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December 21, 2007
Happy Holidays
It is that time of the year when The Intangible Economy indulges in that wonderful intangible - a vacation.
Happy Holidays -- and we will see you in the new year.
Posted by Ken Jarboe at 9:35 AM | Comments (0) | TrackBack
So much for the competitiveness agenda
The science community is expressing disappointment in the final federal budget deal. This was the reaction from
ASTRA:
“Short-sighted and short-changed” declared Dr. Mary Good, Chairman of ASTRA, the Alliance for Science & Technology Research in America, following last-minute changes in key science budgets by Congress and the Administration as lawmakers rush to adjourn before the Holidays.
“Reversing years of hard work, Congress and the Administration have been short-sighted in their haste to get a budget agreement — and they have short-changed America in the process” declared Good. “Only a few months ago, we achieved a refreshing consensus to begin the much-needed doubling of key science budgets under the America COMPETES Act,” said Good, adding “passage of the COMPETES Act recognized that America must increase its investment in physical sciences and engineering if it is to compete successfully in the future global economy. The COMPETES Act was bipartisan and signed by the President. It was a first step in insuring that future generations of Americans can be prepared for the competitive dynamics of a flat world.”
But, apparently, the actual final funding levels don't come up to those set in the COMPETES Act.
The website of ScienceNOW had this to say:
The White House and Congress delivered a heavy blow to the hopes of the U.S. science community yesterday as part of a long-delayed final agreement on the 2008 federal budget. As a result, what began as a year of soaring rhetoric in support of science seems likely to end with agency officials and research advocates shaking their heads and wondering what went wrong.
I don't know how other parts of the competitiveness agenda faired in the budget game between the Congress and the President. But after been promised much, the physical sciences are clearly not happy.
Posted by Ken Jarboe at 9:09 AM | Comments (0) | TrackBack
December 20, 2007
Micro climates of innovation
Today's New York Times has a fascinating article about the microclusters of technology innovation in Silicon Valley -- Silicon Valley Shaped by Technology and Traffic. Similar to the microclimates that determine the locations of the wineries, these microclimates are "collection of remarkably local clusters based on industry niches, skills, school ties, traffic patterns, ethnic groups and even weekend sports teams."
Take, for example Palo Alto Networks:
Nir Zuk, its founder and chief technology officer, notes that Palo Alto is synonymous with high-tech innovation, and he was living there when he came up with the name.
“But in Silicon Valley, you locate a company where the engineers are,” he said. “You would never locate a networking company in Palo Alto.”
As the article points out,
a look at the microclusters within Silicon Valley demonstrates the business relationships, the social connections and the seamless communication that animate the region’s economy. It also suggests the human nuance behind the Valley’s success and shows why that success is not easy to copy, export or outsource.
That human nuance is the interaction of people and ideas and the transmission of tacit knowledge. In my paper Knowledge Management as an Economic Development Strategy, I noted that economic clusters succeeded because they are efficient knowledge management mechanisms. This micro look at Silicon Valley shows just how local that knowledge can be.
The irony of the information age is that while telecommunications technology has resulted in the "death of distance" for some types of information, being there is still important. It become even more important on the cutting edge of innovation, where face to face interaction and serendipity are key. As Richard Florida says, the world is not flat; it is spiky – because innovative and creative people need to be near other innovative and creative people.
Posted by Ken Jarboe at 11:32 AM | Comments (0) | TrackBack
Fiscal stimulus
While today's GDP numbers don't show it (a 4.9% growth in the third quarter of 2007), there is growing worry that the nation is slipping into a recession. Some, such as Marty Feldstein, Larry Summers, and Robert Reich, are calling for fiscal stimulus. Summers calls for a $50 to 75 billion tax cut/spending increase combination. Feldstein isn't specific, other than to condition it to the economy actually going into recession. Reich wants it to be revenue neutral by cutting taxes at the low income end and raising them at the high end.
But David Wessel, in his column today, points out that "the best political forecast is that nothing will come of this talk of fiscal stimulus." (Emphasis in original).
Everyone may have missed something, however. Inadvertently, Summers may have gotten his wish -- at least in part. Congress passed a $50 billion stimulus package just before it went out. It just wasn't called a stimulus package. The $50 billion Alternative Minimum Tax "patch" was not offset my any new revenues (the GOP's anti-tax forces being stronger than the anti-deficit side). And supposedly, it provides a break to the middle class.
While I was initially disturbed at the lack of a budget offset for the ATM, maybe - just maybe some good will come out of this. Not the most effective or well designed stimulus package. But a "stimulus" none the less.
The real question remains, however. Is fiscal stimulus the right treatment for the current situation? Congress has inadvertently set up a nature experiment. We will know the answer in a few months.
