December 2008 Archives

Once again, it is that time of year. After an exciting 12 months, Athena Alliance and The Intangible Economy is taking the rest of the year off.

(from Christmas dinner center piece this year)

Happy Holidays and best wishes for a wonderful 2009.

Athena Alliance has just published it latest report, Crafting an Obama Innovation Policy. Candidate Obama made it clear that long-term economic growth—not just economic recovery—is a priority. The campaign advanced a well-thought-out list of technology policy recommendations. President-elect Obama now faces an opportunity and a challenge. The opportunity is to broaden his agenda into an innovation policy focused on other drivers of growth—not just science and technology. The challenge is to make the best use of existing and new institutions of government to design and implement that policy without getting in each others’ way. This paper outline short-term actions that would signal a commitment to a broad innovation agenda and longer-range actions which could significantly strengthen the nation’s innovation capacity.

The report is an expansion of an earlier posting, and has been forwarded to the Obama transition team.

Yesterday's New York Times ran a story on the growing number of underemployed - More Companies Cutting Labor Costs, but Not the Labor:

A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor.

As I've noted many times before, this may be a good business strategy but it creates a new economic policy challenge. A part of our demand stimulus -- specifically unemployment insurance -- is based on people who have lost their jobs, and therefore lost their purchasing power. That type of stimulus will not help restore the purchasing power (and therefore aggregate demand) of people who have wage or hour cuts. Some of the infrastructure stimulus will address the hours issue -- but not the lower wages. We need specific policies to deal with the underemployment problem.

As I have argued before, one of the policies would be a knowledge tax credit. Take those slack hours and put people into training programs. That will help replace lost income (and purchasing power) and make the companies and the country stronger in the long run.

In case you missed it, Paul Krugman's Nobel Prize Lecture is available. The slide available at nobelslides.pdf. It is a great overview of his work on "new trade" and "new geography" economic theories.

On a related auto note, the battery manufacturers are forming consortia -- National Alliance for Advanced Transportation Battery Cell Manufacture -- to develop technology to electric cars. According to the Wall Street Journal:

The consortium is modeled on Sematech, the group formed by U.S. computer-chip companies in 1987 to compete with the Japanese. Sematech, based in Austin, Texas, is credited with helping U.S. companies regain their footing by focusing on manufacturing and design advancements with funding from the federal government. "We think Sematech was one of the best examples of government intervention in industry," said Jim Greenberger, a Chicago attorney at Reed Smith LLP, who is working with the battery consortium.

While I support such consortia and wish the new group all the best, I would caution against too over optimism that this is the solution to the problems. I have some background in both electric cars and Sematech. Back in the early 1980's, I was involved in a study of the potential of electric vehicles (that study help put me through my Ph.D. program) - and I was licensed to drive the Detroit Edison's electric cars. The problem back then was batteries - and 25 years later it appears that it is still batteries.

On Sematech, I was involved in the crafting of the legislation creating the group. Originally, Sematech was meant to confront the Japanese memory chip challenge. By the mid-1990's Sematech stopped being a US competitiveness institution and became an international research organization for the industry - including the non-US industry. Sematech made that decision for very sound business reasons. The industry also felt that it had reached to point that the US industry has stabilized. But the industry was now irrevocably internationalized with no thought that the US could necessarily regain the competitive lead.

The other point on Sematech is that it worked because of Bob Noyce. As one of the inventors of the computer chip, Bob has the eminence in the industry to pull this off. Without someone of Bob's stature, Sematech could have easily become a failed irrelevancy, as some consortia are. Bob forced the industry to take the effort seriously and to contribute not only funds, but top talent and executive attention.

So I wish the battery consortia well. I would urge two points however. One, find someone who is committed and who has the stature to drive the group to success. Two, be very clear in your goals. Is it a mechanism to advanced research on batteries, manufacturing technology or something else? Is it a means to strengthen the electric car industry - or to help the US manufactures compete - or to keep production in the US? There is enough difference among those goals to cause the effort to fail if it tries to be all things to all people.

The White House announced a $17.4 billion loan package for GM and Chrysler this morning. According to the Fact Sheet (courtesy of the Wall Street Journal), here are the details:

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:
* Firms must provide warrants for non-voting stock.
* Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
* Debt owed to the government would be senior to other debts, to the extent permitted by law.
* Firms must allow the government to examine their books and records.
* Firms must report and the government has the power to block any large transactions (> $100 M).
* Firms must comply with applicable Federal fuel efficiency and emissions requirements.
* Firms must not issue new dividends while they owe government debt.

In addition, according to the New York Times, the loan would be called for immediate repayment if the companies cannot meet a viability standard by March 30.

What is unclear is the government's recourse in case of bankruptcy -- which would likely be triggered by calling in the loan. The government' would get first claim on the companies' assets, include the intangible assets such as the patent portfolio. (Generally, as I understand it, if it is not explicitly included, IP is automatically included. The problem is finding out if someone else has a claim on those assets -- including a license.)

But what would the government do with those assets? There is a great opportunity to use this as a case study in the value of intangibles. The deal gives the government the right to look at the books and records. Treasury should use this power to go in and find out what the companies are really worth -- specifically in terms of their intangibles assets. Such an audit would set a standard and raise the awareness of the issue.

