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April 28, 2006
Is growth back?
This morning's advanced GDP numbers from BEA show the US economy surging ahead at an annual rate of 4.8% for the 1st quarter of 2006 - compared to 1.% in the 4 quarter of 2005. Some of the biggest changes were increased auto purchases, greater investments in equipment and software and increased exports.
However, similar to last quarter, BEA is estimating that services trade will be down, based on the Jan and Feb trade numbers. Our intangibles trade surplus in Feb was down sharply, but that may have been due to a one-time payment of royalties for the Olympics. March trade figures will be out on May 12. We will be able to see then what really happened to intangibles trade in the 1st quarter.
Posted by Ken Jarboe at 9:00 AM | Comments (0) | TrackBack
April 27, 2006
Innovation in finance - a new derivative
When the term "innovation" is used, most people automatically associate it with new things, specifically new technologies. That innovation = technology formulation is especially true in the current debate on economic competitiveness. However, innovation is a much broader concept. One of the often overlooked areas of innovation is in finance. It is also an area that highlights the complexity of innovation as an outcome by raising the question: "are all innovations good?"
To highlight financial innovation, the Chicago Mercantile Exchange (now simply called the CME) created a Center for Innovation in 2003. One of Center's programs it the CME Fred Arditti Innovation Award.
The CME Center for Innovation's signature program is the CME Fred Arditti Innovation Award. The Center annually honors an individual or group of individuals whose innovative ideas, products or services have created significant change to markets, commerce or trade. This award strives to celebrate innovation in action, not only the creative idea, but also the impact that practical application of the idea has made on improving the economic well being of individuals, an industry or a nation.
One of the forthcoming innovations from the CME is described by The Economist - "Property derivatives: Homes with hedges":
In the next few weeks, the CME is likely to open trading in financial futures and options linked to American house prices. Investors who want to hedge the risks of residential property -- or merely to speculate on the market's direction -- will be able to bet on a rise or drop in a house-price index, without having to buy or sell bricks and mortar. With interest rates on the rise, prompting worries that the recent housing boom is about to give way to a downturn, the potential appeal of these new hedging products is easy to see.
Punters will be able to bet on price changes in ten cities from Boston to San Diego, as well on a national index that aggregates all ten. The indices will be part of the CME's Alternative Investment Products group, which fosters derivatives linked to economically important trends and events not directly related to underlying securities or commodities. The group already has products based on the weather and on economic data such as non-farm payrolls.
Now, this immediately brings to mind the negative side of financial innovations: it is just one more tool for speculation. But, while speculation is a part of any financial market, the purpose of these new financial instruments is risk management. As The Economist goes on to explain:
Because the new derivatives will allow bets up to only a year ahead, homeowners will not be able to use them to hedge long-term risks. That limits their usefulness for ordinary folk. For many companies in the property industry, however, they should be helpful. A property developer or contractor, for example, can start a housing project without worrying whether prices will fall sharply by the time it is completed. Monika Piazessi, an economist at the University of Chicago's Graduate School of Business, says that half the volatility in the price of individual homes is linked to city-wide changes in prices. So the CME's new city indices could go a long way towards lowering the risks.
As a result:
Financial firms such as mortgage lenders will also no doubt find uses for the new derivatives. And so will investors with a view about America's residential property market -- whether they expect a continued boom, or a bust.
Given that a large percentage of most people's net wealth is tied up in their homes, it would be a major step forward if these derivatives can smooth out risk of the price volatilities and thereby lessen the underbuild/overbuild cycle. On the other hand, if you believe that derivatives contribute to speculation, then this is a scary step for the housing market. (For more on the derivatives debate - especially Warren Buffet versus Alan Greenspan - see the 2003 story in Forbes. "The Great Derivatives Smackdown".) (See also Andrew Gyn's comment in today's FT - "Finance's rise threatens economic stability" - subscribtion required).
So, it this a good innovation or a bad innovation? I don't know, but I am reminded of the old saying from technology assessment: technology is neither good nor bad, nor is it neutral. Maybe we should broaden that phrase to encompass all innovation?
Posted by Ken Jarboe at 9:47 AM | Comments (0) | TrackBack
April 26, 2006
Feb parody video - or is it satire?
The economics blog, The Big Picture: "Every Change of Rate", has posted a link to a parody video by Columbia business students on Fed Chairman Bernanke, set to the Police tune "Every Breath You Take".
Here is the direct link to the video.
As Big Picture says, "Its a bit harsh on Ben Bernanke, who after all has only been in office for one FOMC meeting. Still, the overall effect is quite amusing!"
Very amusing, indeed. My only question is whether it is protected under the parody provisions of copyright law. I think it is closer to satire, which is less protected. If the whomever the owner is to the song's copyright goes after these Columbia business students, they may learn an interesting lesson about the business world's take on IPR.
And, who knows, at the rate things are going this could end up as yet another Supreme Court case.
Posted by Ken Jarboe at 12:54 PM | Comments (0) | TrackBack
The Germans get it - a new d-school
A new design-business school in German is beginning to get noticed - the Zollverein School of Management and Design. The school was featured in the latest online conversation of the NextDesign Leadership Institute in New York - NextD Journal. According to the conversation "Think NewB+NewD: Understanding the New Zollverein School" with the schools founder, Prof. Dr. Ralph Bruder:
The whole project of founding a new school started in 1999 as part of a larger program to transform a former coal mining complex in the western part of Germany into a leading international location for design, art and culture. This coal mine (named Zeche Zollverein) is very special for the region, not least because it became part of the UNESCO World Heritage list in December, 2001, and is a symbol of the rise and fall of a complete industrial branch. But also Zollverein represents the necessity for an imaginative restart in an area with a high rate of unemployment. So the European Union, the state of North Rhine-Westphalia and the city of Essen decided to give a total of 110 million euros from 2002-2007 to not only preserve the historic place, but to revitalize it with a focus on creative businesses.
In 1999, the idea was born that a new school is needed at the Zollverein area that can work as a stimulator for creating new jobs in the so-called creative business sector.
The following three years were spent writing proposals to get public funding, creating a network of academics and practitioners to support the idea of the school and looking for an appropriate organizational structure for this new school. Finally in December, 2003, the Zollverein School of Management and Design was founded as a private institution for teaching and doing research in the field of business and design.
The purpose of the Zollverein School is to create a platform for the mutual exchange between the often separated fields of business and design. At the Zollverein School, managers become familiar with the views and ways of thinking of designers or architects and vice versa. Both sides move away from their traditional viewpoints and link their activities to create innovative and sustainable strategies for future businesses.
What makes the Zollverein School very special and unique is that it is neither a business school nor a design school, but rather an institution where those different disciplines define a space of mutual respect
. . . .
The Zollverein School becomes more and more attractive as well for professionals who have no basic education in any design-related disciplines, but who feel that understanding design processes and adapting design methods might be helpful for their future professional careers.
The school is positioning itself squarely in the MBA tradition, even participating in the World MBA Tour, a join international recruiting tour of top MBA schools. There are also special doctoral programs in design science offered with other universities. The first group of MBAs will graduate this September.
While this is not "unique" (meaning one and only), it is certainly unusual and cutting edge -- like the Stanford d-school. It may be unique for Europe, however. We have a fairly good sense where the Stanford grads will end up. Where the German students will go is unclear. Given that the MBA is taught in English, they could go anywhere. Some of the current students are apparently coming from large European companies - such as Deutsche Telekom. But my perception is that the larger companies - which dominate the European economies - are not necessarily open to or enthusiastic about or see the need for such an innovative degree. It will be worth tracking where the graduates end up. That will give us a good leading indicator of what countries, and companies, truly do get it.
