March 2010 Archives

Today's New York Times story on the recent court decision on gene patents (see earlier posting) makes two important point. The first is that the industry has already shifting to a point where the decision may not have as much impact:

Diagnostic laboratories, for instance, are shifting from testing individual genes to testing multiple genes or even a person's entire genome. When hundreds or thousands of genes are being tested at once, patents on each individual gene can become a hindrance to innovation rather than a spur.

This is especially important in the context of the split on patent reform between IT and bio -- where electronic devices contain multiple patents that all need to be "owned" whereas bio usually has a few. Consequently, the electronics folks are more concerned about patent assertions what will block their products and the bio folks are concerned about counterfeits [a grossly over simplified description I know]. If parts of the bio industry are moving to a point where dealing with a multitude of individual patents becomes a barrier, they might swing over to the IT side of the debate.

The second point made in the story is this:

Even before an appeal is decided, the landscape could change in a way that would render the Myriad case moot. A ruling is expected soon from the Supreme Court in the so-called Bilski case. That case does not directly concern gene patents -- it is about a fight over a method of hedging risk in commodities trading -- but it gives the Supreme Court a chance to set new standards on what is patentable.

Everyone expects the Supreme Court to narrow the scope of patents -- the only question is how dramatically. The Court heard oral arguments on that case back in November (see earlier posting). So we are just waiting on a decision - which could come at any time.

And speaking of the real economy (see yesterday's post), Michael Lind at New America Foundation has two proposals for extending credit to manufacturing: The Manufacturing Credit System and Made in America Bonds. The first proposal would create regional manufacturing credit banks, modeled on the farm loan banks, and a single federally-chartered GSE: the National Manufacturing Loan Marketing Association (NMLMA), or "Mannie Mac" to provide a secondary market in loans to manufacturing. The second proposal would create "Made in America Bonds" modeled after the "Build America Bonds" for state and local infrastructure programs. The Made in America Bonds would be a new class of tax credit bonds that could be issued by states, local governments and other authorized entities to encourage the establishment or expansion of manufacturing in the United States.

I think we need to find ways to get credit to US manufacturing companies and lower the cost of capital. I'm not sure that I completely support these particular programs. I would suggest another, possibly complimentary, route. We need to allow all companies, including manufacturing companies to use their intangible assets as collateral for loans. Our earlier report, Intangible Asset Monetization: The Promise and the Reality, outlines some of the policies to foster the use of intangibles as collateral. One of those ideas was also a GSE to create a secondary market -- in this case an Intangibles Mortgage Corporation (Ida Mae) to regularize the intangibles-backed securities market, either as a limited government-sponsored enterprise (GSE) or as an independent organization. However, I understand that creating a new GSE does not necessarily engender a lot of political support now days.

Regardless of what you think of the ideas, there is one telling fact in Lind's proposals: if our financial system was working, we wouldn't such programs to finance manufacturing companies. That we are having these discussion shows just how badly the system is broken.

FYI -- new report from the National Academy of Engineering: Rebuilding a Real Economy: Unleashing Engineering Innovation: Summary of a Forum

Yesterday, a federal judge invalided seven gene patents (see stories in the Wall Street Journal and New York Times). The case involved whether Myriad Genetics Inc. and the University of Utah Research Foundation patents covering the BRCA1 and BRCA2 genes. Myriad sells diagnostic tests for the genes, which are markers for breast and ovarian cancers. Since Myriad holds the patents, only they sell they diagnostic test.

Opponents sued on the grounds that products of nature and therefore cannot be patented. The judge agreed. But the decision is likely to be appealed, so this fight is far from over.

Both sides claim that their position is good for innovation - and that the other side will stifle innovation. One side argues the need for property and profit incentives to carry our research; the other argues that open and free flow of information is most important for research. It is ongoing debate that too is not likely to be settled soon.

One comment in the New York Times story was especially telling however:

Bryan Roberts, a prominent Silicon Valley venture capitalist, said the decision could push more work aimed at discovering genes and diagnostic tests to universities. "The government is going to become the funder for content discovery because it's going to be very hard to justify it outside of academia."

I think that is exactly correct. The question then is what type of division of labor between public and private research do we want. And again, that is a question that will not be resolved quickly.

Yesterday, the Treasury Department announced the second round of its Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets. The program was originally set up in mid-February to fund innovative state-level programs targeted in five states with home price declines greater than 20 percent. The second round will target five states with high concentrations of people living in economically distressed areas in which the unemployment rate exceeded 12 percent in 2009.

Besides begin a targeted program, what I like about this approach is its emphasis on public sector innovation. The incentive here is for states to come up with locally-focused solutions.

We are seeing this approach more and more in the Obama Administration. For example, also yesterday the Education Department announced the winners of it's competition for Race to the Top grants while the companion Invest in Innovation Fund is still taking applications.

