February 2008 Archives

Don't count on those service jobs

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The Christian Science Monitor has an amusing story on Robots set to overhaul service industry, jobs:

As a growing number of robots become capable of working alongside humans, the service industry may face a pattern all too familiar in the manufacturing sector: robots replacing humans in jobs.

"The service sector, which is a gigantic part of the employment landscape in the United States, is inevitably going to be a place where you can replace millions of people with robots that work 24/7 for less money," says futurist Marshall Brain.

The story is mostly about the emergence of "autonomous mobile robots", such as those which deliver supplies and meals in hospitals. But as the story points out, service automation has been going on for many years:

Though they might not look like robots, automated checkout lines at grocery stores or touch-screen check-in kiosks at airports are the tip of the service industry's robotic revolution.

Just another illustration of what Levy and others have pointed out: if your job can be routinized, it can either be automated or done by someone in a lower wage area following instructions.

(See also a posting from a couple of years ago on jobs in the intangible economy).

A different type of "gown"

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In yesterday's posting, I talked about the role that universities play in a local economy -- and the trend to globalization. This week's Economist had a similar story about another local institution: heath care. According to the piece (Cities and hospitals | Mayo with everything), large institutions such as the Mayo Clinic in Rochester Minnesota and the Cleveland Clinic are major players in economic development:

The size of the health giants ensures that their reach extends far beyond the examination room. Each, for example, has made its city something of a destination for “health tourists” (people who come for operations or check-ups) and conferees. Rochester received 2.5m visitors in 2007; about 70% of these came to visit Mayo. At the last count, Rochester had the same number of hotel rooms as nearby Minneapolis, which is about four times as large.

The Cleveland Clinic has taken on many of the traits of a hospitality group. Its main campus served almost 3m patients in 2006, bending over backwards for them. A posh international centre offers translators, coffee and foreign newspapers. The clinic owns three hotels and lets the InterContinental hotel group manage them. The most expensive hotel, built in 2003, has space for conferences and plush suites, popular among royal patients from the Middle East.

In addition to importing visitors, each hospital has turned its city into an exporter of sorts. Each is spinning off technologies and start-ups. Mayo has hospitals in Florida and Arizona. The Cleveland Clinic has begun to offer management expertise, for a fee, to a handful of hospitals around the country. It already has facilities in Florida, a “wellness centre” in Toronto and projects under way in Abu Dhabi and Vienna. Cleveland's manufacturing base may have declined, but its main commodity in future may be cardiac expertise.

That can give rise to a different form of town/gown conflict:

For all this activity, community relations remain a work in progress. Mayo has dominated Rochester for so long, donating to a host of local programmes, that the mayor—himself a former Mayo employee—calls the clinic “a gorilla, but...a very nice gorilla”. The Cleveland Clinic's relationship with its city is more complex. Cleveland is much larger than Rochester and much more racially diverse; the city has an industrial hangover and the attendant headaches of poverty and urban decay. The clinic itself sits in a poor neighbourhood where few employees live, preferring to drive in from the suburbs.

. . .

Much energy is directed towards education, through gifts to local schools and programmes to teach students about careers in health care. The premise is that the hospital cannot succeed without a successful city. “Our future”, Dr Cosgrove [head of Cleveland Clinic] has said, “is intimately tied with the future of Cleveland.” And, increasingly, vice versa.

Of course, this last quote brings immediate comparisons to the universities. This is especially true given the fact that these health institutions are also branching out into other geographical regions. Then add in the rising trend toward a reverse medical tourism. In the past, rich foreigners (and others) came to places like the Mayo Clinic for health care. Now, middle class American's are going overseas (see earlier posting.)

There is yet another wrinkle in the “health institution as economic driver” story. A few years ago, I had a conversation with someone who was involved in city finances. He was very interested in what I thought about the trend to telemedicine. I told him I thought it was great. It could cut health care costs and provide care in underserved areas because people wouldn't have to travel to a centralized health care facility. That was exactly what worried him. If telemedicine reduced the need for large centralized health care facilities, many urban areas might suffer -- since these institutions are often the largest employer and the economic base for many cities now days.

So, as much as I agree with the description of the current situation in the Economist’s piece, I can’t help but think it may be a story about the past not the future. Mayo Clinic is to Rochester MN what US Steel was to my small home town in northern Michigan, or what the auto industry was to Detroit. As the I-Cubed Economy evolves, are these large institutions still as relevant as they once were? Granted, economies of scale and scope will still be important in some areas. But the nature of production is changing. We still don’t understand very well the role of agglomeration in this new system. Large institutions could decline, but geographical economic clustering could continue – ala Marshall’s “something in the air” comment. Or the “death of distance” decentralization could be the rule. More likely, both will happen as we mix and match the organizational structures to the specific economic production situation and business model.

That is one of the things that will keep the evolution of the I-Cubed Economy interesting.


Town and Gown

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There have been tensions between town and gown since universities first came into existence. In more recent years, communities have come to appreciate universities as a major driver of economic development. Any basic primer on technology-led economic development stresses the role of local universities in both creating a skilled workforce and in spinning off new companies. (See the State Science and Technology Institute for resources on tech-led economic development.) So this story in today's Wall Street Journal caught my eye -- Colleges Teach 'Urban Development 101' - WSJ.com:

Universities, increasingly, are extending their reach to off-campus development in an effort to give their surrounding areas and town centers a vibrant and modern feel. In the process, they are becoming major drivers of economic development after concluding that their fortunes are directly tied to those of their cities.

The story describes a couple of major real estate developments by U Penn, U Maryland College Park and Case Western. Interesting, but not new. One of the major town/gown frictions has always been the universities' real estate expansion. As the story notes:

Neighbors also eye some expansion projects warily, such as New York University's proposal to add six million square feet to its campuses in the next 25 years, half of that in Greenwich Village. "There are more and more parts of the neighborhood where you feel like NYU is the sole defining entity, and that footprint is growing and growing," says Andrew Burman, executive director of the Greenwich Village Society for Historic Preservation.

What really intrigued me, however, was the statement that universities have concluded that "their fortunes are directly tied to those of their cities." That is debatable. More and more top universities are globalizing (for example, see U.S. Universities Rush to Set Up Outposts Abroad - New York Times and California universities take globalization of business education to new level - International Herald Tribune). As this trend continues, there is a real danger of localities becoming wary of general support for local institutions of higher education. After all, why support those institutions with tax dollars for activities that don't directly benefit the local community. Universities are going to have to walk a careful line between turning themselves into a footloose global institution and cultivating their local roots. Not to say this can't be done. But it does raise a new challenge - and set of issues -- in the old town/gown saga.

Oil and the stock market

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On Feb. 19, the Wall Street Journal ran this story -- Today's Markets - WSJ.com:

Crude's surge to a record over $100 a barrel quashed a daylong stock rally, as investors unloaded consumer stocks that may suffer as everyday Americans spend more at the pump.

Today, the Journal is running this story -- Today's Markets - WSJ.com:

The market got a boost from a stock-buyback plan at International Business Machines and solid gains in the energy sector, which benefited from crude oil's return above $100 a barrel.

So, on the 19th oil, at $100 a barrel is a market negative; on the 26th, oil at $100 a barrel is a market positive? Or, is there some intangible -- like market confidence and herd behavior -- at work here?

