July 2008 Archives

Following up on my earlier posting, it looks like even the current USTR Sue Schwab is questioning the idea of large rounds of trade negotiations. The Financial Times reports:

She told the Financial Times on Wednesday: “It may be that this grand-scale agreements format that we have been operating under since 1947 is obsolete”, a description she quickly amended to “needs to be reviewed”.

"In the future, we could have a global trade round, but we'd probably have a building block process, agreeing on issues one by one, instead of waiting until you've agreed on everything," she said.

The WTO should try two things: first, take on smaller, more manageable legislative projects among coalitions of the willing; second, try to extend consistent rules over more of the existing system.

For the first project, it could start by gathering together the few countries that dominate world trade in services and hammering out a standalone deal in sectors where it can find convergence. Last weekend’s fruitful services talks were an encouraging sign, especially now that developing countries such as India are powerful service exporters as well as importers. The benefits, on the model of the successful Information Technology Agreement of 1996, would then be extended to all WTO members. Several parts of the Doha deal such as export subsidies and “trade facilitation” (getting goods easily across borders) might also be agreed separately.

And the Wall Street Journal also raises the idea - Trade Talks' Failure Weighs on Other Issues:

Future trade deals may focus more on narrower national interests, rather than Doha-style talks that call for countries to make concessions in one area to make gains in another. One possible model is a kind of "coalition of the willing" approach. The model is the Information Technology Agreement signed in 1996, which set zero tariffs on new technology goods for countries that signed on. About half the WTO's members have done so.

So -- maybe a "intangibles trade" negotiations?

The New York Times has discovered the issue of the involuntary underemployed -- i.e. the part-time worker -- in a nice article today entitled A Hidden Toll on Employment - Cut to Part Time:

The number of Americans who have seen their full-time jobs chopped to part time because of weak business has swelled to more than 3.7 million — the largest figure since the government began tracking such data more than half a century ago.

This is something I have been blogging on for some time -- see Job numbers look worse on July's unemployment numbers. I'm glad to see an article on this silent job crisis in a mainstream media outlet.

I will be posting a comment on the latest numbers tomorrow when the July data is released.

A couple of months ago, I posted a comment on the problems with trying to drill our way out of the energy problem. Yesterday's Financial Times ran a story about another problem with that strategy -- Warning over oil industry skills shortages:

A shortage of skilled engineers threatens to limit oil supply growth in the coming three to five years as companies struggle to develop complex new fields, the head of the world's biggest oil services company has warned.

A quick note on this morning's Gross Domestic Product data showing growth of 1.9% in the second quarter. As BEA points out, the higher growth rate compared to first quarter is due in part to increased exports and decreased imports. But this "advanced estimate" is based on only two months of trade data -- June data is not yet available. And, as I pointed out when the May trade data came out, it surprised many people who were expecting a much larger deficit. So key an eye out for the "preliminary estimate" which comes out in late August to see how much the number changes with more complete data.

Update:
It is interesting to see how the media is playing the numbers. According to the Wall Street Journal - GDP Accelerates in Second Quarter On Exports, Stimulus Spending. The New York Times had a different take - G.D.P. Grows at Tepid 1.9% Pace Despite Stimulus:

The economy grew less than expected from April to June, the government said on Thursday, and it shrank in the final months of 2007, dimming the outlook for a quick recovery.

At the same time on Tuesday when the Doha Round of multilateral trade negotiations was once again falling apart (see earlier posting), the Senate Finance Committee was holding a hearing on The Future of U.S. Trade Policy: Perspectives from Former U.S. Trade Representatives. The hearing heard from four former Trade Representatives: Mickey Kantor, Bill Brock, Carla Hills, and Charlene Barshefsky. Interestingly, all of them talked about overall competitiveness as well as trade. As Charlene Barshefsky put it:

Structural change in the global economy is creating new industries and overturning familiar old ones; outdating old domestic policies, social arrangements and elements of our trade regime; and, as China and India rise, raising questions about America’s status as the world’s economic leader.

This hearing, accordingly, is a remarkable opportunity to reflect and develop consensus on our response to a profound set of challenges. My first and most important point is that trade policy can be only one element in this response, and not the principal element. We should place national competitiveness at the center, examining our finances, our commitment to science and innovation, our high-tech and traditional infrastructure, our human resources policies in both education and immigration, and other matters. We should also restructure our domestic social contract, to remove powerful sources of anxiety, notably fear of the loss of health care, as well as to spread the benefits more equitably and mitigate the risks for individuals. Together with this, we need a battery of trade, financial and other global policies that allow us to draw maximum benefit from the global economy, tap new areas of growth, and support our goals in national security, development and poverty reduction, and environmental quality.

Mickey Kantor laid out an overview agenda:

I. Building a competitive America
  A. Renewal and rebirth of public education (K-12);
  B. Energy security and addressing global warming, climate change and environmental challenges;
  C. Rebuilding and updating our infrastructure;
  D. Emphasis on science, discovery, research and development;
  E. A sound fiscal policy.
II. Restoring a credible, open and expanding trade agenda
  A. Enforcing trade laws and trade agreements;
    (1) Vigorous enforcement of our trade laws and full use of the WTO and other dispute settlement systems;
    (2) Establishment of a trade prosecutor at USTR;
    (3) New comprehensive trade negotiations with China to ensure full compliance with international trade commitments;
    (4) Review and update all existing significant trade agreements;
    (5) Enforce legislative standards in all preference programs;
    (6) Initiate discussions with Mexico and Canada re: NAFTA, labor and environmental provisions and dispute settlement agreements;
  B. Advancing U.S. trade and economic interests
    (1) Seeking multilateral and pluralateral sectoral agreements in critical areas;
    (2) Renewed efforts to implement the FTAA and APEC;
    (3) Complete the Doha Round;
    (4) Negotiate convergence and mutual recognition agreements on a multilateral, regional and bilateral basis;
    (5) Seek to resolve problems with the pending FTA’s with the Congress;
    (6) Seek an FTA with Japan or an expanded agreement involving the Quad (Canada, the European Union, U.S. and Japan);
    (7) Opening markets for U.S. agriculture.
  (C) Fair Trade Initiatives
    (1) Passing and implementing an expanding TAA program;
    (2) Seek to abolish abuse of child labor worldwide;
    (3) Include enforceable labor and environmental provisions in all trade agreements;
    (4) Implement stronger dispute settlement understandings in all trade agreements;
  (D) Promoting developing countries access to international trade and spreading the benefits of an open, rules-based trading system
    (1) Removing barriers to entry of products no longer produced in the United States;
    (2) Provide technical assistance and training to developing nations in negotiations and in WTO processes;
  (E) Encourage presidential leadership and advocacy.

Kantor also said something that echoes what I have said about the current trade strategy:

we should begin to fashion initiatives to promote the most prominent growth industries in the United States. Industries such as biotechnology, nanotechnology, environmental controls, health care, education and financial services are prime examples. This, of course, is not to ignore the other important areas of agriculture, telecommunications and other copyright industries. The attempt to negotiate a new and comprehensive Doha development round agreement has stood in the way of sectoral agreements, which have the potential of large impacts on global growth.

. . .

Agreements covering convergence of standards, mutual recognition agreements, regulatory regimes and transparency should be pursued. As we become increasingly connected, the ability to reach understandings covering accounting standards, corporate governance and financial reporting, product standards and safety and internet protocols can have a large impact on global growth and efficiency. Our businesses, workers and investors would profit immeasurably from progress in these areas.

Fundamentally, trade policy should turn from bilateral agreements with relatively small partners toward the fast-growing industries and major economies that we can tap for growth. Among these industries are services generally, energy and environmental technologies, infrastructure-linked industries where Asian countries in particular are large buyers, and medical and health industries. Our goal should be to ensure that American-based service providers and manufacturers can supply the goods and services where demand is greatest. Major targets should include the EU and Japan, China, India, Brazil, ASEAN, the Persian Gulf and similar large developing country
markets.