On Friday, BP (formerly British Petroleum) announced it would be closing its solar panel manufacturing plant in Fredrick Maryland, while leaving its sales office, project development and R&D facilities in place. At first glance, this looks like a standard case of offshoring of manufacturing, as the first sentence in the Washington Post story noted that this was: "the final step in moving its solar business out of the United States to facilities in China, India and other countries." A closer look at the story reveals some more interesting information. For example, the Post story notes that BP "was producing 125 millimeter multi-crystalline solar cells in Frederick while the rest of the industry had moved to 156 millimeter cells, which have become standard." The story goes on to note that BP Solar's CEO Reyad Fezzani said that changing the production lines would be too expensive.

This, to me, is the real story. The Frederick plant is decade years old -- so old that according to the Post story "The company, unable to sell or lease the building, will tear it down." This raises a set of questions and issues -- mostly around why BP didn't feel the need to continually upgrade the plant. If they think there is a business case for simply scraping the facility, why is there not a business case for building a new facility in the same location? After all, there is already a trained workforce. The answer may be in another quote from the story:

"We remain absolutely committed to solar," BP chief executive Tony Hayward said in an interview Friday. But he said BP was "moving to where we can manufacture cheaply."

Sounds to me like BP has been ambivalent toward this plant for some time. According to the Gazette, BPO had laid off 140 assembly line workers last year while also looking for government grants to update the plant.

In the world of historic preservation of buildings there is a term "demolition by neglect." It describes the process where an owner wishes to tear down a building (usually to replace it with something much larger and more profitable) but can't. The solution is to simply wait until the building is in such poor condition that demolition is the only alternative.

I have to wonder if the story of the Frederick solar manufacturing plant is a case of offshoring-by-neglect?

Yesterday, the National Economic Council in the White House put out an announcement Request for Information on Commercialization of University Research. As part of the earlier announced Obama innovation strategy:

the Administration is interested in working with all stakeholders (including universities, companies, Federal research labs, entrepreneurs, investors, and non-profits) to identify ways in which we can increase the economic impact of Federal investment in university R&D and the innovations being fostered in Federal and private proof of concept centers (POCCs). This RFI is designed to collect input from the public on ideas for promoting the commercialization of Federally funded research. The first section of the RFI seeks public comments on how best to encourage commercialization of university research. The second section of the RFI seeks public comments on whether POCCs can be a means of stimulating the commercialization of early-stage technologies by bridging the "valley of death.''

The Request for Information asks the following specific questions:

Part I: With Respect to University Research, Promising Practices and Successful Models

What are some promising practices and successful models for fostering commercialization and diffusion of university research? What is the evidence that these approaches are successful? How could these promising practices be more widely adopted? Examples include, but are not limited to:
       Business plan competitions
       Coursework, training programs, and experiential learning that give faculty and students the skills they need to become entrepreneurs
       Programs that encourage multidisciplinary collaboration between faculty and students in different disciplines, such as science, engineering, business, and medicine
       Technology transfer and sponsored project offices that can negotiate agreements with companies in a timely fashion, and that have a mandate to maximize the impact of their university's research as opposed to maximizing licensing income
       "Templates'' for agreements on issues such as intellectual property, sponsored research, material transfer agreements, and visiting industry fellows that can reduce the time and cost required to commercialize university research and form university-industry partnerships
       Models for promoting open innovation and an intellectual property "commons''
       University-industry collaborations that increase investment in pre-competitive research and development that is beyond the time horizon of any single firm
       University participation in regional economic development initiatives and efforts to strengthen ``clusters''
       Supportive university policies such as "industrial leave'' that allows faculty members to work for a new or existing company to commercialize their research

Bootstrapping Innovation Ecosystems

Some universities participate in regional innovation "ecosystems'' with dense concentrations of venture and angel investors, experienced entrepreneurs and managers, and a mix of large and small firms. These universities also have faculty who have been involved in commercialization of research and entrepreneurship, and can serve as mentors and role models to faculty or students. How can universities and their external partners expand their ability to commercialize research in the absence of these favorable conditions?

Metrics for Success

What are appropriate metrics for evaluating the success or failure of initiatives to promote commercialization of university research?

Changes in Public Policy and Funding

What changes in public policy and research funding should the Obama Administration consider that would promote commercialization of university research? How could existing programs be modified or augmented to encourage commercialization of university research?

Part II: With Respect to POCCs

Underlying Conditions and Infrastructure

What underlying conditions are necessary to enhance the success of a POCC?
        [cir] How can regions with less significant angel and VC investment cultures support POCCs and start-up business activity? Can current POCC successes transfer to other regions and universities?
       [cir] How important is active participation by strong local business community in a POCC? Describe how you integrate them into the POCC ecosystem?
How can Federal agencies, research institutions, Federal researchers, and the private sector work together to foster more successful POCCs that accelerate commercialization into the marketplace?
How can we leverage NSF's and industry's investment in Engineering Research Centers and Industry/University Cooperative Research Centers to speed the development and commercialization of new technology that has already reached the proof-of-concept stage?
In addition to Federal resources, what existing state, regional or local government funded resources or programs supplement the POCCs in bridging the "valley of death''?
       [cir] Describe any alternative sources of private funding/financing that might be available such as not for profit entities or charitable foundations.