The traveling band

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This from the Times of London earlier this month -- Search goes on for cheapest labour - Times Online:

The deindustrialisation of Western countries has led to multinational companies trawling the world like a “travelling band” in search of cheaper labour, according to the chief executive of Alcoa.

Klaus Kleinfeld said that there had been “fundamental changes” in where and how firms sought blue-collar labour. He said: “Those types of changes were probably seen first when there was a big debate around the deindustrialisation of Western countries, and interestingly this seems to continue.

“You actually have labour-intense industries very often that moved away from the US to Mexico, and if you go today to Mexico you’ll see that there are industries that have moved away from Mexico to SouthEast Asia.

“So it looks like it’s a travelling band almost that goes around the world and always looks for ‘where can we get the additional cost benefit from lower labour costs?’ A very interesting and very critical development, but one that we have to accept and probably have to live with.”

Rare for the CEO of a major company to admit this.

Improvisation

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In keeping with my earlier global history theme, one of the other books I've just finished is Timothy Brook's Vermeer's Hat: The Seventeenth Century and the Dawn of the Global World. I won't go into a description of the book - you can read the reviews in the Washington Post. Suffice it to say that the author uses Vermeer's paintings as device to discussion the newly emerged global interconnections, especially between Holland and China. There is one quote, however, that deserves special attention. Brook is seeking to place the 17th Century in context. He argues that it was one of "second contacts" -- where both sides were negotiating the relationship. As he puts it,

The age of discovery was largely over, the age of imperialism yet to come. The seventeenth century was the age of improvisation.

That description -- the age of improvisation -- might well describe our current situation. The industrial age is gone, the information age has not yet fully arrived. Our economy is in flux; our economic policy deficient. We are searching for an effective macroeconomic policy: at a time of record government budget deficits and historically low interest rates, we are falling into recession. Our policies to cope with globalization are inadequate at best (a miserly level of funding for an overly narrow trade adjustment assistance program) and – more to the point – mostly completely missing. Our technology policy has sunk to a level where we promise to throw a few more dollars at the physical sciences, and can’t even deliver on that meager promise. Our education policy is teach-to-the-test, rather than promote creativity.

We are clearly in an age of improvisation. And that improv is not going all that well.


Competiting - Italian style

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Here is a story from this morning's Wall Street Journal -- How Small Italian Firms Married Style to Globalism:

PUTIGNANO, Italy -- For more than half a century, wedding-dress maker Giovanna Sbiroli SRL built its brand and customer base by serving the Italian market. But over the past decade, the company -- one of around 40 small wedding-dress makers in and around this remote hill town -- watched its share of the Italian market drop by 20% as Chinese imports and goods made in other low-cost countries flooded in.

"Fewer orders were coming in, and we began to realize that we were losing our customers," says Gianpiero Lippolis, a principal in the firm. "If we didn't react and attack these markets, then we risked having to shut our doors," he says.

Today, Giovanna Sbrioli exports to 18 countries, and foreign sales account for 30% of its business. Though it employs only 50 seamstresses, down from 80 a decade ago, it has made up for its smaller workforce with new technology, and annual sales have remained steady at about $7.3 million.

And that includes booming sales to China.

All is not completely rosy, however:

Even as these companies are succeeding in selling their Italian style and know-how on the world stage, they are straining to maintain their own quality and traditions at home. Most of the seamstresses in the area have 20 years of experience and replacing them is difficult. Few young women are interested in becoming seamstresses, aspiring to become designers instead. To find local talent, the companies scout trade schools, advertise in newspapers and rely heavily on word-of-mouth.

Last year, Mr. Lippolis gave 15 young seamstresses a trial run at the company but hired only two of them. "There is on-the-job training, but we can't invest time and money in people who don't show a real interest in the craft," he says. Soon he may have to start relying on immigrants from Hungary or Romania to make the dresses. But, he says, "It will still be made in Italy, always."

Can the US economy succeed following this niche strategy? Unclear. It may work for a portion of the economy but may not generate enough exports to offset our imports. It does bring us back to what Michael Porter said decades ago: you either compete on price or on premium. Those in the middle of the road are roadkill. Thus, if you can't match the "Chinese price", your only alternative is the high end model - as these Italian dressmakers have found out.


Intangibles food fight

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The new French President has stepped into the middle of a new fight over an intangible -- in this case, food. As the Times of London reports Nicolas Sarkozy loses his cool over French food:

The right way to make mayonnaise, cheese soufflé and foie gras will be protected by the UN if President Sarkozy’s latest ploy wins approval (writes Charles Bremner in Paris).

The French leader wants la cuisine française to be listed by Unesco, the UN agency, as part of the world’s cultural heritage.

At the opening of the annual Paris Agriculture Show, Mr Sarkozy said: “We have the best gastronomy in the world — at least from our point of view. We want it to be recognised among world heritage.”

Mr Sarkozy’s gesture in response to a two-year campaign by a group of leading chefs — who fear French cuisine is under threat from modern life and the global food industry — raised eyebrows because it stretches the meaning of a UN project to protect traditions in the developing world.

But, according to the Financial Times, this has not gone down well with everyone - France stirs food fight with Italy:

France's campaign to put its cuisine on the United Nations' world heritage list has sparked a transalpine war of words with Italy.

Italian farmers spurned President Nicolas Sarkozy's proposal over the weekend that France should become the first country to have its cuisine recognised as an "intangible" cultural treasure.

"With 166 food specialities recognised by the European Union, Italy clearly beats France, in second place with 156," Coldiretti, the Italian farmers' association, told Reuters.

I really think that says it all.


Lessons from JP Morgan

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Floyd Norris's column today in the New York Times - When Bankers Fear to Act - ask the key question: Where is the next J. P. Morgan?

The column is an interesting discussion of the paralles parallels with the Panic of 1907 - well worth the read.

For my own take on that see earlier postings Buffett makes a move and Buffett and Morgan

Investing in workers

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Speaking of investing in intangibles, the Knowledge@Wharton newsletter is running an interesting story/podcast on Taking Work-based Learning to the Next Level:

In the mid-1990s, a new C-suite title was born when General Electric CEO Jack Welch dubbed Steve Kerr the company's "chief learning officer." Since then, CLOs have sprouted up at major firms in several industries. But what does this new breed of "learning leaders" bring to the table that traditional human resources departments and employee training programs do not?

The article interviews three "CLOs": Ed Betof, former vice president of talent management and CLO at Becton, Dickinson and Company, who is a senior fellow and academic director of Wharton Executive Education's Executive Program in Work-Based Learning Leadership; Mike Barger, vice president and CLO at JetBlue University; and Ann Schulte, vice president of global learning at MasterCard Worldwide.

The bottom line is that companies are taking their skills development activities much more seriously:

Knowledge@Wharton: Historically, Human Resources departments have been in charge of programs that enhance employees' skills, such as on-the-job training and tuition reimbursement. Why is there a need for a separate role that's wholly dedicated to learning?

Schulte: Well, I think that in the environment that we're in today, identifying the skills and the competencies that are necessary for an organization to be successful is a critical first step. Once those competencies have been agreed upon at a strategic level by the organization, the learning department and the learning leaders can come in and provide a variety of different interventions.
In the old days, as you referenced, when training existed in the HR department, a lot of times those interventions were limited to a class of some sort. Today, we talk about all different sorts of ways to help employees build their skills and become continuous learners, so that they can continue to contribute to the strategic goals of the organization.