A quick conclusion of the Doha Round would be a good start here, though not at all sufficient. Whether Doha succeeds or fails, we should move quickly to a new approach, based on the negotiation of plurilateral sectoral agreements among the main economies. These would seek broad liberalization of large and rapidly growing industries: energy and environmental industries perhaps first, also selected medical and health industries, based on agreement among the major players rather than requiring participation of each one of the WTO’s 153 members. The model would be the Information Technology Agreement of 1996, and the WTO’s later agreements on financial services and basic telecommunications. Here is where we will tap rapidly growing markets, and ensure that America remains a leading player in the industries that will lead the 2010s and 2020s. These agreements have the further advantage of being sectoral in nature, not country-specific, and are therefore based upon MFN policies that work with rather than against supply chains and other business trends.

It worked reasonably well for the Kennedy Round in the 1960s and the Tokyo Round in the 1970s, spottily for the Uruguay Round in the 1980s and 1990s, and is now a hindrance.

On a different point, Bill Brock made another interesting comment about job loss and insecurity:

This Congress clearly needs to think about an urgent change in the way we address people whose jobs have been affected by all these varied economic forces, not just trade.

One of the problems in doing so is that our trade adjustment assistance is based largely on giving workers some help when their jobs are affected by trade. Well, what if it wasn’t trade that cost them their employment? What if it was just the fact that Americans preferred hybrid cars to buggy whips? They are still out of work, and we need them just as much as they need a job. Why do we lead them to believe that we only care if they lost their job due to some competitor overseas, for that is at least the implicit message of our present trade adjustment assistance program?

I suggest that one critical step in a new trade policy would be to address this issue. In a world where the pace of change seems locked into ‘warp’ speed, hard‐working men and women are going to be faced with changes in their job situation time and again throughout their working lives. The studies we did when I was at Labor indicated that our youngsters coming out of school could expect to hold eight to ten jobs, and have two to three careers during their working lives. If anything, we may have underestimated the magnitude of the problem. To date, this nation has done virtually nothing to address this fact, but the loss of skills, which occurs because we do not, costs us dearly.

If we could create a far more comprehensive worker adjustment and training system, it would not only be more humane to those individuals who are suffering, through no fault of their own, but it would expedite their return to the workforce, perhaps more effectively than ever.

The US clearly needs a new trade strategy, as this hearing pointed out. The insights from these former Trade Representatives are a good start at leading the way toward the development of that new strategy -- by people who have been there and done that.

From the brand analysis blog Dim Bulb: Pick Up the Phone come this discussion of why financial analysis don't get brand value:

The financial community has always had an arms-length relationship with branding. It's slotted in as an intangible, or goodwill component on a company balance sheet, which makes it an exception to most anything else that is measured and attributed to (or debited from) estimates of corporate value.

Analysts, like the executives they haunt, like to use the word brand to reference or explain lots of things that aren't dependably explainable, like awareness, momentum, buzz, and any word that has a future tense to it. These are all reasonable, qualitative observations about human behavior and society in general, but they're certainly not primary sources of information like the other data used in financial analysis.

. . .

Brands can and should matter to how we understand and predict corporate performance, only now we’re seeing that they're just nice-to-have references in annual reports and in newspaper quotes. Now could be the time for the financial community to come up with an inventive, new definition of what goes into branding, and perhaps agree on a methodology to assign values to companies...values that are tangible useful to them, to reporters, and to the working shlubs like yours truly who buy and sell the stocks.

I agree that now could be the time for new methodologies to assign values. But we need that with all intangibles, not just brands. And that is a much more complicated undertaking.

According to a recent story in the Times of London, at least one big drug company may be changing it business model - GlaxoSmithKline to break up research and development operations:

The world's second-largest pharmaceuticals group is to abandon its big-is-beautiful model and run its businesses more like small biotech outfits.

Andrew Witty, who took over as chief executive of GlaxoSmithKline in May, unveiled the change in strategy yesterday as he said that profits had fallen from £1.3 billion in the second quarter last year to £1.2 billion this time.
The company will also make its first move into the branded generics market through an alliance with Aspen Pharmacare Holdings, a South African group, in a sign that it is trying to target emerging markets as the West becomes more challenging.

. . .

Mr Witty expressed concern for the state of the pharmaceuticals industry, saying: “I can't help but see that the sector has lower ratings by shareholders and that anxiety exists about where the sector is going.”

GSK is trying to tackle the problem by dividing its research and development, which is in seven centres, into smaller groups of up to 80 scientists. The groups will have to apply for funding to a central investment board.

Rather than the traditional model of chasing blockbuster drugs that achieve more than $1 billion in annual sales, GSK hopes that its new approach will lead to more drugs that earn a modest amount being developed by the company, reducing the risk of relying on a few big sellers.

One more example of how companies are moving away from the large corporate lab approach to a decentralized research strategy. The one thing the article doesn't talk about is the fact that big pharma has been practicing this model for years -- relying on smaller, mostly bio-tech companies to keep their product pipeline full. Looks like GSK is just internalizing what companies have been doing in their external research relationships.

It is interesting to note that part of the strategy is a link up with generics. As we discussed earlier, such a tie-up has benefits for both sides. Look for more changes in the drug industry’s business model as they work through how to compete in this new I-Cubed Economy.

The Wall Street Journal is running a story that the WTO trade talks have collapsed -- Global Trade Talks Falter. The speculation is that this was the last chance for the Doha Round (so named because the talks began with a meeting in Doha). Of course, this is not the first time that the trade negotiations have been said to be at the end. I can't count the number of posting on this blog about the "end" of the Doha Round.

Part of the problem is what the Round was trying to accomplish. Originally, the Round was supposed to be the "services round" -- the so-called Millennial Round which fell apart in Seattle in 1999. But it quickly became the "development" round at the meeting in Doha. The idea was that developing countries would gain access to markets in the developed world, especially of agricultural products. As the Journal story puts it:

The nine-day meeting, the longest trade summit diplomats in Geneva could recall, aimed at concluding a simple bargain: The European Union and U.S. would lower farm subsidies and tariffs in exchange for China, India, Brazil and other emerging economies opening up their markets for industrial goods like chemicals and cars.

More importantly, the nature of global economic activity has shifted. Let me repeat my comment back at the beginning of the Round in 2001 (in After Doha: What The WTO Is Not Talking About), many of the real issues weren't even on the table:

Slightly less than a decade ago, I played a small part in the implementation of the Uruguay Round and the birth of the WTO. As a Senate trade policy staffer, I had fly-on-the-wall view of the pushing and shoving. At the time, I could not help but think that I was witnessing the last major trade round. I may be proven wrong. But, regardless of whether a new round is launched and successfully completed, it will be outdated before it begins. As we engage in the first war of the 21st century, we may be entering into the last trade negotiations of the 20th Century.

This is not to say that the negotiations are unimportant. There are numerous areas, ranging from agricultural subsidies to the dispute settlement process, that need to be addressed. These are, however, the loose ends of trade in the Industrial Age – not the emerging issues of the Information Era.

Maybe the new Administration can move beyond the past and craft a new approach to trade negotiations. Clearly, the current one isn’t working.

Our normal habit (or should I say bias) when thinking about intangibles is to divide the world into intangible and tangible producing industries. Services and manufacturing is the crudest form of this breakdown. However, we forget that intangibles are a fundamental input in all industries, even the most basic of them such as mining.

The IBM Institute for Business Value has released a report reminding us of this --
Unlocking the DNA of the Adaptable Workforce: The Global Human Capital Study 2008/Metals and Mining Edition:

Today, the metals and mining industries are rapidly changing. As business becomes more global and competitive, companies are being challenged to reassess where and how products are made and marketed. A less understood challenge, however, is how to make the best use of the enterprise's most important asset: the workforce.

Our findings suggest that three key capabilities influence the workforce's ability to adapt to change.

First, workers must be able to collaborate across their organizations, connecting individuals and groups that are separated by organizational boundaries and different physical locations. Only 7 percent of the metals and mining survey respondents say they are very effective at collaboration – the ability to bring together workers to solve problems and to innovate, either formally or informally. To address this, a number of leading metals and mining companies are actively using technology enablers today for collaboration, knowledge sharing and learning. However, our evidence indicates that the real hurdles to collaboration are not technology, but issues of the company culture.