Apropos yesterday's posting on broad innovation policy, come this story in TIME on the 50 Best Inventions 2008. We may still be gadget oriented when it comes to the word "invention," but the TIME's list has a couple of social and process (non-technological) inventions on the list, including MacroMarkets, co-founded by economist Robert Shiller, which will offer the first exchange-traded funds on housing prices; the Vatican's new Seven New Deadly Sins; the proposal for new short-term housing refinance; the "Branded Candidate" ala Obama; the use of instant replay in baseball; and Montreal's Public Bike System, nicknamed Bixi. My favorite "invention" was Number 36. The New Ping-Pong Serve:

German Olympian Dimitrij Ovtcharov's serve isn't about power. It's about weirdness. Crouching to table-level, he peers over his paddle and executes a hand dance before launching the ball at his opponent, who is probably too dumbfounded to respond. Which, of course, is the point.

As they say, whatever works.

During the Presidential race, both campaigns put together lists of technology policy recommendations. Candidate Obama talked about the need to restore adequate funding for R&D, increase STEM education, make the R&D tax credit permanent, streamlining our patent system, promote the deployment of next-generation broadband networks, and develop next generation manufacturing technologies, among other things. He even proposed creation of a Chief Technology Officer (CTO) for the United States. (see Fact Sheet Innovation and Technology and Obama Science Plan)

But now President Obama has the opportunity to broaden the view from a technology policy to an innovation policy. That is not to say the Obama technology policy is wrong – it isn’t. It is just incomplete.

As I argued four years ago in National Innovation Policy: An Urgent U.S. Need:

To use a sports analogy, imagine an NFL coach who concentrates solely on the passing game--working only with the quarterback and the wide receivers. Granted, these are the players that produce many of the TV-highlights plays. But as any football fan can tell you, you don’t get to the Super Bowl if you neglect the running game, defense, the kicking game, and special teams.

We have equated innovation only with S&T and have neglected other parts of the game. Is S&T necessary? Yes. Is it sufficient? No.

In a number of postings over the years, I’ve highlight examples of what a broader innovation policy would look like. Two most recent posting highlight this point: the FT Climate Change Challenge and Husick’s Top 25 Innovations.

The FT Climate Change Challenge stated:

The innovation need not be technological, although such entries are certainly eligible. Creativity could equally come in marketing, financing, analysis or in an entire business model.

“Innovation” is not just inventions; it is a process of making changes by introducing valuable new methods, ideas, or products. “Innovations” are the things themselves—the ideas, methods, and processes. It’s not simply that better mousetrap; it’s different ways of thinking and doing. Innovations may of course be inventions, but they may also be beliefs, organizational methods, and discoveries. An innovation is a value-creation mechanism. It is the way we humans manage to extract more value, generate more economic surplus and therefore more leisure time, and manage to get away from just hunting and gathering.

To help craft this broad innovation policy, the new Obama Administration will have a mechanism created for it by the previous Congress and Administration. Section 1006 of the America COMPETES Act creates a President's Council on Innovation and Competitiveness (PCIC). Made up of the heads of the departments and agencies involved in the innovation and competitiveness agenda, it is chaired by the Secretary of Commerce. The purpose of the Council is to develop a comprehensive strategy and oversee the implementation of that strategy.

To seize this opportunity, it is important that this Council be given standing in its own right. While the legislation contains an "out" to allow the President to designate some other organization to handle the Council’s responsibilities, this would be a complete negation of the purpose of the proposal. As importantly, the Council needs to be staffed out of the White House, and specifically the National Economic Council (NEC). The NEC is the economic equivalent of the National Security Council and is the President’s mechanism for coordinating economic policy. PCIC should serve as its innovation policy compliment.

The America COMPETES Act very explicitly outlines a broad the innovation and competitiveness agenda for the Council. This agenda cuts across numerous departments and agencies; 16 are listed as members of the Council. Only staffing out of the White House can effectively manage this crosscutting agenda.

In addition, the broad nature of the Council’s mandate argues for staffing out of the NEC. There have been suggestions that the Council should be part of the Office of Science and Technology Policy (OSTP). I would argue that such a placement would seriously narrow the scope of the Innovation Council – and run the risk of turning it into a Technology Council. We already have a National Science and Technology Council as part of OSTP:

The National Science and Technology Council (NSTC) was established by Executive Order on November 23, 1993. This Cabinet-level Council is the principal means within the executive branch to coordinate science and technology policy across the diverse entities that make up the Federal research and development enterprise.

In fact, the America COMPETES Act specifically calls for the PCIC to coordinate with the NSTC, and obviously not duplicate it.

The Obama Administration may also wish to upgrade the status of the PCIC. Both the NEC and NSTC are Chaired by the President and included the Vice President as a member. The PCIC should have the same status. This could be done through Executive Order.

The task before the Council is daunting. As it goes about its work, it must not only pull together the existing policies, programs and resources. The Council must also craft and innovation and competitiveness policy for the 21st Century. I have argued before (see "Competitiveness Revisited") that we are in a very different situation than when competitiveness policy was created in the 1980:

Twenty years ago, the U.S. faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy. Then, the main financial challenge was reducing the cost of capital; today’s equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to an increasingly globalized and interconnected economy.

In the 1980s our focus was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services—as well as the suppliers of financial, scientific, and human capital—have the capabilities and resources necessary to prosper and grow in this new environment.

In crafting a new policy, we must recognize three points:
1. the innovation model has changed,
2. its all about people and organizations, and
3. technology plays multiple roles.

First, we all need to recognize that the innovation model has changed. It is not the linear process of flowing from basic research to final product that sticks in everyone mind. It is a network process. There are many points on the network where innovation can come from. We have used a number of terms to try to describe parts of the new model: “open innovation,” “user-driven innovation,” and even “design thinking.”