It will also be worth tracking to see if the school sparks any development of the local economy. As it founder stated, the government's purpose in supporting this endeavor was to revitalize the area with a focus on creative businesses. It is standard wisdom that universities serve as a key economic development catalyst. That has been true in numerous examples (i.e. Silicon Valley). But there are also numerous counter examples. Other elements must be present as well.
Officials in the area understand that economic re-development will take a concerted effort -- and have been making that effort. Essen and the Ruhr area has been named the European Cultural Capital 2010 and has taken the motto "Transformation through Culture - Culture through Transformation". Numerous cultural/creative projects are underway or planned as part of this activity.
Watching the Essen experiment in preparing for the I-Cubed Economy (and the development of the Zollverein School) should prove to be very enlightening.
Posted by Ken Jarboe at 8:48 AM | Comments (1) | TrackBack
April 25, 2006
Jane Jacobs
Jane Jacobs died early today at her home in Toronto. To understand why the words "profound" and "path breaking" applied to her thought, read the story in the New York Times outlining her life and work. All of us who struggle with understanding creativity and urban life owe her more than a debt of gratitude - she was there first and her ideas will long out last us all.
Posted by Ken Jarboe at 6:00 PM | Comments (0) | TrackBack
Yet another Supreme Court patent case?
U.S. Justices May Review Patent Case - New York Times:
The Supreme Court asked the Bush administration yesterday for help in deciding whether to review a patent dispute between the Microsoft Corporation and AT&T over technology used to improve Internet voice transmissions.
The request, directed to the United States solicitor general, Paul D. Clement, signaled that the justices might have questions about a lower court ruling that allowed AT&T to seek royalties for programs installed in copies of the Microsoft Windows operating system on computers in foreign countries. The court generally heeds the administration's advice on whether to take up pending appeals.
Microsoft's appeal seeks to limit the vulnerability of software makers to patent lawsuits for sales outside the country. Microsoft, the world's largest software maker, argues that software code does not fit within the provision in federal law that bars exports of patented inventions without permission.
"This case presents a recurring question of vital importance to the U.S. software industry," Microsoft argued in its appeal, filed in Washington. The lower court ruling "vastly expands the extraterritorial reach of U.S. patents involving software."
. . .
AT&T urged the justices not to hear the patent case.
"Microsoft's position conflicts with 30 years of patent jurisprudence, business practices in the software industry and Microsoft's own patent portfolio," AT&T argued.
Seems like the Court has decided that patent law is too important to be left to the lower courts and that 30 years of jurisprudence they have laid down.
Posted by Ken Jarboe at 8:03 AM | Comments (0) | TrackBack
April 24, 2006
Design economy gone wrong
The Wall Street types have found a new "new economy" to hype. According to Andy Kessler, a former hedge fund manager and now techie investment pundit, its The Design Economy:
Perhaps here's how the world works these days. No need to borrow billions and build big ethylene plants anymore. You invent something here (chip, movie, iPod, medicine, financial instrument), email the design overseas for manufacture in $1-an-hour factories (OK, not financial stuff), and then ship it back for consumption. Sure, this runs up trade deficits, and our precious dollars leave the country, but that's only half the story. Those dollars come back and invest in the U.S. Most go into long bonds, 10-years and 30-years. That's why Alan Greenspan left with a puzzled look on his face. Foreign buying is keeping long rates low; the yield curve is flat.
But maybe the stock market has figured out that we're running out of long bonds. Maybe, just maybe, the surprise is fiscal discipline being voted into office in November and shrinking red ink in D.C. Marginal rate tax cuts and lower rates on dividends and cap gains might actually work and increase revenue. If we run smaller deficits, then there'll be fewer bonds for foreigners to buy, so they have to buy something else with those dollars and the next big pot of liquidity is -- hmm, let me think for a second, oh yeah, on Wall and Broad, the $15 trillion stock market. When bonds are scarce, foreigners are going to have to buy our stocks, or so the stock market might be screaming.
That scenario may be great for the Wall Street speculators looks for the next big score. But it is a disaster for the economy. Yes, those dollars come back and pump up an inflated bond market (higher bond prices = low interest rates) and could pump up an inflated stock market. But, they still represent the selling off of our assets (either IOUs or equities) to foreigners - leading to what Warren Buffett calls the "sharecropper society" (in this case, where we labor to come up with those wonderful designs that make other rich.
I must say this scares the beejeeze out of me. When the folks who were involved in stoking up the last big hype of the dot.com bubble have discovered "design" - I worry that a great idea is once again going to be inflated beyond recognition and lost.
Let me repeat what I said before: design is a key factor in maintaining our competitive advantage. The combination of design-manufacturing-marketing-service can lead to a sustainable intangibles-based economy in the US. That kind of "design economy" would also be good for Wall Street over the long term, a fact that most investors (rather than speculators) might appreciate.
Posted by Ken Jarboe at 2:45 PM | Comments (0) | TrackBack
Trade focus shifting to IMF?
Over the weekend, a subtle shift occurred in the focus of trade. Perhaps two stories in this morning's FT sum it up. The first
was an announcement that some may see as the death knell of the Doha Round - "WTO admits defeat on Doha deadline":
Pascal Lamy, director-general of the World Trade Organisation, will on Monday ask WTO members to work for a crucial deal on farm and industrial goods by early summer, after key trading powers acknowledged their self-imposed April 30 deadline was out of reach.
The meeting on Friday, attended by about 25 rich and poor WTO members agreed to call off plans for ministerial talks this week.
A new "deadline" was set for this summer. But that makes it very difficult to get an agreement in the necessary final form to submit to Congress before the fast-trade negotiating authority expires next year. While it may be possible to either renew fast-trade or even consider the agreement without it, both are extreme problematic for institutional and political reasons.
The second announcement came from this weekend's IMF meeting - "Shake-up agreed on IMF world trade role":
Leading countries secured a breakthrough in the governance of the global economy at the weekend, transforming the role of the International Monetary Fund and putting it at the centre of a more co-operative effort to resolve trade imbalances.
The IMF was given a mandate to start immediate negotiations between the countries with the largest trade imbalances. Its goal will be to secure agreements to reform economic and exchange rate policies to close trade gaps and prevent a global financial crisis. If successful, it could lead to big changes in economic policies, including an appreciation of China's renminbi.
As another FT story "IMF plaudits on imbalances deal" put it:
The weekend agreement to establish "multilateral surveillance" and "multilateral consultations" to address global trade imbalances may not sound like a breakthrough. The terms are steeped in jargon and the International Monetary Fund lacks the power to force changes to individual countries' domestic economic policies unless they are forced to borrow from it.
But even the most sceptical finance ministers and central bank governors viewed the IMF meeting as a great success. There was finally a shared understanding that huge trade gaps represent the biggest threat to the world economy, they said and a willingness to do something about them.
In my earlier posting on the trade negotiations, I argued that new and multiple mechanisms may be needed for economic discussions. The new IMF focus may be one of these new fora.
Posted by Ken Jarboe at 8:31 AM | Comments (0) | TrackBack
April 21, 2006
How teenager's create identity - branding
Just like companies and products, when you are a teenager trying to "discover yourself" it is all about branding. And the latest is the merge of the military style and hip-hip bling-bling - the dog tag. From today's Washington Post - "Teenage Passions, Writ Small":
Earlier generations draped themselves in silver or gold heart-shaped lockets, earnestly sentimental neckwear that enclosed a person's most private thoughts or relationships. Now, the modern-day locket, as worn by teenagers, young adults and the hip-hop avatars they parrot, has taken the shape of a military dog tag, but the inscriptions and images are hardly discreet.