Workers also need to effectively identify and locate experts. Only a small number of metals and mining respondents (14 percent) believe their companies are very capable of identifying individuals with specific expertise.

And last, organizations must be capable of predicting their future skill requirements to keep ahead of changing conditions. Only 13 percent of metals and mining respondents said that their organizations have a very clear understanding of the key workforce skills required in the next three to five years.

The full report opens with this wonderful quote:

“The only sustainable competitive advantage is the type of people you have and the way they work together.”
– Klaus Kleinfeld, President and Chief Operating Officer, Alcoa

The study and this quote reinforces what I have been saying for sometime: there is no separate "intangible" or "knowledge-intensive" sector of the economy. All industries and sectors need to embrace intangibles, innovation and information in order to compete. The distinctions we make between old and new industries , between high-tech and basic, between services and manufacturing are out of date. They may tell us about certain characteristics of the sector. But they tell us little about what companies and individuals are doing to add value and foster competitiveness. In my mind, it’s not old versus new; its companies who understand the I-Cubed Economy and those who don’t. Those who do will be able to make (and remake) themselves into prosperous institutions. Those who don’t will fail, even if they are in so-called “new” sectors.

The brand valuation firm Intangible Business has produced two studies on reporting of intangibles under US and international accounting rules. Those rules (SFAS 141/142 and IFRS 3) require companies to break out the value of acquired intangible assets from the overall category of "goodwill." The US report (SFAS 141: The First 5 Years) concluded that goodwill is substantially over reported and intangible assets under reported. Some examples:

Disney
Bought PIXAR for $7.5bn and allocated only 3% to intangible assets. 75% was goodwill.

Conoco Phillips
Bought Burlington Resources for $35bn allocating just $0.1bn to intangibles, 0%.

Chevron
Bought Unocal for $20bn and determined that intangible assets had no value at all.

Google
Bought YouTube for $1.2bn and allocated $0.2bn to intangibles and $1.1bn to goodwill, 92%.

JPMorgan
Bought Bank One for $95bn. Only 9% was allocated to intangibles but 36% to goodwill.

Wachovia
Bought Golden West for $75bn with intangibles like customers, brands, contracts valued at 1%.

On the international side, the results appear to be somewhat better (Goodwill Reporting Internationally):

IFRS3 disclosure requirement on the components of goodwill is just about adequate for stakeholders’ needs. USGAAP is still some way short of even this level of disclosure and, most disturbingly, compliance frequently consists of “going through the motions” and sometimes doesn’t happen at all.

Auditors seem unwilling to make an issue of this, and perhaps this is because compliance still results in such woolly, ‘motherhood and apple pie’ type statements. The attitude seems to be that if disclosure requirements are considered to be bland and uninformative, it doesn’t matter if they are overlooked altogether. The absence of any effective monitoring of compliance with IFRS by reporting companies and their auditors, along the lines of the SEC in the United States, means that the quality of disclosure is likely to remain poor.

Not a good result. Maybe SEC needs to do its own analysis of the impact of the 141/142.

A few years ago, I was at a conference on intangibles in London listening to an executive from BP (the UK energy company). He was explaining how the recent deal to invest in Russia was based on an intangible asset. Russia was seen then as a very risky place to invest. This investment would work because of BP's reputation -- that reputation alone increased the value of the joint venture.

In the short term, that seems to have been true. However, in the long term this case illustrates the fragility of reputation as an intangible asset. Yesterday, the head of the joint venture TNK-BP, Robert Dudley, was forced to leave Russia because he was denied a work visa. (For details, see stories in New York Times, Wall Street Journal, Financial Times and Washinton Post.)

The deal may have been doomed from the beginning. As the Post story explains:

The marriage of British oil giant BP and a group of Russian-bred tycoons in a joint venture in 2003 was strained from the start.

"The first risk . . . is mutual distrust," the joint venture's executive director German Khan warned his colleagues in the company newsletter when the deal was signed.

Mistrust has curdled into open hostility, despite the fact that the 50-50 joint venture, called TNK-BP, has doubled or tripled in value -- and paid out a staggering $18 billion in dividends to its shareholders in just five years.

Even with that success, it appears that the partners are fighting over control of the goose, not content with having a share of the golden egg. As the Journal article points out, the Russian's don't necessarily want BP's reputation anymore. In fact, they bridle at what they see as the treatment of the joint venture as a subsidiary of BP:

"TNK-BP is an independent oil company in which BP is not a controlling shareholder," Mikhail Fridman, chairman of the TNK-BP board, said in a statement. He insisted that BP nominate a "new independent CEO who would be based in Moscow and manage TNK-BP in the interest of all shareholders."

Reputation is only as good as the actions that back it up. And protecting reputation is often a difficult task, even when you are in the position to act. BP is in an awkward position of having their name on the line without necessarily having the power to control events. Such is the case that others can also find themselves in. This is why reputation is one of the most powerful yet precarious of intangible assets – and one that needs to often be given special attention.

The Information Technology and Innovation Foundation has published an important new report -- Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970-2006, written by Fred Block and Matthew Keller of UCal, Davis. The report describes the shift in technological innovation over the past few decades:

Whereas the lion’s share of the R&D 100 Award-winning U.S. innovations in the 1970s came from corporations acting on their own, most of the R&D 100 Award-winning U.S. innovations in the last two decades have come from partnerships involving business and government, including federal labs and federally funded university research. Indeed, in the 1970s, approximately 80 percent of the award-winning U.S. innovations were from large firms acting on their own. Today, approximately two-thirds of the award-winning U.S. innovations involve some kind of interorganizational collaboration—a situation that reflects the more collaborative nature of the innovation process and the greater role in private sector innovation by government agencies, federal laboratories, and research universities.

The report has a nice overview of both the innovation policy debate (specifically on the role of government) and the shifts in the economy since the 1970's. They describe five:
• mounting competition from foreign firms
• deregulation that lowered barriers to competition for entrenched firms.
• computerization
• shifts away from mass markets to niche markets
• increasing short-term performance orientation of financial markets.
The result was the breakdown of the old large industrial system to a more networked approach.

The data they use is based on R&D Magazine's annual "Best 100 Inventions" awards. The authors readily admit that this is somewhat "gizmo" oriented. But still it is good data source to support the underlying conclusions about the success of technology policy over the past three decades:

The federal government has created a decentralized network of publicly funded laboratories where technologists will have incentives to work with private firms and find ways to turn their discoveries into commercial products.

. . .

Complementing these decentralized efforts are more targeted federal government programs that are designed to accelerate progress across specific technological barriers.

That does not mean that everything is fine. As the authors point out, there are still major problems:

In our view, the system of federal support for innovation has enormous strengths, but it also suffers from three major, interconnected weaknesses. First, the system carries decentralization to an unproductive extreme. Under current arrangements, it is entirely possible that five different government agencies might be supporting 30 different teams of technologists working on an identical problem without a full awareness of the duplication of efforts. This situation is a particular problem if different groups are unable to learn from each other in a timely fashion. Second, because the importance of the federal role in fostering innovation is not widely recognized, federal programs in support of innovation lack the broad public support that would be commensurate with their economic importance. Third, the budgetary support for the current system is inadequate and uncertain. Funding for more collaborative research and commercialization efforts are relatively limited, and total federal levels of R&D spending have been declining in real terms since 2003. These declines put the entire U.S. innovation system at risk.

Those are all good points -- especially the second point of a lack of understanding of the positive role of the government.

I do have one not so minor critique of the report. It has nothing to do with the actual study, but the framework. The authors keep describing this as a study of the "national innovation system." It is not. It is a study of the R&D/technology system. As I have said many times (and it is a wall I will continue to beat my head against, I guess), there is more to innovation than technological innovation. As this report shows, we have a pretty good idea of the role of government policy in technology innovation. We need to do much more to understand the role in innovation in general.

Apropos my earlier posting on the recent National Academy conference on intangibles, Mary Adams at the IC Knowledge Center has posted summary comments . Note this link is the intro which then further links to more detailed comments on the Hybrid Vigor blog.