Successful Practices

What are examples of successful practices?
What are the key ingredients responsible for this success?
Is there any evidence that indicates POCCs are an effective mechanism to foster local or regional economic development and job creation (e.g. research related to the needs of particular clusters, participating in regional networks, making shared facilities available to local firms, addressing the need for skilled labor in particular sectors)?
What lessons can be learned from other successful models such as technology-based economic development organizations that support POCCs?
Describe educational programs associated with POCCs that better prepare students to work in entrepreneurial environments?
To what extent do interdisciplinary services (legal, accounting, business plan training) contribute to POCCs successes?
At POCCs, what lessons have been learned regarding:
Leadership and team composition, project selection, optimum scale of effort, importance of brick-and-mortar facilities, geographic scope of participation, and multi-agency involvement?

Success Metrics

How do you define the success of a POCC?
       [cir] What are the relevant inputs, outputs, outcomes, and impacts for success metrics?
       [cir] What is the time period needed to measure success as applied
to different types of technologies?
Would the appropriate success metrics for a POCC affiliated with a university be different than one affiliated with a Federal research lab?

Other Questions

For those institutions with POCCs, how would you describe what you do and how you do it?
How can research and development assets supported by the Federal Government be leveraged to support POCCs, such as a multi-agency, multi-disciplinary database of supported research?
How could such assistance also bolster State and local government programs?
What other administrative policies/practices should the Administration consider modifying, adopting or implementing to enhance the success prospects of POCCs, including streamlining reporting requirements?

Responses are due by 11:59 p.m. Eastern Time on April 26, 2010. According to the announcement:

Responses to this RFI must be delivered electronically as an attachment to an e-mail sent to NEC_General@who.eop.gov with the subject line "Commercialization of University Research.''

Speaking of economic development (see previous posting), last week, the House Small Business Committee held a hearing on Business Incubators and Their Role in Job Creation (see Chairwoman's statement, witness statements, and video highlights).

I have long been a supporter of incubators. During one of the many meetings this winter over possible new innovation policies, I argued for an expansion of funding for incubators -- and that some of that new funding should go to support programming, not just facilities (see previous posting).

Well, it looks like the President of the National Business Incubation Association, David Monkman, agrees. In his testimony, he stated:

Currently, federal funding for incubation programs focuses almost exclusively on bricks and mortar - the facilities themselves. But successful incubators provide much more than shared space. I urge you to consider ways to also provide operational funding for incubators committed to developing innovative programming and following industry best practices, which will allow them to provide continued and expanded services to high-growth companies.

That argument was echoed by Lou Cooperhouse, Director of the Rutgers University Food Innovation Center. As he noted:

The heart of a true business incubation program is the ongoing, personalized and comprehensive services that are provided to clients.

Timothy Early, President of the Hampton Roads Technology Council, also pointed out that:

The U.S. Small Business Administration, which provides funding for SCORE and SBDC programs, offers many important programs to help small businesses. However, SBA has no business incubator funding program, and it does not offer intensive, sustained services to the start-up and fledgling companies that are creating our nation's new jobs and commercializing new technologies.

That is a great point - and SBA programs should be modified accordingly. Specifically, those services should include helping companies identify, develop, and better utilize their intangible assets and intellectual capital. Other nations are already doing this -- for example, Glasgow's Intellectual Assets Centre and Hong Kong's Intellectual Capital Management Consultancy Programme (see also the press release). We should as well.

I would like to draw your attention to two new reports on economic development in the knowledge economy. The first is a study of what universities have been doing successfully to promote economic development. The report A New Paradigm for Economic Development was written for the new chancellor of the State University of New York (SUNY) system by SUNY's Rockefeller Institute, but it's lessons are universal. I specifically like that it looks at the roles of universities beyond what is normally categorized as "tech transfer":

First, institutions and systems are advancing innovation-- new technologies, new processes, new products, new ideas-- in their local and regional economies. This focus on innovation sees university faculty and leaders thinking creatively about how to leverage their strengths in knowledge creation to yield tangible economic benefits.
Second, higher education institutions and systems are pursuing strategies to help employers prosper and grow. They do this by deploying their strengths in knowledge transfer-- through worker training, management counseling, help for startups, and other initiatives.
Third, higher education institutions are playing a more vigorous role in community revitalization. Many are a significant factor in the life of their home communities, and take that responsibility seriously.
Finally, higher education's most fundamental contribution to economic development lies in its traditional role: creating an educated population. The new economy is making the traditional academic mission ever more important.

I admit that the title of the report "A new paradigm" is rather old news and that the survey covers a lot of old ground. But nonetheless, it is a good compendium of information for those interested in the topic.