Posted by Ken Jarboe at 11:12 AM | Comments (0) | TrackBack
December 19, 2007
Creative central banks
This from Business Week - Why Central Banks Are 'Experimenting':
When is the last time "central banker" and "creative" appeared in the same sentence? The conservative guardians of the world financial system aren't exactly known as renegades, but the global credit crunch that originated in the U.S. housing market is forcing them to try things they've never tried before.The rush to the creative economy has begun!
Some are concerned with this trend:
Bert Ely, a banking consultant in Alexandria, Va., who's known for his irreverent declarations, puts it differently: "These guys are flying by the seat of their pants."But as those in the creative fields know, flying by the seat of your pants is the standard modus operandi.
Posted by Ken Jarboe at 11:51 AM | Comments (0) | TrackBack
Services trade as part of gambling settlement
According to press reports issued Monday, USTR has agreed to a settlement with the EU, Japan and Canada over our ban on foreign online gambling. The US will keep the ban, but as allowed under the trade rules, give other countries trade compensation:
"The agreement involves commitments to maintain our liberalized markets for warehousing services, technical testing services, research and development services and postal services relating to outbound international letters," said Gretchen Hamel, the USTR spokeswoman, in a statement.
I don't understand this. Does it mean we currently have restrictions on foreign technical testing services and R&D services? Or are we just promising not to put future restrictions on these services? And were there proposals for restrictions on technical testing and R&D services? (I hadn't heard of any). All very interesting.
Posted by Ken Jarboe at 9:53 AM | Comments (0) | TrackBack
The ECB and intangibles
Yesterday, following last week's joint move by the world's leading central banks, the European Central Bank up the scale of the liquidity relief to $500 billion (see Cheap Money Is ECB's Answer - WSJ.com and E.C.B. Makes $500 Billion Infusion - New York Times). This prompts me to raise the same question I asked earlier about the Fed action: will they accept intangibles as collateral for any of this lending? As Steven Pearlstein put it this morning:
In this case, it's not only $500 billion, but $500 billion lent against almost any collateral, including a handwritten IOU from Uncle Ludwig in Dusseldorf.If that is the case, then lending intangibles might be a much safer bet.
Posted by Ken Jarboe at 9:21 AM | Comments (0) | TrackBack
December 18, 2007
Medical tourism
For a long time, international trade in services was seen as an outlier -- some thing that is rare and not quite comprehensible. That changed in the 1980's with the inclusion of services in the Uruguay Round of trade negotiations. Back then, I was also involved in one of the first looks at the specifics services trade by the non-disbanded Congressional Office of Technology Assessment. Our study, International Competition in Services: Banking, Building, Software, Know-How... looked at what we saw were four key tradable services. Medical services were not on the radar -- except for some wealthy foreigners coming to the US for specialized treatment.
Now, as a new case study from Harvard Business School outlines, trade in medical services (dubbed "medial tourism") is a big deal -- and the shoe is on the other foot. More and more Americans are seeking lower cost treatment abroad, especially in India. The case study looks specifically at the rise of Apollo Hospitals. But, as the overview discussion in HBS Working Knowledge — The Rise of Medical Tourism the phenomenon is more wide spread:
Patients with resources can easily go where care is provided. "Historically doctors moved from Africa and India to London and New York to provide care. Now we are basically flipping it around and saying, 'Why don't the patients move? It's not as difficult as it used to be.' "
It is growing and it is not just trade catering to patients from Western nations:
We will see solutions emerge that have nothing to do with the West and that specialize in particular kinds of care where the West may not even have much competence: tropical diseases in Southeast Asia and Africa, for instance. On the other hand, you might see very interesting links between particular companies, research institutes, and hospitals in different parts of the world—in the Middle East, Europe, the United States. My guess is that 3 or 4 prominent hospital companies will survive because the demand is so huge.
The growth of medical tourism highlights the changes in what is tradable. Medical services were once seen as one of the last remaining bedrocks of local economic development. The medical center replaced the factory as the main employer in many cities. But with greater push for telemedicine, the centralization of medical services is not as compelling as it once was. And improvements in transportation, not just information technology, are enabling the rise of medial tourism.
As the I-Cubed continues to evolve, look for more of these paradigm flipping strategies. They will pose a challenge not only to corporate strategy, but to our economic development strategies.