I've written before about states and communities trying to create a film industry as part of their economic development strategy. Today's Wall Street Journal has a story about the latest attempt, in Michigan -- Detroit as Dream Factory. The story outlines the steps the state is taking to get companies to shoot movies in the state. Mainly these involve tax incentives.

Unfortunately, as the story points out, other locations are attempting to do the same thing:

Pittsburgh is trying to create "Hollywood on the Mon(ongahela River)." New Mexico and Louisiana are well ahead on this path. And there's nothing stopping Kentucky, Colorado or Florida from leapfrogging Michigan, which previously hiked its rebate to 20% in 2006.

What worries me is that we are once again into a smokestack chasing race to the bottom. To create a sustainable cluster, you need to develop the infrastructure which makes the location of the industry desirable. You have to develop the reason to be there -- other than one-shot tax incentives. If your main tool is tax subsidies for a one-time activity, there is always someone who can outbid you. Not a way to create jurisdictional advantage.

Jim Fallows on the power of an important intangible - the image:

I turn on the TV in America, and in the first ten minutes I see...

Barack Obama in Iraq, meeting with the troops and sinking his long basketball shot. My Lord. Politicians have to be tough, and driven, and indefatigable. They also have to be lucky.

We can think of unlucky examples. Gerald Ford, who out of college was offered pro football contracts, tripping on his way down the steps to Air Force One. The first George Bush, all-American* college baseball player, bouncing a ceremonial First Pitch before tens of thousands in the Astrodome (as immortalized in Richard Ben Cramer's What It Takes). Jimmy Carter, lifelong outdoorsman, being caught in a surreal photo that made it look as if he were being attacked by a crazed rabbit.Let's not get into Al Gore's luck in 2000.

I don't know how many times out of ten Obama would make that shot -- but with the (military) cameras running, he made it this time. And it becomes much harder to portray him as an anti-military outsider weirdo after the pictures of the troops clamoring to shake his hand. Politics is only partly rational. The late Mike Deaver, who didn't care how much TV reporters criticized Ronald Reagan as long as they kept broadcasting handsome-looking shots of him, would have appreciated the importance of this footage. If Obama wins, we'll see film of this trip three or four years from now and be amazed that the the worn, haggard looking man in the White House ever looked so carefree and fit. But that's how he does look now, and anyone who has seen campaigns knows how powerful these images are. (And I'm not even talking about the whole godsend for Obama of P.M. Maliki's comments.)

Andrew Jack's has an article in today's Financial Times on the convergence between pharmaceuticals and generics - A bigger dose: Why generic drug producers are bulking up:

Traditionally, pharmaceutical groups developing patented medicines spurned and criticised their upstart rivals producing cheaper generic alternatives once these patents expired. But over the past few weeks, a flurry of planned takeovers and legal settlements has brought them closer together than ever.

For now, by selling a broader range of patented and off-patent medicines, pharmaceutical companies such as Novartis have the flexibility to offset the unpredictability of innovative medicines. They can also gain economies of scale and have greater scope to offer a broader bundle of drugs, on more attractive terms, to pharmacy chains such as Wal-Mart and CVS in the US.

While the innovators stand to lose tens of billions of dollars in revenues over the next few years as patents expire, the generic “cliff” then becomes less steep, offering fewer future products to refill the generics companies’ pipelines. The new generation of biological medicines coming to market are also more complex to produce and will be harder to convert into generics.

It is this, combined with renewed pricing pressure, that is driving the generics industry itself to consolidate through deals such as Teva’s with Barr. In the US, cut-throat competition is already squeezing margins and making generic drugs ever more a low-cost commodity. Meanwhile, cash-strapped healthcare systems across Europe are beginning to take a more aggressive attitude. Germany and the Netherlands have both recently introduced tenders, for example, which are eroding generics prices.

there is the question of culture. Robert Wessman of Actavis, an Iceland-based generics company, argues that there are limits to the ability of innovative pharmaceutical companies to enter the generics market, because they lack experience of low-cost manufacturing. “It’s a different mindset and set of skills,” he says.

In any event, the most recent flurry of activity between big phrama and the generics reminds us that the development and utilization of intangible assets in the I-Cubed Economy can take many paths. It is not simple as IP or no IP. There are many other intangibles in play – and the relationship between IP and successful business models is not always straightforward.

Today's Wall Street Journal has an interesting piece on the dilemma of protecting the brand -- Why Dora the Explorer Can't Come To Your Kid's Birthday Party. The story focuses on how the owners of popular cartoon characters are cracking down on birthday party character impersonators. The business strategy of the trademark owners seems to be to limit the exposure of the characters. Even when the characters are available, they may not be affordable. As the story points out, "Marvel contracts with a company that now offers sanctioned entertainers dressed as Spider-Man and Iron Man. But the cost of an appearance starts at $1,600."

But it is unclear to me that this business model is going to be successful. Some party companies are creating there own more generic characters in response. And not always successfully:

Miriam Sorkin, an office manager in Englewood Cliffs, N.J., threw a fourth-birthday party for her daughter in May and arranged for a costumed impersonator of Dora the Explorer. Though the walk-about "Dora" had the expected pageboy haircut and backpack, her expression was blank and her legs appeared out of proportion to the rest of her body. "When Dora came out," Mrs. Sorkin says, "none of the kids would go to Dora, including my daughter, and a few of the kids started crying."

Elvira Grau, who owns Space Odyssey USA, where Mrs. Sorkin held her daughter's party, says the costume companies that service her parties try to make their costumes look sufficiently different from the trademarked characters to avoid lawsuits. When Mrs. Sorkin complained to her that Dora was "hideous," Mrs. Grau gave her a $250 credit. "But I told her, 'You can't have the real Dora. If you want the real Dora, call Nickelodeon.' "

That may a case where there is still trademark infringement because of the confusion created over the brand. But still, it points out a real danger of having less than perfect knock offs damaging the brand -- and an opportunity. Rather than try to shut down the party business, maybe the companies should have a more aggressive licensing program.

Sounds like the standard problem with IPR -- "we need to lock this up tight" -- rather than "how do we get this out". I understand the worry about overexposure. But given all the marketing that already goes on based on these characters, I would think that having the characters out with the kids would be an additional plus.

Jane Bryant Quinn's latest personal finance column outlines a disturbing possibility -- Lawsuit Threatens Sarbanes-Oxley Act:

Just when you thought that the drive toward better financial accounting couldn't be stopped, a stick may be shoved into the spokes. A decision expected soon from a federal court might throw the Sarbanes-Oxley Act into limbo. The law, also known as SOX, is essential to the movement for accurate and honest corporate reports. Congress could rescue SOX but perhaps with its beating heart cut out.

The critics of SOX have been vocal since the beginning - and may now have their chance to gut the law. That would be a mistake. As Quinn responds to the claim that SOX doesn't help investors, "Are investors better off buying stocks based on sloppy or fraudulent accounting?" Let me ask a different question. Don't the wizards of Wall Street understand that markets are all based on reputation? Yes, there are quick gains to be made by playing fast and loose with the rules. But in the long run, reputation and trust are what ultimately matter. So, in the middle of the worst melt down in investor confidence, we are going to throw out our accounting safe guards.

If that does nothing else, I fear it will kill any attempt to create a financial market in intangibles. For without some underlying backdrop of confidence, investors will run from these "exotic" assets like .. well, pick your cliché.

I guess London had it partly wrong (see earlier posting). They don't need to worry about a competitive threat from the US undermining their place in the financial services industry. We will take care of that by doing ourselves in, thank you very much.

Last year there was a huge hew and cry from bankers and politicians that the United States (read "New York") is losing its competitive advantage in financial services to London. Treasury Secretary Paulson blamed overregulation for our (supposed) decline -- (is that ancient history). Mayor Bloomberg and Senator Schumer commissioned a study by McKinsey which showed how the US is falling behind. By October, the frenzy had slackened somewhat - with Mayor Bloomberg telling a London audience that he was not worried.