The second is a report from the Economic Development Administration A Practitioner's Guide To Economic Development Tools for Regional Competitiveness in a Knowledge-Based Economy. A shorter volume -- only 19 pages -- it covers four tools that are important in understanding and planning for a local knowledge economy:

•  Industry Cluster Analysis: With a useful set of 17 clusters, this tool helps the practitioner see networks of businesses that are creating wealth in their local or regional economy. This tool enables economic development professionals to define their own regions. As such, it represents a major advance in both the ease and flexibility of industry cluster analysis.
•  Regional Innovation Index: Businesses generate new wealth through innovation. Until now, economic development practitioners had no practical way to measure the innovation capacity of their local or regional economy. This innovation index represents a breakthrough in regional economic analysis. For the first time, professionals can examine the capacity of their economy to support innovative companies. Like the industry cluster tool, practitioners can design their own region by deciding which counties to include in their analysis.
•  Occupational Cluster Analysis: One of the major transformations underway involves the closer integration of education, workforce development and economic development. For many economic development practitioners, this shift opens unfamiliar territory to their practice. The occupation cluster tool provides fast insights into the talent base that drives a local or regional economy. With this tool, economic development professionals can begin to structure effective collaborations with businesses managers, educators, and workforce development professionals. Like the industry cluster analysis and the regional innovation index, the occupation cluster analysis is flexible. It starts at the county level, but practitioners can assemble their own regions by grouping individual counties.
•  Guidelines for Regional Organization and Investment Decisions: In the new world of economic development, collaboration matters, but it is often tricky. The guidelines for regional organization and investment decisions help leaders move forward as a region. These guiding principles provide frameworks for establishing investment priorities and making investment decisions. Unlike general guides on collaboration, these guidelines are designed specifically to meet the needs of economic development professionals who must structure investments among cooperating partners.

By the way, the data for these tools can be found at the Innovation in America's Regions website.

It has been a busy weekend in Washington. On Saturday, there was an anti-war demonstration. On Sunday, tens of thousands of immigration reform supporters gathered on the Mall (and many thousands of them marched past my house in a festive gala). And, of course, there was all the drama of health care reform.

So, is Washington ready for another controversial take on a tough issue? Trade attorney Bob Lighthizer thinks so and has proposed what some may see as a radical step on trade policy in an op-ed in today's New York Times: Stifling the Economy, One Argument at a Time . In that piece he calls for pulling the plug on the Doha Round of multilateral trade negotiations and specifically re-focusing our trade agenda on four major problems: the US-China trade balance; currency manipulation; unfair tax rules; and, regulatory disparities.

I worked with Bob on trade issues decades ago on the 1988 Trade Act and the Uruguay Round negotiations when I was on Senate staff and he was at USTR in the Reagan Administration and later in private practice. Bob makes a good point. The basic premise of the Doha Round -- as the development round -- may no longer be central to the issues facing the trading system. I wondered if they ever were. Back in 2001, I wrote a paper on After Doha: What The WTO Is Not Talking About. In that piece I speculated that the Uruguay Round might have been the last major comprehensive round of multilateral trade negotiations. The complexity and range of issues now under discussion may be simply too big to handle in one package. These negotiations worked well when the issue was trading off tariffs on steel for tariffs on shoes -- when the goal of the discussions are to push tariffs lower on everything. But when the trade-offs involve balancing environmental regulations with investment issues, the process is not as clear. This is a point I and others have made before (see earlier postings).

My 2001 piece also made the point that for all the various issues being raised in the Doha Round, a major piece is missing:

Not on the table is a comprehensive look at policies toward information and other intangibles. We are moving to a knowledge economy. Knowledge is both an increasingly important input into the production process and an end-use commodity in and of itself. As the role of information increases in both our economic and social systems, issues of control of information will become increasingly central to our policy and political debates. Parts of the issue are included in the WTO agenda, such as: Trade-Related Aspects of Intellectual Property Rights (TRIPS); the work program on electronic commerce; trade and investment; and the proposal for a new discussion on technology transfer. Missing from the discussions is the recognition of the interconnection between these areas.

So, I don't know if Bob is right that we should pull the plug on Doha -- or whether we should make a last push to wrap up something and call it a success. Nor am I sure that he has the right set of issues. For example, his concern over unfair tax policy focuses on the use of a value-added tax by other nations. Rather than fight this, I think we should be adopting it.

But I agree with him and many others that the major issues confronting trade policy are outside of and beyond the Doha framework. We need to re-orient our policy towards issues that matter, not simply continue on the same old path.

Here is an interesting story from Forbes on America's Most Inventive Companies. What was most interesting was not the fact that companies with patent make money -- but the differential among companies:

foreign electronics manufacturers dominated the Top 10 in patent awards, but didn't come close to the earnings power of the top U.S. companies. Look behind the raw number of patents, and U.S. companies far outperformed their foreign competitors on return on invested capital, a measure of how after-tax operating profits compare to assets invested in the business.
. . .
Measured according to earnings per patent, General Electric led with $11.3 million per patent, followed by Cisco Systems at $6.6 million and Hewlett-Packard at $6.3 million.

The story also notes the companies not on the list (of "most inventive"):

Big chemical companies like Exxon and Dow, and drug makers like Pfizer and Merck, who arguably derive more value from a given patent than any other type of company.

So, in other words, it is not how many patents you have but what you do with them that really counts.