Befitting an age in which teenagers are glomming onto just about any inanimate object for self-branding -- think cell phones, custom-made Nike sneakers and, sigh , Myspace.com -- personalized dog tags are just another avenue for self-advertisement, a way for young people to feel like celebrities even if their stratosphere is hemmed in by lunch bells and school bus schedules.
. . .
Teenagers get the dog tags mainly from kiosks at local shopping malls, where they can pick out their favorite image from a catalog or bring in photographs for engraving. The process can take a half-hour or so and can be as inexpensive as $30.
But sometimes, kids buy name-brand dog tags from Icedoutgear.com or Ecko Unlimited that are 18-karat white gold-plated or stainless steel. (Gucci sells an 18-karat white gold-plated dog tag necklace with diamonds -- for about $2,500.)
But, just like the teenage years are fleeting, so are the branding techniques used by teenagers.
To cultural observers such as Minya Oh, the author of a recent book on hip-hop jewelry titled "Bling Bling: Hip Hop's Crown Jewels" and a radio show host on New York's Hot 97, the emergence of dog tags in the high school scene is a harbinger that the fad could be coming to an end.
"It's completely played out. I've seen the next thing," Oh said. "I am seeing a lot of talented independent jewelers making sneaker-related jewelry or DJ-related jewelry. Like replicas of speakers around your necks."
Maybe that is why we call these "intangibles."
Posted by Ken Jarboe at 9:16 AM | Comments (0) | TrackBack
April 20, 2006
Re-vitalizing the Baldrige award
Yesterday afternoon, the Vice President handed out the 2005 Malcolm Baldrige National Quality Awards at the Hilton Washington Hotel. This should have been a major event. However, outside of a few (very few) local news stories touting one of the winners, there was absolutely no press coverage. It is not as if the issue isn't important. As the Vice President remarked:
If anyone has doubts about America's ability to lead in the global economy, I would simply ask them to look at the Baldrige criteria, and look at the enterprises that have won this award. This year, as before, the Board of Examiners has identified a group following very diverse missions, but powered by the same basic qualities of teamwork, a problem-solving mind set, impatience with the status quo, a focus on the customer, and an ethic of responsibility and trust throughout the enterprise.
The National Innovation Initiative called for the creation of a National Innovation prize (although that provision was not included in the National Innovation Act legislation) The Baldrige National Quality Award has been attempting to turn itself into a broad business excellence award by infusing innovation into the criteria for the award. As the 2006 Baldrige Criteria for Performance Excellence states:
In 2005, the Baldrige Criteria were significantly revised to address the focused demands on senior leaders, the need for long-term (as well as short-term) organizational sustainability, the great challenges of innovating organizations (not just technology), the difficulty of executing new processes and strategic plans, and the benefits of improved alignment of all aspects of your management system with your results measurements.
That change has not yet seemed to taken hold. I think a big part of the lack of attention is in the name and perception. It is still viewed as a "quality" award - something left over from the 1980s. The first year of the award in 1988, there were 45 applicants in the manufacturing category (according to the factsheet). The number of applicants has never exceeded that peak (there was only one other year, 1990). In the services category, the peak was 1991 with 21 applications. In 2005, there were 6 applicants in the service category - and the previous year there were 5 applicants and no award given. There was only 1 -- yes, one -- application in 2005 in the manufacturing category.
(It should be noted that the non-business categories of education and health care (added in 1999) have grown steadily. But both of which have their own separate set of criteria. The education criteria are focused on student achievement and the health care criteria are about patient care.)
Clearly, quality - at least in the business community - is old hat. It is the entry fee, not the key to winning the race. As I have noted before, the nature of the competitive challenges has shifted. And the business community knows that.
It would not take much to turn the Baldrige Award into the Baldrige National Innovation and Performance Award. But that will take a focus from the top. I fear that this focus is not there. This is the second year in a row where the Vice-President has presented the awards.)
While we are debating competitiveness, we should include an expansion of this proven program into something of more relevance to today's issues. Otherwise, if it follows current trends, the Baldrige Award will slowly and subtly shift from our premier business competitiveness award to begin a non-profit performance award. That is not necessarily a bad outcome; having such an award is good. It is just not what the original purpose of the award. It would also leave a large gap in our competitiveness policy - just at a time when we need such an award the most.
Posted by Ken Jarboe at 11:20 AM | Comments (0) | TrackBack
The libertarian take on patent reform
I usually find Holman Jenkins' column in the Wall Street Journal amusing. And his take on patent reform "What's Good About Patent Wars" is no exception. He is clearly not in the "patents uber alles" camp:
The one property right not found in anybody's idea of natural law is the right to prevent someone from copying your idea, embodied in a book, piece of music or design for a gadget. It took a big, imaginative act of government to decide it would identify creators of valuable ideas and protect them, for some period, from being copycatted.
Somewhere, an Ayn Rand aficionado is losing sleep over this. Valuable ideas are exclusively valuable to their inventors at the discretion of bureaucrats. It's also a system that breeds conflict and court fights, a feature thrust into the public eye recently by two unusual cases, involving BlackBerry and eBay. These lawsuits are being treated as wake-up calls for patent reform.
. . .
What's the lesson here for "patent reform"? Refer back to paragraph three -- patents are a kind of property not merely protected by government but created by public policy. And history suggests that things go best when patent rights are strong, but not too strong.
He has gotten the problem right. So what is his solution:
If the Supreme Court uses the invitations presented by eBay and Metabolite to tweak the system back in a more serviceable direction, Congress could chuck the idea of legislating, always an invitation to make matters worse.
An interesting idea - let the Court handle it. Yes, Congress could easily muck things up even more. And Yes, the Supreme Court cases will resolve some of the problems. There are even some who have said if we could just rein in a District Court that has misinterpreted the Supreme Court's earlier case on what could be patented, every thing would be fine. But, as I understand it not every issue of concern is before the Court. There are still evolving issues - such as standards versus patents and whether a one-size fits all patent system works. So Congress may still have an important role to play.
And aren't conservatives supposed to be against activist judges?
Posted by Ken Jarboe at 8:22 AM | Comments (0) | TrackBack
April 19, 2006
Business Week on Innovation
Business Week has come out with its innovation issue, including "The World's Most Innovative Companies". Most of the top companies are tech or product based (Apple, Google, Toyota, P&G, etc.) But the top 25 also includes Starbucks, IKEA. Target and Southwest. Capitol One comes in at 37th and Cique du Soleil tied at 75th.
There is too much in this special report to comment upon -- including the online links to previous BW stories. Just read it.
Posted by Ken Jarboe at 6:30 PM | Comments (0) | TrackBack
Anti-dark matter
Brad Selzer takes another good swing at the "dark matter" thesis - "RGE - You can not put dark matter in a container . . .". His conclusion, based on his own work and that of Daniel Gros, is that it is all an artifact of bad data. But the implication of adjusting for the bad data are important:
Bottom lines:
* The high returns on US investment in Ireland sure look like tax arbitrage.
* The low reported return on foreign direct investment in the US makes no economic sense.
* The fact that the US data shows that US firms investing abroad have large reinvested earnings while foreign firms investing in the US have no reinvested earnings doesn't make much sense either. After you adjust for this fact, a lot of the "dark matter" that Hausmann and Sturzenegger claim to have discovered suddenly disappears.
* Tax arbitrage may reduce the reported stock of debt claims on the US, not just the reported income on foreign assets on foreign direct investment in the US.