And the financial crisis of this year has put a complete damper on issue. Right now Wall Street is more interested in surviving its own miscues than on London's supposed competitive advantage.

So this item in today's Financial Times is especially interesting -- London fears loss of financial edge:

London has appointed McKinsey, the management consultants, to study its financial services industry, amid fears that the British capital may be losing its competitive edge.

But London's fear isn't New York; it’s Dubai, Moscow and Luxembourg. In other words, the regional and up and coming exchanges.

London may be right to fear such new competitors. In the I-Cubed Economy, it is not clear that financial services need to be concentrated in a couple of big hubs (New York, London, and Tokyo). More regional centers may be able to match the economies of scale and scope that that large centers once had an advantage in. More importantly, regional centers may be much better at the specialization and local knowledge that is becoming a much more important advantage. The old "major money centers" will need to find their place in this new system. With all the talk about stock exchanges acquiring one another, they have realized that the sands have shifted and are searching for new strategies. Local and national political leaders are trying to do the same. Unfortunately, they often seem to hit on the race-to-the-bottom form of competition - such as the anti-regulation movement in place before the financial crisis broke.

Let us hope that we can do better than that as we work through the crisis - and improve our competitiveness at the same time.

I have often stated that the value of a brand is only as good as the products behind that brand (and sales of that product). This lesson was illustrated yesterday by Coco-Cola - FT.com- Coke takes $1.1bn writedown after low demand hits bottler:

Coca-Cola Enterprises yesterday announced a $5.3bn non-cash writedown in the value of its business. It cited higher commodity costs and declining demand from increasingly frugal US consumers for Coke's biggest brands.

The non-cash impairment charge is the result of CCE's impairment analysis in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." The charge is necessary to reduce the book value of the company's North American franchise license intangibles to their estimated fair value in light of an expected near term decline in operating income and a recent decline in CCE's stock price - both largely the result of deteriorating North American macroeconomic conditions and expected substantial increases in commodity costs.

Given that franchise licenses are a major part of the intangibles that are reported under GAAP accounting, are we likely to see more write-downs over the next few months?

Here is a fun example of how one town is building its economy on its intangible assets, its romantic appeal -- Clifton cashes in on weddings:

It's not a beach or a mountain resort, but with its quaint buildings and growing wedding industry, the tiny town of Clifton [VA] is casting its spell on dozens of brides and grooms every year.

Clifton's picturesque restaurants, parks, gazebo and barns attract a variety of couples preparing to exchange vows.

And that someone could walk from the florist, to the hair dresser, to a church, to a reception site and then to a bed and breakfast in 10 minutes, probably twice, might be an added bonus.

Clifton has become a one-stop shop for weddings with a cluster of wedding-related business having grown up in the town. The town is so popular that the local church had to expand its building.

Obviously, not every town can be a picturesque Clinton. But jurisdictional advantage lurks every where. Sometime finding it just takes a little imagination and vision.

One of the items I noted in my various reports on accounting for intangibles (see Reporting Intangibles and Intangible Asset Monetization) is the slight difference in how intangibles are treated in different accounting systems. Specifically, I noted the difference in accounting for R&D between the US Generally Accepted Accounting Principles (GAAP) overseen by the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS ), which includes International Accounting Standards (IAS), developed by the International Accounting Standards Board (IASB). I wondered if these differences had much of an impact on the bottom line.

Well, the answer, according to a report by Citigroup (as reported last August in Accountancy Age) is yes, but. The study looked at a set of multinational companies which file under both systems and need to reconcile their accounts. According to the report:

The study found that 82% had higher net income under IFRS, while book value was lower for about 70% of the sample. Overall returns on equity were also much higher on average under IFRS, according to Citigroup.
. . .
Profits under IFRS were on average 23% higher for the sampled companies with the median value levelling out at 6%.

But, the study found a number of reasons for the differences:

The main sticking points occurred in the treatment of tax (60), pensions (55), goodwill and intangible assets (53), and financial instruments (40).

Bottom line: while "material" differences exist between the accounting standards, intangibles don't seem to be the biggest problem.

All of this may be moot, however, as FASB and IASB are working toward greater harmonization. Some are legitimately concerned about this, based on a fear of weakening US financial regulations) (see Push for New Accounting Standards Gains Speed - washingtonpost.com).

But I think the conclusion of the Citigroup report makes the point:

In general, the banking giant believed that there was not much to choose from between the two standards: 'Trying to make investment decisions based on a superior knowledge of the GAAP differences may add some value, but for many of these differences it is difficult to choose a clearly superior accounting treatment.'

It looks like the credit crunch has taken its toll on at least one intangible investment project. According to the Financial Times, Deutsche Bank has scrapped its plan for a $450 million fund to finance film production at Paramount:

Liquidity has dried up and although film slate deals can generate lucrative returns, potential lenders are steering clear of asset classes that are not triple A rated.
. . .
But while the bank was able to assemble the equity and junior debt component, the credit freeze meant the bank could not generate interest in the deal's senior debt component.

In fact, Deutsche has decided to close its film finance unit. According to the New York Times, "Three executives who had been detailed to assemble film finance packages were informed of the closure about a week ago, according to a person who was briefed on the situation but spoke on condition of anonymity to avoid conflict with the studio."

And given the latest twist to the credit crunch - the bank solvency concern, it looks like market financing of intangibles might be on hold for awhile.

The Economist is running a short piece on The cult of the dabbawala. The dabbawala are the meal delivery people in India. As Wikipedia explains:

The word "Dabbawala" in Hindi when literally translated, means "one who carries a box". "Dabba" means a box (usually a cylindrical tin or aluminium container), while "wala" is a suffix, denoting a doer of the preceding word[1]. The closest meaning of the Dabbawala in English would be the "lunch box delivery man". Though this profession seems to be simple, it is actually a highly specialized service in Mumbai which is over a century old and has become integral to the cultural life of this city.

The concept of the dabbawala originated when India was under British rule. Many British people who came to the colony didn't like the local food, so a service was set up to bring lunch to these people in their workplace straight from their home. Nowadays, Indian business men are the main customers for the dabbawalas, and the services provided are cooking as well as delivery.

Why this interest by the Economist? Apparently this system has a 99.9999% error-free rate. So management gurus are looking at how they can be so successful:

Harvard Business School has produced a case study of the dabbawalas, urging its students to learn from the organisation, which relies entirely on human endeavour and employs no technology. For Paul Goodman, a professor of organisational psychology at Carnegie Mellon University who has made a documentary on the dabbawalas, this is one of the critical aspects of their appeal to Western management thinkers. “Most of our modern business education is about analytic models, technology and efficient business practices,” he says. The dabbawalas, by contrast, focus more on “human and social ingenuity”, he says.

Human and social ingenuity! What a concept! What an intangible!

We all know that a picture is worth a thousand words. But sometimes, people just don't get the joke. That is the case with the new New Yorker cover which show Barack Obama as a Muslim and Michelle as a revolutionary (complete with AK-47). The piece is meant as satire. But is fall tragically flat. To the initiated, it is a hysterically funny piece. To the casual observer with the quick glance, however, it reinforces the underground whispers of the right wing paranoia about Obama.

Years ago, it was observed that the power of the visual eclipsed the written word. The history of the Vietnam War is testimony to this fact -- the first war televised. The visual dictated the analysis.

Such may be the case now as well. One image can create an impression that override all other. We will see.

But such is the power of the intangible – now and in history. Let us see whether America can overcome the false image – or succumb to the quick view. Let us hope in the better nature . . .

When is a tangible an intangible? When the tangible is your physical location which gives you a competitive advantage. It has long been know that certain activities locate at certain geographical points. Major markets, for example, locate at crossroads, places with good harbors, river crossings, etc. Manufacturing facilities originally located near raw materials. Clustering to take advantage of geographical features is a standard economic phenomena -- and economic development strategy.