Yesterday, the FCC sent its National Broadband Plan to Congress. The goals of the Plan are:

Goal 1: At least 100 million U.S. homes should have affordable access to actual download speeds of at least 100 megabits per second and actual upload speeds of at least 50 megabits per second.
Goal 2: The United States should lead the world in mobile innovation, with the fastest and most extensive wireless networks of any nation.
Goal 3: Every American should have affordable access to robust broadband service, and the means and skills to subscribe if they so choose.
Goal 4: Every community should have affordable access to at least 1 Gbps broadband service to anchor institutions such as schools, hospitals and government buildings.
Goal 5: To ensure the safety of Americans, every first responder should have access to a nationwide public safety wireless network.
Goal 6: To ensure that America leads in the clean energy economy, every American should be able to use broadband to track and manage their real-time energy consumption.

It is an ambitious undertaking - but one that I think is needed it the US is to remain competitive in the I-Cubed Economy.

For much, much more comment on the Plan, see the Benton Foundation's reading list.

One of the bias' out there is that heavy industries - such as shipbuilding - are the dinosaurs of the information age. They could not possibly be cutting edge on work processes or technology or any other intangible asset. But here is an interesting story in the Wall Street Journal on how one company is using its communications infrastructure (an intangible asset) to be more productive (High-Speed Wireless Transforms a Shipyard):

The challenge [of efficiency] is magnified at Hyundai Heavy, where more than 8,000 workers build as many as 30 ships at a time, using millions of parts as small as rivets and as large as five-story buildings. The shipyard sprawls over 4.2 square miles and includes nine drydocks, the biggest of which is longer than seven football fields.

But over the past few months, Hyundai Heavy deployed a high-speed wireless network across the yard, one of the first such installations in an industrial setting anywhere in the world. Data zips around the complex at four megabits per second, about four times as fast as on a cable modem that is common in U.S. homes.

Now, the company can use radio sensors to track the movements of parts as they go from fabrication shop to the side of a drydock and onto a ship under construction. Workers on a vessel can also access plans via notebook computers or handheld phones and hold two-way video conversations with ship designers in the office more than a mile away.

. . .

In large part, the new technology is designed to help Hyundai Heavy reduce expenses and streamline production. Mr. Hwang [Hyundai Heavy CIO] says the company estimates it will save around $40 million annually in reduced labor costs and improved efficiency.

. . .

As part of the network, Hyundai Heavy this month began testing a communications link with workers who are inside a vessel that is below ground or sea level. Previously, workers with a problem inside a ship had to climb up topside to talk to someone by phone or walkie-talkie.

To change this, the company connected its new wireless network to the electric lines in the ship, which then convey the digital data to Wi-Fi transmitters placed around the hull during construction. The Wi-Fi system can then reach PCs, independent Web cams and Internet-based phones used by workers.

Now, workers inside a ship under construction simply use Skype numbers to call their colleagues on the surface. Designers in an office building a mile or so away, meanwhile, can take control of Web cams to look in on problems.

Intangible are just as important in heavy industries as anywhere else in the economy -- and are the key to making these sectors more productive. That is a lesson we need to continually keep in mind.

As I mentioned last September, the WTO ruling on US cotton subsidies allows Brazil to impose counter penalties on US trade. Those countermeasures could include penalties on services and intellectual property. Now Brazil has announced that is exactly what it will do. According to the Economist (Brazil, America and trade: Picking a fight):

Brazil's government says that it intends to do this with measures later this month, to the value of $238m--the "remaining annual amount of retaliation to which Brazil is entitled"--which will be applied to intellectual property and services.

Business Week (Brazil Raises Tariffs on U.S. Goods, to Break Patents) adds:

The government of President Luiz Inancio Lula da Silva plans to take additional steps and break U.S. patents as part of the $829 million retaliatory measures, [Brazilian Foreign Ministry official Carlos Marcio] Cosendey said. The ministry will publish a draft for public consultation of sanctions over intellectual property March 23, he said.

However, this may backfire. As Joff Wild at the IAM Blog asks:

if I were a US IP owner I would also be asking myself whether I wanted to have anything to do with Brazil in the future. Why on earth would I want to invest in a country that is prepared to use IP as a political football in this way when there are other countries I can go to where I will not have this problem?

Brazil seems to understand the dangers here. According to a story in Bloomberg:

"These measures don't change policies or our commitment to protection of intellectual property," Carlos Marcio Cosendey, head of Foreign Ministry's economic department told reporters in Brasilia. "These are temporary measures aimed to force a change in the U.S."

Given that the US seems to be in no hurry to change its cotton subsidies, that "temporary" measure may be around for a long time. And other nations may be tempted to use the same tactic in the future. It could get very interesting.