It is also not solely about technology. Technology remains an important component. But, as noted earlier, social innovations, marketing, finance, design and business models are also key sources of innovation as well. As Christopher Hill points out in "The Post-Scientific Society":

In the post-scientific society, the creation of wealth and jobs based on innovation and new ideas will tend to draw less on the natural sciences and engineering and more on the organizational and social sciences, on the arts, on new business processes, and on meeting consumer needs based on niche production of specialized products and services in which interesting design and appeal to individual tastes matter more than low cost or radical new technologies.

Suffice it to say that innovation policy needs embraced this broader concept.

Second, innovation is about people and organizations. Skills, not just education, are critical. Likewise, both tacit and experiential knowledge, not just codified and science-based knowledge, are also important. In order to put those skills and knowledge to proper use, organizational structure comes into play. The old hierarchal systems of the industrial age are no longer adequate or appropriate. New adaptive organizations which encourage innovation are needed. What we used to call “High Performance Work Organizations” are needed to effectively utilize worker skills and knowledge.

Finally, any innovation policy needs to understand that there are multiple roles for technology. Technology can be a driver of innovation, a tool of innovation, and even sometimes not all that that relevant to innovation. As a driver, the creation of new technology is a major source of innovation – the kind we normally think of when we use the word “innovation.”

But technology is also a tool in the innovation process. Technology as innovation tool works in two ways. One is innovation as the absorption and utilization of technology. For example, the iPod contained no new technology. It utilized the technology in a new way. The other is technology as an enabler. This is especially true in the information technology (IT) area, where IT allows for a myriad of new applications and innovations.

The analogy I like to use is the railroad. The marrying of the steam engine to a carriage on iron rails brought about far reaching changes in many difference areas. The railroads spurred on development of a number of other industries, most notably the steel industry. They changed opened up vast new markets and changed the retail and wholesale industries. They even gave rise to new management practices and the shift from ownership capitalism to managerial capitalism.

And sometimes technology plays a very minor role in innovation, if at all. I often ask, which was more important in creating the American suburbs: the automobile, Levittown or the 30 year mortgage. One was technological; one was design; one was financial. All were important. As a nation we need to recognize and promote multiple forms of innovation.

This last point on financial innovation brings up an important issue left out of the talk on promoting innovation. Not all innovation is necessary beneficial. One of the tasks of the Council needs to be the encouragement of the study of innovation’s consequences. Some, such as Jagdish Bhagwati have called for a group of wisemen to vet financial innovations. I have noted that we used to have such a function:

the idea of analyzing the pluses and minus of innovation has a long history -- which has fallen out of favor. It is called "technology assessment".

In fact, for 23 years until 1995, Congress had its own Office of Technology Assessment (where I once worked). It was closed by the new GOP Congressional majority who, I guess, felt such activities were not needed. Over the past decade, a number of people have called for the re-creation of this function, if not the actual organization.

I’m not suggesting that the PCIC taken on the role of OTA. But it can be a catalyst and customer for this type of analysis.

Likewise, the Council will have to create an atmosphere that breaks through the “not invented here” syndrome. In an earlier posting, I described the importance of having an ability to absorb and utilize knowledge from outside. This open innovation model has been adopted by leading companies. But the concept is just as applicable to nations as well. As the UK's NESTA (National Endowment for Science, Technology and the Arts) notes in a recent report Innovation by Adoption:

The capacity to absorb external knowledge was identified as early as the 1950s as playing a major role in bridging economic development gaps between places. The new ideas and innovations brought by migration, trade and foreign investment networks cannot be fully captured and exploited if a place lacks the internal ability to absorb external knowledge.

So, the capacity of places to innovate depends on internal and external sources of knowledge, which complement each other. Traditional innovation policy has ignored the importance of external knowledge in developing local innovation capacity. But a place needs both to be able to draw in good ideas from elsewhere – an innovation absorptive capacity (AC) – and to use them to create new products and services – an innovation development capacity (DC). This is what the report describes as the AC/DC model. Absorptive capacity allows a place to identify, value and assimilate new knowledge. The development capacity of a place allows it to exploit that knowledge. The extent to which different places draw on ‘AC’ or ‘DC’ to create new value differs across economic sectors.

Five main components are essential to any innovation system. Three of these elements form the ‘absorptive capacity’ components of the AC/DC model: (1) the capacity to access international networks of knowledge and innovation; (2) the capacity to anchor external knowledge from people, institutions and firms; and (3) the capacity to diffuse new innovation and knowledge in the wider economy. The two components of the ‘development capacities’ element of the AC/DC model are (1) knowledge creation and (2) knowledge exploitation.

These are some of the challenges in moving from a technology policy to an innovation policy. They are challenges that must, however, be overcome if we are to create a globally competitive economy. Other nations are not standing still. They understand that innovation is the driving force in economic prosperity. They also understand that innovation is more than technology.

Give these challenges, the President’s Council on Innovation and Competitiveness can be a potent tool in making America more prosperous. It is a tool that must be used to its fullest capability. The Obama Administration has a unique opportunity to set a new path for this country. Part of that path should be an innovation policy. But creating such a policy will only come about if the Administration embraces the true concept of innovation and commits the resources to making it happen. Making the President’s Council on Innovation and Competitiveness a working White House operation is essential to that undertaking.

