also a set of organisational elements perfectly aligned with that process. If companies require an innovation role model, they need look no further than design firms.

. . .

By observing how many design firms work, I have identified three core organisational capabilities at which they particularly excel, which also comprise the rudiments of any innovation journey: user-centric insighting, deep and diverse ideating, and rapid and cheap iterating.

A good description of the design thinking paradigm (see earlier posting).

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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