Who says manufacturing isn't innovative. Here is a list of Innovations That Could Change the Way You Manufacture from the Society of Manufacturing Engineers (SME):

2010
• Printed RFID Tags
• Nanoporous Silicon Electrodes
• High-Temperature, High-Power Microelectronics
• Nanotube Inks
• Nano Fibers
• Self-Healing Agents
• Phase-Changing Polymers
• Bio-Based Products and Materials

Innovations Watch
• Small Gallium Nitride-Based Transistor
• Quantum Dots
• World's Smallest Radio -- Nano Radio
• Dip-Pen Nanolithography
• Method to Print Polymer X-Ray Sensing Panels

2009
• High-Speed Sintering
• Buckypaper
• Synthetic Gecko Tape
• Micro-Laser-Assisted Machining
• Wireless Power Transfer
• Personal Fabrication

Innovations Watch
• Self-Healing Polymers
• Liquid Lens Imaging
• Foldable and Stretchable, Silicon Circuits

2008
• Direct Digital Manufacturing (DDM) Part 1 & Part 2
• Ultracapacitors
• Self-Assembling Nanotechnology
• Intelligent Device Integration
• Integrated 3-D Simulation and Modeling/Desktop Super Computers

You can go on line to find out more about each -- and to nominate manufacturing innovations for the 2011 list.

This morning Senate Banking Committee Chairman Chris Dodd introduced his long awaited financial reform legislation (see Dodd's statement, the summary, the full legislation, and stories in the Washington Post, the Wall Street Journal, and (two stories) the New York Times). There is a lot in the bill -- it creates a Consumer Financial Protection Agency Bureau, an Agency for Financial Stability Oversight Council and a Financial Institutions Regulatory Administration (which replaces the Comptroller of the Currency and the Office of Thrift Supervisions and takes on certain functions of the Federal Reserve and the FDIC) and streamlines the authority of the Federal Reserve and the Comptroller of the Currency. It also creates new regulations on credit rating agencies, corporate pay and governance, hedge funds, derivatives, insurance, investor protections, municipal securities, and securitizations.

This last set of new regulations for securitization may have a direct impact on the monetization of intangible assets. Ever since the melt down of the asset-backed securities (ABS) market, use of the securitization to monetize intangibles has essentially become a dead practice. The proposed legislation requires issuers to hold 10% 5% of the risk. The legislation would also require the SEC to issue rules and regulations requiring a due diligence analysis of the assets underlying the asset-backed security and public disclosure of the results.

The point of these changes is to increase investor trust in the ABS financial instruments. Restoring trust in securitization should help restart the ABS market -- and that should also revive intangible-backed securitization.

At least, that is how it should work in theory. We will have to wait and see if a) any financial reform bill dealing with securitization actually makes it into law, and b) whether it is enough to convince investors to return to the ABS market and, specifically the intangible asset backed securities.

One of the best sources of data on new start-ups is the Kauffman Foundation's Firm Survey, which is tracking 5000 companies that began operations in 2004. Each year, new questions are added to the survey. I'm happy to say that the survey is fully cognizant of the importance of intangibles. The 2009 survey specifically asked questions on the firms' investments in intangibles. Data on the 2009 survey will be available in April but a preliminary discussion of survey was presented at the annual AEA meeting (see earlier posting):

The preliminary data shows that almost half of the new companies surveyed in the US invested in some form of intangible assets (almost 65% of "high-tech" companies). For US companies, the leading intangible asset was brand development, followed by investments in software or databases, worker training and then design of new and improved products and services. Organizational development investment was very low.

Now comes word that the 2010 survey will include more questions on intangible investments and innovation. One set of questions will focus on what debt financing the firms use. As part of that question, it will specifically ask whether companies used their intellectual property (patents, copyrights, trademarks) as collateral for loans.

I am especially pleased to see this in the survey as it incorporates the suggested question I submitted to Kauffman late last year in response to their call for new questions. In that submission I noted that a better understanding of how new businesses are financing their operations and expansion - specifically whether they are taking advantage of their intangible assets and intellectual property. It is becoming somewhat more common that the borrower's IP is explicitly included in an asset-backed loan and that the value of these intangible assets are included in the loan analysis. In a very few cases, the IP is specifically used as the major form of collateral for the loan. However, collateral often takes the form of a blanket lien on all assets. Intangibles and IP would implicitly be including in such a lien. In this case, their value would not necessarily be recognized at the time of the loan or used to determine the conditions of the loan (i.e. the amount of collateral required and the loan-to-value ratio).

It will be interesting to see the results of the survey -- especially if companies are explicitly aware that their intangibles might be part of their loan collateral. That data will not be available for over a year, however. In the meantime, I'm looking forward to more in-depth analysis of the 2009 data in investments in intangibles.

This morning's BEA trade data for January had some welcome news that the deficit declined slightly to $37.3 billion, down from the revised December level of $39.9 billion. Both imports and exports declined. That does not speak well for the health of the recovery. The largest decreases in import were in automotive vehicles, capital goods, and consumer goods. Oil imports also dropped dramatically. According to the Wall Street Journal, economists had expected the deficit to rise to $41 billion.

Our trade surplus in intangibles also improved in January, growing slightly to $12.3 billion. Unlike the overall trade flows, both exports and imports of intangibles increased, with exports rising slightly faster than imports.

Our deficit in Advanced Technology Products also decreased in January, down to $3.3 billion from December's $4.9 billion. The details reveal, however, that this is not necessarily due to good news. The improvement was due to $2.7 billion drop in imports of information and communications technologies. Exports of aerospace technologies and information and communications technologies declined substantially. And BEA and the Census Bureau note that exports were over stated by $558 million because of non-disclosure requirements. 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.