The latest example of this comes from today's Financial Times story on aviation -
FT.com / Reports - Middle East: Sky’s the limit for Gulf states with soaring aerospace ambitions:

Qatar Airways intends to nearly double its fleet of aircraft to 110 by 2013, and Dubai’s Emirates, the Arab world’s biggest carrier, says it has outstanding orders and options for 244 Boeing and Airbus aeroplanes worth a total of $60bn. Abu Dhabi’s Etihad Airways, which was founded only five years ago, will announce the purchase of 50-100 wide and narrow body aeroplanes at Farnborough.

“Within two to three hours’ flight we have a catchment population of China, with improving economies,” says James Hogan, the chief executive of Etihad. “The Gulf is becoming the natural crossroads of the world.”

As the saying goes, its location, location and location. Whether the Gulf states can leverage their location remains to be seen. At one time the Persian Gulf was a major part of world trade as the southern sea route of the Silk Road. Trade patterns shifted and left the area generally off of the beaten track. We will see if modern aviation can revitalize the area as the "crossroads of the world." It is certainly an interesting idea.

From Gordan Crovitz's "Information Age" column in today's Wall Street Jounral - Patent Gridlock Suppresses Innovation:

The Founders might have used quill pens, but they would roll their eyes at how, in this supposedly technology-minded era, we're undermining their intention to encourage innovation. The U.S. is stumbling in the transition from their Industrial Age to our Information Age, despite the charge in the Constitution that Congress "promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."
. . .
Our patent system for most innovations has become patently absurd. It's a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy. Imagine how much more productive our information-driven economy would be if the patent system lived up to the intention of the Founders, by encouraging progress instead of suppressing it.

Enough said!

A lot of words have already been written about last night's announcement by Treasury Secretary Paulson on Fannie Mae and Freddie Mac and the parallel announcement by the Federal Reserve Bank. (See Wall Street Journal), New York Times, The Economist, and Washington Post. Note: the news aggregator site Real Clear Markets links to many of these sites and more.)

The news was rather dramatic. As the Financial Times points out:

It goes further than many market participants expected. In effect the government is seeking full discretion to inject both debt and equity into Fannie and Freddie, and take them over if necessary.

Two quick points on the situation. First, it is all about an intangible: investor confidence. Fannie and Freddie operate by borrowing short term to buy long term (mortgages). If short term investors stop lending, the operation grinds to a halt. That is what the Treasury and Fed announcement is mostly about -- "we will lend to keep the operation going even if no one else will". By the way, as of when I am writing this, the confidence building exercise seems to have worked for the US markets as well. The Dow opened up over 100 points and both Fannie and Freddie were up.

[UPDATE: as of noon, the early bounce had evaporated - the Dow is down and Fannie and Freddie were about even with Friday's close. Maybe the best that can be said is that the announcement prevented a large sell off.]

Second, the timing of the announcement was interesting. The announcement was not made Monday morning before the US financial markets opened. It was made last night before the Asian financial markets opened. This is not just an exercise in restoring confidence in the financial solvency of Fannie and Freddie. This is about maintaining investor confidence in the United States government - and in the US dollar. That exercise was generally successful, as the Wall Street Journal reports:

Caution remained high in Asian financial markets Monday, after a U.S. government plan to bolster mortgage finance giants Fannie Mae and Freddie Mac offered some reassurance early in the session.
Stock markets ended lower, with markets in Tokyo and Hong Kong reversing early gains that came on the heels of that news, while the U.S. dollar remained stronger against major currencies.

As financers have known since the beginning of time, intangibles ultimately rule the markets. In the hyper-global world of finance in the I-Cubed Economy, the intangible of confidence is even more important. Hank Paulson and Ben Bernanke understand that – and acted accordingly.

The BEA's trade data carried some good news this morning: the deficit declined slightly in May by $0.7 billion to $59.8 billion (compared to the revised figure of $60.5 billion for April). The improvement was due to exports growing faster than imports, as imports of oil actually declined. Exports were up $1.4 $.4 billion and imports were up $0.7 billion. The improvement caught many by surprise. As the Wall Street Journal reports, "Economists surveyed by Dow Jones Newswires estimated a $62.70 billion shortfall for May."

The exact same story held true for intangibles: the surplus increased slightly as export rose faster than imports. The intangibles trade surplus rose by $203 million to $13.2 billion. Intangible exports rose by $335 million while imports rose by $131 million. This pattern of export increasing faster than import existed for both royalties and business services.

The deficit in Advanced Technology Products also declined in May to $3.5 billion. This is more in keeping with the size of the deficit in earlier months rather than April's much larger deficit of $5.3 billion. The improvement was generally across the board, except for opto-electronics showing a worsening deficit. 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.

The Democratic Leadership Council (DLC)/Progressive Policy Institute (PPI) has released its latest agenda on globalization: Winning in the World Economy II. The report is billed as a sequel to its 1985 report by the same name. Generally, it is a defense of free trade and an argument for some policies to meet the competitive challenge. The report contains a number of generally good recommendations:

Raise our Game.
Strengthen America's competitiveness and our status as the world's economic and technological leader, through new policies in high-skilled immigration, education, infrastructure, and scientific research.
Design a New Social Contract.
As the economy evolves under the pressures of technology and global integration, we must bolster the security of American workers and families through new health, pension security, and social insurance programs.
Modernize Global Institutions.
Create a new Global Environmental Organization, reform global financial institutions, and remodel U.S. consumer-safety policy to bring 20th-century institutions in line with modern needs.
Reshape U.S. Trade and Financial Strategy.
Retarget market-opening negotiations on rapidly growing sectors of the U.S. economy and major trading partners, and defend American rights more assertively.
Remember the Poorest.
Make the global trade system fairer by reforming tariff and farm policies to raise living standards for poor people in the United States and elsewhere, raise labor and environmental standards, and promote job creation and growth in the Muslim world.

Its critique of current trade policy is telling:

trade negotiating strategy has devolved into a directionless string of free trade agreements that provoke controversy within the United States, while ignoring the big economies and future-oriented industries that account for most U.S. trade.

The report touches lightly on a number of topics. For example, it calls for us to "Rebalance Global Growth":

Use the reshaped G-8 and IMF to negotiate an agreement with Europe and Asia to rebalance world trade and financial flows. . . . The next president should seek to structurally rebalance global growth, through Asian and especially Chinese commitments to increase consumption and rely less heavily on exports for growth;

There are other areas that are missing from the paper. While its focus is on competitiveness (not simply trade), there is only a limited discussion of education -- a recommendation to create 250 science and technology charter schools. The issue of education was discussed in much greater detail at the press conference yesterday.

Also missing were some of the ideas on technology and innovation - beyond simply the recommendation to increase basic research in the physical sciences. I would have also liked to have seen more on helping workers prepare for the changing economy. We need to have a broader policy that helps all dislocated workers -- and helps continually upgrade workers skills to prevent dislocation in the first place.

So, while one may dispute some of the arguments in the paper - and not agree with all of the specific recommendations. But, it is a set of recommendations that should be taken seriously. Given DLC/PPI's history, I sure that will be the case.

I ran into this story on Mother Jones -- What's John McCain's Technology Policy?. Not to pick on Mother Jones, but almost the entire story is NOT about "technology policy" -- but about "information technology policy". Yes, there are two (count them two) references to energy/green technology and one reference to STEM education and R&D funding. But that is it.

When will folks get the message that "technology" is much more than IT; and innovation is much greater than "technology"!!!!

End of rant; back to banging my head against the wall.

Marketing a brand can often times be a game of exclusivity -- you want your brand in front of the eyeballs, not your rival's. For that reason, companies pay big buck for the exclusive rights to advertise at sporting events. Well, the rival's have come up with ways around this. As the Economist reports, Ambush marketing is one way. The concept is simple. Give away a lot of stuff (i.e. hats) to people going to a sporting event. For example, Heineken gave away free hats to Dutch fans going to the Euro 2008 football (soccer) games -- which Carlsberg paid to be the exclusive beer sponsor. In this case, apparently, fans were told to take the hats off least a TV shot of the fans ended up looking like a Heineken ad.

