The Intangible Economy

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August 29, 2008

Re-purposing technology - insights for policy

The Financial Times has a great story on how to utilize old patents in new products - New profit from old patents. The heart of the story is about utilizing the core HP thermal printing technology for an alternative to the dreaded needle for drug delivery (using a transdermal skin patch). HP is licensing the technology to a small Irish company, Crospon.

The story is also about the importance role government can play in the process:

It was Enterprise Ireland, an Irish government agency charged with fostering innovation and technology links between multinationals and indigenous Irish companies, that brought the two together.

This type of matchmaking (usually thought of as part of a technology transfer function) is an important role that government agencies - or quasi-government, public/private partnerships -- play in technology-based economic development. It is not just a matter of standing back and let the market work, as some like to claim. It is a matter of activity fostering a market in technology exchanges.

There was another part of the story that caught my eye, however:

At HP Labs, the company’s central research facility, it has an active programme to identify new uses for these old technologies. HP does not disclose how much it makes in annual royalties and fees from such arrangements, but it is believed to be about $500m(£272m).

Say what? HP does not have to disclose its royalty income? That can't be completely right. Somewhere that $500 million has to show up on the books. The fact that it can't be easily traced back to technology licensing (at least apparently by the FT) is an accounting and disclosure problem. And it is a problem that needs to be fixed.

Posted by Ken Jarboe at 1:12 PM | Comments (0) | TrackBack

Opportunity for intangible collateral lending - the auto industry loan

For the past few weeks, the idea of a loan program to the auto companies has been gaining momentum.
According to today's Wall Street Journal, Overdue Budget, Auto-Maker Bailout Will Top Democrats' Agenda. Here is their comment on the idea:

The proposal to throw a lifeline to Detroit's auto makers could prove particularly challenging, and its future is unclear. Democratic presidential nominee Barack Obama has endorsed the plan, as has John McCain, his Republican rival. Both are battling to win Michigan in the race for electoral-college votes.

General Motors Corp. Vice Chairman Bob Lutz said Detroit's Big Three have been hit by a "perfect storm" of rising gas prices, a slumping economy and new fuel-efficiency rules that will force them to invest heavily in new technologies. "The American auto industry is deserving of loans to get credit that it may well need," Mr. Lutz said, noting that none of the auto makers would be able to get loans from financial institutions in today's tight lending markets.

But the White House remains cool to the idea. Tony Fratto, a spokesman for President George W. Bush, said the administration is "very reluctant to consider government intervention."

Last week, the Washington Post said basically the same thing: Car Makers to Press for Loans:

Automakers plan to urge Congress to support funding up to $50 billion in low-interest loans over three years to help them modernize their assembly plants and develop next-generation fuel-efficient vehicles.

Industry officials said the loans, which are twice the amount authorized in last year's energy bill, are a top priority when Congress returns next month because of the declining fortunes of Detroit's automakers and tightening credit markets.

Auto industry officials have argued that the loan program would not represent a bailout, but would be similar to aid lawmakers have given to Wall Street investment banks and struggling mortgage firms.

"We don't see it as a bailout. We see it as government assistance to help retooling tied to the production of these advanced technology vehicles," said Alan Reuther, legislative director for the United Auto Workers union.

This proposal generally would tie any financial assistance to creation and utilization of new energy technologies. Let me make two suggestions, however. First, that there are conditions similar to the Chrysler guarantee - which actually paid back the taxpayers after the company turned itself around.

Second, the US taxpayers get a part of the intellectual property. The companies should be required to put up their IP as collateral to the loan. This would both protect the taxpayers’ investment and give a jump start to the idea that IP is and should be treated as important collateral in financial transactions.

I would also require that there be some sort of technology transfer process on any new technology created as part of the program. I know that this will be unpopular with some - but it will be important to make sure that the technology does not get locked up.

If the taxpayers are going to assume the risk, the taxpayers should reap some of the benefits -- both financially and in the introduction of new technologies.

Posted by Ken Jarboe at 10:34 AM | Comments (0) | TrackBack

August 28, 2008

Surprising GDP

When the preliminary GDP numbers came out last month, I cautioned that we need to be careful in our analysis, as the final trade numbers had not yet come out. Well, today BEA released the revised Gross Domestic Product and Corporate Profits with a very large revision upwards -- from the advanced estimate of 1.9% to today's preliminary estimate of 3.3%. According to BEA, higher number "reflected upward revisions to exports and to private inventory investment and a downward revision to imports."

At least I got part of the issue right. The size and direction still surprise me, especially since the Fed's July 23, 2008 Beige Book (which covered June and the first two weeks of July) stated that, "Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report."

So I'm not sure we can take much solace from the new GDP numbers. They will, however, certainly spice up the political debate. At least for a week, since all eyes are more likely to be glued on the release of the latest Beige Book next Wednesday.

Posted by Ken Jarboe at 9:37 AM | Comments (0) | TrackBack

Moving to international accounting standards

Yesterday, the SEC gave the international accounting harmonization project a turbo charge when it proposed its Roadmap Toward Global Accounting Standards. The proposal does not guarantee that the US will switch to International Accounting Standard Board (IASB) rules. The SEC will have to make that determination in 2011 and the rules will not fully take effect until 2014. But it does move everything a big step closer.

The transition will have some impacts that may jar the system slightly. For example, as the Wall Street Journal points out, earnings will be affected:

Jack Ciesielski, an accountant and publisher of the Analyst's Accounting Observer, says accounting under IFRS tends to lead to higher earnings. He examined filings from 137 foreign companies whose shares traded in the U.S. in 2006. That was the final year that U.S. regulators required these companies to translate their books into GAAP from IFRS. Mr. Ciesielski says 63% of the companies reported higher earnings under the international standard, and the median increase was 11.1%.

As I noted earlier, much of the differences have to do with treatment of things like taxes, pensions and financial instruments. Intangibles do play a part - mainly due to IASB's rules for amortizing rather than immediately expensing R&D costs.

Accounting for intangibles may also eventually benefit from the shift -- as the IASB has seemed more willing to take on the issue of recognition of internally generated intangible assets and the harmonization process appears to have drawn resources away from that effort. As the switch to IASB moves along, there may be more resources available for the intangibles project.

At least we can hope so.

Posted by Ken Jarboe at 9:11 AM | Comments (0) | TrackBack

August 27, 2008

Financial competitiveness

Remember all the talk about New York losing out to London as a financial center? Well, it has not turned out that way recently, according to analysis in today's Financial Times -- Northern Rock woes take toll on City's reputation. The article points out that in the first half of 2008, the number of shares traded in New York went up while the number when down in London. And New York leads in a number of other areas (London does lead in the number of new foreign listings).

The reason? A regulatory system that promotes trust and security -- building a reputation as a good place to do business:

"The brand of London has taken a hammering because of Northern Rock," says Tim Linacre, chief executive of Panmure Gordon, a London stockbroker that also has a large US presence. "I don't think it is terminal, but London needs to be absolutely on its toes."