The other news is that the 2009 data has been revised. The new data shows higher levels of exports and lower levels of imports in the second half of the year. As a result, the intangibles trade surplus for 2009 is $4 billion higher than previously reported.
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.

This morning the National Governors Association Center for Best Practices and Council of Chief State School Officers released their draft K-12 Common Core State Standards for comment. The standards are the latest attempt to set some form of national standards, in this case in English-language arts and mathematics. According to the groups announcement:

These standards define the knowledge and skills students should have within their K-12 education careers so that they will graduate high school able to succeed in entry-level, credit-bearing academic college courses and in workforce training programs. The standards are:

• Aligned with college and work expectations;
• Clear, understandable and consistent;
• Include rigorous content and application of knowledge through high-order skills;
• Build upon strengths and lessons of current state standards;
• Informed by other top performing countries, so that all students are prepared to succeed in our global economy and society; and
• Evidence-based.

These common standards seem to me to be a step forward in boosting effective investments in one of our most important intangible assets: education. I have somewhat wary of the standardized test approach to education. It seem that approach is more suited to the old industrial era than the current information age. People have different learning styles and different forms of "intelligence" that can be hard to capture in standardized test. However, a common core of expectations of the foundational skills that children should have seems to me to be an important starting point.

For example, I support efforts to improve STEM (science, technology, engineering, math) education -- not because I think we should try to make everyone into a techie (that would be a disaster on so many levels). I support STEM because math and science are foundational skills needed for many activities -- including critical thinking and deductive reasoning.

In my quick look at the materials, I did find one slightly amusing note. The reading standards for kindergartners includes the following:

1. Demonstrate understanding of the organization and basic features of print.

a. Identify the front cover, back cover, and title page of a book.
b. Follow words from left to right, top to bottom, and page by page.
c. Understand that words are separated by spaces in print.
d. Recognize and name all upper- and lowercase letters of the alphabet.

I wonder in a future electronic print world if the ability to recognize the front cover of a book will be a foundational skill.

The draft standards are out for comment until April 2.

As noted in my previous posting, productivity growth is the key to sustainable long term economic growth. But the productivity data needs to be looked at with a careful eye. And not all productivity growth in the short run helps with other economic issues, such as employment. The Wall Street Journal's Real Time Economics blog raised this point yesterday in a posting "Productivity Surge May Hurt Job Growth, Fed Paper Says". The posting describes a study by two San Francisco Fed economists Mary Daly and Bart Hobijn on Okun's Law and the Unemployment Surprise of 2009. The study found that:

In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun's law. If Okun's law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.

So, productivity is bad for employment - right? Not necessarily. It is not uncommon for productivity to rise in a downturn. Remember that productivity is a measure of output per unit input. In times of growth, productivity measures how much additional output is generated per input. In a recession, companies frequently shed the least productive inputs first while trying to at least hold output steady. If inputs shrink faster than outputs, productivity rises. As the paper notes:

Some of the surge in productivity growth in 2009 was likely due to such cyclical factors as layoffs of least productive workers, greater intensity of work effort, and shifts away from producing intangible capital, which is not measured in output statistics.

Thus, the short term productivity increase may have little to do with increased investments in knowledge, technology, business processes, and other intangibles. Those investments still need to be made if, from a long run perspective, will want to see productivity increases creating growth and employment.

But, as the paper warns, "Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy." As a result, the link between GDP growth and employment is not as strong as it was. This result is also evident in the decade long stagnation of wages and the pattern of "jobless" recoveries. In every recession in the past few decades has resulted in structural adjustments, not just cyclical changes. Workers are not on temporary layoff subject to recall--jobs are permanently eliminated.

Such a shift in economic structure and business strategy is part-and-parcel of the shift to the I-Cubed Economy. It is one that we need to build new labor policy mechanisms to address.

Over at Forbes, Bruce Bartlett has an cogent discussion of the federal deficit and debt (How Much Does The National Debt Matter?). In the piece, he talks about whether we can grow our away out of deficit. He is rather pessimistic about that idea--arguing that productivity growth cannot be large enough. He is especially hard on those who argue we need to cut taxes to spur growth:

it's highly unlikely that further tax cuts will do much to increase growth when they will add to the deficit and taxes are already at their lowest level as a share of GDP in almost 60 years--more than 3% of GDP below the postwar average. In any case, the biggest problem businesses have today is a lack of customers, not high taxes.

He goes on to note:

Recently some foolish bloggers have suggested that it would be better to default on the debt than raise taxes. That would, of course, cause tremendous hardship for millions of Americans because some $800 billion in Treasury securities are owned by private investors, almost $700 billion are owned by mutual funds, more than $500 billion are owned by state and local governments and more than $300 billion are owned by pension funds, among others. I tend to think that they won't take too kindly to the idea that raising taxes would be worse than paying them the money they are owed. In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is.