* According to Gros, the United States' real external position is far worse than the official data reports. The US has more net external debt. The US income balance is already in the red. And the US current account deficit is BIGGER than officially reported.
So, the dark matter folks are partly right: the data misses alot. But the part that it misses, according to Gros and Selzer goes in the other direction to a much larger deficit.
Not good ..., not good at all!
Posted by Ken Jarboe at 12:40 PM | Comments (0) | TrackBack
Future of trade talks
With the appointment of United States Trade Representative Rob Portman as head of OMB, the speculation is ramped that this signals the end of the Doha Round of trade talks.
Washington Post - "Hopes for Trade Talks Dim After Personnel Switch":
By switching his chief trade negotiator yesterday, President Bush sent a gloomy signal to many trade experts and policymakers about the prospects for achieving significant gains in trade talks with foreign countries anytime soon.
. . .
"It's bad news as far as the Doha round is concerned," said Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, which oversees trade policy. He added, however, that "if there's not a major breakthrough within the next 30 days, I don't think it makes much difference who is trade representative."
International Herald Tribune - "U.S. step stirs doubt on global trade talks":
But the European Union trade commissioner, Peter Mandelson, characterized the switch as ill-timed, suggesting that talks now risked losing steam.
"At this stage in the round, it would have been easier to manage with" Portman still in place, Mandelson said in a terse statement.
Financial Times - "US reshuffle signals downgrading of trade policy":
Clay Shaw, a Florida Republican and chairman of the House Ways and Means Trade Subcommittee, told Congress Daily: "If the Doha round is doomed for failure ... this may be a case of looking for where [Portman's] talents, which are extraordinary, can best be used."
The President named Susan Schwab, Deputy USTR to replace Ambassador Portman. I worked with Ms. Schwab when she was on Senate staff and in the Bush, Sr. Administration. She is very talented and capable.
However, I am not sure anyone can pull this rabbit out of the hat.
Just yesterday, the Wall Street Journal ran a story "WTO Head Ponders a Bold Step" that Pascal Lamy is considering issuing his own version of the "Dunkel draft," which is viewed by some as the equivalent of a nuclear strike. In 1991, then head of the GATT (which became the WTO), Arthur Dunkel broke with negotiating tradition and developed his own draft trade agreement document. It was a bold ploy to break the deadlock during the Uruguay Round. It worked, but left a bad taste in many mouths.
During my Senate staff career, I was involved in the beginning and the end of the Uruguay Round. When we finally passed the implementing legislation, I mused out loud that I thought this would be the last global round of trade negotiations. None of my colleagues agreed - and some of the old hands seemed taken aback at such heresy. They argued that you can only get an agreement by linking everything in a big package. (In diplomacy - this is known as "linkage.")
Over a decade later, I still thing I am right. It is not just an issue of a backlash against globalization and a rise of protectionism. That is certainly a factor -- and a point that will be hyped over and over again should the Doha Round fail.
But there is much more going on - especially in the internal dynamics. Global trade talks have become to complex and overarching to succeed in one mega-negotiation. The dynamics that made these trade rounds work is no longer present. Trade talks aren't about just trade any more. They are talks about the harmonization of economic rules. As such, the old trade-offs no longer apply.
In previous negotiations, the focus was on tariff reduction. I'll reduce my tariffs on steel if you reduce your tariffs on autos. This allowed for a win-win (from economists point of view) situation that pushed for lower and lower tariffs. Everyone agreed that the end point was lower tariffs. The question was how to get there.
In the new talks, it is unclear how the trade-offs work, and in what direction the dynamics points. I'll lower my tariffs on steel if you increase your patent protection to 100 years? I'll allow you to subsidize your aircraft industry if you don't ban my genetically-modified beef? I'll decrease my agricultural subsidies if you reduce regulations on investment banking?
We don't have any agreement on what the end point should be. We have a general idea - "open economies" - but we differ dramatically on what that means and on the specifics.
In addition, I'm not sure that the Doha Round is even looking at the right set of issues. As I've said before (After Doha: What The WTO Is Not Talking About), it may be the last trade negotiations of the industrial era - not the first of the information age.
My gut reaction to the trade talks is that we will have to approach each of these economic regulatory issues separately - possibly in separate forums. Yes, this being a negotiation, there will be linkage. But the complex web of links will not become so great as to bring the entire structure down.
I, for one would welcome, such as shift. As the I-Cubed Economy matures, these economic harmonization discussions need to be ongoing. We are still feeling our regulatory way - and the economy keeps shifting. It is not as simply a matter as hitting a zero tariff number or eliminating a trade barrier. It is an evolutionary process that we need to engage with other countries real-time and continuously.
That is much more difficult that negotiating a trade agreement - but also much more important.
So, if the Doha Round collapses, let us not take it as a sign of failure. Rather, it is an opportunity to build the new international framework for regulating the new global I-Cubed Economy.
Posted by Ken Jarboe at 9:08 AM | Comments (1) | TrackBack
April 18, 2006
Benefits of Openness
The Committee on Economic Development has released a new report Open Standards, Open Source, and Open Innovation: Harnessing the Benefits of Openness. The report, written by the CED's Digital Connections Council chaired by Paul Horn of IBM with e-commerce expert Elliot Maxwell as project director, touts the "commons" approach:
The benefits of openness are becoming more apparent and are likely to grow as we learn to utilize the new capabilities enabled by information and communications technologies. These benefits are challenging our conventional wisdom about innovation and the incentives needed to stimulate it. And, they are suggesting new ways of acting based on the special characteristics of the digital world, which are far different than those that developed based on what we knew of the physical world.
Years ago, the theory of the tragedy of the commons was developed in economic literature. It argued that users of a commons (such as a grazing field shared by an entire community), who had no particular or individual stake in the success of the commons, might act in such a way as to maximize their own short-term interests at the long-term expense of the commons and the community that used it. Thus, the actions of a few could harm the interests of many, and of society as a whole.
The digital world provides an opportunity to think of the commons differently. The use of the digital commons by everyone does not necessarily exclude its use by anyone. To the extent that new information and communications technologies allow more and more people to contribute their own genius, the digital world offers new opportunities from the commons and for the commons.
Openness is not an overriding moral value that must prevail in every circumstance. But, its extraordinary capability to harness the collective intelligence of our world requires us to consider its implications carefully, nurture it where possible, and avoid efforts to foreclose it without compelling reason. We should not miss the opportunity to harvest the benefits openness might bring.
The recommendations included the following--
Concerning open standards:
Because of the advantages of open standards, the Council recommends that governments encourage the development and use of open standards through processes as open to participation and contribution as possible. The Council believes that the participation of civil society would be beneficial in the formation of standards with important social consequences. The Council also recommends that the results of government-supported research be readily available for inclusion in open standards, as they have been in areas such as grid computing.
Concerning patenting and standards:
The Council, therefore, recommends that incentives be created to induce the early disclosure of intellectual property claims and that consideration be given to progressively limiting recovery by a firm asserting infringement, as time elapses from the adoption of a standard.
Concerning open source software:
The Council believes that, rather than replacing one another, proprietary software and opensource software will co-exist, with each playing an appropriate role in the information and communication technologies (ICT) environment. The Council opposes any requirement forcing governments to make purchasing decisions based on the licensing system used. It recommends that the U.S. government not advocate purchases based on any particular licensing scheme--proprietary or open. The Council believes there are certain critical functions of government that should be conducted solely with interoperable technology; in these critical areas, no citizen should be required to use the hardware or software of any particular vendor.