Meanwhile, New Yorkers are trying not to say "I told you so" now that financial woes have spread worldwide. They also are touting the benefits of tight regulation, saying that, with volatile markets, many investors value watchful regulators, tight listing standards and the right to sue.

"What Northern Rock demonstrates is that a business-friendly regulatory system may have its disadvantages as well," says Kathryn Wylde, president of the Partnership for New York City, a business group.

So, as we work on the issue of revamping financial regulations (which probably needs to be done), lets be sure of what we are doing. Reputation is a critical intangible asset - especially in financial markets. Once it is lost, it is very hard to get back.

Posted by Ken Jarboe at 9:14 AM | Comments (0) | TrackBack

August 26, 2008

The organizational intangible

Yesterday's Financial Times ran a profile of Wells Fargo's had over from its former head, Dick Kovacevich to its new CEO John Stumpf (The Monday Interview - Wells Fargo cracks the whip). The bank is one of the few to have resisted the temptation of the subprime market -- even though it is a major mortgage originator. Instead, Wells Fargo concentrated on the whole retail experience:

For the past decade, Wells’ knitting has consisted mainly of two patterns: selling as many products as possible to its existing customers, from bread-and-butter bank accounts to investment funds, and buying companies that sell financial goods it does not yet offer.

Cross-selling, often seen as the holy grail of financial services because it enables banks to reap more profits at a lower cost from consumers they know well, is a veritable mission at Wells. Mr Stumpf proudly reels off the average number of products purchased by Wells’ retail customers (5.64, well above the industry average) and says that nearly one in four have more than eight – the company’s long-term goal.

The economics of Wells’ strategy are indisputable. It costs it less to offer extra products to existing customers than to acquire new customers, so it can offer better deals on interest rates, lower premiums, and still make money.

Mr Kovacevich, who got his start at General Mills, the food company, stole that simple but powerful idea from the retail sector; it is no coincidence that Wells refers to its branches as “stores” and makes the most of its stagecoach logo and history as the bank that helped America conquer the West.

However, the key to success has been much more than its retail focused strategy:

But in addition to its Coca-Cola-like focus on customers and branding, Wells appears to have succeeded where many would-be financial one-stop shops have failed: getting different parts of the bank to talk and share customers with one another. Mr Stumpf’s explanation of how the company pulled off such a feat would sound wishy-washy were it not for the fact he has the evidence to back it up. “Financial services is the ultimate team sport,” he says, recalling how he learned teamwork first growing up as the second of 11 children and then spending much of his youth playing table football. “We think of ourselves not as a hierarchy but as a series of concentric circles with the customer in the middle.”

He maintains that banks are wrong to assume that co-operation between different parts of the organisation can be fostered simply through monetary incentives for customer referrals and joint selling. Unless there is a common sense of purpose, bonuses alone cannot eliminate internal rivalries and jealousies, he says. That is why Wells asks Gallup periodically to measure the ratio of “happy to grumpy” employees. At the last count, it stood at 8.5 to 1, compared to 2 to 1 for the US population.

A strong balance sheet, an enviable competitive position and a satisfied workforce: Wells is such an outlier in the ravaged US financial sector that rivals have begun to wonder if it has a secret formula.

Mr Stumpf shakes his grey-haired head: “It’s about culture. I could leave our strategy on an aeroplane seat and have a competitor read it and it would not make any difference”.

Corporate culture has long been recoginzed as an important intangible asset. It is also one of the hardest to analyze and, as Mr. Stumpf recognized, to replicate. As such it remains an individual company's competitive advantage. But from a public policy perspective, it raises a fundamental issue. How can a nation (state, region, city) foster this asset in order to remain competitive? Or are locations simply dependent on the idiosyncratic nature of corporate culture, i.e. this company located here is competitive and this company over there is not - for reasons having nothing to do with the location?

Some might argue that corporate culture is out of the realm of public policy. But if education—the betterment of the individual—is an important economic and social goal worthy of public policy attention, then isn’t organizational improvement as well?

Something to think about in waning dog days of summer.

Posted by Ken Jarboe at 8:25 AM | Comments (0) | TrackBack

August 25, 2008

Inequality and its causes:globalization and technology

Two newspaper stories today worthy of juxtaposition. The first is a summary of a discussion of 4 Noble Prize winners as covered in the Wall Street Journal - Nobel Laureates Say Globalization's Winners Should Aid Poor:

Globalization and technology have increased income inequality around the world, four Nobel Laureates in economics argued, and governments should intervene to try to help those at the bottom.

Meeting on a picturesque island in southern Germany, the Nobel laureates focused Saturday on the growing gap between rich and poor, which has become a big issue in elections around the world, including the U.S. presidential race. The discussion focused more on broad themes than detailed solutions. But the main thrust was clear: Free markets aren't always fair, and economists should help governments figure out how to make them fairer. (See video of the panel discussions.)

The second is a Financial Times review of a new book, The Race Between Technology and Education by Goldin and Katz contained in an article entitled The lesson of US income inequality:

They [Goldin and Katz] dismiss the populists' two favourite culprits - immigration and trade - in short order (possibly too short; my only quibble with this work is that I would have liked to read more on trade). Instead, Goldin and Katz are persuaded by a view common amongst professional economists - that technological change is a major driver of the growing gap between rich and poor.

But Goldin and Katz give a twist to the assertion that "computers did it". The real point, they say, in an argument buttressed by historical comparisons and technical analysis (if you cannot quite remember what a logarithm is you may want to skip this part) is the race between the demand for skilled workers, as created by new technologies, and the supply of them, as created by the educational system.

Neither of these takes on inequality seems to mention the link between trade and technology. As I've pointed out before -- taking my lines from Frank Levy - if your job can be routinized, it can either be automated or done by someone in a lower wage area following instructions. In other words, technology enhances globalization. On the other side, as many other have pointed out, globalization enhances technology development. It is a two sided coin - and policy needs to address the consequences of both.

Posted by Ken Jarboe at 2:02 PM | Comments (0) | TrackBack

Tough time dealing with intangibles

The International Institute for the Unification of Private Law (Unidroit) is trying to come up with a model international law covering leasing. Sounds like a straightforward activity (if anything concerning international law can be considered straightforward). However, the activity has highlighted an interesting problem -- how tough it is to deal with intangibles.

The summary of the 2007 meeting makes clear the intangibles, such as intellectual property and software are not included in the definition of an asset:

First, it was agreed that, because intellectual property was more commonly licensed than leased and because leases of intellectual property involved unique issues, it would not be appropriate for the preliminary draft model law to make any specific mention of intellectual property.

In part, this is due to the problem of how to treat software:

One State also noted that the model law does not specifically mention whether it covers leases of software, which are of growing importance. This is consistent with other international instruments, such as the Vienna Convention on Contracts for the International Sale of Goods (“CISG”). By not mentioning software explicitly, the model law recognizes that sometimes, software is an “asset” like other physical assets. But sometimes, software is much more like a “service,” designed and maintained for a particular user. Just as under the Vienna Convention, courts applying the model law will decide on a case-by-case basis whether particular software qualifies as an “asset” or a “service.”