No, it is not another report about New York. According to the Wall Street Journal:

Echoing warnings from some bankers, London's mayor's office said the City faces serious threats to its status as a financial center.

In a rare official admission, a report commissioned by Mayor Boris Johnson concluded that London position is under threat as it loses business to "competitor cities that have developed aggressive strategies to steal business away."
Citing taxes and regulations, Mayor Boris Johnson is worried about London's role in finance.

. . .

Among other problems, the report, which canvassed industry executives, found the British capital suffered from too much U.K. and European Union regulation, a lack of proficient science graduates, and a creaking infrastructure.

Mr. Johnson's soul-searching mirrors a similar approach by New York City Mayor Michael Bloomberg, who commissioned a report to look at threats, in particular from London, to his city's financial services sector which concluded in 2007.

I'm glad to see that London is looking at its competitive position. Every city/region/state/nation needs to be doing that constantly. I do, however, grow concerned when I hear the financial sectors complaining of "too much regulations." The problem may be wrong or ineffective regulations - not "too much."

In a column in last week's FT, Lynda Gratton (of the London Business School) made an interesting observation about how recessions change things -- Recessions give space for new ideas to flourish:

Next, past recessions have often served to accelerate the development of practices and processes that had limited popularity pre-recession. Before the 1990s recession, for example, off-shoring was seen to be too complex and difficult an option. It was only with the cost imperatives of the recession that off-shoring was initially pushed and then eventually became a norm, later to be broadened and deepened into its current application. The same is true of group-ware technologies, which have had limited uptake as people said they would prefer to meet face to face. Now, however, those who last year would have jumped on a plane to attend meetings have had their travel budgets slashed. They are being forced to use video conferencing and webcasts. Once the cost-cutting is relaxed, some will return to the airports. Others, however, will have fundamentally changed their habits and begun to build working communities that are virtual.

I think she is exactly right. Last week, Athena Alliance issued a new working paper on Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness. That report describes how these new collaborative work tools can changed the product development process, improve training and strengthen after sales support (see earlier posting). The result will be a change in organizational structure--including the rise of "fourth wave" industries and the emergence of guild-like organizations.

The current economic downturn may, as Gratton suggests, foster the adoption of these new tools. While the cost cutting climate may seem a barrier to new expenditures to support such activities, those same pressures will force some to try new things. As collaborative work technologies result in cost savings as well as increased organizational efficiency and effectiveness, their use will spread. It will take a few leaders, willing to invest the time, effort and resources to make these new technologies work. But as the paper points out, a number of uses by major companies are already underway. Those examples should spread as others learn from these pioneers.

Part of the role of government, therefore, should be to help spread the word. For example, the federal agencies, such as NASA, the Department of Defense, and the Department of Health and
Human Services (HHS), could sponsor demonstration projects using the technology to improve collaboration between suppliers, manufactures and end-use customers. There are other importance government activities we need to be pursuing, such as standard setting and increased education and training so that the workforce is prepared to utilize these tools.

The current economic downturn is seen by most as a time of troubles. That is true. But it is also a time of opportunity. One of those opportunities is to reshape how we work together. By using this as an time to adopt a new generation of collaborative work tools, including virtual worlds, US companies and workers could come out of this recession stronger and more competitive. Achieving this will take leadership in both the public and private sectors. Let us make sure we take advantage of that opportunity.

Here is an update on the latest on the patent wars - from our friends at Law.com: Patent Ambush Costs Qualcomm:

The U.S. Court of Appeals for the Federal Circuit agreed Monday that Qualcomm should be punished for what has in other cases been called a "patent ambush" -- not disclosing patents to a standards-setting body and then suing adopters of the standard. In this case, Qualcomm's target was Broadcom.
. . .
The opinion helps clarify what is legal behavior in the murky area of standards-setting organizations, which are widely used in the technology industry to ensure, for instance, that all lamp plugs can fit into the same electrical outlet, said Joseph Miller, a Lewis & Clark Law School professor.

Looks like the courts are continuing to sort out patent policy on their own. Last week, Chief Judge Paul R Michel, of the Federal Circuit Court of Appeals, basically told Congress and the Administration to stay away from patent reform (see earlier posting).

A copy of the ruling is available at the Federal Circuit's website.

The National Science Foundation is about to launch a new Business R&D and Innovation Survey (BRDIS)) which replaces the old Survey of Industrial Research and Development. According to the announcement:

The survey will collect a broad range of research and development (R&D) data from both manufacturing and service companies and will begin to collect innovation data with an eye toward increasing the number and breadth of innovation-related items in the future.

The new survey an effort to update the statistical system so that it "better reflects the changing nature of business in the United States." As the FAQs summarizes it:

Essentially times have changed. The landscape in business has changed dramatically since the 1950s when the Survey of Industrial Research and Development was created. The way R&D is conducted has changed and so have R&D operations. Incremental updates to the survey have not kept pace with these changes. The new Business R&D and Innovation Survey is designed to better capture information on R&D as it is conducted now.

But what is really exciting is the new data collection on measures related to IP, technology transfer, and innovation. These include:

• Participation in activities that introduce new or improve existing goods, services, methods of manufacturing, distribution, or support systems
• Patent-related data
• Licensing to outside parties
• Participation in specific technology-transfer activities

Collection will begin in January 2009 for 2008 data. So we should have some interesting results sometime next year.

This morning's BEA trade data showed the trade deficit increased in October by $600 million to $57.2 billion. Both exports and imports fell, but the decline in exports was larger than that in imports. The increase was also due to continued oil imports. The increase was somewhat unexpected. The New York Times notes, "Analysts had been looking for the deficit to decline to $53.5 billion on lower oil prices."