Posted by Ken Jarboe at 10:08 AM | Comments (0) | TrackBack
December 17, 2007
Innovation predictions
Business Week has published its Innovation Predictions 2008. An interesting bunch of predictions about innovation itself -- not necessarily about innovations. Some of them are already in place -- like "the customer is king" where "Consumers replace competitors as the key reference point for corporate strategy." Many revolve around the new face of innovation - with d-schools replacing b-schools, private equity firms embracing innovation as a turn around strategy and major consulting firms going after the design/innovation firms. Others have to do with the privacy backlash and new marketing trends. The one I found especially interesting was about politics:
A national innovation policy emerges as a key part of the Presidential campaign. With the economy sinking into recession and competitors from China, India, and Europe embracing national innovation plans, Hillary Clinton is the first to propose a program—and rivals respond.That would be nice -- but don't hold your breath. Yes, the candidates will say (and already have said) nice things about innovation and have put forward plans and proposals (see earlier posting). But whether they add up to a "national innovation strategy" or simply a call for a "national innovation strategy" remains to be seen. Of course, even a call for a strategy would be a good starting point.
The real problem will be connecting to the voters - which is needed if innovation becomes a "key part." The candidates can talk about what ever they want, but it is what the voters are interested in hearing about that determines the course of a campaign. Right now, "innovation" is a MEGO issue ("my eyes glass over"). Until and unless one of the candidates can connect the issue emotionally to the public, it will remain the providence of policy wonks and specific interests. And making that connection requires transforming the rhetoric and the public consciousness -- two things I don't yet see happening.
So, look for innovation to come up in the campaign, but not be a key part. It would be great if I'm wrong on that latter point, however.
Posted by Ken Jarboe at 12:56 PM | Comments (0) | TrackBack
December 14, 2007
Riding the Rising Tide
Earlier this week, ASTRA (the Alliance for Science & Technology Research in America) released its report - Riding the Rising Tide: A 21st Century Strategy for U.S. Competitiveness and Prosperity. The report is really a call for the various Presidential campaigns to take the issue of competitiveness seriously. It echoes and builds upon the now familiar concern about the lack of an innovation strategy in the US. The ASTRA report offers a 14 point plan:
1. BALANCE DEFENSE/CIVILIAN SHARE OF FEDERAL R&D PORTFOLIO
2. INCREASE FEDERAL FUNDING FOR PHYSICAL SCIENCES AND ENGINEERING RESEARCH
The Congress and the Administration should fulfill the physical sciences and engineering R&D commitments made in the American Competitiveness Initiative (ACI). However, to ensure that funding expands beyond increases in inflation, the timetable for these investments should be accelerated. In addition, investment should be increased beyond the ACI recipient agencies.
3. INCREASE AND STABILIZE FUNDING FOR APPLIED RESEARCH
The Federal government should increase and stabilize funding for applied research and advancing promising, high-risk technologies with substantial economic potential to bring them to a stage of maturity that is attractive for private sector investment. This includes funding for the new Technology Innovation Program (TIP) and other programs that meet this objective.
In addition, the approach to SBIR funding should be reviewed to determine how this program could maximize its ability to contribute to the U.S. innovation base.
4. FOCUS R&D ON LEADING EDGE OF SCIENCE AND TECHNOLOGY
A large share of Federal R&D investment should focus on the leading edge of science and technology, especially in fields expected to have revolutionary impacts, such as nanotechnology, biotechnology, and high-performance computing.
5. INCREASE R&D TO SUPPORT GROWING SERVICES SECTOR
The Federal government should increase R&D to support the U.S. service economy, including support for services innovation, productivity, efficiency, competitiveness, and technical workforce development.
6. INCREASE FOCUS ON INTERDISCIPLINARY AND MULTI-DISCIPLINARY RESEARCH, NEW FORMS OF COLLABORATION, AND NURTURING INNOVATIVE CAPACITY IN GEOGRAPHIC REGIONS WHERE INNOVATIVE CAPACITY EXISTS BUT IS UNDER-USED
While investigator-driven research remains the cornerstone of Federally-supported academic R&D, the Federal government should increase attention to emerging opportunities for interdisciplinary and multidisciplinary research, including a focus on centers of research excellence where rapid development of innovations requires this type of collaboration. This includes reaching out to academic institutions in geographic regions in which the potential for innovative capacity exists—such as high quality research and researchers—but needs further nurturing.
7. PROVIDE INCENTIVES FOR BENEFITS OF FEDERAL R&D TO BE CAPTURED WITHIN THE U.S.
To ensure that the US. reaps the benefits of Federal R&D investments, the Federal government should examine what incentives can be put in place to enable adequate returns from public R&D to be captured domestically For example, the U.S. should consider devoting a small part of the Federal research portfolio to investments in applied research,
technology prototyping, demonstration, testing, pilot-scale production and other precompetitive activities to increase the likelihood of eventual commercialization on our shores.
8. EXAMINE ADEQUACY OF U.S. SKILLS FOR INNOVATION ECONOMY
The U.S. needs to examine whether prevailing skill levels are adequate for an innovation based economy, and for our success in the growing global “trade in tasks” in which routine knowledge work is easy to ship offshore.