In other words, international law is still trying to figure out the difference between an off-the-shelf software programs (like Microsoft Word) and a customized software program (such as the design of my website). One is an intangible good; the other is an intangible service.

In all fairness, this can be a tough question: is the design of this blog an asset or a service? I used the standard Movable Type software, but customized the details.

The underlying problem is that the Convention on Contracts for the International Sale of Goods excludes services from its coverage. Declare software an "asset", then it is covered; declare it a service, then it is not. As the states Wikipedia entry states:

With some limited exceptions, the CISG does not apply to domestic goods, nor does it apply to auctions, ships, aircraft or intangibles and services.] The position of computer software is ‘controversial’ and will depend upon various conditions and situations.

The situation is nothing new. Over a decade ago, Karen Giannuzzi pointed out the problem with this approach in an article
The Convention on Contracts for the International Sale of Goods: Temporarily out of 'Service'?:

It is surprising that in the present global economy, this monumental international convention applies only to "contracts for the sale of goods" and, by its own terms, fails to account for the ever-increasing role of service industries and service-related contracts. As a result, the CISG is an inadequate medium for the constantly changing international legal environment and therefore only has limited utility with respect to international transactions.

International transactions are no longer limited to those involving the sale of goods. Rapid advances in technology, communication services, and information systems allow multi-national companies to extend their businesses throughout the world, globalizing regional economies and changing the manner in which business is conducted. In the international context, simple contracts for the sale of goods are now mired with service-oriented provisions as issues concerning the licensing of technology and know-how, various distribution, agency and franchise requirements and restrictions, sales performances, and the transfer of trademarks and trade secrets create a more complex and intricate relationship between what has been traditionally known as the "buyer" and the "seller." Services are becoming an increasingly important part of international transactions, and contracts are no longer clearly categorized into separate groups either as "contracts for the sale of goods" or "contracts for the performance of services. "

The international business community needs a predictable structure to govern legal issues--regardless of whether a contract is for the sale of goods or for the provision of services.

Just one more example of how we let increasingly artificial definitions of service versus good get in the way.

Posted by Ken Jarboe at 8:42 AM | Comments (0) | TrackBack

August 22, 2008

That pesky accounting valuation problem

Its not just intellectual capital and intangible assets that often run afoul of the accounting valuation rules. Here is a case of a financial assets with similar problems (from Bloomberg):

National City Corp., the Ohio bank whose market value fell 70 percent this year on investor concern that capital may run short, has a $1 billion stake in Visa Inc. that doesn't get counted on its balance sheet.

National City gained $532 million by selling Visa stock when the credit-card company went public in March and still holds 19.7 million Class B shares, according to an August filing by Cleveland-based National City. The stake is probably worth about $1 billion and is carried at zero because sales are restricted, Treasurer Thomas Richlovsky said.

As Richlovsky points out, if the bank needed to raise capital in this stock, they could find a way. Yet the accounting rules don't account for that -- for probably good reasons. None the less, how these "difficult-to-value" assets are treated is a major problem throughout the business world. Maybe we can all get together to find a solution that will encompass all asset classes, including intangibles.

Posted by Ken Jarboe at 9:55 AM | Comments (0) | TrackBack

Digital Promise

To catch up on something - before it went out on recess, Congress passed and the President signed the Higher Education Opportunities Act of 2008. Included in that bill is the creation of a National Center for Research in Advanced Information and Digital Technologies:

The purpose of the Center shall be to support a comprehensive research and development program to harness the in creasing capacity of advanced information and digital technologies to improve all levels of learning and education, formal and informal, in order to provide Americans with the knowledge and skills needed to compete in the global economy.

This have been the long standing goal of our friends over at Digital Promise. Originally conceived of as DO-IT (Digital Opportunity Investment Trust), the Center is a major step forward toward creating an educational system for the I-Cubed Economy. As Digital Promise explains:

Advanced information technologies such as virtual reality, visualization, digital modeling, digitization, simulations and intelligent one-on-one tutoring systems are proven to dramatically enhance and accelerate teaching and learning difficult and abstract concepts by translating abstractions into real-world contexts and providing customized tutoring and individualized assessments. “Educational Games” and virtual reality training simulations are examples of technology-based learning tools that could be used to teach higher-order thinking skills such as strategic thinking, interpretative analysis, problem solving, plan formulation and execution, and adaption to rapid change. These are skills more American must have to compete with lower cost knowledge workers in other nations. In addition, at present, we have no systemized way to research and produce content for learning in a way that is replicable on a national level.

Congratulations on that big step forward.

Of course, now comes the funding issue . . .

Posted by Ken Jarboe at 8:41 AM | Comments (0) | TrackBack

August 21, 2008

Medical tourism

The Economist is running a story on Globalisation and health care -- as it is also referred to "medical tourism." For the most part, the story concentrates on how increased global competition will spur reform in bureaucracy heavy health care systems. From an economic development perspective, however, this might have been the most important paragraph:

Paul Mango, the chief author of a report by McKinsey, a management consultancy, disputes wild-eyed claims that millions of patients are already travelling abroad. Yet even he predicts that the future for medical travel is bright, and that in the long run it may even “largely dispel the idea that health care is a purely local service.”

Exactly -- health care is no longer a purely local service. Yes, some health care will stay local (it does not make economic sense to fly to Singapore for your annual physical). But for major and expensive procedures, offshoring is making more and more economic sense.

So localities that are banking on localized health care as an automatic economic driver need to understand that this is not the case. As I've said before, if you have a jurisdictional advantage (like the brand of the Mayo Clinic or the Cleveland Clinic), then a health care cluster might make economic sense as your key export item. But even then, these locations need to understand that their competition, as the Economist points out, is increasingly global. And then need to strategize accordingly.

Posted by Ken Jarboe at 9:07 AM | Comments (1) | TrackBack

August 20, 2008

Pushing for stimulus - and a knowledge tax credit

The drumbeat for another economic stimulus package continues to get louder. An editorial in today's New York Times (No End in Sight) describes the conventional wisdom on what the package should do:

The next package has to focus on actions that are known to yield big economic benefits: bolstered food stamps, which rapidly boost consumption; and aid to states and cities so they can continue to provide essential services. Lawmakers should also invest in infrastructure projects, like repairing bridges and roads. If not, projects that are already under way may have to be canceled, creating more unemployment.

But they also acknowledge that this may not be enough:

Congress also cannot wait to see if its anti-foreclosure measures work. It must begin to vet other ideas and be ready to move quickly if the crisis worsens.

Let me repeat a suggestion I have made before. Any stimulus package should include a knowledge creation tax credit - specifically a tax credit for worker training. That credit should cover not only the cost of direct cost of the training but also the wages paid to the worker while they are undergoing the training. Such a knowledge tax credit helps in a number of ways:
1) it addresses the macro economic stimulus of boosting individual spending;
2) it targets directly the problem of the involuntary underemployed (those who are part time for economic reasons), which is the hidden factor in the current slowdown;
3) it makes companies (and the economy) more competitive; and,
4) it facilitates the transition tot he I-Cubed Economy.

As I said before, 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.