This does not mean that only open-source software would be available. Proprietary software vendors choosing to sell in these markets, however, would be required to provide sufficiently open interfaces, so as to allow others to interoperate with their product. The use of open standards and royalty-free licensing are particularly important in these areas.
The Council recommends that the United States support such interoperability requirements in international procurement as well. The Council also recommends that international agreements entered into by the United States regarding intellectual property should reflect the nation's historically balanced intellectual property regime reflecting the interests of both first and follow on innovators.
Concerning open innovation:
In order to foster open innovation, the Council recommends not only that the NIH should continue their efforts to expand the dissemination of the research they support, but also that other federally funded, unclassified research should be made broadly available. Consistent with the position it has taken in its earlier reports, the Council recommends that any legislation or regulation regarding intellectual property rights be weighed with a presumption against the granting of new rights. The burden of proof should be on proponents of new rights to demonstrate with rigorous analysis the necessity of such an extension, because of the benefits to society of further innovation through greater access to technology. Finally, the Council suggests that the National Science Foundation (NSF) fund research into alternative compensation methods, similar to those created to facilitate the growth of radio, to reward creators of digital information products and accommodate the changes brought about by the digitization and growth of the Internet.
Explicit in these recommendations is the view that proprietary rights not be allowed to trump the openness necessary for technological development. The report uses phrases such as "burden of proof should be on proponents of new rights to demonstrate with rigorous analysis the necessity of such an extension" and "international agreements entered into by the United States regarding intellectual property should reflect the nation's historically balanced intellectual property regime reflecting the interests of both first and follow on innovators."
As the Congress grapples with patent reform, let us hope that this report is widely read.
(Thanks to Blogzilla: Harnessing the benefits of openness for pointing this one out.)
Posted by Ken Jarboe at 1:20 PM | Comments (0) | TrackBack
April 17, 2006
Wealth of Networks - new book
From the New Economist blog comes this news of Yochia Benkler's new book - 'The Wealth of Networks':
[Benkler] argues that while the strength and domain of copyright, trademarks and patents have expanded, social trends in the past few years "are pushing in the opposite direction." Benkler's vision is a utopian one, seeing a networked information economy as "an opportunity to change the way we create and exchange information, knowledge, and culture". This will "offer individuals greater autonomy, political communities greater democracy, and societies greater opportunities for cultural self-reflection and human connection."
Cynics will snort. Business will wonder how to profit from it. Politicians will see it as a threat. But anyone interested in these issues should certainly take the time to read this book.
I haven't read the book yet - but I will. It should be an important contribution to thought on this issue. For those who want to go directly to the book, it is posted (in keeping with Benkler's philosophy) on his website as WikiNotes.
Posted by Ken Jarboe at 4:34 PM | Comments (0) | TrackBack
A competitiveness week
According to published reports of his schedule, President Bush seems to be turning this week into a push for his competitiveness agenda. He is scheduled to participate in a forum in Sterling, Virginia on Monday, to speak at a middle school in Rockville on Tuesday and to speak on competitiveness at Tuskegee University on Wednesday.
On Thursday, he is meeting with President Hu Jintao of China. The White House meeting is sure to touch on matters of economic competitiveness.
Then the President flies out to California to participate in a competitiveness forum at Cisco Systems on Friday.
Also of interest is that on Wednesday, while the President is out of town, Vice President Cheney will be presenting Malcolm Baldrige National Quality awards for 2005.
Quite a line up of competitiveness events.
I have only one concern. Why isn't the President handing out the Baldride Awards? The Baldrige award is the closest thing the US has to an economic competitiveness award.
I see no reason why the President shouldn't be doing both of the Tuskegee event and the Baldrige awards. Both are important if the White House wants to highlight economic competitiveness. And, with all due respect to the Vice President, handing the Baldrige Awards off to someone else is not the way to draw attention to companies and organizations that are on the front line of the battle for "performance excellence."
Posted by Ken Jarboe at 8:21 AM | Comments (0) | TrackBack
April 13, 2006
Who owns Marilyn Monroe?
Speaking of the intangible assets of celebrities, there is a nasty battle brewing over who owns the rights to images of Marilyn Monroe, according to the Wall Street Journal:
More than 40 years after her death, Marilyn Monroe's photos are used to hawk everything from T-shirts and posters to coffee mugs and key chains. Now, the late actress is at the center of a bitter legal dispute over who controls the rights to her profitable image.
Licensing her famous poses and pout have made more than $30 million in fees for two of the litigants. They are Anna Strasberg, the wife of Ms. Monroe's former acting coach, and her Indiana-based business partner, a professional peddler of dead peoples' images. Seeking to share in the Monroe spoils are the families of four photographers who snapped famous Monroe pictures, but who have earned far less in licensing fees.
The central issue in four Monroe-related lawsuits, now pending in Indiana, New York and California is seemingly simple: At the time of her death, was the actress a Californian, or a New Yorker? The answer is worth millions.
As the majority owner of Ms. Monroe's rights of publicity -- which permit the licensing of celebrity images for commercial purposes -- Ms. Strasberg insists the star was a Californian. The photographers, who own copyrighted images of Ms. Monroe, have asked the courts to declare that she was a New Yorker. If the photographers prevail, they could potentially wipe out much of Ms. Strasberg's Monroe business.
. . .
Ms. Monroe joined a parade of dead celebrities being marketed aggressively. In 2004, Robert F.X. Sillerman paid Lisa Marie Presley $100 million for an 85% stake in Elvis Presley Enterprises Inc., which licenses Mr. Presley's image and music. Jeffrey Lotman, chief executive of the Los Angeles licensing firm Global Icons, says that after Mr. Presley, Ms. Monroe and James Dean are the most valuable dead-celebrity brands.
40 years? A wonder how long before an icon passes into the public domain (if ever, under our current copyright laws)? And who gets the royalties from all those Che Guevara tee-shirts?
Posted by Ken Jarboe at 5:16 PM | Comments (0) | TrackBack
Intangibles as loan collateral
Many people know that pop-star Michael Jackson owns many of the Beatles songs (just as Paul McCartney owns many of the old stand-bys -- like "Peggy Sue" and "Blue Suede Shoes" -- through MPL Communications.)
What most people may not know is that Jackson has used those songs as collateral on his loans. Now, he is one the verge of losing that collateral as part of his debt restructuring. A story in the New York Times states:
Mr. Jackson used his stake in the song catalog as part of the collateral for about $270 million in loans from Bank of America. The bank sold the loans last year to Fortress Investment Group, a New York-based investment company that buys distressed debt. The entire catalog, of which Mr. Jackson owns 50 percent, has been valued around $1 billion, the people briefed said.
As part of the new agreement, Fortress has agreed to provide a new $300 million loan and reduce the interest payments Mr. Jackson must make.
The deal is actually more complicated, since Jackson does not own the songs outright. He owns 50% of Sony/ATV Music Publishing LLC; Sony owns the other 50%. According to the Times:
Sony has a longstanding interest in keeping Mr. Jackson solvent. If Fortress had moved to foreclose on Mr. Jackson, he might have been forced into bankruptcy protection, where his stake in the publishing company could be put up for auction.In negotiating the deal, Sony seeks to avoid the prospect that another bidder could gain ownership of the stake, which the company has long hoped to control.
So Sony apparently gets an option on half of Jackson's half - which would give it control over the song rights.
All of this may seem a sidelight to the story of Mr. Jackson's life. But there are larger implications. Intangible assets are being used more and more as backstops for financial deals. This trend started to take off when singer/songwriter David Bowie securitized his songs. As Billboard relates in their 2001 story -
Bowie Bonds: One-Off Or a Sound Vision for the Future:
The sale of those Bowie Bonds in 1997 gave Bowie $55 million upfront; in exchange, the buyer of the bonds had the right to receive the future revenue generated by Bowie's catalog until the principal plus 8% interest was repaid.