9. IMPROVE STATISTICAL AND CAREER INFORMATION ABOUT THE U.S. SCIENCE, TECHNOLOGY AND ENGINEERING WORKFORCE
The U.S. should provide better and more detailed information on the nation’s need for scientists, engineers and information technology workers. The National Science Foundation should: encourage employers to better articulate their current and prospective STEM workforce needs, and the types of skills and disciplines needed; ensure students and workers understand what these specific skills and disciplines are; as well as encourage a significant shortening of the feedback loop between employers and their needs, and the responses by education and training institutions. This includes providing career information and nurturing to groups underrepresented in STEM—such as minorities and women—to increase their knowledge of opportunities in STEM education and careers.
10. IMPROVE HIGHER EDUCATION FOR SCIENTISTS AND ENGINEERS BY FOCUSING ON GLOBAL AND CULTURAL AWARENESS, COMMUNICATIONS, BUSINESS AND MANAGEMENT SKILLS
The Federal government should encourage university educators to broaden the skill sets of U.S. scientists, engineers and information technology workers. University educators should ensure that scientists, engineers and IT professionals have: global and cultural awareness;
knowledge that helps them understand business, markets, marketing and customers; the ability to work as a member of and communicate effectively in teams of diverse disciplines; some understanding of business finance such as cost-benefit and return on investment concerns; as well as project management abilities.
11. STRENGTHEN EFFORTS TO ATTRACT TOP FOREIGN STUDENTS AND STEM PROFESSIONALS TO THE U.S.; REMOVE BARRIERS TO IMMIGRATION OF TALENT
The U.S. should strengthen efforts to attract top foreign students and PH.D.-level professionals in science, engineering and technology. This includes developing a national strategic plan for recruiting top international students, scientists, engineers and technologists, and evaluating the U.S. immigration system to remove barriers to these talented individuals migrating to the U.S.
12. PERFORM WHITE HOUSE REVIEW OF LAWS, REGULATIONS AND POLICIES; ADDRESS INHIBITORS TO INNOVATION
The next President should launch a White House level initiative to perform a comprehensive review of U.S. laws and regulations relating to the business climate for innovation. This would include regulations promoting human health and safety, standards for environmental protection, as well as tax, trade and antitrust policies, to determine whether changes are needed to meet the nation’s public policy goals while, at the same time, promoting innovation and competitiveness.
13. DEVELOP A MEANINGFUL SET OF INNOVATION INDICATORS TO GUIDE U.S. INNOVATION POLICY AND STRATEGY
The Federal government should lead efforts to determine where the priorities are, and to begin the process of developing some high level indicators around the key drivers of innovation that are known and recognized.
14. CREATE, AND PROVIDE ADEQUATE SUPPORT FOR, BETTER GOVERNMENT ANALYSIS OF U.S. AND FOREIGN INNOVATION SYSTEMS
The U.S. must create—and provide meaningful financial resources to—institutions within the Federal government capable of performing high quality analysis of U.S. and foreign innovation systems, and formulating a Federal innovation policy and investment agenda commensurate with the new economic realities and 21st century competitiveness challenges.
What I especially like about these points is that they incorporate but go beyond the current calls for more R&D funding and more attention to STEM (science, technology, engineering and mathematics) education. For example, the report discusses the range of innovation relevant skills needed in the US economy and highlights the need for STEM workers to have a broad skills set.
The last three recommendations are of particular interest to me. The report calls for greater efforts to understand the innovation ecosystem. We need to understand that the nature of innovations has changed in the I-Cubed Economy. It is no longer a linear process that begins with men in white coats in labs. Innovation is a complex set of interactions -- truly an ecosystem. By calling for better measures, increased analytical capabilities and new ways of thinking about innovation, the report sets a direction for innovation policy.
Now if the policymakers will only follow ASTRA’s lead.
Posted by Ken Jarboe at 7:08 AM | Comments (0) | TrackBack
December 13, 2007
The Fed and intangibles
On his New York Times Blog, Floyd Norris explains what the Fed did yesterday when it announced a new "term auction facility":
The Fed will lend money to banks based on almost any asset they own, even ones that are not liquid at all. That will include some of the more exotic loans and securities out there.
Investors, it appears, love it. The stock market opened sharply higher, reducing the losses that came yesterday after the Fed cut interest rates, but not by enough to satisfy Wall Street. This move is taken as evidence that central banks are determined to rescue the system, whatever it takes.
How much will the Fed lend against illiquid assets? It has a public list, already in use in discount window lending. You will note that it allows the lending of up to 85 percent of the face value of AAA-rated collateralized mortgage obligations, if there is no observable market value. There are some C.M.O.’s out there that have not yet been downgraded but that might not bring that much in a sale.
I’d love to see which assets are pledged, and how much the Fed lends against them. But the Fed won’t disclose those facts. Nor will it let us know which banks borrow using the new facility.