Barger: I think the evolution of the learning function has moved more from a training and skills delivery function to more of a performance engineering function. Our job now is directed much more at improving frontline performance -- again, connecting that performance to business improvements, which is considerably different than I think what HR and training used to do. I think now our energies, as I mentioned before, are really directed at driving performance improvement through all levels of the organization.

Betof: One thing that I would add is, in addition to addressing the skills, knowledge and talent needs for today, the chief learning officer and the functions that they lead are responsible for anticipating and working with other leaders in their organizations to anticipate the skills, the knowledge, the talents necessary next year, three years and even five years, possibly even beyond, depending on the type of organization. So, it should be just about be impossible now, going forward in very contemporary organizations, to have a strategic business plan without a strong talent and talent learning element -- not just hanging at the end of that plan, but integrated into the fiber of the strategic plan.


And so what is the pubic policy to encourage such activity? In some case, companies understand that enlightened self-interest dictates that they continually train their workforce. Much of this is in firm-specific knowledge. But some of it is in industry-specific or even general skills. Here we run into the free-rider problem. Why should I train workers who can just take that skill to some other company. In some cases, there is an IP solution -- a non-compete agreement. But those have their own problems.

A free-rider problem has generally been accepted by economists as a market failure - where government intervention is acceptable and appropriate. In addition there is the spillover effect where general social welfare is increased by an increase in this private activity, thereby justifying public investment.

In this case, some have suggested a knowledge tax credit. Essentially this is an expansion of the research and experimentation tax credit -- another activity with spillovers to both other companies and to society at large -- to training activities.

There is another argument for the knowledge tax credit. We have long understood that increased private investment in plant and equipment is necessary for continued economic growth. As a result, there are various tax incentives for investment in equipment--including in the recent stimulus package. So why would we treat our people -- which everyone says are companies' most important asset -- worse than equipment? If a tax incentive for investment in machinery is appropriate, so is a tax incentive for investment in workers. It is as simple as that.


Investing in a real intangible

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It is generally supposed that, with most investments, the investor knows something about what they are getting -- even if it is a highly complex financial instrument that is multiple derivatives away from a hard asset. Even in venture capital, there is an idea -- not withstanding the fact that VCs will tell you that they invest in people not necessarily the idea. Now a new investment vehicle which invests in the pure intangible of the fund manager.

As the Washington Post reports The New Way To Make Deals: Blank Checks:

Also known as special-purpose acquisition companies, or SPACs, blank-check firms raise money by selling stock to the public and then scouring the world for businesses to buy. They are the current rage among dealmakers, but have drawn some skepticism from critics who say investors don't know what they are buying when the SPAC goes public.

In many ways, blank-check companies are bets on the dealmaking prowess of their founders. In this case, investors are counting on the connections that Kemp, Aaron, Tavares and Cuomo bring.

"The more I looked at it, the more I realized that the potential for sports properties and entertainment in a global economy is huge," said Kemp, who runs Kemp Partners, a Washington-based investing firm, and is chairman of Sports Properties. "SPACs are hot."

The New York Time's DealBook blog explains - Million to Burn, With a Catch:

Here’s how it works: Average Joe buys shares in an initial public offering for an investment company with no assets to speak of other than the pot of money from the I.P.O. The company’s sole mandate is to make one big acquisition. Average Joe has no idea what it will buy. And frankly, neither do the folks running the investment company. It’s a blind bet that the Masters of the Universe will live up to their name.

But, haven't investors been doing that forever? Isn’t that what the “blind trust” is all about? And how many investors look beyond the historical rate of return in their mutual fund to analyze the portfolio?

Investing has always been about intangibles – especially that intangible of competency. The only question in my mind is not about the blind nature of the bet – but how quickly these things can blow up.


Patent reform update - about the bill

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Last week, Senators Patrick Leahy and Orrin Hatch (the Chairman and Ranking Member of the Judiciary Committee, respectively) published an op-ed in the Washington Times - Meaningful patent reform. The piece defends their bipartisan work on the bill and ends with this:

As legislators, we know we are headed in the right direction when everyone is complaining that the entire bill is not going their way. We see this as a necessary, albeit somewhat difficult, part of the legislative process. But we welcome it. But at the end of day, we are confident that we will resolve the remaining issues in ways that should make everyone comfortable and will ensure final passage.

The Senate has a tremendous and historic opportunity — and a constitutional responsibility — to further strengthen our nation's competitiveness through meaningful patent reform. Now is the time.

Sound like they are building the case for moving ahead soon. I hope so.

The downside of those financial innovations

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Steven Pearlstein lays out the problems with the decade of financial engineering -- - Time for Wall Street to Pay - washingtonpost.com:

As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering -- or perhaps rediscovering -- are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.

For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.

They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.

They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.

They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.

They have given traders a greater ability to secretly manipulate markets.

They have given corporations clever new tools to hide risks, liabilities and losses from investors.

And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.

But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.

For when you look over the long term, at the good periods and the bad, it is obvious that the pay collected by these masters of the universe has been grossly excessive -- out of line with the personal financial risk they have taken, out of line with their skills relative to the next-best performers and certainly out of line with the returns earned by investors.

So our task as we look to incorporating intangibles into the financial system is to avoid this pitfalls. It will be a challenge, to say the least.

Rethinking business method patents

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From today's Wall Street Journal -- Court to Re-Examine Method Patents:

A federal appeals court in Washington has decided to reconsider the boundaries for so-called "business-method patents," a controversial type of intellectual-property protection given to methods and processes used by insurance companies, banks and securities-traders, among others.

The Court of Appeals for the Federal Circuit, which hears appeals from lower courts and decisions of the Patent & Trademark Office, said Friday that it has decided on its own to hear the case en banc, or by all 12 of the court's judges. In its order, issued Friday, the court stated it would re-examine a landmark 1998 case, State Street Bank v. Signature Financial Group, which largely paved the way for the creation of business-method patents.

This could dramatically alter the landscape. For a more detailed discussion, see the Patent Law Blog (Patently-O): Bilski: Full CAFC to Reexamine the Scope of Subject Matter Patentability.


The role of the global corporation - hyperpower glue?

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I've just finished reading Amy Chua's Day of Empire: How Hyperpowers Rise to Global Dominance--and Why They Fall. The thesis is that over the course of history, there have arisen a few "hyperpowers"--nations which overwhelmingly dominate the rest of the world at that time. The United States is the latest of these hyperpowers. Key to the rise--and fall-- of these empires has been diversity and tolerance, especially in order to utilize and incorporate talent from subject peoples. In the case of the US, it is not the incorporation of subject peoples, ala the Roman Empire, but the openness to immigration which supplies this talent.

While she mentions at the problem of forging a unified identity, it is not until the end of the book that she get around to discussing the most important element - what she calls the problem of "glue." In other words, for any of these hyperpowers to sustain themselves, there must be something that holds them together. In the case of Rome, this intangible was Roman citizenship. When this glue disappears, as the case of Indian leaders finally rejecting the British Empire after World War I, the empires crumble.

The challenge facing the US, as she sees it is maintaining some glue. This is especially problematic as components of the American hyperpower system are outside of our boundaries. Unfortunately, this is the weakest part of the book. One suggestion she raises is that multinational corporations and outsourcing are really a form of glue:

The most successful hyperpowers of the past invariably found ways to co-opt and enlist the services of local elites, providing these elites with a stake in the hyperpower's success and a sense of identification with its institutions. This "glue" was essential to their strength and longevity. America, as we have seen, does not have a foreign legion or civil service that it can staff with native-born populations. It does, however, have Google India and Microsoft Ukraine, which can serve as twenty-first-century analogs. If America cannot give foreigners prestigious governmental or military positions-as Rome and, to some extent, Great Britain did--it can give them prestigious and lucrative positions in its corporations.