The intangibles surplus decreased slightly in October by $128 million to just under $13 billion. The September surplus was $13.1 billion (revised). Receipts (exports) of royalties increased while payments (imports) dropped. Exports of business services declined and imports increased. Thus, the trade surplus in royalties increased slightly while the trade surplus in business services declined.

Once again there were revisions to the data, reflecting more complete information. As a result, our intangibles trade surplus was actually slightly lower than previously reported, by about $200 million. Receipts (exports) of royalties were revised upwards while payments (imports) were revised downward. Both imports and exports of business services were revised upward. Thus trade in intangibles was greater that previously reports, even though the surplus was slightly smaller.

There was also bad news on the high-tech front. Advanced Technology Products trade was virtually unchanged, with the deficit increasing by only $119 million to $7.87 billion in October. This level, however, is significantly higher than the average monthly deficit. This reflects continued weakness in aerospace exports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Next month's data will likely be even more interesting. Yesterday, China announced that its exports declined in November -- for the first time since June 2001. Yet, the drop in export is only part of the picture. China's trade surplus actually rose. As the Wall Street Journal notes:

Imports suffered an even steeper drop, down 17.9% in November from a year earlier. They had risen 15.6% in October and more than 20% last year. The import figure signals weakness in domestic consumption, bad news for companies that export to China, and also falling demand for manufacturing components -- which spells trouble for China's future exports as well.

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.

As an update to an earlier posting on the FTC hearings on the IP marketplace, the newsletter Intellectual Property Watch has published a summary of Friday's hearing. The big news seems to have been a statement by Chief Judge Paul R Michel, of the Federal Circuit Court of Appeals telling Congress and the Administration to stay away from patent reform:

“We will probably make more progress in the courts through case law” than by asking the US Patent and Trademark Office (USPTO) or Congress to wade deep into intellectual property conflicts.
“Everyone should make their own choice about who is the right actor to make fine balancing decisions,” continued Michel, adding that “this is what courts do all the time, probably way better than Congress.”

That is pretty heady stuff. Something tells me that Congress and the Administration may have other ideas. The seems especially true give how many times recently the Supreme Court has ruled against the Federal Circuit.

One attendee told me that the most insightful comment of the entire workshop was when someone noted that the recent Supreme Court and Federal Circuit rules changing the rules have not yet really had an impact. In other words, the real change has yet to felt. Given this, I wonder if we will see a pause in reform efforts to digest what has already happened.

For those interested in the entire workshop, copies of some of the presentations -- and a link to the webcast -- are available at the workshop website: 2008 FTC Workshop: The Evolving Intellectual Property Marketplace.

Today, Athena Alliance is releasing a new report, Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness, by Dr. Robert Cohen. Virtual World sites now have millions of users. Total number is expected to grow to one billion by 2017. Enhancing the use of Virtual Worlds can transform how businesses operate and could help create high-technology, high-wage jobs to sustain American competitiveness in the global economy for decades to come. This is possible because collaboration in Virtual Worlds is likely to streamline and shorten design and testing of new products, improve training and learning, and provide important new ways to involve consumers in product design, performance, and after-sales support.

The report gives an overview of current uses of these collaborative enterprises in aircraft and car manufacturing, finance, retail and other applications. It explores potential evolutions in those uses to improve time to market, eliminate waste and speed design and processing times. The paper also examines the potential impact of Virtual World applications on transforming industrial structures, including the effect on traditional Information Technology structures and the creation of new structures such as "fourth wave" and "guild" organizations. It traces phases that will evolve in those new organizations. Obstacles, such as lack of strong legal frameworks, to further progress, and actions taken by other governments, including China, Thailand and Singapore, are spelled out.

The paper suggests a number of policy steps that could foster the development and utilization of these collaborative tools. Promoting the transformation will require policies that generate the following results:

• Heighten the awareness of business, labor, educators, and federal, state, and local politicians and authorities concerning the importance of Virtual Worlds and the collaborative enterprise to the economic competitiveness of the nation.

• Address the need for a technical infrastructure that can support Virtual Worlds and the collaborative enterprise and enhance the technology base of the U.S.

• Encourage corporations, business networks, and industry associations to adopt the use of Virtual Worlds and intensive compute resources.

• Provide economic development agencies with opportunities to work together to help firms and networks of firms adopt and deploy Virtual Worlds and intensive compute resources and that also help firms to insure their deployment and use in communities left behind.

• Assist business and government with identifying the measures that help firms and government agencies evaluate how well they are doing in adopting Virtual Worlds and intensive compute resources.

• Identify the education and training that employees and businesses will need if they are to successfully work as collaborative enterprises with Virtual Worlds and intensive compute resources.

• Promote the international collaboration of U.S. businesses with foreign firms through the use of Virtual Worlds and compute-intensive resources.

I hope you will find it of interest.