Posted by Ken Jarboe at 9:10 AM | Comments (0) | TrackBack

August 19, 2008

When conventional wisdom gets in the way

Some times the conventional wisdom is part of the problem. Take this example (from today's Wall Street Journal - Skilled Trades Seek Workers):

With the shortage of welders, pipe fitters and other high-demand workers likely to get worse as more of them reach retirement age, unions, construction contractors and other businesses are trying to figure out how to attract more young people to those fields.

Their challenge: overcoming the perception that blue-collar trades offer less status, money and chance for advancement than white-collar jobs, and that college is the best investment for everyone.

With the constant drumbeat of "higher education," we forget that "education" and "skills" are not the same thing. We also forget that skilled trades are just as much a part of the I-Cubed Economy as the so-called creative workers.

But there is some good news - at least locally. The District of Columbia just opened its new Phelps Architecture, Construction and Engineering High School, which offers both college-bound and skilled trade related courses in those fields. [And no, it is not named after the Olympic swimmer Michael Phelps]. As such, it may provide a good model for how to blend the two.

Posted by Ken Jarboe at 9:18 AM | Comments (0) | TrackBack

Luggage as innovation

Financial Times columnist Michael Skapinker has an interesting piece about "The luggage revolution that passed me by". A long time traveler (and former FT aviation correspondent) he has only now come to appreciate what other traveler have known for a long time - the benefits of luggage with wheels. But not just any luggage with wheels, the ubiquitous upright wheeled bag:

Then this summer, for the first time in many years, we went on a holiday involving movement from city to city and ticket office to train platform and I realised how horribly unsuitable my luggage was. My suitcase does have wheels, but not the sort that allow you to tip it upright. You do not pull the case along with a lead, as if it were a dog (even I am not that backward). Instead it has a short loop on the top corner, so that you wheel it along in the same position as if you were carrying it by its handle.

This allowed me to see the true genius of Mr Plath’s creation. It is not just the wheels that make his bags easy to move. It is turning the suitcase into the vertical position and equipping it with a long, broad handle that allows an even distribution of the weight. A small handle in the front, as I had, means the entire load is concentrated in your hand.

By the way, the Mr. Plath he refers to is Robert Plath. As Skapinker reminds us, the upright wheeled bag was a user-driven innovation:

It was only in the late 1980s that Robert Plath, a Northwest Airlines pilot who was tired of lugging his bag around, fixed wheels and a pull-up handle to a suitcase and turned it upright. Manufacturers were sceptical, but Mr Plath sold some wheeled bags to other airline crew members and then set up a luggage company called Travelpro.

Not a product of an extensive focus group and development process; not the brain child of some design shop. Just someone who had a better idea.

But you can probably bet that the suitcase Skapinker complains about (with the handle in front) was the result of a product development and design process - attempting to come up with an alternative. Not that it is necessarily bad. It is just not as good as what it is trying to replace.

Score one for user-driven innovation.

Posted by Ken Jarboe at 8:38 AM | Comments (0) | TrackBack

August 18, 2008

Do it yourself innovation

Forbes is running a special feature on do-it-yourself inventors - Inventing The Future:

Most of the big commercial technology companies do all they can to hide the complexity of their products under shiny, tamper-proof surfaces. But there's a subversive movement building too, led by self-proclaimed do-it-yourselfers. They want to reinvent the gadgets in their life, much like software hackers have reworked code.

As one of the stories (Grass-Roots Innovation Takes Root) points out, this is a major part of the innovation system:

We can't get along without hackers and makers. Oil refining, woodworking, sewing machines, guns, scientific instruments and sporting goods have all been fundamentally changed by innovations from users, not producers. These "lead users," as MIT professor Eric von Hippel calls them, have had an outsized influence on the past and will continue to dictate the shape of things to come.

So, where is the National Innovation Policy that recognizes the DIY innovation system? Instead we seem to still have a policy that is built around the old producer-driven, linear model that all innovation comes out of the laboratory (in universities, government labs or corporate labs).

Posted by Ken Jarboe at 11:10 AM | Comments (0) | TrackBack

Permission problem

James Surowiecki's column in the previous issue of the New Yorker (The Permission Problem) takes on a major problem with IPR: how to share.

In the second decade of the twentieth century, it was almost impossible to build an airplane in the United States. That was the result of a chaotic legal battle among the dozens of companies—including one owned by Orville Wright—that held patents on the various components that made a plane go. No one could manufacture aircraft without fear of being hauled into court. The First World War got the industry started again, because Congress realized that something needed to be done to get planes in the air. It created a “patent pool,” putting all the aircraft patents under the control of a new association and letting manufacturers license them for a fee. Had Congress not stepped in, we might still be flying around in blimps.

The situation that grounded the U.S. aircraft industry is an example of what the Columbia law professor Michael Heller, in his new book, “The Gridlock Economy,” calls the “anticommons.” We hear a lot about the “tragedy of the commons”: if a valuable asset (a grazing field, say) is held in common, each individual will try to exploit as much of it as possible. Villagers will send all their cows out to graze at the same time, and soon the field will be useless. When there’s no ownership, the pursuit of individual self-interest can make everyone worse off. But Heller shows that having too much ownership creates its own problems. If too many people own individual parts of a valuable asset, it’s easy to end up with gridlock, since any one person can simply veto the use of the asset.

This anti-commons problem has been a major feature of the I-Cubed Economy. James Boyle labeled it an "enclosure " problem: The Second Enclosure Movement and the Construction of the Public Domain.

The same problem as for aircraft also bedeviled radio - leading to another patent pool called the Radio Corporation of America (RCA). A couple of more recent examples include a potential WiMax patent pool (see earlier posting) and an eco-patent pool (see earlier posting).

Patent pools are one way around the permission problem. Another aspect of the issue is the question of who to ask. Larry Lessig's Creative Commons is an attempt to preempt that problem.

But, as Surowiecki (and Heller) point out, getting the ownership incentives right is just as important as getting the ownership right. There have been numerous studies on the incentives and disincentive to join patent pools and on the nature of what might be "reasonable" royalties in cases of mandatory licensing. Surowiecki sums it up nicely:

the next time we start handing out new ownership rights—whether via patents or copyright or privatization schemes—we’d better try to weigh all the good things that won’t happen as a result. Otherwise, we won’t know what we’ve been missing.

Ownership is a good thing: it promotes responsible management and utilization of an asset, which is the key to capitalist economic growth. But getting the market-based economic incentives aligned to promote that management and utilization is also a necessary part of the equation.

Posted by Ken Jarboe at 10:35 AM | Comments (0) | TrackBack

August 15, 2008

Cashing in on the Olympics

For winning athletes, there is a long standing tradition of turning Olympic Gold into endorsement gold. That intangible asset of favorable name recognition is a staple in advertising. The same holds true for the venue itself, as the Chinese have come to realize (according to this story in today's Wall Street Journal - Seeking Post-Game Sponsors):

For a price tag in the hundreds of millions of dollars, the manager of the "Bird's Nest" National Stadium is selling the 30-year rights to put a corporate name on the front of the Beijing Olympics' most prominent venue, as well as the rights to about 10 specific partnerships, such as soft drinks and technology, inside. Next door, Beijing's "Water Cube" Aquatic Center is also selling partnership rights, though so far only inside.