Not every outsourced job will produce the "glue" that America needs; it is much debated whether low-wage garment workers at American-owned factories in Guatemala feel on the whole stronger or weaker ties to the United States as a result of their employment. But for those foreigners who obtain well-paid jobs in American-owned enterprises, and especially for those who become managers and executives, U.S. multinationals can unquestionably provide people outside the country's borders with a sense of gain from America's prosperity, a real stake in America's continued growth, and an affiliation with America's institutions. It is no coincidence (although other factors of course contribute as well) that India, one of the chief beneficiaries of U.S. outsourcing, is also one of the few countries in which popular attitudes toward America have remained strongly positive.
(Days of Empire, p. 340)

This raises an intriguing question, however. Multinational corporations are attempting to shed their "multinational" identities, which still imply home and host nations. They are rapidly becoming (or trying to become) "global enterprises. Or at least formerly US based companies are seeking this path. As Sam Palmisano, CEO of IBM recently put it in a Wall Street Journal interview "Spinning a Global Plan", "If you're going to be a global entity, you don't want to be viewed as a foreign multinational."

This is not to single out IBM. Few US-based companies have worried more about and done more to promote US economic competitiveness. But IBM sees itself as naturally evolving into a global enterprise.

If this is the direction corporations are headed, what is it that they supposedly are holding together when they act as glue? Does the Indian programmer who becomes an IBM manager gain a sense of sharing in American prosperity or IBM's prosperity? Does the Germany manager gaining a taste for that American institution, the Super Bowl, rather than the World Cup? Are the emerging global enterprises the glue that holds the American hyperpower together? Or are they, as the critics of global capitalism and the multinational companies might claim, themselves the next hyperpower?

I don’t have the answer to these questions. And I don’t know if companies could even play any role as a hyperpower. I do know that there is more and more concern about the nexus of corporate and country interests. Just yesterday, in two separate meetings on two separate economic topics, someone raised the issue. Clearly, no one believes the old saying "what is good for GM is good for the US." It may not have been really true when it was first uttered. But it typified a more nation-based corporate mindset. That mindset is long gone - for good or ill. In its place is something we have yet to truly understand.

Ms. Chua's book touches upon this topic in an interesting way. Having laid out this interesting thesis, I hope she will take the next step in her analysis. Otherwise, I’m afraid that her thesis may have been overtaken by the changing reality.


A city of two tales

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Interesting juxtaposition of stories today on the latest economic development report card from Silicon Valley. Here is the Wall Street Journal, stressing the economic recovery of the area, in part due to more attention to alternative energy industries--Silicon Valley Continues On Economic Comeback:

Silicon Valley continued its economic revival last year by adding nearly 30,000 jobs and raising its median income levels, but the nation's technology capital is experiencing some instability as the national economy struggles.

And here is the story in the New York Times -- Silicon Valley Losing Middle-Wage Jobs:

Silicon Valley is in danger of creating its own digital divide.
The California region is losing its middle-class work force at a significant rate, according to an annual report that tracks the economic, social and environmental health of the region that is the nation’s technology heartland.

Note: both stories talk about the difficulty of middle-income workers in the area and about the economic vitality of the area, due in part to investments in "clean tech." So, you may want to read the report -- Silicon Valley Index -- for yourself.


Securitization on hold; licensing moving forward

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Speaking, as we have been over the past few weeks & months, of turmoil in the financial markets, here is an example of why we need efforts to calm the jittery markets. While the monetization of an intangible asset may have boosted a presidential candidate (see earlier posting), at least one intangible securitization deal is on hold. Last year, when the private equity group Terra Firma bought out the record company EMI everyone expected that the EMI music catalogue would be securitized. Terra Firma would sell bonds backed by the future royalty rights in order to pay for the acquisition of EMI. Earlier this year, however, the Time of London reported that this plan is on hold (see Trouble at EMI - Times Online). The reason: a frozen market.

However, last week EMI announced it is going ahead with another monetization option: licensing. As reporting in the Telegraph

EMI has struck a deal with London-based Ricall, which is poised to launch several EMI websites around the world allowing music-hunters to license its music much more easily.
This is a consumer not buying a song; this is selling the rights to use a song to advertisers, TV producers and computer games makers. It is exactly the type of revenues which would have been used to back the bonds used in the securitization.

No, I am not advocating that we need to get the securitization market back on track in order to finance more leveraged buy outs. I am advocating that we need to get the securitization market back on track to open up a whole new way of financing innovation and economic transformation.

In large part, we also have to set new standards (see the Buffett posting earlier today) so that ordinary investors feel safe to get back into the water. Until we do that, intangible securitization will be a high-end investor’s game with the vast majority of investors (and companies seeking funds) locked out.

More on this later when we release our next Athena working paper: Monetization of Intangible Assets.


Update on copyright for fashion design

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In a number of earlier postings, I raised the issue of copyright for fashion designs. Yesterday, the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property held a hearing on the topic. According to Women's Wear Daily:

A bill that would put more teeth into copyright protection for fashion designs that is trumpeted by the Council of Fashion Designers of America has been stuck in committee because of industry infighting. On Thursday, the pro-and-con cases were presented before a House committee by Narciso Rodriguez and the owner of a California apparel firm, respectively.

The CFDA is trying to bridge the divide with the rest of the apparel industry and has held discussions with the American Apparel and Footwear Association for over a year, according to the designer and written testimony from Kevin Burke, the association's president and chief executive officer. The AAFA represents most of the industry's major brands and companies.

Rodriguez, who claimed knockoffs of his designs take away millions of dollars a year from his business, told lawmakers he is "hopeful" the two associations will reach an agreement within a month on the language of the bill regarding the scope and risk of litigation.

. . .

But the bill's opponents argue that inspiration will be stifled by such legal restrictions, leaving thousands of companies exposed to frivolous lawsuits that could drive them out of business.

Steve Maiman, co-owner of Stony Apparel Corp., a moderate women's and children's apparel manufacturer based in Los Angeles, carried the flag for those in the industry who oppose the bill.

"Extending the copyright laws to the fashion industry is thoroughly a bad idea,' said Maiman. "The bill is misguided and unnecessary, for several reasons."

Maiman told lawmakers the fashion industry has thrived without "help or interference" from this type of copyright law. He argued that it is "impossible to determine the originality of a design because all designs are inspired by existing designs and trends."

No word on whether the legislation will move anytime soon. According to the WWD story, "The subcommittee is expected to wait to see if the CFDA and the AAFA can reach a compromise on the acceptable language in the bill before voting whether to move the legislation."


Back story on patent reform opposition

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Earlier this month, I posted a piece on the prospects for patent reform legislation. That piece (from IP Watch) noted the Commerce Department's problems with the pending patent reform bill. Here is the back story of one provision that triggered those concerns -- Lawmakers Move to Grant Banks Immunity Against Patent Lawsuit - washingtonpost.com

Sen. Jeff Sessions (R-Ala.) has sponsored an unusual provision at the urging of the nation's banks granting them immunity against an active patent lawsuit, potentially saving them billions of dollars.