I don't often agree with Bartlett, but I think he is probably right about how we are going to get ourselves out of this situation. The fact that some folks are actually talking about default shows the depth of the lack of understanding--and frankly scares me silly.

I would argue, however, that he may be too pessimistic about productivity. As the recent Economic Report of the President notes we have had strong growth in productivity--with some recent problems:

From 1996:Q1 to the last available observation (2009:Q3), it averaged 2.7 percent per year, almost equal to its rate over the immediate postwar period. But that rapid growth was concentrated in the first part of the period. In the first eight years (1996:Q1 to 2003:Q4), productivity growth averaged 3.3 percent; in the four years before the business cycle peak (2004:Q1 to 2007:Q4), it averaged only 1.7 percent.

We need to get back to the 3.3% (or even the 2.7%) rate. I do agree that across the board tax cuts are not the solution to the productivity question. Investment in intangibles is.

Unfortunately, such investments often take a long time to pay off. And it is easier to take the short run fix. An example of this is illustrated in a recent story in the Wall Street Journal Schools' New Math: the Four-Day Week. The story notes that kids still have the same number of classroom hours, in a compressed week. And it is unclear whether a four day week has any impact on learning, especially if the fifth day is supplemented by additional tutoring. But the mere idea of cutting back on investments in education runs counter to the direction we need to go to restore productivity growth.

As we confront the deficit issue, let us how we are not "penny-wise and pound-foolish." But if that was not the normal human response, we wouldn't have such clichés in the first place. Not a comforting thought.

This morning's BLS employment data was much better than feared. The unemployment rate stayed steady at 9.7% and the economy lost "only" 36,000 jobs. According to Wall Street Journal estimates, economist "were expecting payrolls to fall by 75,000 mainly because of the severe weather."

However, number of involuntary underemployed (part time for economic reasons) and those part time because of slack work both increased dramatically in February. Not a good sign. But, as I've said before, let's not read too much into one month's data -- especially a month with two major snow storms.

Involuntary Underemployed

By now everyone has heard of Toyota's problems -- with both their cars and their reputation. The company's problems have only gotten worse. The Chairman of the House Oversight and Government Reform Committee is raising concerns that the company may have deliberately withheld information required to be disclosed as part of previous lawsuits. Chairman Ed Towns has given Toyota until March 12 to respond.

But, one of the main whistleblowers, former Toyota lawyer Dimitrios Biller, seems to be claiming that the information is more than just some data on crashes and lawsuits. Those claims apparently are in the documents subpoenaed by the Committee. As an article in the Washington Post explains:

The documents include Biller's recounting of a 2006 arbitration case against Toyota involving a vehicle rollover that left the driver paralyzed. Toyota was willing to pay a premium settlement to prevent the plaintiff's lawyers from getting access to Toyota's Books of Knowledge, which, Biller writes, "contain highly sensitive information that rises to the level of trade secrets and highly confidential information."
In the documents, Biller explains: "The Books of Knowledge contain information on how to design vehicles and component parts (including safety systems like seat belts, side curtain airbags). The information does not relate to any one particular vehicle; the information relates to all vehicles. The information is essentially design principles and philosophies that serve the foundation for how Toyota designs its vehicles." (emphasis added)

Toyota has long been known as a company heavy on intangible capital. The famous Toyota production system -- including its relationship with its suppliers -- is credited with making the company the world leader. If the "Books of Knowledge" are really as comprehensive as Biller claims, they would be the repository of much of that intangible capital. And one can understand the company's reluctance to make that information public. If the information can be claimed as trade secrets, the company may be able to avoid some disclosure. But so far, the company has played the management of these intangibles badly.

It will be interesting to see how they respond to Chairman Towns' request.

There was an interesting article in the Wall Street Journal yesterday on how some banks are coping with the foreclosure problem (As Loans Dry Up, Builders Work for Banks). According to the article, some banks are hiring construction companies to complete building projects which the banks have taken over. The arrangement benefits both parties. While the contractor doesn't get any profits from the houses as they would have if it was their own project, they do earn a flat fee and can keep their crews employed. The banks realize a higher recovery rate on the defaulted loans as the properties are more valuable as competed houses rather than as half-built structures or as vacant land.

Might not this be a model for companies in R&D as well? As I noted earlier, already the US Department of Energy (DOE) urges companies to sign over IP as collateral as part of its clean energy production loans so that DOE can step in and finish the project in case of default. Might not there be a role of for a research company to be paid to finish the project development - so that the bank can reap more value than simply auctioning off the IP?

There might be a somewhat similar model already out there. In our report, Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance, we mentioned that Deutsche Bank is currently managing IP funds with the goal of further refining the commercial potential of the technologies so that they can be sold and/or licensed in the future. While this is not exactly the same, it does provide a possible pathway for banks to take to realize higher value on IP that ends up under their control.

I know this would be a stretch for most banks. It is one thing for a bank to take control of a building project -- something that they understand. And even it that case, it seems that this model is being used by those financial institutes which specialize in real estate, such as the case of Housing Capital Co. cited in the article. But surely there are some IP savvy lenders out there who might want to explore the idea.