Selling off stadium naming rights is, of course, nothing new in the US. Nor is this the first post-Olympic deal. Last year, naming rights to the Sydney Olympic stadium were sold to ANZ Bank based on the deal's advertising potential (as the Sydney Morning Herald explained):

"This stadium is one of the world's great sporting and entertainment arenas and, because of the 2000 Olympics, holds a unique place in the hearts of all Australians," ANZ CEO Mike Smith said.

So this latest move by the Chinese is following in the grand Olympic tradition. What it shows, however, is how sophisticated the Chinese are becoming with respect to intangible assets.

Posted by Ken Jarboe at 10:15 AM | Comments (0) | TrackBack

August 14, 2008

"Design thinking" in action

Jeneanne Rae's column in this month's Business Week (P&G Changes Its Game) gives a great example of how design thinking can work to enhance innovation. She looks at Procter & Gamble’s design thinking workshops, which help the company rethink products and processes:

An excellent example of this type of reframing can be experienced by going to www.olayforyou.com. As a female consumer, I'll be the first to tell you that Olay products are frustrating to shop for. There are too many, you can't zone in easily on what's right for you, and it seems like you ought to feel a little better about shelling out $29 for a tube of goo to try to keep yourself looking good. Apparently I'm not the only woman feeling this way. Through the insights into these frustrations gleaned at a design thinking workshop, Olay marketers came up with the Olayforyou.com Web site, a streamlined way to connect with consumers online.

With her soothing voice, the site's narrator walks you through a series of engaging questions about your skin. What are your habits and goals? What problems are of concern? The experience is simple yet conveys a deep understanding of the myriad factors that make up your specialized needs. Analyzing your responses, the system quickly assembles a tailored set of recommendations for a regime that is designed to meet your age and stated desires. I found myself wishing that all retail encounters could be this easy and fulfilling.

Olayforyou.com provides a calming, easy way to receive a credible consultative experience without ever leaving your own home. P&G now offers a beauty service. Through menu choices that indicate your interests and skin issues, Olay marketers are able to start a new type of dialogue while collecting important data on users that can be more informative than expensive market research. Consumers can opt to have Olayforyou.com send a personalized skin-care regime profile by e-mail.

In other words, Olay went from selling a product to selling a solution. This is a great example of how a company can make the service into the product. It also is an example of moving from a value-chain production model to a value-workshop problems solving model.

A very interesting conjunction of three shifts in the I-Cubed Economy: the rise of design thinking, the fusion of goods and services, and the shift from a production model to a problem solving model.

Posted by Ken Jarboe at 11:36 AM | Comments (0) | TrackBack

August 13, 2008

The measurement problem - and our conceptual models

John Kay's column in today's Financial Times reminds us of how far we have yet to go in measuring economic activity - Statistics, damned statistics and value added:

Sir Josiah Stamp, a founder of economic statistics, observed that “the government are very keen on amassing statistics – they collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But what you must never forget is that every one of these figures comes in the first instance from the village watchman, who just puts down what he damn well pleases.”

But the problem goes well beyond the collection problem to the conceptual one. Kay's case in point - financial services:

Output of financial services is difficult to compute. The usual economic definition looks at value added, the difference between the value of the goods you sell and the cost of the materials you buy. This definition excludes profits from securities, interest paid or received and all transactions associated with the financing, rather than the operations, of the business. These principles work well for manufacturers, but not for a financial services company, which typically pays its bills through profits from trading and investment returns.

And this is a economic sector that has been around for a very long time. Yet, we apparently continue to attempt to apply an observation model from one part of the economy (manufacturing) to another area where it does not necessarily apply. Burgman and Eccles have described an alternative approach of looking at basic economic activity:

Three business models define shareholder value creation today – the value chain, the value shop and the value network:
• Value chains create value by transforming inputs into products (e.g., Toyota Motor Corporation, Nike Inc.);
• Value shops create value by mobilizing resources to create individual solutions to customer problems or to exploit market opportunities (e.g., Apache Corp., Harrah’s Entertainment Inc.); and
• Value networks create value by mediating or facilitating exchanges between their constituents (e.g., eBay Inc., FedEx Corporation).

The last of these - the network model - is really a transaction-based activity. Such a model is much more appropriate for addressing Kay's problem of how economic measurement in the financial services industry. These models were developed as part of an ongoing attempt to come up with new financial reporting methods (see the Enhanced Business Reporting Consortium.)
[Update -- see also Harris and Burgman - Chains, Shops, and Networks: The Logic of Organizational Value]

I'm sure there are other models as well. The point is that we have to stop thinking that all economic activity fits into the linear flow model of the manufacturing assembly line. That linear model has come to dominate our thinking in areas from economic statistics to innovation policy.

So the measure problem is as much what we tell the village watchman to write down as any errors his observations may cause. Changing the mental model he carries around may, in the end, be the best way to improve our statistical understanding of how the economy is doing.

Posted by Ken Jarboe at 8:13 AM | Comments (1) | TrackBack

August 12, 2008

June trade in intangibles

Good news on the trade front as this morning's BEA trade data showed a slight decline in the trade deficit. June's deficit was $56.8 billion compared to $59.2 billion for the revised May data. Exports increased by $6.4 billion while imports grew by only $3.9 billion. The deficit was less than expected. As the Wall Street Journal reports, "Economists surveyed by Dow Jones Newswires had estimated a $62.70 billion shortfall." The lower deficit number is also good news for the upcoming GDP revision - since a smaller deficit boosted the economic growth figure (see earlier posting).

The intangibles trade surplus also improved slightly as export rose faster than imports for both royalties and business services. The intangibles trade surplus rose by $247 million to $13.5 billion. As I posted earlier, the Institute for Supply Management (ISM) New Export Orders Index declined in June from the May level, indicating a slow down in services exports. However, the ISM service index includes service such as transport and wholesale activity which we do not consider as intangibles trade.

The deficit in Advanced Technology Products increased slightly in June to $3.9 billion. The change was almost completely due to a $326 million deficit in nuclear technology. The other categories had only minor gains or losses or remained relatively unchanged. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Posted by Ken Jarboe at 8:46 AM | Comments (0) | TrackBack

August 11, 2008

Some good news on monetization of intangibles

This bit of good news from our friends over at IP finance ... where money issues meet intellectual property rights: Music catalogues, securitisation and the credit crunch: not all bad news:

While the credit crunch has certainly had an impact on liquidity in the debt markets, its influence has been worst in the large M&A market and in the capital markets. Smaller deals can still be done and banks are looking in particular at alternative asset classes to provide them with a source of transactional revenue from fees for deals which they structure and sell. In addition, hedge funds have also entered the market. Some funds have been established specifically to invest in or lend to the sector and others have been prepared to commit smaller amounts of their capital to "non-traditional" deals to provide an interesting story for their investors.