Intangible are not included on the current list of assets, however. The Fed will lend against Commercial and Agricultural Loans, Commercial Real Estate Loans, Construction Real Estate Loans, Family Residential Mortgages, Home Equity Loans, Consumer Loans- Autos, Private Banking, Installment, Etc., Consumer Loans- Credit Card Receivables, Student Loans, SubPrime Credit Card Receivables and Asset-Back Securities. It will be interesting to see if anyone asks them to lend against an intangible-backed loan.
Posted by Ken Jarboe at 10:04 AM | Comments (0) | TrackBack
December 12, 2007
October trade in intangibles
In a reversal of the trend for the past few months, this morning's BEA trade data shows an increase in the deficit by $0.7 billion to $57.82 billion in October. The deficit for September was also revised upwards, meaning the deficit actually increased in that month rather than decreased as previously reported. Much of the increased deficit was due to oil. As the Wall Street Journal reports:
The U.S. bill for crude oil imports was $22.92 billion, up from $20.38 billion in September. The average price per barrel increased $3.98 to a record $72.49 from $68.51. Crude import volumes rose to 316.18 million barrels from 297.50 million.The New York Times points out that imports from China also played a major role:
The deficit with China jumped 9.1 percent to $25.9 billion, a record for a single month.
The rise reflected record imports from China, led by large gains in shipments of toys and games and televisions as retailers stocked their shelves for Christmas. The demand for Chinese imports is still surging despite a string of high-profile recalls of Chinese products from toys with lead paint to defective tires and tainted toothpaste.
The good news is that our intangible trade balance improved by $90 million in October to a surplus of $10.21 billion. The increase was due to royalty receipts and exports of business services growing faster than royalty payments and imports of business services.
The other story on our intangibles trade is the revisions of the data for the past six months. The revised data does not change the overall trend. But it does show constantly higher figures for business service imports and exports and for royalty receipts (exports). Curiously, royalty payments (imports) were consistently lowered in the revisions. In other words, the earlier data appears to systematically underestimate trade in business services and royalty receipts while overestimating royalty payments. This highlights the continued difficulties of measuring trade in the I-Cubed Economy.
The deficit in Advanced Technology Products increased dramatically in October by $1.5 billion, reaching a record monthly deficit of $6.667 billion. This came in spite of a $1.4 billion improvement in aerospace trade as exports surged by almost $1.9 billion. That improvement was overshadowed by increased imports of information and communications technology (ICT), life sciences and opto-electronics. Imports of ICT alone increased by $1.6 billion. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.
Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.
Posted by Ken Jarboe at 9:17 AM | Comments (0) | TrackBack
December 11, 2007
Expectations
The Fed cuts interest rates and the Dow drops almost 300 points. I guess Wall Street really is fueled by that most intangible of intangibles - expectations. To quote Keynes:
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. (The General Theory of Employment Interest and Money, pp. 161-162).
Posted by Ken Jarboe at 4:31 PM | Comments (0) | TrackBack
Global Innovation 1000
The latest Booz Allen Hamilton innovation report is out -- The Customer Connection: The Global Innovation 1000 -- and the results sound familiar:
In 2006, as in the two previous years of our annual study of the Booz Allen Hamilton Global Innovation 1000 — the 1,000 publicly held companies around the world that spent the most on research and development — overall corporate revenues among these companies increased 10 percent. Once again, their overall spending on research and development also rose, to US$447 billion this year. And as in years past, we found no statistically significant connection between the amount of money a company spent on innovation and its financial performance.
In other words, just throwing money at innovation doesn't work. But the B-A-H report talks about what does work: listening to your customers:
We also compiled a list of high-leverage innovators, as we did last year. These were the companies that, compared to other companies in 2006, got a significantly bigger performance bang for their R&D buck. The high-leverage innovators consistently achieve better sustained financial performance than their industry peers while spending less on R&D. We’ve spoken to executives at a number of these companies, including Black & Decker. When listing the reasons for their success, they all mention two key factors. The first is strategic alignment: They work hard to align their innovation strategies closely to overall corporate strategy. The second is customer focus: They all have processes in place to pay close attention to their customers in every phase of the innovation value chain, from idea generation to product development to marketing.
The study breaks these innovation strategies into three types:
Need Seekers: These companies actively engage current and potential customers to shape new products, services, and processes; they strive to be first to market with those products.
Market Readers: These companies watch their markets carefully, but they maintain a more cautious approach, focusing largely on creating value through incremental change.
Technology Drivers: These companies follow the direction suggested by their technological capabilities, leveraging their investment in research and development to drive breakthrough innovation and incremental change, often seeking to solve the unarticulated needs of their customers.
The report goes on to describe each of these three strategies and give an example of a company in each category. Unfortunately, the report does not give the breakdown by strategy of all 110 companies listed as "high leverage innovators." It would be interesting to see which companies are following which strategy - and if they clustered by industry.