Adopted with little fanfare, the amendment would prevent a small Texas company called DataTreasury from collecting damages from banks for infringing on its patented method for digitally scanning, sending and archiving checks. The patents were upheld last summer by the U.S. Patent and Trademark Office after they were challenged.

The provision, passed without dissent by the Senate Judiciary Committee in July and inserted into legislation scheduled for a vote by the full Senate this month, is a rare attempt by Congress to intervene in ongoing litigation, congressional experts say.

The Commerce Department's letter specifically opposes this provision:

Check Collection
The Administration opposes the bill's provisions to limit remedies against financial institutions that use patented check collection systems, when such use would otherwise be patent infringement. Limiting patent holders' rights and remedies in this instance could reduce innovation in this technology area. As a general matter, the Administration does not support exceptions to patent protection based on a particular technology.

The Post story cites banking industry claims that this is a case of a patent troll - hence the need for the legislative solution.

I don't know the facts in this case. I don't know if this is a patent troll or an inventor seeking redress (the story does mention that some banks have licensed the technology while others have not). I am also a strong supporter of patent reform. But this strikes me as the wrong way to go about it.


Wall Street Journal on McCain's intangible loan

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The editorial board of the Wall Street Journal has taken aim at John McCain's loan on his donor list -- (see my earlier posting - Presidential fundraising and intangibles).

According to the Journal's editorial:

Though the bank could have conceivably sold or rented the donor list if Mr. McCain failed to repay the loan, the market value would have been significantly less than with the Senator throwing his political weight behind it.

The strong implication of the editorial being that this was ethically questionable.

Of course, the real reason for the editorial has nothing to do with lending on intangibles. It is just an opportunity for the Journal's editorial board to tweak McCain about something they hate - campaign reform:

We'll assume none of Mr. McCain's fund raising is "influence peddling." But imagine how much more open and transparent campaign finance would be if reformers like Mr. McCain hadn't built our current maze of fund-raising and spending limits.

Open and transparent? You mean like the money bagmen from the good old days of unlimited and secret spending? Having to list something of value as collateral is, in my mind, a much more transparent system that the wild west of buying campaigns that the Journal seems to advocate.

At least the Journal recognized that the donor list was of some value. That is a step forward in understanding the importance of intangible assets.

December trade in intangibles - and 2007

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The US appeared to get a valentine this morning, as the BEA trade data showed a big drop of $4.3 billion—down to $58.8 billion in December from November’s $63.1 billion in November. The Wall Street Journal noted that "the December deficit was smaller than expected by Wall Street. Economists surveyed by Dow Jones Newswires estimated a $61.70 billion shortfall." For the year, the deficit is down $46.9 billion from 2006.

However, on closer inspection, this rose still has some thorns. Even with the drop, the trade deficit is running higher than October (although less than the monthly average for 2006). The dollar amount of oil imports continued to grow, even though the volume decreased. The deficit with China also continued to grow.

Our intangible trade balance in December grew slightly by $38 million to $10.25 billion as exports increased faster than imports (see chart 1 below). Overall trade in intangibles continued to grow, as every category—imports and exports, royalties and business services—grew. (Note: the BEA reports that “services” exports decreased. This is because the definition of “services” includes travel, tourism and transfers under U.S. military sales contracts, which we excluded from the definition of intangibles – see below.)

Data for the entire year of 2007 shows strong growth in intangibles trade (see chart 2 below). Our surplus rose by over $14 billion to $121.3 billion. Again, every category—imports and exports, royalties and business services—grew. Total trade in intangible grew by $47.7 billion to $440.9 billion. The percentage of intangible trade in our total international trade has been increasing—although it dropped and recovered during this decade.

The deficit in Advanced Technology Products took a dramatic drop in December to “only” $2.8 billion, as imports declined dramatically and exports grew. The rise in exports and the drop in imports was mainly in the information and communications technology (ICT) area, with smaller declines in imports and rises in exports in life sciences and opto-electronics. Flexible manufacturing also saw increased exports. 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.

Intangibles trade-Dec07.gif

Intangibles trade-2007.gif

Intangibles trade-2007.gif




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.


Credit crunch woes

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And if you don't think that restoring confidence to the credit markets is important -- read this story -- Credit Woes Hit Funding For Loans to Students - WSJ.com:

The credit crunch that has so far caused more than $100 billion of losses for big Wall Street investment firms now extends to students in Michigan, and it could soon hit many other borrowers, ranging from California museums to the prestigious Deerfield Academy prep school in Massachusetts.

Yesterday, the Michigan Higher Education Student Loan Authority, a state agency, said on its Web site that "due to the current and unprecedented capital-markets disruption" it will stop making loans under the state's Michigan Alternative Student Loan, or MI-Loan, program. More than 100 Michigan colleges and universities participate in the program.

Can anyone think of a more important intangible asset than education? So when the credit market turmoil means that young people might not be able to go to college, we have a mess on our hands. A really big mess. One that doesn't just create pain today; it threatens our economic future.

Buffett makes a move

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Last month, I speculated that Warren Buffet might be able to play the famous role of JP Morgan in calming financial jitters. Yesterday, that happened—sort of. In an interview on CNBC, Buffett announced that Berkshire Hathaway is willing to reinsure the municipal bonds currently backed by MBIA, Financial Guaranty Insurance and Ambac (the three big monoline insurers). (See DealBook - New York Times for links to the video and transcript.) And the stock market rallied.

Let’s not get too excited about this, though. The move is specifically aimed at the municipal bond market. As such, it may help clam jitters in that market. A Wall Street Journal story notes:

"Within the municipal-bond market it would be a positive," says Dan Solender, head of the muni-bond investment team at Lord Abbett & Co. "The market is trading right now as if there is no value to the insurance, and if [Mr. Buffett] came in and reinsured them, then they would have their triple-A rating back."

But, as the Journal story points out, the deal won't necessarily help the current monoline insurers, as the "offer to hive away their low-risk muni businesses would leave them with little more than risky, complex debt securities backed by deteriorating mortgage debt."

One analyst, quoted in the New York Times put it this way:

“Essentially, if any of the companies were to take him up on this offer, it would be almost them waving a white flag saying that they are done,” said Rob Haines, an analyst at the research firm CreditSights. “It does not make sense to give up what is the good part of your business.”

In my posting last month, I pointed out that a key factor in the credit market meltdown has been the loss of confidence in the underwriting standards. Investors don't trust the current system. Because of this, Buffett has the opportunity not only to calm the markets but also to catalyze fundamental long term change. If he gets into the bond insurance business—beyond taking over some existing policies on municipal bonds—he is likely to set very strong standards. Those standards may be just what the market needs right now.

So, a small step was taken yesterday—with a very smart businessman looking to skim off some cream. It was neither the white knight to the rescue (the positive spin) nor the monoline investor bailout (the negative spin) that some may have hoped for. But it was a cautious step in the right direction.


Defining innovation at Davos

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Highlight from the World Economic Forum session on Defining Innovation:

• The innovation-driven corporation produces 20-50% more results than firms not dedicated to innovation.
• How to innovate is in many senses less complicated than discovering what to innovate.
• The question asked is the most important step, not the answer. Without the right list of challenges, innovative talent is wasted.
• The tipping points of innovation are usually cultural.
• Entrepreneurs succeed when they address higher goals.
• Sometimes "de-innovation" – doing something with nothing, without artefacts – is what is called for. Less can be more and KISS (keep it simple, stupid) can result in wider dissemination of the new.
• The public posting of problems, the most challenging puzzles, will attract responders who will solve them.
• To encourage innovation, trust the talent and "get out of the way".
• Web collaboration is distributed collaboration. Open source results in robustness but not innovation.
• Creating prizes for innovation within a genre (blogs) or a topic (healthcare) will generate innovation (in accordance with the "if you build it, they will come" principle).
• Disruptive innovation most often comes from reframing the system and/or space.