UPDATE:
You can access a recording of today's conference call releasing the report by calling (641) 715-3456 and entering the code 279849. The recording is 18 minutes long. Dr. Cohen's talking points are also up on the website along with the report at http://www.athenaalliance.org/apapers/VirtualWorldsandtheTransformationofBusiness.htm

Here is an interesting new study by Erika Harden, Douglas Kruse and Joseph Blasi of Rutgers University -- Who Has a Better Idea? Innovation, Shared Capitalism, and HR Policies - (Chapter 7 of a forthcoming book - Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options):

We investigate the relationship of "shared capitalist" compensation systems - profit/gainsharing, employee ownership, and stock options - to the culture for innovation and employees' ability and willingness to engage in innovative activity. Using a large dataset with over 25,000 employee surveys in over 200 worksites of a large multinational organization, we find that both shared capitalism compensation and high performance work policies contribute to these innovation outcomes. Owning company stock is the most consistently positive compensation variable in predicting both an innovation culture and willingness to engage in innovative activity. We also find that shared capitalism and high performance work policies have stronger effects in predicting an innovation culture when they are combined, and that the effects of shared capitalism and high performance work policies are partially, but not wholly, mediated through greater employee alignment with company strategy. The findings are consistent with agency theories predicting that the principal agent problem can be addressed by a combination of shared incentives and cooperative culture which encourages mutual monitoring and opportunities to share information.

In other words, gain sharing and other types of employee participation in economic rewards help foster a culture of innovation. What is interesting in this study is the finding that such shared capitalism works better when combined with "high performance work organizations". This form of organization places greater decision making responsibility on front line workers. I've also heard references to "street-level bureaucracies".

So it is the combination of rewards and responsibilities at the lowest level of the organizations that fosters more innovation. Makes sense when you think of it -- it is just like turning all of your workers in to entrepreneurs.

I have long advocated policies to foster high performance work organizations. As I noted in a 1997 paper "Time to Get Serious About Workplace Change", there are numerous actions the government can take to spur on this change. Maybe the incoming Administration will take up the challenge.

There was an interesting story in this morning's Financial Times about the collateral damage to the alternative energy sector due to the profit problems in the financial sector - Energy projects fund hits buffers:

A vehicle for funding clean energy projects in the US has stopped functioning, jeopardising the continued development of large-scale wind and solar projects.

The so-called “tax equity markets”, in which banks and others invest in renewable energy projects in exchange for tax credits, are struggling because the investors no longer have profits that will be taxed.

The small group of investors included Wachovia, Lehman Brothers and AIG. All have been hit hard by the financial crisis and, with profit forecasts uncertain, most have stopped making deals, according to Randall Swisher, executive director of the American Wind Energy Association.

. . .

Mr Swisher said a proposed solution was circulating among policymakers and renewable energy providers. Backers of the fix suggest the US government should make the tax credits for renewable energy production refundable.

This would allow investors without significant profits to re-enter the tax equity market, and also, said Mr Swisher, greatly enlarge the pool of potential investors.

The tax equity market allows companies to basically raise cash by selling off the tax credit. (For a more detailed explanation, see What's Hot in Renewable Energy Project Financing.) While these markets have been abused in the past, making the alternative energy tax credit refundable is an interesting idea. It would help start up companies, even if they didn't raise funds by monetizing the tax credit in the tax equity market.

For the same reason -- to help start-ups -- we should think about making other tax credits refundable, such as the R&D tax credit. With or without the tax equity markets, select uses of refundable tax credits could be powerful ways to finance start ups. A lot of thought would need to go into this to ensure it works properly and does not become just a big give away. But let's start thinking.

As bad as today's employment numbers are (see the BEA data), the loss of 533,000 jobs in November is only part of the story. The Wall Street Journal notes:

By some broader measures, labor-market conditions are even worse. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers reached 12.5% last month, up 0.7 percentage point from October.

The involuntary underemployed (part-time for economic reasons) rose by 621,000. Using the same household survey, employment fell by 673,000 (compared to 533,000 jobs in the establishment payroll survey). So, from a Keynesian point of view, purchasing power for almost 1.3 million workers (and their families) has just declined dramatically.

In earlier postings I have argued for GM to revive their Saturn experiment -- or let someone else (who would be more committed and supportive) take it over. Today's New York Times is running a story -- With Saturn, G.M. Failed in a Makeover Attempt -- that describes how GM effective undercut Saturn:

True believers in Saturn insist the concept behind the division, which stressed respect, teamwork and communication from the factory floor to the auto showroom, could have kept G.M. from losing nearly half the market share it held when the first Saturns went on sale 18 years ago.

“I’m absolutely convinced that the Saturn way could have worked,” said Michael Bennett, the original U.A.W. leader at Saturn. “But what we had was never embraced or adopted.”

Mr. Bennett, like many others, can point fingers to explain why Saturn fell short of its promise.

Mr. Bennett blamed a lack of interest by G.M. executives who succeeded Roger Smith, who as chief executive in the 1980s committed $5 billion to begin Saturn.

But those who followed him — including John F. Smith Jr., who became chief executive in 1992, and G.M.’s current chief executive, Rick Wagoner, who ran its North American operations in the 1990s — had bigger worries.

They had to lead the company through the financial turbulence at G.M. in the early 1990s. And with managers at G.M.’s other, older brands begging for investment, G.M. executives declared Saturn would have to prove it deserved more support, even though its small cars were accomplishing their main goal of winning buyers from imports.

Despite G.M.’s pledge that Saturn would be run as a separate company, with its own car development and purchasing operations, it was folded into G.M.’s small-car operations in 1994, and its lineup did not receive any new models for the next five years.

While executives were souring on the concept, U.A.W. officials questioned the consensus approach at the Spring Hill plant, where G.M. set up a consulting arm that taught other companies how to adopt Saturn principles with their employees.

Fearful that the division might not survive, Mr. Bennett devised a proposal to spin off Saturn as a separate business, but was told G.M.’s board would not consider the plan.