Since then the monetization of intangible assets has continued at full speed - especially for traditional IP: patents and copyrighted material. But even franchise agreements of major brand names can be securitized. For example, UCC Capital Corporation, for example, has specialized in structuring financial packages backed by franchise fee revenues - and has set up a new revolving credit fund for this purpose.
As such deals grow, a number of public policy question arise, such as how these intangibles should be valued and accounted for, how federal and state security regulations should be applied to these assets and what is the right level of protection of these assets as intellectual property. To help answer these questions, Athena Alliance has an ongoing project on the monetization of intangible assets. We hope to publish our report later this year.
Posted by Ken Jarboe at 11:32 AM | Comments (0) | TrackBack
April 12, 2006
US lags in broadband
From today's Wall Street Journal: U.S. Lags Behind in High-Speed Internet Access.
The U.S. continues to lag behind rich nations in Europe and Asia in adopting high-speed Internet connections, a critical form of technological infrastructure, according to data from the Organization for Economic Cooperation and Development.
. . .
Access to high-speed Internet connections is about much more than being able to download movies or music quickly. The quality of communication networks is a major determinant of productivity growth, allowing products and services to be made more efficiently and opening up new markets.
. . .
In many of the countries at the top of the rankings, governments have taken an active role in spurring broadband use and in some cases in building communications infrastructure as they would a public utility like highways or airports. In Stockholm, the municipal government laid fiber-optic cables throughout the city and rents them out to commercial operators who sell Internet services to consumers. In South Korea, the government heavily subsidized telecom companies to encourage them to lay fiber to villages and towns.
Another approach used in countries such as the Netherlands has been to force telephone companies to allow rivals to use their lines to offer Internet services to consumers. Known as "local loop unbundling," this approach causes the number of Internet providers to proliferate, leading to lower prices and faster access as the companies jockey for customers.
The U.S. passed a law mandating such a policy in 1996, but lobbying from phone and cable companies and several court decisions have undermined parts of these efforts. In recent years, regulators have rolled back many "unbundling" requirements because they contend that competition is forming on its own among cable, Internet companies and phone-service providers, making regulation unnecessary.
'Nuf said.
Posted by Ken Jarboe at 1:39 PM | Comments (0) | TrackBack
February trade in intangibles
While the BEA trade data released this morning showed a slight improvement in our overall trade deficit, our balance in intangibles trade declined. Our surplus declined almost 9.5% to $6.5 billion. This is the lowest surplus since the summer of 2004. The decline in our intangibles trade balance was due mostly to a large increase in imports -- specifically in increased royalties and licensing payments to foreigners. It remains to be seen whether this is a one time spike in royalty payments or the beginning of an ominous trend.
Ironically, the overall decline in our trade deficit was due to a large decrease in imports. According to the Wall Street Journal:
Consumer goods imports -- including furniture and televisions -- fell by $888 million. Purchases of cars and parts made abroad dropped $1.3 billion. U.S. imports of capital goods, like civilian aircraft and medicinal equipment, decreased by $1.5 billion. Purchases of industrial materials from overseas dropped by $185 million.
The average price of a barrel of crude rose by $53.72 to $51.93. But the volume of crude oil imports decreased to 291.03 million barrels, down from 302.81 million. That brought the value of crude imports to $15.64 billion in February from $15.72 billion in January.
The deficit in Advanced Technology Products also declined significantly to $1.4 billion -- the lowest monthly deficit in two years. The smaller deficit was due almost entirely to a major decline in imports of Advanced Technology Products. The decline in imports was across the board: advanced materials, imports down by 2.5%; aerospace, down by 7.4%; biotechnology, down by 18.7%; electronics, down by 3.3%; flexible Manufacturing, down by 12.9%; information and communications, down by 9.8%; life science, down by 11.4%; opto-electronics, down by 6.6%; weapons, down by 10.2%. Only in nuclear technology did imports increase (interesting!).
Many believe the decline in imports will not last and are a reflection of the weak consumer spending in February. (See Consumer Spending, Income Growth Cooled in February.)
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.
Posted by Ken Jarboe at 9:34 AM | Comments (1) | TrackBack
April 11, 2006
Tech transfer and the pay off from Federal R&D investments
A new study by the Kauffman Foundation - The Knowledge Filter and Economic Growth: The Role of Scientist Entrepreneurship - shows that Federal spending on cancer research has a higher payoff that previously estimated (from the press release):
Federally funded university cancer researchers are contributing more to the nation's economy by commercializing their research at rates much higher than is currently being measured by federal and university officials.. . .
The study shows that the current reliance on publicly available modes for measuring the commercialization of university innovation -- patents and Small Business Innovation Research (SBIR) grants, along with figures provided by university Technology Transfer Offices -- is failing to capture the true number of business start-ups in which scientists are engaged.
As we suspected, the current data tracking system is bias toward old-industrial styles of knowledge transfer -- namely codification of the knowledge into a patent and the transfer of that codified knowledge to an outside party via sale or license (traditional technology transfer).
What I find more important in the study is its critique of the existing technology transfer system. The conclusions speak for themselves:
A consequence of globalization in the most developed countries, such as the United States, has been to shift the comparative advantage away from traditional manufacturing industries and towards new knowledge-based economic activity. But where is this knowledge to come from? At this point, the answer is uncertain, but along with education and human capital, as well as critical research and development (R&D) by private industry and government agencies, research undertaken by universities is sure to play a prominent role. As research and knowledge become perhaps the most crucial component to generating economic growth and competitive jobs in globally-linked markets, universities emerge as a key factor in determining the future well-being of the country. After all, it ranks among the most important tasks of universities to create new scientific knowledge. In addition, the magnitude of resources being invested in university research, including some of the most capable and creative scientists in the country, is the envy of the world.
The massive investment in university research can impact economic growth only if knowledge can be transformed into actual innovations and new and better products through the commercialization process. That is, the extent to which university research becomes commercialized. It matters for economic growth, for jobs and for global competitiveness.
Thus, a large literature has emerged trying to gauge and analyze the extent to which university research spills over into commercial activity. Much, if not most, of this previous research has been restricted to focusing on the activities emanating from Technology Transfer Offices, which have provided systematic and consistent documentation of their efforts over a fairly long period of time. Analyses of these data have typically led to conclusions suggesting that while patents and licenses from university research have increased over time, the typical TTO does not generate significant commercialization of university research. However, an important qualification is that, by restricting themselves to TTO generated data, such studies are not able to consider any commercialization activities not emanating from the TTOs.
This study has taken a different approach. Rather than focus on what the TTOs do, it instead focuses on what university scientists do. Thus, the findings about the commercialization of university research are based on actual university scientists and not the TTOs. The results are revealing. In particular, while all modes of commercialization are important, scientist entrepreneurship emerges as an important and prevalent mode of commercialization of university research. More than one in four patenting NCI scientists has started a new firm. This is a remarkably high rate of entrepreneurship for any group of people, let alone university scientists. Thus, the extent to which university research is being commercialized and entering the market may be significantly greater than might have been inferred from studies restricted only to the commercialization activities of the TTO. Scientist entrepreneurship may prove to be the sleeping giant of university commercialization.