Such efforts, however, can have amusing outcomes:

Overzealous enforcement can also result in bad press—as with the orange plastic Lederhosen given out by Bavaria, a Dutch brewery, to Dutch fans before a match at the 2006 football World Cup. Officials asked fans to remove the offending garments, to placate Budweiser, a rival beer brand that was the tournament’s official sponsor. Many fans ended up watching the match in their underwear, and the resulting fuss generated even more publicity for Bavaria.

Moral of the story: free publicity is free publicity. And, sometimes, trying to protect the value of your intangible asset--the brand--can end up doing more harm than good.

Every once and a while, national security concerns get raised in the offshoring debate. This comes in two variations. The first is the concern over the defense industrial base -- do we have a secure supply of war-making material? That debate centers around sharing with allies and whether we should be producing at home.

There is another strand to the national security issue, however. That is the Trojan Horse situation -- is our technology compromised. This second strand is the focus of a new report on WTOP - news radio here in Washington -- A massive threat to national security may be in your computer:

As he sat down at a conference room table in his office, the picture of calm, National Counterintelligence Executive Joel Brenner made it clear that his very presence with this reporter, or any reporter was an anomaly.

"The fact that I am talking to you at all is a remarkable thing. Counterintelligence lives in the dark most of the time. There are people in the counterintelligence community that are amazed that I would be giving an interview like this," Brenner says.

. . .

Among the worst of the problems are industrial espionage and American dependence of foreign production of sensitive computer components.

"Computer chips are a big issue. People who make your hardware are insiders in your business," Brenner says.

He cited serious concerns about some of the countries and companies that make software and hardware used for sensitive U.S. government purposes, and possibly the computer you're using to read this story.

"We do need to have a serious national discussion about what things need to be made in the U.S.," Brenner says.

. . .

There's concern that components in many of the devices were deliberately built with vulnerabilities for espionage or other purposes.

The fact that counterintelligence is raising the issue in public is unusual. I'm not sure quite what to make of the fact that Mr. Brenner decided to air this issue right now. It may spark the broader discussion he is looking for about offshoring. Then again, it may be a public warning to other that "we know what you are doing."

In any event, it points out the complex nature of the production process in the I-Cubed Economy. It seems nothing is a straight forward as it may appear.

Looks like there is another entry into the medical tourism business: New Zealand. According to the Washington Post -- One Company With an Eye on U.S. Customers:

Better known for its awe-inspiring scenery and for offering tourists the opportunity to risk life and limb jumping off tall buildings in the name of adventure, New Zealand also has fine private hospitals that, unlike their public counterparts, are not full to overflowing. But the major advantage, and the biggest selling point for Medtral, a New Zealand company set up to attract refugees from the U.S. health-care system, is cost: The company says it can offer procedures at boutique hospitals with follow-up personal nursing care at a fraction of the cost of the same surgery in the United States. And with an English-speaking hospital staff and a culture that feels familiar to many Americans, Medtral aims to make New Zealand a destination of choice for some of the growing number of medical tourists -- Americans who travel overseas for health care.
. . .
"New Zealand is perceived as a safe option," [Medtral founder Edward] Watson says. "We're not as cheap as India; we're never going to be as cheap as India." However, New Zealand is cheaper than Singapore, Belgium and Germany, he says. What's more, he says, "for an American coming here, it's not a foreign experience. Yeah, it's different, but you still have Starbucks, you have McDonald's."

Being the safe option may pay off big time. In a companion piece in the Post, When Things Go Wrong, It's Better To Be at Home, there is this horror story:

At the Thai doctor's suggestion, [Betty] Meisel opted for a few more procedures while there: an eyelid tuck and a chin tuck. As a result, she was under anesthesia for 11 hours. She barely woke up in the first three days after surgery. When she did come to, she was plagued, suddenly, with panic attacks, claustrophobia and acid reflux. When her husband tried to get her help, the hospital nurses didn't understand what he was saying.

When Meisel got the bandages off at home, she saw that her surgeries ranged from badly done to completely botched.

The story points out that there is little hard data:

"Without the necessary surveillance and research, it's impossible to judge a phenomenon like medical tourism," says John F.P. Bridges, an assistant professor in the department of health and policy management at Johns Hopkins School of Public Health. "How can one judge the quality of care by anecdote? One can't, and that's a real issue."

As medical tourism continues to grow (and given the cost differentials, it is likely to continue to grow), there will need to be more research. On the other hand, we have heard for years about the lack of data available to the public on US hospitals and doctors (see for example a New York Times editorial from June 2007 - (Sort of) Rating Hospitals).

Better data means better choices -- and that is a key feature of the I-Cubed Economy.

Intellectual Property Watch is carrying a summary of a recent remarks by Professor Joseph Stiglitz (2001 Nobel Laureate in Economics) and Professor John Sulston (2002 Nobel Laureate in Physiology/Medicine) “Who Owns Science?”. Both were critical of the current system:

Patent monopolies are believed to drive innovation but they actually impede the pace of science and innovation, Stiglitz said. The current “patent thicket,” in which anyone who writes a successful software programme is sued for alleged patent infringement, highlights the current IP system’s failure to encourage innovation, he said.

Another problem is that the social returns from innovation do not accord with the private returns associated with the patent system, Stiglitz said. The marginal benefit from innovation is >br>that an idea may become available sooner than it might have. But the person who secures the patent on it wins a long-term monopoly, creating a gap between private and social returns.

. . .

Sulston said science can be driven by need and curiosity, which requires a substantial degree of openness and trust among players. Increasingly, however, the picture is one of private ownership of science and innovation, a situation welcomed by governments and investors who control the direction of research, he said. But the consequence is to funnel science into profitable areas and steer clear of those that will not make money, he said.

Stiglitz advocated for a more tailored IP system - for different situations to meet country and industry needs. Sulston apparently wants to keep the science part separate from the business part. I'm not sure I agree with that since the linkage between the research and the use is very important. But I understand that certain parts of pure research should be conducted separate from the commercialization.

The lectures were given as part of the launch of the Manchester University's new Institute for Science, Ethics and Innovation. The lectures are the kickoff to a series of meetings to produce a Manchester Manifesto, which "will lay down a consensus on intellectual property in science."

Great piece today in L. Gordan Crovitz's "Information Age" column in the Wall Street Journal - Unloading Information Overload:

Warning: On average, knowledge workers change activities every three minutes, usually because they're distracted by email or a phone call. It then takes almost half an hour to get back to the task once attention is lost.

He goes on to cite other who have written on the subject and on some of the work being done by major IT companies to reduce information overload in their own companies. In the spirit of the fair-use doctrine, I suggest you read the entire essay.

I would also point out that this is a great example of user-driven innovation: companies will come up with things to solve internal problems (i.e. information overload on IT workers) which will be helpful (and eventually marketed to) the rest of us. Remember, that is how the whole web got started -- some physicists trying to share data.

Some of you might be old enough to remember when GM launched Saturn Corporation. Saturn was supposed to save the car industry - by reinventing how cars were made and sold.

Well, things have apparently not worked out that way. As the Wall Street Journal reports "GM Weighs More Layoffs, Sale of Brands":

In the meantime, the company will continue to reconsider its mix of brands. One under examination is Saturn, a maker of economy cars that analysts believe has never made money in its nearly 20-year history.

In the past three years, as part of Mr. Wagoner's turnaround strategy, GM has launched several critically acclaimed models under the Saturn nameplate, but the brand's sales have failed to notch significant gains, confounding GM executives.

Maybe someone other than GM can make this concept work.

Last month, I posted a piece on the doctrine of fair use in copyright. In that piece I talked about the importance to the blogsphere of the ability to use clips from others. The same is true in the video part of the blogsphere.

To deal with the video issue, the American University's (AU) Program on Information Justice and Intellectual Property (PIJIP) the AU Center for Social Media have released Best Practices in Copyright and Fair Use for User-Generated Content:

Until now, anyone uploading a video has run the risk of becoming inadvertently entangled in an industry skirmish, as media companies struggle to keep their programs from circulating on the Internet. As online providers have begun to negotiate with media companies, everyone has agreed that fair use should be protected. Before the code's release, there was no clear statement about what constitutes fair use in online video.