Now this is written by a solicitor in the UK, so I don't know if it applies to the US as well. I am told that there is more interest in intangibles right now in Europe rather than the US. But at least the market is continuing.

Posted by Ken Jarboe at 9:52 AM | Comments (0) | TrackBack

August 8, 2008

Market intangible

One of the long standing advantages that the US has had in the financial arena has been faith in the fairness of the market. As Floyd Norris points out in his New York Times column today High and Low Finance:

There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.

Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.

Norris notes that this American premium collapsed when the bubble burst in 2002, but recovered somewhat after that and after the passage of Sarbanes-Oxley. He also points to:

A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.

In other words, the US financial market is not losing its competitive advantage because of regulation. In fact, one of the authors of the study, G. Andrew Karolyi, a finance professor at Ohio State, warns just the opposite:

“I think there is a grave risk that the advantage may be lost because of the continued chipping away at the rock,” Mr. Karolyi said. “It just doesn’t seem like the right time or the right place to be engaged in a serious deregulation of financial markets.”

We need to understand what the sources of competitive advantage are for the United States. One of them, as my conservative friends like to point out, is the rule of law. That doesn't just mean that there is strong enforcement of the laws, but that the laws are seen as fair to all. This extends to financial regulations. If the regulatory system is seen as protecting a version of "devil-take-the-hindmost" or is seen as rigged toward particular participants, then the prudent investor is likely to stay away. Open and transparent markets are our best weapon in the fight for competitive advantage in the financial area. The recent credit meltdown should reinforce that message -- illustrating what happens when markets lose their transparency. They also illustrate how fragile that intangible asset of faith and confidence can be. Let us make sure we learn the correct lesson from this experience.

Posted by Ken Jarboe at 8:44 AM | Comments (0) | TrackBack

Reshaping the market

Pardon the pun, but here is an interesting story on how innovation works by reshaping the market. Case in point, women's "shapeware". A Dated Industry Gets a Modern Makeover

While many entrepreneurs tackle new or emerging businesses, hoping to come up with the next great product, Spanx succeeded in reviving a tired industry by casting it in a fresh new light.

. . .

For Spanx, that meant developing a product line that refashioned shapewear -- a corner of the retail universe that had been sagging for decades, since women stopped regularly wearing pantyhose -- as an essential item for well-heeled, well-dressed women. With slick, colorful packaging and kitschy product names like Hide & Sleek, Spanx shapewear appeals to a younger, more fashion-savvy demographic than a traditional girdle, which instantly conjures an old-lady image.

"Ten years ago, shapewear was considered your grandmother's kind of product," says Mary Krug, a vice president and divisional merchandise manager for Neiman Marcus Stores, a part of Neiman Marcus Group Inc. in Dallas. Spanx "made it cool and hip in what is not a cool and hip category." Today, she says, Spanx is one of Neiman Marcus's highest-grossing intimate-apparel vendors.

In other words, there are no "old industries" -- just industries that have not yet been re-invented.

Posted by Ken Jarboe at 8:07 AM | Comments (0) | TrackBack

August 7, 2008

Patent office extends pilot program

Catching up on old news, last month the US Patent and Trademark Office announced that it was extending and expanding its new Peer Review Pilot program. This is a pre-review pilot program that is specifically designed to increase the input of information on prior art. Under this program, participants may suggest cases of relevant prior art, including a detailed description of the relevancy. Participants will then vote to rank the top-10 cases to be forwarded to the patent examiner. The concept was developed by the Peer-to-Patent Project at the New York Law School’s Institute for Information Law and Policy.

The project seems to have been a success. According to the USPTO announcement:

So far, the pilot’s first 31 applications have been examined. More than half of the examiners who examined an application in the Peer Review Pilot so far thought the prior art submitted by the peers was helpful during examination. More than one-third of the examiners used peer-supplied prior art in the first action on the merits. Nearly 75 percent of the participating examiners said they believed the program would be useful if it were incorporated into regular Office practice.

This program is voluntary on the part of the applicant and limited to certain computer-related patents. USPTO is expanding the program to include some business method patents.

I strongly support this program -- expanding it is one of the recommendations in our working paper Intangible Asset Monetization: The Promise and the Reality. As I note in that paper, participation should pay off in the form of a stronger and more valuable patent that has been subject to a more intense pre-grant review. This will benefit the patent holder with both a stronger patent (more like to withstand any challenges) and a patent that is more attractive to investors. The more confident an investor feels about the validity of a patent, the easier it will be to either borrow against or otherwise monetize that patent.

So, the extension and expansion of this program is one small step toward improving our innovation system and strengthening the I-Cubed Economy.

Posted by Ken Jarboe at 10:30 AM | Comments (0) | TrackBack

August 6, 2008

Wall Street reforms

A group made up of the large Wall Street institutions (which goes by the catchy title of the Counterparty Rick Management Policy Group) has released a new report -- Containing Systemic Risk: The Road to Reform. As the Wall Street Journal notes:

The group, co-chaired by Gerald Corrigan, a Goldman Sachs managing director and former president of the Federal Reserve Bank of New York, laid out sixty proposals in all over 138 pages. They recommended that banks be forced to account for more assets on their balance sheets, face tougher standards for selling complex debt instruments, accelerate reforms of the credit default swap market and implement tougher standards for managing their own risk and liquidity. . . .
In an interview, Mr. Corrigan described the proposals as "a significant raising of the bar" for Wall Street. But it isn't clear to what extent the proposals will be adopted by banks and brokers. The group, called the Counterparty Risk Management Policy Group, included representatives from nearly every big U.S. bank and broker. It has issued reports in past years -- most notably one in 2005 -- that weren't fully embraced by Wall Street.

That situation may have changed because, as the Journal notes, "The 2005 report included warnings about the workings of the collateralized debt obligation market, which subsequently experienced a boom and bust that has cost Wall Street hundreds of billions of dollars in write-downs and losses." Nothing like being right before to enhance one's credibility.

While the recommendations don't touch directly on intangible assets, they may indirectly affect intangibles. For example, the group states the following:

With respect to high-risk complex asset-backed securitizations, underwriters and placement agents should have in place an ongoing framework for evaluating the performance and reputation of issuers as well as effective and clearly articulated procedures for evaluating the quality of assets. The Policy Group strongly urges that underwriters and placement agents redouble efforts to adhere fully to the letter and spirit of existing diligence standards, and seek opportunities to standardize and enhance such standards. These enhancements include the following recommendations:
III-4a. Requiring all firms to follow statistically valid sampling techniques in assessing the quality of assets in a securitization; and
III-4b. Encouraging disclosure to investors of due diligence results, including making the AUP letter publicly available.

Having "clearly articulated procedures for evaluating the quality of assets" would be of benefit to intangibles - as it would make those assets more understandable, and therefore more acceptable to investors. The trick here, however, is to make sure that those procedures are not internally bias against intangibles.

There are undoubtedly more recommendations that could affect intangibles. The complexity of the subject and of the policy recommendations simply highlights the education process. As these types of reports come forward, those making the recommendations need to at least be aware of this emerging new asset class called intangibles.