In any event, the report is yet another piece of evidence of what some of us have been saying for some time: innovation isn't just about technology and it isn't just about R&D spending. The companies get that. Maybe some day the policymakers will as well.
Posted by Ken Jarboe at 7:35 AM | Comments (0) | TrackBack
December 10, 2007
Tranches and tranches - and safety of intangibles
In an earlier posting on the subprime mess, I noted in passing that part of the problem was the tranche system of dividing loans up into groups by risk. This tranche system was supposed to isolate risk, but seems to have failed miserably -- which I never completely understood. Last week, Steven Pearlstein enlightened me (and everyone else) in his column It's Not 1929, but It's the Biggest Mess Since:
In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next.
With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.
Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.
The problem being that these new second level tranches really weren't AAA quality. They might be the top tier of the second tier - but they were still second tier. Pearlstein argues that this tranches of tranches created so much leverage that could not be sustained:
If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.
Tranches of tranches were just on part of the leveraging. As I mentioned earlier, the banks were using these CDO's (collateralized debt instruments obligations) for interest rate arbitrage in offbook SIVs (Special Investment Vehicles). So what was originally designed as a relatively safe investment product (bonds backed by a steady stream of revenues placed in a separate entity to protect against bankruptcy or other financial problems of the parent entity) became a leveraged speculation play.
So, how does the market recover from what is quickly becoming, as the Wall Street Journal puts it, "comparable to some of the biggest financial disasters of the past half-century"? Both parts of the problem -- the housing bubble that caused the value of underlying assets to decline and the overleverage -- need to be addressed. Right now, most eyes seem to be on the housing part of the crisis. A few are looking at the financing part, specifically the role of the rating agencies. But sooner or later the leveraging issues will attract more attention.
When that happens it will be important to get the regulations right - not just shut down the system. That will also be the time to see if we can improve the process for financing using intangible assets. It will not be everyone's nature reaction (which will be to reign in "exotic" loans). As the Journal article points out, these instruments so complicated that "coming up with a value for a CDO entails analyzing more than 100 separate securities, each of which contains several thousand individual loans -- a feat that, if done on any scale, can require millions of dollars in computing power alone." Even the traditional vulture investors are staying away.
We can make the case for intangible lending, but it will not be easy. In part, we will have to build in safeguards up front and return to simplified mechanisms. That will be moving in the opposite direction of the trend in financial engineering. But the current market is likely to reward those who can create a simple, transparent investment vehicle. People still want to invest. They just need to feel safe in doing so. So, making investments in intangible safe has to be our goal right now. It is as straightforward as that.
Posted by Ken Jarboe at 9:07 AM | Comments (0) | TrackBack
December 6, 2007
More credit worries
Oh boy, this doesn't look good -- Surge in Auto-Loan Delinquencies Is Latest Trouble for the Economy - WSJ.com. Why is this bad? As the story explains:
Car loans differ from home loans in one crucial way. During 2004-06, many home loans were made to speculators on the assumption that the underlying asset -- the home -- was sure to keep rising in value. Many people, inspired by fervor in the market, took out home loans that in retrospect they had little hope of paying back.
By contrast, everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy.
Not good. Not good at all.
Posted by Ken Jarboe at 2:24 PM | Comments (0) | TrackBack
Fixing the subprime mess
It looks like Treasury Secretary Paulson has beat back the laissez faire skeptics (the inheritors of Hoover's Treasury Sec Andrew Mellon whose response to the Great Depression was to let the economy "purge them all") and has won Presidential support for his plan to help subprime mortgage borrowers (see Bush to Unveil Aid to Homeowners - WSJ.com, Lenders Agree to Freeze Rates on Some Loans - New York Times, Bush mortgage plan would freeze rates - Los Angeles Times, Bush Wins Agreement To Freeze Mortgages - washingtonpost.com).
Great, you say. But what has this got to do with intangibles? Simply this: if we can't get a handle on the home mortgage lending problem (one of the most tangible of tangible assets), how are we ever going to expand lending on intangibles? The problem is systemic to the financial system right now. As WSJ columnist David Wessel points out:
For years, banks and investors lent freely. They took big risks for surprisingly little reward (known as "low risk premiums" in the patois of the trade). Now, they're shunning risk. Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash.
. . .
Leverage is defined as the factor by which a lever multiplies a force. In economics and finance, leverage allows the bold to borrow to make bets that can pay off handsomely when times are good. But leverage magnifies losses when things go bad. So borrowing binges are followed by periods of deleveraging in which lenders and investors borrow less and take fewer risks. Economists dub the recent decades in which recessions were scarce and inflation calm the Great Moderation. That seems to be giving way to the Grand Deleveraging.