For me, the most important message from the summary of this session was stated in the intro: innovation is not about technology, but about answering "what if" questions.


The Chrysler plan

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In an earlier posting, I talked about Steven Pearlstein's comments on how the emerging business model for the I-Cubed Economy is based on smaller, rather than bigger. Well, at least one company may be taking that advice. According to this morning's Wall Street Journal:

Chrysler LLC is laying out a turnaround plan based on a radical idea: offering a smaller number of models will lead to bigger profits.

Over the next three years or so, the closely held auto maker plans to drop as many as half of the roughly 30 models it now produces, a move likely to cut sales at least for a while. Along the way, it expects a substantial consolidation in its network of 3,600 dealers.

"We're going to be the best little car company in America," Chrysler Vice Chairman Jim Press said in an interview here.

The plan defies conventional wisdom in the auto industry and in Detroit. For almost a century, auto makers have been fixated on building greater economies of scale. The notion that bigger is better has driven each of Detroit's Big Three auto makers and most of their rivals for decades. It inspired several mergers and provided the foundation for just about every turnaround effort the industry has seen.

But the new management team at Chrysler and its advisers at private-equity firm Cerberus Capital Management LP, its majority owner, are convinced "the old rules in this industry no longer apply," Mr. Press said.

Not quite the "just-in-time, just-for-me" business model -- but far different from the old days of the Ford Rouge Plant, where iron ore came in one end and Model T's went out the other.

The Chrysler transition is likely to be painful. And I'm sure we will hear cries of "downsizing" and trying to cut your way to profitability. But in this case, downsizing might be exactly what is needed.

The real test is whether that downsizing is tied with innovation and new product development. If it is just more of the same-old same-old of cuts, cuts and more cuts, then the results will, in fact, be the same old ending: a smaller and less competitive company.

In any event, it will be a future case study of what to do -- either right or wrong.


Update on Patent Reform legislation

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From Intellectual Property Watch: US Patent Reform Legislation On Bumpy Road To Completion:

The Commerce Department on Monday sent a letter to the Senate outlining the administration’s concern over S 1145, which was introduced by Vermont Democratic Senator Patrick Leahy, approved by the Senate Judiciary Committee and, on 24 January, was placed on the full Senate calendar for consideration, possibly this month.

Claiming that US intellectual property is valued at more than $5 trillion, the administration letter said that “any changes intended to improve our nation’s intellectual property system must be made carefully and thoughtfully.”

“We recognise our patent system in the United States is the envy of the world … but it can be improved,” Jon Dudas, Commerce undersecretary and head of the US Patent and Trademark office, said Tuesday, adding that the administration has argued that innovation and competitiveness must be preserved in any reform bill.

Manufacturing, biotechnology and pharmaceutical industries, as well as venture capitalists, universities and small inventors and businesses are concerned about the measure, Dudas added.

The House of Representatives version of the bill passed that chamber last autumn (IPW, US Policy, 9 September 2008).

The administration opposes Section 4 of the Senate bill, which deals with rights of the inventor to obtain damages for infringement. The Senate Judiciary Committee’s report on the bill notes that royalties have overtaken lost profits as a measure of damages in patent cases. The panel wants to ensure judges and juries on these cases have the legal information needed to properly assess harm to a patent holder and calculate ‘reasonable’ royalties.

The piece goes on to talk about how this damages section has become the target of the opposition. So look for some battles when the bill final comes to the Senate floor. But look of those battles to be focused. That bodes well for a final resolution of the bill.


FASB fumbles

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Last year, the Financial Account Standards Board (FASB) and the International Accounting Standards Board (IASB) had begun to look at a joint research project to explore ways to expand disclosure guidelines for intangibles. Right now, we face an absurd situation where externally acquired intangibles (such as a patent) must be accounted for in a company's financial statement - but an internally generated intangible specifically may not be included. The joint project was to look at ways to fix that problem.

Unfortunately, at their December 2007 meetings, both IASB and FASB decided to shelve this project. FASB put it this way:

Agenda decision: intangible assets. The Board decided not to add a project on intangible assets to its agenda. The Board acknowledged the importance of addressing the accounting issues relating to intangible assets, noting concerns with current requirements that lead to inconsistent treatments for particular types of intangible assets depending on how they arise. However, the Board noted that properly addressing the accounting for intangible assets would impose a large demand on the Board’s limited resources. The IASB reached the same conclusions at its most recent Board meeting.

Here is what IASB said:

The IASB is contemplating undertaking an active project on identifiable intangible assets (that is, excluding goodwill) jointly with the FASB. A project proposal was developed and considered by the IASB at its meeting in December 2007. At that time, the Board decided not to add a project on intangible assets to its active agenda. The Board acknowledged the importance of addressing the accounting issues relating to intangible assets, noting concerns with current requirements that lead to inconsistent treatments for particular types of intangible assets depending on how they arise. However, the Board noted that properly addressing the accounting for intangible assets would impose a large demand on the Board’s limited resources. Instead, the Board expressed a desire that the research work begun as part of the development of the agenda proposal should continue until the Board could consider it again for addition to the active agenda. Consideration will now be given to determining the scope and a process for continuing such research work.

Both cited limited resources as a reason for shelving the project. IASB has at least expressed a wish that research on the issue continue. However, they state “the timing is uncertain.”

FASB does have a project on Determination of the Useful Life of Intangible Assets and last November put out a draft Staff Position Paper (comment period ending January 16, 2008).

This recent decision is unfortunate, indeed. At a minimum, FASB and IASB should devote adequate resources to research on the topic, in order to bring our state of knowledge to a point where guidelines can be issued.

Yes, coming to grips with intangibles will be difficult and require a major expenditure of time, effort and resources. Given the importance of intangible in the economy of almost every nation, the fact that our accounting systems are unable to account for them is simply shameful. Apparently our accounting professionals prefer living in the past, rather than face the challenges of the future.


Customization

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Here is an interesting piece of the future of customization -- Designs to Set Us Apart From the Crowd - WSJ.com:

Devotees of trendy clothes can find it tough to avoid looking like clones. But, now, designers of everything from shoes to handbags are allowing shoppers the chance to customize their products and create unique looks.

For personalization that goes beyond monogramming, we checked out Nike (www.nike.com), Converse (www.converse.com), Steve Madden (www.stevemadden.com), Oakley (www.oakley.com) and Freddyandma.com. We quickly discovered that picking out color and prints is harder than it looks. In some cases, we spent 30 minutes designing the shoes of our dreams. Still, it was pretty cool to be able to create something none of our friends would have. Just be sure you're in love with the look, since all sales are final.

I'm not sure that this is the future of shopping. But it does point the rapidly advancing capabilities as we move to the "just -in-time, just-for-me" business model.