Second, the mode of commercialization is apparently not independent of the commercialization route. Nearly one-third of patenting NCI scientists rely on the entrepreneurial commercialization route, in that they do not assign all of their patents to the university. These scientists exhibit a higher likelihood of starting a new firm but a lower propensity to license. By contrast, scientists choosing the TTO commercialization route exhibit a higher propensity to license but a lower likelihood to start a new firm. These findings in no way provide any evaluation or judgment about the efficacy of the TTO office. Rather, they do suggest that the extent of commercialization of scientist research has been greater and more vigorous than previously had been measured.
Third, we find that the determinants of scientist commercialization vary considerably according to the specific mode of commercialization. Social capital, measured in terms of co-patenting with other NCI scientists, co-publishing with industry scientists, and sitting on a scientific advisory board (SAB) or board of directors, generally promotes all modes of commercialization, although the impact seems to be the strongest for scientist entrepreneurship. However, the role of the TTO is sharply divided depending upon the commercialization mode. Having a TTO that is perceived to be helpful for commercialization seems to increase the likelihood of a scientist licensing but decrease the propensity of the scientist to start a new firm. By contrast, having a TTO that is perceived not to be helpful reduces the licensing activity of scientists but increases their likelihood of becoming entrepreneurs.
How are scientists able to start a business without TTO support? There is at least some evidence indicating that social capital can serve as a mechanism to compensate for lack of TTO help when starting a new firm. This would suggest that university governance and public policy facilitating participation in scientific networks may be a valuable investment accruing positive returns in terms of knowledge spillovers and technology transfer, ultimately leading to commercialization, innovation and economic growth.
Future research needs to further probe why and how scientists choose to commercialize their research, what commercialization route they select, what mode of commercialization is most effective, and how university governance and public policy can best promote such commercialization efforts. A host of pressing questions remain. For example, are all social networks equivalent, that is are they homogeneous, or do some facilitate scientist commercialization more than others? Similarly, do non-patenting scientists engage in commercialization activities, particularly entrepreneurship, or does their lack of patented intellectual propensity preclude commercialization of their research? Whatever answers to these and other crucial questions future research can uncover, the sleeping giant of scientist entrepreneurship may prove to be one giant that is worth waking up.
In addition to research, we need to think long and hard about our public policies. Two decades ago, we created a series of mechanisms to help facilitate the movement of knowledge and technology out of universities and national laboratories: SBIR, Stevenson- Wilder, Bayh-Dole, CRADA's, Semitech etc. We need a new generation of mechanisms if we are to need to unleash that sleeping giant.
Posted by Ken Jarboe at 8:14 AM | Comments (1) | TrackBack
April 10, 2006
Capitalizing R&D
Yesterday, New York Times columnist Louis Uchitelle picked up on part of the Corrado, Hulten and Sichel studies of intangible assets. The main point of Uchitelle's column - "Seizing Intangibles for the G.D.P." - was that the share of profits going to labor are even smaller (and hence inequality even greater) when intangibles are properly factored in -- i.e. R&D is capitalized rather than expensed.
The numbers show that the profit portion of the gross domestic product has risen mildly in recent years, while the wage-and-salary share has shrunk slightly. There is evidence, however, that because of the way the G.D.P. is calculated, the actual shift is much more pronounced."We know that income inequality is quite substantial," said Harry J. Holzer, a labor economist at Georgetown University, "and this new evidence suggests that it is worse than we thought."
But Uchitelle made another important comment:
The approximately $300 billion spent each year on R & D is a big concern of the bureau's economists. Until now, it has been counted as an expense, reducing the profit total within the G.D.P. Starting in September, however, the bureau will publish an experimental G.D.P. account that parallels the standard quarterly report, except for one change: R & D will be counted as capital investment rather than as an expense.
This seemingly minor technical shift will have a major impact. The accounting profession has long been talking about expensing R&D costs. In fact, the International Accounting Standard Board (IASB) is taking a first step toward this, in a major difference from the US Financial Accounting Standards Board (FASB). As I stated in our working paper Reporting Intangibles: Lessons from the US Experience, this will create a natural experiment to see how capitalizing create R&D cost will affect corporate accounting. At the very least, this movement by economists in charge of macroeconomic statistics toward capitalization of R&D in the national accounts may give a new push for similar capitalization of R&D in business accounting.
Once that happens, there are a number of other types of intangibles (which are outlined in the C-H-S papers) that might also be candidates for capitalization - which may be the accountants' worse nightmare. When everything can be capitalized, what happens to the rules? For this reason, the profession seems to have been resisting any change to what I call the "hard asset" philosophy.
Unfortunately (or fortunately) the business world continues to evolve, and intangible assets are a major part of that evolution. The accountants can not hold it back forever. But they can prepare with better rules.
Which makes FASB's reinstatement of its suspended 2002 intangibles project all the more urgent. And the work of the Enhanced Business Reporting Consortium all that more important.
As we talk about competitiveness in our political debates, I hope we don't forget these types of almost invisible efforts to get the rules right.
Posted by Ken Jarboe at 3:13 PM | Comments (0) | TrackBack
Innovation in law firms
Rob Millard's blog Adventure of Strategy points us to an interesting question: are law firms innovative?
I was told a while back that it is pointless trying to sell consulting services aimed at helping law firms become more innovative. They are so conservative and precedent-driven, I was told, that they simply don't "do" innovation.
Well, things may be changing. Today's Financial Times (London) contains an article titled In Pursuit of Modern Practice, announcing an innovation ranking that they have just launched, to find out who the most innovative lawyers and law firms in the UK are. The article identifies several market pressures that are forcing UK law firms to become more innovative, whether they are comfortable with it or not.
And here is the story Rob was referencing -- "Business life - In pursuit of modern practice":
Lawyers and innovation are not words that people automatically put together. Being a good lawyer is traditionally about caution, prudence and risk analysis. Businesses innovate and lawyers protect. Innovation has not been on the lawyers' agenda, and until recently there has been little requirement for it to be there.
In the past five years, however, the legal landscape has been transformed. International expansion and the demands of cost-conscious clients have thrown down new challenges to the UK legal profession.
The Financial Times on Thursday launches a ranking of the most innovative lawyers in the UK, which will measure innovation by firms and individuals. It will be sponsored by BDO Stoy Hayward, the accountancy firm, and the research will be carried out by RSG Consulting, a legal research company.
Rob promises to keep us updated as to the results of the survey. Should be very enlightening.
Posted by Ken Jarboe at 8:06 AM | Comments (0) | TrackBack
April 7, 2006
March employment
Quick take on the March employment numbers:
Good news: payrolls continue to grow -- up by 211,000 in March after a healthy increase in February.
Not so good news: Biggest gainers continue to be in non-export earning areas: food services and drinking places; administrative and support services; general merchandise stores; ambulatory health care services; local government (excluding education); construction of buildings; amusements, gambling and recreation; and hospitals.
These areas accounted for 146,200 jobs (two-thirds of the total).
Again, not a bad month in general, widespread gains offsetting loses in most areas. This was a continuation of the current trends, which unfortunately, do not look good on the export-earning side.
Posted by Ken Jarboe at 10:26 AM | Comments (0) | TrackBack
Stealth competitiveness issues
Congress is grapping with two major pieces of legislation that will affect the future of the US economy. One has recently grabbed the headlines: immigration reform. As I've stated before, immigration is one of the issues we need to get right if we are to have the workforce we need for the I-Cubed economy.
Another part of that human capital equation is also under debate in the Congress, but not getting the headlines: higher education. At the end of March, the House passed the College Access and Opportunity Act of 2006. As the New York Times - "House Passes Education Bill on Party Lines" reports:
The $70 billion proposal, which would renew the law until 2012, sets the terms for loans and grants along with the limits for maximum aid. It was last renewed in 1998.