Posted by Ken Jarboe at 12:11 PM | Comments (0) | TrackBack

Dani Rodrik on the Doha Round

Dani Rodrik latest article - Don’t cry for Doha:

But look at the Doha agenda with a more detached set of eyes, and you wonder what all the fuss is about. True, farm-support policies in rich countries tend to depress world prices, along with the incomes of agricultural producers in developing countries. But for most farm products, the phasing out of these subsidies is likely to have only modest effects on world prices — at most a few percentage points. This is small potatoes compared to the significant run-up in prices that world markets have been experiencing recently, and it would in any case be swamped by the high volatility to which these markets are normally subject.

. . .

What about industrial tariffs? Rich countries have demanded sharp cuts in import tariffs by developing countries such as India and Brazil in return for phasing out their farm subsidies. (Why they need to be bribed by poor countries to do what is good for them is an enduring mystery.) But here, too, the potential benefits are slim. Applied tariff rates in developing countries, while higher than in advanced countries, are already at an all-time low.

According to World Bank estimates, complete elimination of all merchandise trade restrictions would ultimately boost developing-country incomes by no more than 1 percent. The impact on developed-country incomes would be even smaller. And, of course, the Doha Round would only reduce these barriers, not eliminate them altogether.

The Doha Round was constructed on a myth, namely that a negotiating agenda focused on agriculture would constitute a “development round.” This gave key constituencies what they wanted. It provided rich-country governments and then-WTO Director General Mike Moore with an opportunity to gain the moral high ground over anti-globalization protesters.

It gave the US a stick with which to tear down the EU’s common agricultural policy. And it was tailor-made for the few middle-income developing countries (such as Brazil, Argentina, and Thailand) that are large agricultural exporters.

But the myth of a “development” round, promoted by trade officials and economists who espouse the “bicycle theory” of trade negotiations — the view that the trade regime can remain upright only with continuous progress in liberalization — backfired, because the US and key developing countries found it difficult to liberalize their farm sectors. What ultimately led to the collapse of the latest round of negotiations was India’s refusal to accept rigid rules that it felt would put India’s agricultural smallholders in jeopardy.

More importantly, the fears underlying the bicycle theory are wildly inflated.

We live under the most liberal trade regime in history not because the WTO enforces it, but because important countries — rich and poor alike — find greater openness to be in their best interest.

So maybe we can pick up the pieces and get on with other areas of trade and economic policy.


(Tip of the hat to Global Strategy Watch for alerting me to this).

Posted by Ken Jarboe at 11:48 AM | Comments (0) | TrackBack

Service exports index declines

Yesterday, the Institute for Supply Management (ISM) released its "July 2008 Non-Manufacturing ISM Report On Business®". The overall Non-Manufacturing Business Activity Index decreased 0.3 percentage point to 49.6 percent, showing a slow down in the service sector. Trade in services was also down:

Orders and requests for services and other non-manufacturing activities to be provided outside of the United States by domestically based personnel indicated contraction for the month of July. The New Export Orders Index for July registered 47.5 percent, compared to June's index of 52 percent. Of the total respondents in July, 70 percent indicated they either do not perform, or do not separately measure, orders for work outside of the United States.

The industries reporting an increase in new export orders in July are: Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; and Retail Trade. The industries reporting a decrease in export orders in July are: Educational Services; Management of Companies & Support Services; Transportation & Warehousing; Wholesale Trade; Finance & Insurance; and Accommodation & Food Services.

The June index of 52% was also lower than in May. The June trade data comes out on Tuesday. We will see then how this affects our intangibles trade surplus. The Tuesday overall trade numbers will also affect the 2Q GDP number - in so far as the preliminary GDP figure was based on incomplete trade data (see earlier posting).
(Note that the ISM service index is different from the Athena Alliance intangibles trade. The ISM includes service such as transport and wholesale that are not including in the intangibles data).

Posted by Ken Jarboe at 10:02 AM | Comments (0) | TrackBack

Measuring human capital in urban America

There is a new study out Human Capital and Economic Activity in Urban America by Jaison Abel and Todd Gabe showing that human capital is important for economic growth:

This paper examines the relationship between human capital and economic activity in U.S. metropolitan areas, extending the existing literature in two important ways. First, we utilize new data on metropolitan-area GDP to measure economic activity. Using educational attainment as an indicator of human capital, we find that a one-percentage point increase in the proportion of residents with a college degree is associated with a 2.3 percent increase in metropolitan-area GDP per capita. Second, we move beyond the conventional proxy for human capital—educational attainment—to develop new measures that reflect the types of knowledge within U.S. metropolitan areas. Results show that knowledge associated with the provision of producer services and information technology are particularly important determinants of economic vitality in U.S. metropolitan areas.

The findings go beyond looking at urban areas. Using urban areas to create a large enough sample, the authors show a direct correlation between human capital and economic growth which sidesteps all of the problems associated with using nations as the sample.

More important is their attempt to create an alternative metric for human capital using the knowledge requirements of specific occupations from the U.S. Department of Labor’s Occupational Information Network (O*NET). They create 13 knowledge clusters that rank along the O*NET's 33 knowledge areas.

They then correlated this clusters against economic performance. The findings were both expected and counterintuitive. The expected part was the human capital matters:

Specifically, we find that the percentage of a metropolitan area’s workforce in the knowledge-based occupation clusters of “executives and managers,” “financial and legal,” “information technology” and “artists and designers” have a positive and statistically significant effect on GDP per capita. Further analysis shows that knowledge in specific areas such as administration and management, economics and accounting, mathematics, computers and electronics, and telecommunications are particularly important drivers of economic activity in urban America.

The counterintuitive part came from how other clusters correlated with economic growth:

we do not find a statistically significant relationship between GDP per capita and the clusters of “engineers and scientists” and “medicine and health” occupations. These results are particularly surprising given the importance of scientific innovations and healthcare to economic vitality and overall quality-of-life. One potential reason for this finding is that innovations of these sorts tend to provide global benefits, and thus may not be captured fully by differences across metropolitan areas.

and

the proportions of employment in the knowledge-based occupation clusters of “public safety,” “agriculture and food services,” “counselors and social workers,” and “educators, librarians, and writers” have a negative and statistically significant effect on GDP per capita. Other things being equal, an increase in the relative size of the “educators, librarians, and writers” cluster equivalent to one standard deviation relative to the mean is associated with a 12.5 percent decrease in GDP per capita. It appears from this analysis that, other things being equal, a regional workforce possessing high knowledge about education and training, foreign language, and history and archaeology—areas that are relatively important in the cluster of “educators, librarians, and writers”—actually diminishes the amount of measured economic activity in urban America.