Competiting on the high end

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For years there has been a thread of an argument about the US economy that goes like this: don't worry about those low end jobs, America will prosper as a high-end, service oriented, royalty-earning economy. While I strongly agree that the future of the US at the high end, that does not mean that we will automatically own that part of the value-web. The competition is, and will be, fierce. Case in point is this story in today's Wall Street Journal:
Engineering Jobs Become Car Makers' New Export:

For years, car makers have been slashing expenses by building assembly plants in low-cost countries such as Russia, Turkey and Mexico. Now, high-skill design and engineering operations, which have long remained in industrialized countries like the U.S., Germany and Japan, are starting to follow.

If you think that we can simply coast because of our past position as an "advanced economy", think again. Think real hard.


Confusing?

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This from a quick look at the financial news:

Worker productivity slows sharply: AP - Wed Feb 6, 10:54 AM ET
WASHINGTON - Worker productivity, the key factor in rising living standards, slowed sharply in the final three months of the year while wage pressures increased.

Treasury’s drop on productivity data: AP - Wed Feb 6, 3:11 PM ET

NEW YORK - Treasury prices fell Wednesday after a report showed workers producing at a stronger-than-forecast pace and labor costs in check at the end of 2007.

Productivity slowed sharply at a strong-than-forecast pace?

Wage pressures increased while labor costs were in check?

No wonder the markets are confused.

More budget analysis

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The State Science and Technology Institute (SSTI) (the group of tech-based economic development organizations) send out this analysis of the budget request in their weekly email:

Final Bush Budget Released: R&D Gets Boost; Economic Development Slashed
Analysts Say Request Going Nowhere

The last budget request of a lame duck administration rarely musters much attention from Congress as its focus is turned toward the next administration and, for entire the House of Representatives, its own re-election. Not one of the previous seven budgets of the Bush years has been passed on time, so no one in Washington expects this one to be the exception.

Nevertheless, the fiscal year 2009 request provides the Bush Administration one final opportunity to outline how it would like to see the federal government spend its money. As in every previous budget request from the Bush White House, that doesn’t include much for economic development programs. “Highlights” for economic development programs include:

• Every economic development program in the Department of Agriculture is either slated for elimination or deep cuts.
• The Manufacturing Extension Partnership (MEP) would receive only $4 million, down from $89.6 million in FY08.
• Grants from the Economic Development Administration (EDA) would be slashed 60 percent, dropping from $250 million to $100 million.
• SBA grant programs for entrepreneurial assistance efforts, such as the Small Business Development Centers, SCORE and Women’s Business Centers, would see a $10 million cut for a combined total in FY09 of $87 million.
• The Minority Business Development Agency, while requesting a continuation level of $29 million, would be prohibited from spending $12 million in grant funding until the last day of the FY08 fiscal year – leaving the funding extremely vulnerable to rescissions during the year.
• Community Development Block Grants would see at least a $660 million cut according to the Housing and Urban Development request.
• The Community Development Financial Institutions (CDFI) Fund would be cut to $29 million, nearly 70 percent less than the $94 million appropriated in FY08.

Whether or not this tired assault on the federal government’s role in encouraging innovation and entrepreneurship gains much traction during Congress’s budget sessions this summer remains to be seen. To the Administration’s credit, it has managed to whittle down spending on economic development. For example, in FY 2001, MEP’s budget was $107 million. The EDA budget was a whopping $412 million.

By proposing cuts or elimination, the Administration forces constituents to argue for maintaining some level of funding, rather than sustaining or growing programs. Squeezing budgets year after year, as has been the approach, means programs do not keep pace with inflation or meet the growing needs for services as the country slips further into recession.

COMPETE Research Rising as Other Fields Slip
While the president vetoed FY07 budgets reflecting increases for the science agencies as recently as December, the Administration this month is proposing similar increases for those same agencies in FY09. The National Science Foundation (NSF) and the Office of Science with the Department of Energy (DOE) both stand to benefit. Unfortunately, both increases come at a cost to other programs and line items – cuts that are probably too unpalatable for even congressional Republicans to swallow in an election year (e.g., Medicare, student aid, etc). On the positive side:

• DOE’s Office of Science would see an 18.8 percent increase to $4.72 billion. All research areas of the office would see increases ranging from a nominal 4.4 percent for critical biological and environmental research to 72 percent for fusion energy sciences. One STEM highlight of note, Workforce Development for Teachers and Scientists would receive $13.6 million, a $5.5 million or 68.9 percent increase.
• The Administration’s FY09 NSF budget request of $6.85 billion represents an increase of $789 million, 13 percent higher than the FY08 budget estimate. Research and research-related expenses account for much of this new funding, with a $772.5 million increase. Of this total, the largest program increases effect research in mathematic and physical sciences, computer and information science and engineering, geosciences, and engineering.

All news on the research side of the federal budget request is not encouraging, however. The National Institutes of Health (NIH), on the other hand, would be level-funded, further exacerbating complaints within the life science community for the slowdown in medical advances resulting from lower-than-inflation increases for the National Institutes of Health.

While the overall defense budget would see a robust boost of 8.2 percent in the Administration request, basic research investment at the Department of Defense (6.1 funds) would decline 5 percent.

Space science and engineering at NASA would experience a staggering 21 percent reduction, dropping to $8.39 billion from the FY07 total of $10.57 billion.

Digest readers looking for more information regarding the Administration’s FY09 budget request are encouraged to peruse the following sources:

White House Office of Management and Budget: http://www.whitehouse.gov/omb/budget/fy2009/
Association of American Universities: http://www.aau.edu/budget/09Summary_by_Agency.cfm
American Association for the Advancement of Science: http://www.aaas.org/



The new intangible of consumer spending

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The consumer's mindset has always been based on intangibles. For the past decades if not centuries, it has been based on spending and envy. In modern times, that spending has been fueled by debt. With the current economic and credit crunch, some speculate that frugality may be replacing conspicuous consumption as a neighborhood virtue. For example, take this story in today's New York Times - Economy Fitful, Americans Start to Pay as They Go:

Not long ago, Elena Gamble would have looked at the Cadillac parked across the street from her modest home in Elk City, Okla., and felt a twinge of jealousy.

“We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done,” said Ms. Gamble, who earns about $2,600 a month as a grievance counselor at a local prison.

Now, she and her husband — a prison guard who brings home $2,000 a month — are grappling with $10,000 in high-interest debt. They no longer go to the movies or out to eat, except occasionally to McDonald’s. They quit their Internet service. Their car was repossessed. “What we say now is, ‘If we can’t afford it, we can’t buy it,’ ” Ms. Gamble said.

And when she looks across the street at that Cadillac, her envy has been replaced by pity for the neighbor on the hook.

“I say, ‘Oh my, you’re living here, and driving that? There’s got to be something wrong,’ ” Ms. Gamble said. “ ‘You’re in debt, and you’re in trouble.’ ”

Does that mean that homemade furniture and back yard clothesline will become neighborhood chic? I doubt it. But it may mean that conspicuous consumption may be taking on a different twist – with conspicuous debt no longer carrying the cache it had. The new trick for keeping up with the Jones will be trying to figure out whether their latest triumph was bought or borrowed.


From the "if you can't beat them" department . . .

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. . . comes this story in the Economist - The pharmaceutical industry: The bitterest pill on how Big Pharma is taking on the generics:

Under American laws designed to encourage generic drugs, which save money for patients, the first generic maker to win regulatory approval for its version of any given branded drug is supposed to enjoy a six-month monopoly. This promised pot of gold was designed to support small generics firms—but Big Pharma has found a loophole. It is pre-emptively launching generic versions of its own branded pills, which wipes out those six months of monopoly profits and undermines the economics of generics firms.