The floor debate showcased partisan differences over how to approach an era when increases in tuition routinely outpace inflation and the ability of many Americans to pay for college. Republicans, who are particularly striving to control a soaring budget deficit by avoiding new spending, said the bill would make college more affordable.
Democrats wanted to cut interest rates on student loans and enlarge Pell Grants, which had been frozen for several years.
The bill had been threatened by a number of controversial provisions, including one that aid for-profit education companies. According to the Wall Street Journal - Higher-Education Bill Aims to Stir Up Academia":
Congress recently handed for-profit schools a big win when it eliminated a rule requiring all colleges to offer at least half of their instruction in brick-and-mortar classrooms to be eligible for federal financial aid. The restriction, intended to prevent fraud, had hindered online education programs that are especially popular offerings among education companies.
A provision in the latest bill would weaken another requirement -- that schools receive no more than 90% of their revenue from federal financial aid. The rule was intended to prevent a repeat of widespread fraud in the 1980s and early 1990s, when some trade schools signed up unqualified low-income students in order to collect federal aid. For-profit schools are most likely to bump up against the 90% limit because they lack other funding sources and often cater to low-income students. Schools would now have more time to get back in line with the rule if they fall short.
Apparently, those problems were worked out, as the bill that passed the House had different language regarding for-profit colleges than what was in the bill when it was reported out of the House Education and the Workforce Committee. And the
American Council on Education President David Ward issued the following statement regarding passage of H.R. 609:
I am pleased that today the House of Representatives passed the College Access and Opportunity Act (H.R. 609). This is an important step in the process of completing the reauthorization of the Higher Education Act of 1965--a process that began three years ago.
It is important to the I-Cubed Economy that non-traditional forms of learning flourish - without the fraud and waste that has accompanied some of these endeavors in the past. As the same time, it is important to strengthen the ability of traditional higher education institutions to offer a variety of learning experiences. Let's hope that this bill has struck the proper balance.
Let us also hope that when the Senate takes up the bill, it will be able to find the additional resources to expand student loans and grants -- so that a college education is accessible to all.
Posted by Ken Jarboe at 9:43 AM | Comments (0) | TrackBack
April 6, 2006
Fed uses industrial data
Recently, the Fed released the transcripts of the 2000 meetings of the Open Market Committee -- the place where the decisions on rates get made. Washington Post business editor and columnist Steven Pearlstein claims he "spent most of the day happily wallowing in the 814 pages." Happy or not, he came away with some interesting insights as to how the Fed really works, including this:
One [conclusion] is that, despite all the new-economy talk, the Fed continues to put too much emphasis on old-economy variables like inventories and industrial capacity, and not anywhere near enough on the impact of financial flows and asset prices on the behavior of businesses and consumers.
So, even at the height of the dot.com bubble the Fed was stuck in an industrial age mindset. I'm both heartened and worried about that. It is good that the Fed didn't succumb to all the hype. On the other hand, we clearly need a new set of economic indicators.
Maybe that can be Chairman Bernanke task - to come up with new ideas as befits the new economy
Posted by Ken Jarboe at 1:53 PM | Comments (0) | TrackBack
April 5, 2006
Courts and patents
A new piece on CNET News by patent expert Brian Kahin - "How Washington reinvented invention" asks the key question:
How did an activist court single-handedly undo 600 years of history that confined patents to fields of technology--offering 20-year monopolies to such things as diaper services and frequent flyer miles?
Posted by Ken Jarboe at 4:45 PM | Comments (0) | TrackBack
New manufacturing reports
Just a quick note on a few new reports relating to manufacturing in the I-Cubed Economy.
Thanks to Egils Milbergs at Accelerating Innovation, there is this report by Mark Schweitzer and Saeed Zaman of the Federal Reserve Bank of Cleveland on the relationship between manufacturing productivity and employment - Are We Engineering Ourselves out of Manufacturing Jobs? There answer to that rhetorical question is no. But their conclusion is interesting:
As recently as 1990, roughly 30 percent of U.S. gross purchases were domestically produced goods, whereas 52 percent of purchases were domestic services. Now, only 25 percent of U.S. purchases are domestically produced goods. About half of this decline is attributable to the rise of imported goods, but the rest is simply the result of greater consumption of services, which likely reflects a change in consumption preferences.
Implied in that conclusion, however, it that the change in consumption preferences from goods to services is in part made possible by the lower costs of goods (due, in part, to higher manufacturing productivity) which frees up funds to be used for services instead.
Thanks to the New Economist for pointing out some new studies on the effect of offshoring. From Europe comes
How Does Investing in Cheap Labour Countries Affect Performance at Home? France and Italy by Giorgio Barba Navaretti, Davide Castellani and Anne-Célia Disdier
ABSTRACT: Transferring low tech manufacturing jobs to cheap labour countries is often seen by part of the general public and policy makers as a step into the de-industrialisation of the European economies. However, several recent contributions have shown that the effects on home economies are rarely negative and often positive. Our paper contributes to this literature by examining how outward investment to cheap labour countries affect home activities of a sample of French and Italian firms that turn multinational in the period analysed. The effects of these investment are also compared to the effects of outward investment to developed economies. The analysis is carried out by using propensity score matching in order to build an appropriate counterfactual of national firms. This provides the hypothetical benchmark of what would have happened to domestic activities if firms had not invested abroad. We find no evidence of a negative effect of outward investment to cheap labour countries. In Italy they enhance the efficiency of home activities, with also positive long term effect on output and employment growth. Also for France we find a positive effect on productivity and the size of domestic activity, although not as robust and significant. Investment to developed economies from both countries have essentially scale effects but which do not trickle down on productivity at home.
And Karsten Bjerring Olsen at the OECD has produced Productivity impacts of offshoring and outsourcing: a review:
This paper surveys the empirical literature on offshore outsourcing and its productivity effects. Due to the small number of existing studies, the survey also includes research that may serve as indirect evidence of the phenomenon's link to productivity, such as its effect on skill upgrading.
The most apparent conclusion drawn from the review is that there appears to be no clear patterns as to how offshore outsourcing affects productivity, and that much depends on both sector and firm-specific characteristics. There are some indications, however, that positive productivity effects from foreign material sourcing depends on the degree to which firms are already globally engaged, but also that such engagements generally could be close to their optimum level in developed economies.
There is little existing research on offshoring of services, but it appears that its productivity enhancing effects generally are small in manufacturing plants while being of a somewhat greater magnitude for firms in the services sector.
"Little existing research on offshoring of services." Humm ... sounds like an opportunity.
Finally, there are two new Department of Defense reports The first is the DOD's Annual Industrial Capabilities Report to Congress which describes the current state of the defense industrial base:
U.S. suppliers appear well-positioned to supply the most critical technologies enabling 21st century warfare. Nevertheless, although the industrial base supporting defense generally is sufficient to meet current and projected DoD needs, there are and will always be problem areas that the Department must address.
A case in point:
The provision of body armor to troops deploying to Iraq demonstrates both the very real difficulties in properly assessing evolving operational requirements, as well industry's ability to respond to those requirements once established. DoD body armor requirements increased greatly prior to combat operations in Afghanistan and Iraq, straining domestic industry's ability to meet DoD warfighting requirements. In particularly short supply was the specialized ballistic backing material incorporated into the body armor. Between April 2002 and May 2003, the Department's monthly requirements for the backing material quadrupled and the sole domestic source--Honeywell--was unable to keep up with the demand. Although not completed in time to support initial operations in Iraq, Dutch State Mines (headquartered in the Netherlands) built a new production facility for a comparable backing material in Greenville, North Carolina, significantly increasing domestic prod