The code identifies, among other things, six kinds of unlicensed uses of copyrighted material that may be considered fair, under certain limitations. They are:

* Commenting or critiquing of copyrighted material
* Use for illustration or example
* Incidental or accidental capture of copyrighted material
* Memorializing or rescuing of an experience or event
* Use to launch a discussion
* Recombining to make a new work, such as a mashup or a remix, whose elements depend on relationships between existing works

For instance, a blogger's critique of mainstream news is commentary. The toddler dancing to the song "Let s Go Crazy" is an example of incidental capture of copyrighted material. Many variations on the popular online video "Dramatic Chipmunk" may be considered fair use, because they recombine existing work to create new meaning.

Full text of the code is available online for download.

The presentations are now available from the June 23, 2008 National Academies' Board on Science, Technology and Economic Policy (STEP) one-day conference on Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth. Preparation of a workshop summary report is underway.

My presentation on "US Policies for Fostering Intangibles" is also available. This presentation outlines the size of the federal government’s investments in intangible assets and outlines a number of policy steps that can be taken to foster the creation and utilization of intangible assets in the US economy.

I think those of you who made it to the conference will agree it was a stimulating and valuable event. It is, I hope, also only the latest step in our work on this issue. I will keep you informed as to follow up activities.

Speaking of stimulus, Greg Mankiw draws our attention to what that check writing activity by the federal government might actually be doing -- Greg Mankiw's Blog: Not exactly what they had in mind. He directs us to a recent press release:

An unforeseen and surprising beneficiary of the Economic Stimulus Plan, a plan that George Bush contends will "boost our economy and encourage job creation," has surfaced this week. An independent market-research firm, AIMRCo (Adult Internet Market Research Company), has discovered that many websites focused on adult or erotic material have experienced an upswing in sales in the recent weeks since checks have appeared in millions of Americans' mailboxes across the country.
According to Kirk Mishkin, Head Research Consultant for AIMRCo, "Many of the sites we surveyed have reported 20-30% growth in membership rates since mid-May when the checks were first sent out, and typically the summer is a slow period for this market."

I still think my idea for a training tax credit is a better way to go (he says, tongue firmly planted in cheek).

Even before this morning's bad employment numbers came out (see previous posting), talk had already started in Washington about yet another stimulus package. According to the Wall Street Journal:

Already, Lawrence Summers, the former Clinton Treasury Secretary, and Robert Shiller, the Yale economist, are advocating some sort of additional stimulus. Democrats on Capitol Hill are discussing legislation to boost the economy. And the presidential candidates are also mulling ways to spur growth.

Most of these are ideas that have been discussed for a number of months: helping housing, increased spending on infrastructure, etc. That is all well and good. But I think we need to think more broadly. Let me repeat what I said in April:

If there is a further stimulus package, it should include some elements that help the I-Cubed Economy. Let me make a suggestion. Add a tax break for worker training -- a knowledge creation tax credit. In a time of slower production, rather than send workers to the unemployment office, let's send them to the classroom. If we can give companies a tax break for a new piece of equipment (as we did in the first stimulus package), surely we can give companies a tax break to upgrade their most valuable asset: their workers.

This morning's unemployment numbers from BLS were as bad if not worse than last month, even though the unemployment rate remained unchanged. Employment loss in June was 62,000. And May's revised job loss was put at also 62,000 -- a dramatic increase from the loss of 49,000 originally reported. This is worse than expected. According to the Wall Street Journal, "Wall Street economists had expected an unemployment rate of 5.4% and a decrease of 55,000 payrolls jobs for June."

The other part is our silent employment problem (see earlier posting). The involuntary underemployed (part-time for economic reasons) continued to rise by 183,000.

And the worse may be yet to come. As the New York Times reports:

Goldman Sachs forecasts that the unemployment rate will peak at 6.4 percent late in 2009 before the picture improves, meaning that the painful process of shedding jobs may be only half-way complete.

I have raised this issue in past postings: can large medical facilities actually be a sustainable driver of local economic development. Part of my concern stems from the potential of telemedicine to replace travel to large medical hubs. In The Economist's recent Technology Quarterly, there was this great description of the power of telemedicine, based on the practice of Dr. Carel Van der Merwe on the isolated island of Tristan da Cunha (Telemedicine comes home):

A satellite-internet connection to a 24-hour emergency medical centre in America enables Dr Van der Merwe to send digitised X-rays, electrocardiograms (ECGs) and lung-function tests to experts. He can consult specialists over a video link when he needs to. The system even enables cardiologists to test and reprogram pacemakers or implanted defibrillators from the other side of the globe. In short, when a patient in Tristan da Cunha enters Dr Van der Merwe’s surgery, he may as well be stepping into the University of Pittsburgh medical centre.

But, what does that do for economic development around the Pitt medical center? Telemedicine allows for greater export of specialized care services. So overall activity at the medical center may go up. But it decreases all the auxiliary services, such as primary care and X-ray technicians, and all the economic spillovers (that cup of coffee in the lobby, the hotel room for the visiting outpatient or the family of the inpatient). What the net gain will be is unclear. What is clear is that it changes the nature of the economic development activity. And it calls into question the health-care based model of economic development.

One of the more fascinating forms of intellectual property is that of the geographical indicators. These are essentially trade names based on a particular place rather than a particular company or organization (see earlier postings). Everyone in the area can claim the name - such as Parma ham - but no one from outside the area may.

We are seeing more and more food stuffs using the geographical indicator to differentiate themselves. Wine is a classic example (Bordeaux versus Burgundy as a very old case in point). In the US, such designations are called American Viticultural Areas (AVA).

Now comes this story in today's Washington Post - Cindy Skrzycki - Would a Wine Really Taste as Fine by Any Other Name? - about an unsuccessful attempt at a geographical indicator by some growers in the Napa Valley area known as Coombville. But they didn't want to use the word "Coombsville" They wanted to use the word "Tulocay":

Led by Aaron Pott, a consulting winemaker who filed a petition with the government in 2006, the growers said the word Tulocay had deep, local roots that harkened back to an 1859 land plat showing Tulocay Rancho. Plus, they didn't think Coombsville was a pretty enough or marketable name to put on cabernets that are commanding as much as $125 a bottle.
"For every line you add to the label, you can add $5" to the price, said Tyler Colman, who writes a wine blog called Dr. Vino, offering another rationale for seeking the Tulocay designation. "The more information, the more exclusive it is."
The Treasury bureau, which regulates the labeling and taxing of alcohol, has awarded geographic appellations since 1980 as a way for consumers to better place the identity of the wines they are buying. There are 167 such designations. Once approved, 85 percent of the grapes used in wines bottled under the appellation must be from that area.
Napa became a special viticultural area in 1981 and now produces some of the best domestic wines. There are also 14 sub-appellations within Napa, including Oak Knoll and Rutherford.
. . .
We felt Coombsville sent kind of a redneck vibe," Pott said in an interview -- a point he also made in comments to a national wine magazine.

Here is the real kicker, as the Post story relates:

[T]here is already a Tulocay Winery, which is on Coombsville Road.
Bill Cadman, owner of the winery, trademarked Tulocay as a brand name in 1975 and has been using it since. "I like the name. It's an old Indian word," Cadman said, adding that he chose it because "it doesn't conjure up anything."
Until now.
Cadman said he first thought a Tulocay viticultural area would help publicize his brand. Then he wondered if a new state law that protects geographic identities would force him to drop the Tulocay name, dump the wine he had branded under that name, or require he use grapes mostly grown in the new area.
He consulted Kristen Techel, an attorney with Hinman & Carmichael in San Francisco. Techel told regulators that approving the Tulocay name as a geographic appellation would have meant economic ruin for Cadman's small winery since he buys grapes from surrounding counties to make vintages like Amador County Zinfandel, made from Amador County grapes.

Moral of the story: company trade names trump geography. On the other hand, when you are looking for a really good cabernet, just try looking for the words Coombsville. Or you could forget about it entirely. As the wine writer Steve Heimoff posted on his blog - R.I.P. Tulocay. Here comes Coombsville!

After all, it’s not about the AVA, it’s about what’s in the bottle, anyway.