In 1998, Mr. Bennett was voted out of office at the U.A.W., and workers eventually chose to abandon their separate contract.

Since then, Saturn’s lineup has shifted from small import fighters to a more conventional G.M. division, with cars from G.M.’s Opel division, crossovers and the Vue, a small sport utility.

In other words, during the years of the SUV, GM chose to follow the market rather than lead it. And when that market collapsed, now they come to the taxpayer for help. I don't know if this was failure of strategy, failure of vision or failure of the market. But in any case, it is a classic example of reactive rather than proactive management.

So let me repeat my earlier suggestion: use some of the auto bailout money to set up Saturn as an independent company. Let' bet that someone else, besides the big GM bureaucracy with apparently a thousand other things on their minds, can make this business model work.

Two items on broadband. First, earlier this week a new coalition appears to be coming together to push for a new roadmap for a broadband strategy. According to a story in yesterday's Washington Post - New Coalition Drawing Up Nationwide Broadband Access Strategy:

That map could include tax breaks, low-interest loans, subsidies and public-private partnerships to encourage more investments in upgrading and building out high-speed networks, representatives from Google, AT&T and public interest group Free Press said during a panel discussion on broadband policy that also served as a coming-out party for their newly formed coalition.

The details of how to meet those goals still must be worked out by the group, whose aim is to bring more affordable high-speed Internet access to every consumer.

Second, the Benton Foundation has put together a plan for broadband strategy - An Action Plan for America: Using Technology and Innovation to Address our Nation's Critical Challenges. According to the Executive Summary:

Most calls for the deployment of universal, affordable, and robust broadband focus on proposals to increase the supply of broadband. In "Reaching for the American Dream by Connecting Our Nation," we recommend several initiatives that this new Administration and the NBS [National Broadband Strategy] should undertake to stimulate broadband supply.

But while stimulating broadband supply is necessary to achieving the goal of universal, affordable, and robust broadband, it is not sufficient. The NBS must also promote initiatives to stimulate broadband demand. These include programs to ensure that all Americans have access to the digital skills and tools necessary to realize broadband's enormous potential benefits. These programs also include initiatives that employ broadband-powered applications to address critical challenges facing our nation, including economic growth, job creation, health care, education, public safety, energy consumption and climate change, and others. In health care, for example, promoting telehealth and health information technologies will not only deliver better health care at a lower cost, but also stimulate the demand for broadband. To reduce energy consumption and environmental degradation, the NBS should promote initiatives that support telework and the construction of a smart electricity grid. In "Using Technology and Innovation to Address Our Nation's Critical Challenges," we recommend several initiatives to address these critical challenges that will have the added salutary benefit of stimulating demand for universal, affordable, and robust broadband.

By promoting both the supply of and the demand for broadband, a well-conceived NBS will establish a "virtuous circle" in which an increased supply of robust and affordable broadband stimulates creation of applications that produce wide-ranging, valuable social benefits that then cause citizens to demand even more robust and affordable broadband; which in turn stimulates greater investment in more robust broadband; which then stimulates the creation of even more beneficial applications that cause citizens to demand even more robust and affordable broadband. Strong federal leadership, expressed in a comprehensive NBS, is crucial to ending the stand-off between those ready to invest in the deployment of robust broadband when great technologies and applications emerge to take advantage of it, and those ready to invest in transforming technologies and applications and who are waiting for robust broadband to be built out. By adopting a bold and imaginative action plan on Day One to connect all of our citizens to robust and affordable broadband, the new President will enable America to catch up to and surpass our global competitors on broadband, while at the same time utilizing technology and innovation to address our nation's critical challenges. The President will deliver to all our citizens the opportunity they seek for their children and themselves: to reach for the American Dream in the Digital Age.

This focus on demand pull for broadband is exactly right. As applications grow, not only will the demand for broadband increase making deployment easier but critical needs can be met.

Years ago I was somewhat skeptical of rapid broadband deployment. I worried that we were selling people a Ferrari when they needed a bicycle. I also worried that some of the proposed applications would restrict choices rather than open them up (such as switching government services to only net-provided mechanisms). I argued for multiple routes for information flow. In our 2001 report, Inclusion in the Information Age: Reframing the Debate we laid out a number of "points of consideration":

Point one: Focus on the transformation, not the technology. The issue of concern is the transformation to the Information Age. It is not simply a question of technological deployment. The end purpose is not to narrow some gap, but to ensure that everyone has access to the expanded opportunities.

Point two: Review and coordinate efforts. The problem has aspects from many areas of public policy. Reaching our goal requires a coordinated approach.

Point three: Work to ensure that everyone has access to the technological infrastructure. Barriers to access to the infrastructure are many as are the ways of overcoming those barriers.

Point four: Encourage and facilitate participation and involvement by all in the digital economy and information society. To foster participation and involvement, the technology must meet people’s needs – not define those needs.

Point five: Focus economic development on the Information Economy, not the Internet Economy. We must focus on building the local economy’s vitality and ability to compete in the age of globalization and help people make the switch to the new economy.

Point six: We need a better understanding of what is going on. We need both better data and expanded analysis of the socioeconomic aspects of the information technology.

Point seven: The decision making process must be open. True inclusion and opportunity can only occur if the process of decision making is open and transparent.

Point eight: Innovate and experiment. We are in a time of transformation and change. In such a time, we must often invent new ways of coping with our problems and new policies for guiding our economy and society. Learning is the hallmark of the Information Age. Our public policy process must embrace that concept as tightly as the rest of our economy and society already have.