At best, the economy has a hangover, and will feel better in a couple of months. But this may be more like a case of mono, an ailment in which the patient doesn't return to normal vigor for a lot longer.
Until we get through the Great Deleveraging, advances in monetization of intangibles may be on hold. But we may be in a position to put in place the infrastructure and the public policies needed for the next expansion -- learning from the problems of today.
It is often said that it is too late to fix the roof when it is raining. But the rain shows you where the hidden leaks are. You just need to be prepared to get out the ladder as soon as the rain stops.
Posted by Ken Jarboe at 9:41 AM | Comments (0) | TrackBack
December 5, 2007
Economic anxiety
Bob Reich has a simple answer to the question of why rising economic anxiety -- It's the Economy, Stupid -- But Not Just the Slowdown:
The real reason is middle-class families have exhausted the coping mechanisms they've used for over three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation.
The first was the two-earner household as more women moved into the labor market. The second was working longer hours. The third was the ATM machine known as rising home equity. Having gone through these three ways of maintaining family income that masked the effects of stagnate wages, the real economic question is what to do next. How to we get wages back on the growth track that created the great American middle-class? And how do we do it in the face of the new circumstances of the global I-Cubed Economy?
Unfortunately, the answers to those questions are few and far between. Pabulum, nostrums, nostalgia and rhetoric is in great supply. But real answers are rare.
Posted by Ken Jarboe at 11:59 AM | Comments (0) | TrackBack
New IP proposals in WTO
From Intellectual Property Watch comes this update - Members Seek To Raise TRIPs Amendments In WTO Negotiations:
World Trade Organization members seeking changes to international rules on trade and intellectual property rights moved this week to include the debate on their proposals in an upcoming deadline for the broader trade negotiations at the WTO. But opponents continued to resist moving the issues to negotiation.
At issue is a proposal to raise the level of trade protection for geographical indications (distinctive products named for places) on a variety of products to the level already enjoyed by wines and spirits, and a separate proposal to require the disclosure of the origin of biological resources and traditional knowledge in patent applications.
It continues to be unclear whether the Doha Round of trade negotiations will ever be concluded. The IP issues are not the major hold ups. By themselves, it doesn't look like these proposals are necessarily going to go anywhere. But the dynamics of these negotiations are such that the IP proposals could become trading chips for other issues. And, as the IP Watch story points out, they are being raised in the context of an overarching “single undertaking” negotiation. So, while not yet becoming the tail that wags the dog, IP issues are still in play in the negotiations.
Posted by Ken Jarboe at 11:01 AM | Comments (0) | TrackBack
December 4, 2007
Infrastructure
Infrastructure is still a large competitive advantage in the intangible economy. See this story about New York - Delays erode competitiveness of New York airports - International Herald Tribune:
The growing number of delayed flights at Kennedy International Airport and the region's other major airports has cost passengers nearly $200 million in lost productivity this year, says a report released Sunday by the New York City comptroller's office.
The increase in delays has also cost the airlines more money for fuel and wages, interfered with delivery of air freight and increased pollution in neighborhoods near Kennedy, says the report, a copy of which was provided to The New York Times.
Taken together, the problems are chipping away at the city's competitiveness and could drive away some companies, the report says.
After all, even in the I-Cubed Economy, you still have to be able to get around.
Posted by Ken Jarboe at 12:21 PM | Comments (0) | TrackBack
Indian pharma
Indian pharmaceutical companies are making inroads in the global industry, not just in generic drugs (although that is a large part of their current success). There moving into other parts of the value network, according to Pankaj Ghemawat in Big Pharma’s Eastern Sunset:
In addition they engage in a variety of related activities other than drugs manufacturing:
&bull Contract R&D: Instead of simply engaging in contract manufacturing, a number of Indian firms are also undertaking contract R&D for Western manufacturers. Such an approach focuses on the largest arbitrage differentials in the sector. Pfizer estimates that Indian chemists make about $5 an hour, versus more than $50 an hour for U.S. scientists. Thus, in early 2007, Nicholas Piramal and Eli Lilly signed an agreement under which the former will be responsible for the global design and execution of pre-clinical and early-stage clinical work for some of the latter’s new drugs.
&bull Clinical trials: A new medicine must go through clinical trials — the final and most expensive stage of trials — on a carefully selected sample of patients. These trials have also attracted great attention — from drug-industry arbitrageurs. Forty percent of all clinical trials are now conducted in poor countries. India attracts particular attention because of a large supply of patients and of English-speaking doctors.
&bull IT-enabled services: India has also been successful as a destination for IT-enabled services, accounting for nearly half of total off-shoring activity in 2005. As a result, the pharmaceutical sector has shown great interest in exploiting its potential to contain the surging costs of data management and informatics support during the drug development process in areas such as data entry, database management and trial study design, customer support services and data analytics.