Very interesting -- and worth follow up study to understand exactly what is going on. They do have a partial explanation for the "educators" finding:

This result can be explained by the fact that GDP per capita, the variable used to measure economic activity, is defined as the market value of all final goods and services produced within a metropolitan area. In the case of the knowledge area of education and training, the final goods and services that are counted in GDP statistics are the revenues generated by a university or college such as tuition, fees, and grants and contracts. On the other hand, the most valuable output of an educational institution, arguably its graduates, is not directly connected in metropolitan area GDP statistics to the level of knowledge about education and training. The extent to which the acquisition of a K-12 education is captured in GDP statistics is likely to be even smaller. Similarly, the output generated by knowledge about subjects such as history and archeology, philosophy and theology, and fine arts appears to contribute relatively little to measured GDP. Knowing a lot about fine arts or theology can create a beautiful sonata or inspiring sermon (as an output), but this knowledge contributes to GDP only to the extent that it is captured in the value of a final good or service.

A plausible, but not satisfying explanation. Clearly more work needs to be done.

I am especially excited about their knowledge index based on the O*NET data. For years everyone has been complaining that education level is a poor proxy for workforce knowledge and skills (just like patents are a poor proxy for innovation). Maybe we have a new measure here. Definitely worth exploring further.

Posted by Ken Jarboe at 8:58 AM | Comments (0) | TrackBack

August 5, 2008

Reputation (and the internet)

Speaking of people and reputation, Andrew Sorkin has a story in his DealBook column in today's New York Times on "On Wall St., Reputation Is Fragile". The story is about Steven Rattner who recently resigned as a managing director at Credit Suisse. The reason, 5 years ago he had an affair with a married woman:

Kelly Cosgrove, the woman with whom Mr. Rattner had an affair, was married at the time to an Australian named Tommii Cosgrove. And after he learned of the affair, Mr. Cosgrove decided to make it his life’s mission to damage Mr. Rattner. And with Mr. Rattner’s resignation, he may have succeeded.

Mr. Rattner, who is apologetic and contrite, did not commit a crime. He did not violate Credit Suisse’s code of ethics. His affair was not with a subordinate or a peer — Ms. Cosgrove had no relationship with Credit Suisse.

Here is one of the bizarre facts about the case: Although Mr. Cosgrove has known about the affair for five years — indeed although the Cosgroves were divorced last year — he began his vendetta only two months ago. When I asked him about the strange five-year gap, Mr. Cosgrove said, “I had to put my life back together again. He destroyed everything I had. And I had to find him.”

Such is the power of the internet and the fragility of repuation. As Sorkin concludes:

But this isn’t about a man who made a mistake and had an affair. It is a story about a man who said he was helpless against the destruction that can be wrought by aggressive campaigns on the Internet.

By the way, there might be some collateral damage in this case. There is another Steven Rattner -- a more well known financier who, among other things, manages Mayor Bloomberg's blind trust:

Even the other, more prominent Mr. Rattner has learned that through this tale. “I’ve gotten people calling up in a panic,” he said. “I had to tell them it wasn’t me.”

Posted by Ken Jarboe at 9:48 AM | Comments (0) | TrackBack

That intangible called people

Do intangibles (like people) make a difference in stock price? Apparently so, given the Motorola story. Yesterday, Motorola announced it was hiring Sanjay Jha, formerly chief operating officer of Qualcomm, to head its mobile phone division. Motorola's stock price jumped over 11%. As the Financial Times explained:

Analysts said Mr Jha’s appointment was expected to give the unit credibility and quell doubts that Motorola would go through with plans to split off the mobile phone business in the third quarter next year.

By the way, Qualcomm's price dropped about 4.7% -- in a market that went down by about 1%. But, as the Wall Street Journal reports, Qualcomm is trying to look at this as an opportunity:

Paul Jacobs, chief executive of Qualcomm Inc., could dwell on Sanjay Jha's departure to Motorola Inc. as the loss of a key team member. But he'd rather think of the possibilities with Mr. Jha as a customer.

Ah, yes, the importance of another intangible: relationships.

Posted by Ken Jarboe at 9:23 AM | Comments (0) | TrackBack

August 4, 2008

Hedging on an intangible?

Today's Heard on the Street column in the Wall Street Journal is arguing that hedge funds might clean up due to the proposed new SEC rules on harmonization of accounting standards. One of the keys: intangible costs, specifically R&D. Here is the argument in brief:

companies that meet certain market-value or revenue criteria are likely to be able to choose between the two systems for a few years.

That could lead to companies within the same sector reporting results differently, making comparisons difficult for all but the most sophisticated investors. Hedge funds, many of which specialize in the kind of deep-dive research that will be needed to ferret out the ensuing valuation anomalies, are likely beneficiaries, but average investors could suffer.

Take research-and-development costs. In the U.S., companies have to expense these when they occur. Under international rules, companies expense research but capitalize, or spread out over time, development costs.

The international approach can help flatter profits in the short term. Unless investors understand such differences, valuation comparisons will be off-base.

The problem with this argument is that it is unclear that the difference in treatment of R&D costs really matters that much. In an earlier posting, I cited research that showed that the biggest differences were due to the accounting treatment of other factors such as taxes and financial instruments. Goodwill, which includes R&D, plays a part - but a small part.

Still, there are differences -- and hedge funds make big bucks betting large amounts on small differences. So, there might be a business opportunity here. Including a role for accounting consultants to ferret out the minor differences between how the US and the rest of the world handles R&D accounting.

Posted by Ken Jarboe at 11:15 AM | Comments (0) | TrackBack

Doha backlash and intangibles

It looks like the first piece of fallout from the breakdown of the Doha Round is about to hit. According to the Financial Times, Brazil is preparing to go ahead with both retaliatory sanctions in the WTO cotton case and prepare new cases against the US on other agricultural products. In the cotton case, the WTO found that the US subsidies violated trade rules. That decision was upheld on appeal in late June of this year. According to the FT story, Brazil had been holding off any action to see if a deal on agriculture could be reached. With the collapse of Doha, it looks like the Brazilians are moving ahead.

This action is also in part a direct response to this year's farm bill, which in the Brazilian's (and WTO's) eyes made matters worse. Thus it is likely to set up a confrontation with the Congress over the issue of whether WTO rules can override US law. Technically, the answer is no; the only thing Brazil can do is impose retaliatory sanctions. But the impact may be the same since the idea is to increase the pain in order to get the offending party to change their laws/policies.

The action has special significance for intangibles trade: the WTO authorized retaliatory sanctions are on services and intellectual property. In other words, Brazil could retaliate by ignoring certain US patents. In an earlier test (on offshore gambling), the US partly settled by keeping the US law but opening up certain services in the US to the foreign firms as compensation. That settlement, however, did not include the original complainants, Antigua and Barbuda, who were subsequently also given the right to retaliate on intellectual property (see earlier posting).

The US has steadily maintained that the retaliatory sanctions do not override a country's obligations to enforce intellectual property rights (see earlier USTR statement on internet gambling). That stance may now be put to the test.

It might also create a complicated political dynamic in the US – pitting IPR-intensive and service-intensive industries against agricultural interests.

By the way, the FT is also reporting another fight:

After two months of negotiations, Washington and Brussels have been unable to settle their fight over the interpretation of the Information Technology Agreement, a decade-old 70-nation pact that prohibits countries from imposing tariffs on many high-tech products.

This is not a good sign, given that the ITA was supposed to be the model of future sector specific negotiations (see earlier posting).

Posted by Ken Jarboe at