From what I see in the Benton Foundation's strategy, they are in line with these points. I hope the incoming Administration will adopt the Benton recommendations. And that the newly formed coalition will look seriously at our "points of consideration" as they craft their roadmap.

Booz & Company has released its most recent Global Innovation 1000 survey. According to the survey, the R&D intensity (% of sales) of the largest 1000 R&D companies is on a ten year decline. Actual R&D spending is going up, just not as fast as sales. The divergence between sales and R&D spending is especially pronounced since 2004, mostly because sales shot up.

They also find that companies that have fewer, but larger R&D and product development centers have better economic performance.

Interestingly, Toyota, GM and Ford each spend more on R&D that either Microsoft or Pfizer.

But, as was found in earlier studies, the study also showed that higher R&D spending does not correlate with growth, profit or shareholder return. What matters is aligning innovation strategy with corporate strategy and leveraging knowledge of customers, supplier and partners globally. There is a need to invest a minimum in R&D, but the real payoff is in execution.

This highlights the persistent myth we have about innovation: that it comes from men and women in white coats running around in laboratories. The Booz & Co report shows that the payoff in terms of economic performance comes from learning from your customers, suppliers and other business partners. We have to stop thinking about innovation as linear process -- like an assembly line -- from basic research to final product. It is much more like a stew, where ingredients -- multiple technologies, capital, marketing plans, and business models -- are all mixed together to product the end result.

Also on my pet peeve: this is NOT an "innovation" survey. These are not the top 1000 innovative companies. It is an R&D survey; the companies are the top R&D spenders. The R&D survey informs us about the innovation process. But it does not survey innovation.


UPDATE: The Booz & Co webcast on the survey is now available at http://www.strategy-business.com/webinars/webinar/webinar-bb_global_1000

Here is a little tidbit from today's Wall Street Journal concerning the auto industry:

Ford is in a somewhat better position than GM and Chrysler because it mortgaged nearly every asset it had in 2006 -- including its blue, oval-shaped logo -- and now has a heftier cash cushion than its rivals.

I have been saying that the auto companies should look to their intangible assets to raise funds. It looks like Ford already has -- at least its logo. Now, has it done the same using its patent portfolio?

According to a story in yesterday's New York Times, GM might "buy out dealers that exclusively sell Saturns and market the cars through its Buick-Pontiac-GMC dealers instead."

I can't think of a worse idea. Saturn was set up to be an innovative alternative. Even the marketing was deliberately meant to be different. Rolling the Saturn dealerships into the existing brand dealership would be an abandonment of that experiment. Nothing GM could do would be a bigger signal of a return to the same old way of doing things. At a time when a line of economy cars is seen as the only hope for the short-term future, GM apparently want to turn its innovative economy line into the same thing as all of its current brands.

Earlier this year, there were rumors that GM wanted to sell off its Saturn brand (see earlier posting). Apparently, GM couldn't find a buyer back then. I don't know if there was a lack of interest or no one was willing to match GM's price. But it still sounds like a good solution to me. Since GM can't seem to make this innovative idea work, maybe some one else can.

So let me propose this: Congress should take some of the planned auto bailout money and use it to spin out Saturn as a stand-alone company. As a requirement, all of the supplier contracts with GM and other suppliers would remain (so that GM couldn't cut the new competitor off at the knees). Other adjustments might be allowed with an eye to making the company financially viable.

This solution would keep the factories operating, keep the workers employed and keep an American source of economy cars. It would even create some work for that other group of threatened workers: investment bankers.

A story in today's Financial Times looks at what companies are doing to avoid layoffs - Employers innovate to reduce job losses. The reason: "companies are hoping to avoid some of the problems from the last downturn when cutting staff too severely led to trouble when a recovery came." Because some companies last time lost a valuable asset -- their trained workforce -- they are looking for alternatives.

Of course, these may be the rare exceptions. Other stories in the FT just a few pages away talk about large layoffs. The recessions of the new economy are characterized by permanent firings, as opposed to the tactic of layoff and recall of the industrial age. Still, the fact that some companies are understanding the importance of maintaining a trained workforce is heartening.

To help in this process of finding alternatives to mass layoffs, we need to recraft our labor policies. The industrial era of temporary layoff was supported by government subsidies in the form of short-term unemployment insurance. Worker knew that if they got through the slowdown, the company would call them back to work. Companies used short-term unemployment insurance to keep the workforce generally intact.

The knowledge tax credit could play a similar role in the I-Cubed Economy. This proposal would give companies a tax credit for training their current workers. We already provide support for unemployed workers, but not for those would have a job. The irony of this situation is that a worker have to lose their job before they can get the training that might have helped them keep their job int he first place. For companies, the incentive is to fire people and then hire those with the higher skills when the turnaround comes -- at a cost of losing company-specific tacit knowledge.

As I've said many time before, instead of giving companies an incentive to send workers to the unemployment line during a recession, we should be sending those workers to the classroom. The knowledge tax credit creates the incentive for companies to do just that, It should be part of any forward-looking stimulus package.

OK, OK, I know I am stating the obvious. But, today's statement by NBER's Business Cycle Dating Committee begs the question: why did it take almost a year to call the recession? I realize that this was a somewhat tricky call. Economic indicators have been up, down and sideways for some time. But, that may be the nature of recessions in this new economy. And we better get used to it. The last old fashioned industrial-age recession was back in 1981-82. Maybe we need some new indicators of the new economy.