As I'm mentioned before, India is attempting to move toward becoming a Knowledge Economy. The pharma companies are certainly headed that way. The nation itself has a long way to go -- much of the country is still poor and agricultural. But the part of India that is competitive in the modern economy is huge -- and will continue to present both challenges and opportunities for the US.
Posted by Ken Jarboe at 8:38 AM | Comments (0) | TrackBack
December 3, 2007
Krugman on "financial inovation"
From today’s Paul Krugman column Innovating Our Way to Financial Crisis - New York Times on the financial mess:
How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.
O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.
But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.
So how to we facilitate the good innovations and protect from the bad? Unfortunately, no one has come up with a really good answer to that. Krugman blames that lack of regulatory oversight: "The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess." While I believe that lack regulation and oversight was a factor, I’m hesitant to jump on the “lets just re-regulate everything” bandwagon. I think we need to take a hard look at where the regulatory system and the market incentives failed (or, in actuality, drove the system to this bad outcome). Then we can devise the appropriate response.
There will be those who will fight any attempt at reform -- like there are those who are still arguing against the basic premises of Sarbanes-Oxley. As Krugman notes, the laissez faire mentality dies hard.
But his implication that regulation should get ahead of innovation is misguided. Regulation doesn’t drive innovation – but it has to keep up in tandem. And that has been one of the biggest failings of public policy recently – its inability to understand, let alone keep up, with the changes driving the I-Cubed Economy. Financial regulation is but one area of that failure. Let’s hope others don’t end up with the same costly result.
Posted by Ken Jarboe at 1:01 PM | Comments (0) | TrackBack
Patent reform - from the right
There is a new report out supporting patent reform legislation, apparently commissioned by the Coalition for Patent Fairness. Written by Georgetown University Law Professor Viet D. Dihn and attorney William Paxton. Dihn served as an Assistant Attorney General for Legal Policy in the early years of the Bush Administration and is considered one of the rising conservative legal stars. The report, Patent Reform: Protecting Property Rights and the Marketplace of Ideas argues that the current system is a court-mandated process, thereby damaging the market and, by implication actually weakening property rights:
The marketplace of ideas, like any market, is vulnerable to exploitation in the absence of effective oversight and clear governing rules. Unfortunately, the legal rules governing patent infringement—particularly those concerning damage awards—are outdated and, as a result, engender strike suits and other net loss speculative endeavors. Perhaps even more disturbingly, these legal rules actually encourage bona fide patent holders to seek judicially coerced transactions for the simple reason that the courts routinely compensate successful litigants over and above the true value of the infringed patent. The enterprising patent holder is now driven—by a system of perverse incentives—away from mutually beneficial arrangements such as voluntary licensing agreements, and toward more profitable holdout positions anchored by judicial fiat. This devolution is hardly what the Framers or Congress intended for the patent system.
The authors also use an argument that I have also used for clearer patent rights: that patent holders and investors need unambiguous title.
The patent system cannot work if the personal property right embodied by the patent is ambiguous. An inventor’s property right is most valuable and best protected when the right is clearly defined. Indeed, our legal system recognizes this in other contexts by accepting that disputes are inevitable in any system with multiple rights holders, and by developing mechanisms to allow challenges to property rights that clarify the owner’s interests and resolve any competing claims to it. By providing a forum for resolving competing claims, properly designed legal procedures eliminate the uncertainty surrounding the owner’s right, making the title more transferable, and, consequently, more valuable.
For example, in traditional real property law, surveyors and others seek to describe the parcel of land so that an owner’s right is fully captured by the title. An owner can bring a quiet title action to resolve challenges where the title to the property is ambiguous due to a competing claim of adverse possession, a surveying error, or the assertion of a tax lien. Thus, the legal system resolves disputes by determining who rightfully has title to the property, and eliminates uncertainty as a result. In turn, this encourages the owner to develop the land because certainty reduces risk, and decreasing risk lowers the cost of capital. In addition, by conveying unambiguous signals, clear title serves as a deterrent to abusive litigation by reducing the likelihood of success of unmeritorious, competing claims.
The real estate market has interesting parallels here, especially on the investor/lending side. If I can't show clear evidence that I actually own my house (or the Brooklyn Bridge for that matter), how am I able to use it collateral on a loan or securitize it? Of course, other factors are holding back patent securitization -- such as the lack of a central clearinghouse of who has what secondary claims on a patent ("prefecture" to use the legal term). And right now, real-estate backed securitization is revealing all its flaws and downsides.
But securitization of patents and other intangible is only a matter of time. And patent reform would move the process forward. More on this in the forthcoming paper on Intangible Asset Monetization.
Posted by Ken Jarboe at 11:16 AM | Comments (0) | TrackBack