Merck, a big American pharmaceuticals firm, is soon expected to launch an authorised generic version of Fosamax, an osteoporosis drug that is due to lose patent protection in February. A recent survey of global branded-drugs firms by Cutting Edge Information, a consultancy, found that a third of them had launched authorised generics between 2005 and 2007—and the number will grow to 44% between 2008 and 2010. Pfizer has set up an in-house division to handle such generics.

Brand, marketing and manufacturing capabilities may be the key to success in the drug market. It's not just patents anymore.

FY 2009 budget and government investment in intangibles

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This morning, the Administration released its proposed Budget of the United States Government. Regardless of the politics as to whether or not this particular version of the budget will be enacted or not, the document contains interesting information, including on investments by the federal government in intangibles. The documents released today do not contain a detailed or complete analysis of what we invest in intangibles assets. But it does contain a rudimentary analysis as part of the federal investment chapter (Chapter 6) of the Analytical Perspectives volume. The analysis includes investments in physical capital, R&D and education and training. Education and training expenditures include aid for higher education through student financial assistance, loan subsidies, the veterans’ GI bill, and health training programs, education programs for the disadvantaged and individuals with disabilities, training programs in the Department of Labor, and Head Start.

Last year, I used these figures to compute a rough estimate of investment in intangibles (see analysis of last year's budget submission). This rough estimate is derived by looking just at the R&D and education and training budgets. Federal government investments in intangibles peaking in 2006 in real terms. Real dollar investments in R&D and education and training grew slightly between 1968 and 2001 and then jumped dramatically. Estimated levels for 2008 and proposed levels for 2009 drop, mostly due to a sharp decline in investments in education and training, again in constant dollars.

Unfortunately, this analysis is very rudimentary and incomplete. It does not look at the education and training budget in any depth and does not include training done by the federal government for its own purposes. It does not include funding for the arts and humanities. Nor does it look at a number of other activities of the federal government that result in the production of intangibles, such as government statistics and other information services like the weather service or standards setting activities. And it doesn’t include any brand management activities, such as export promotion.

If we are to understand the I-Cubed Economy, we need a better understanding of the contribution of the federal budget to the creation and utilization of intangible assets.


Fy09Investment.gif

Update: For the politics of the budget see
White House Budget Request Expects Near-Record Deficit - WSJ.com


The White House again called for lawmakers to scrap hundreds of government programs it deems ineffective. Getting rid of 151 programs would save more than $18 billion, according to the White House. It is unclear how many, if any, of those programs Congress would be willing to cut, however.

The White House's budget request is typically declared dead on arrival on Capitol Hill and less than a year before Mr. Bush leaves the Oval Office, lawmakers were quick to dismiss the administration's most recent effort.

"This budget will be quickly forgotten," said Senate Budget Committee Chairman Kent Conrad (D., N.D.). "But, unfortunately, the President's legacy of debt will stay with us, as it is passed on to future generations. His stewardship of our budget has been an utter disaster."

Senate Budget Committee ranking Republican Judd Gregg (R., N.H.) said the president's budget isn't "serious." While quick to point out that Democrats have done an equally poor job since taking control of Congress a year ago, Mr. Gregg didn't hesitate to criticize Mr. Bush. The plan relies upon revenue from the alternative minimum tax, makes unrealistic assumptions about discretionary spending, and fails to budget for military operations in Iraq and Afghanistan, Mr. Gregg said.

"Look at the defense numbers. They are absurd on their face," Mr. Gregg said.


New studies

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A brief note on some new and interesting studies just released--

The recently disbanded Technology Administration in the Commerce Department has released a bunch of its last studies -- all commissioned and written last year. See Technology Administration Reports for links. Athena Alliance was involved in one of these, the Innovation Vital Signs Project, prepared by ASTRA—The Alliance for Science and Technology Research in America. See our paper on Measuring Intangibles: A Summary of Recent Activity.

Other studies include An Economic Investigation of the Valley of Death in the Innovation Sequence by The Phoenix Center for Advanced Legal & Economic Public Policy Studies; Barriers to Nanotechnology Commercialization by The University of Illinois at Springfield, College of Business and Management; The Emerging Clusters Project; by 1790 Analytics; and Resilient Enterprise Paradigm by the Council on Competitiveness.

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NAM's Manufacturing Institute and RSM McGladrey have a new report out on supply chain management: Forging New Partnerships: How to Thrive in Today's Global Value Chain

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Business Roundtable has a new report on competitiveness: Prospering Together: America’s Citizens, Communities and Companies (see also their press release).


The jobs numbers - the involuntary part time

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As you can expect, most economists were surprised at this morning's jobs numbers showing a net decline in nonfarm payrolls of 14,000 17,000 -- the first actual decline since August 2003. According to the Wall Street Journal (Payrolls Unexpectedly Decline, Increasing Odds of Recession - WSJ.com):

Wall Street economists had expected a much sturdier 75,000 rise in payrolls last month. Jobless claims, after all, hovered near 300,000 for much of January, well below December levels. And a report released Wednesday from ADP and Macroeconomic Advisers that attempts to mirror the jobs report signaled 130,000 private-sector jobs were created last month.

Lost in the headlines is another piece of bad news: the number of workers who are part-time for economic reasons continued to grow. As I've noted before, the growth of involuntary part time workers is a hidden factor in economic downturns in the I-Cubed Economy. So hidden that policymakers and journalists don't even talk about it -- or recognize that it is there. But in January 2008, a net 100,000 additional workers joined the ranks of the involuntarily underemployed. That should be at least as worrisome as the net 14,000 17,000 unemployed.

Presidential fundraising and intangibles

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In its last season, the storyline of the TV series The West Wing revolved around the election of President Bartlet’s successor. One episode featured the candidate who ultimately won agonizing over whether to take out a large loan back by his house in order to continue his faltering campaign. Part of the issue was whether a loser could raise enough post-election money to pay off the debt or whether he was simply signing away the family’s home.

The West Wing was always praised for its realistic portrayal of politics. Former White House and Congressional aides served as writers and consultants to the show. The idea of a political candidate taking out second mortgages is not uncommon—just as hopeful entrepreneurs often hock their houses for start up cash.

Now comes a new twist: taking out a loan using your donor list as collateral. According to a story in this morning’s Washington Post - With Crucial Loan, McCain Put His Bid Back in the Black, Senator John McCain took out a $3 million line of credit from the Fidelity & Trust Bank in the DC suburb of Bethesda, Maryland. The chief asset pledged as collateral according to the story was the fundraising list. But:

Because McCain would have to be alive to give the fundraising lists their value, [the McCain campaign's lawyer Trevor] Potter said, the campaign took out the insurance policy on him.

So in part the loan was backed by the calculation of the Senator’s fundraising prowess. This is a good example of how the value of intangible assets is link with other assets. But, as the West Wing episode pointed out, losers can have a tough time raising money – even if you are still a Senator. The donor list may have been the most valuable asset in the package even as a stand-alone asset.

The November loan came at a critical time in the campaign, when McCain was failing behind and running out of money. The infusion of funds allowed McCain to not only carry on but put enough resources in to the key New Hampshire primary to become the front runner. Bottom line: if John McCain becomes the 44th President of the United States, it will because of the monetization of an intangible asset. Think about that.

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


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