October 2011 Archives

Kevin Hassett and Rob Shapiro have released an update of their 2005 report on intellectual property. The new study, What Ideas Are Worth: The Value of Intellectual Capital And Intangible Assets in the American Economy reports that the value of intellectual capital (really intellectual property) has grown from between $5 and $5.5 trillion in 2005 to between $8.1 and $9.2 trillion in 2011. They have also tried to extend that estimate to a broader range of intangible assets (without however, a clear definition of what that entails). [By the way, much of the report is a study on why stronger intellectual property enforcement is needed.]

I have to say that these estimates seem excessively high. They are derivative estimates based on an imputation from current stock market values and from ratios provided by the more extensive economic analyses of Corrado, et al. The stock market imputation is especially troublesome as it assumes all of the value between book value and market value is due to intangible assets (so intangibles get basically defined as everything left over, just like "goodwill"). An alternative method they used is also somewhat of concern in that it based on the assumption that "intangible and tangible investments have the same or very similar productivity and depreciation rates." I am not at all sure that assumption holds.

But, in sheer dollar value, the analysis does demonstrate the importance of intangibles to the U.S. economy. And the concerns over the methodology point to the crying need to improve our measurements of intangible assets. The authors have tried to make a good faith estimate -- and have shown just how hard that can be to do.

We know intangible assets are important. Now we need to better understand just how important and what we can do to better foster and utilize these assets to increase economic prosperity.

Bloomberg news is reporting that a group of Kodak lenders has sent the company Board a letter warning them of their fiduciary duty on patent sales:

The second-lien lenders, who are being advised by Akin Gump Strauss Hauer & Feld LLP, cautioned the company it could face lawsuits if it sells patents for less than market value, said people familiar with the matter.

However, as Joff Wild points out in his blog, if the lenders have a $3 billion price tag in mind (which some have speculated on), they are likely to be disappointed:

Nobody I have spoken to about the sale -who could express an opinion on it - believes that the Kodak patents will fetch close to that amount (though to be fair, no-one thought that the Nortel portfolio would raise close to $4.5 billion either).

Such an over expectation by the lenders of the patents' "market value" could be the trigger for a massive lawsuit. That in turn would be a major wake-up call for all company Boards of Directors.

I have been saying for some time that intangibles will take center stage in Corporate America when a Board is first sued for failure to exercise their fiduciary duty on their intangibles. That day may be fast approaching.

One of the major topics at our New Building Block conference on intangible assets last May was the need to different parts of a company to work together on intangibles. Too many parts of a company see intangible assets as the blind men understand the elephant with each believing that the small part he could feel constituted the whole: one said it is a rope (the tail); another, a wall (the body); another, a water spout (the trunk); and yet another, a tree trunk (the legs). Like the blind men, people experience intangibles from different points of view depending on their role and expertise, whether they are business managers, accountants, lawyers, risk managers, investors, or public policymakers.

A clear example of the need for the different parts to work together can be found in a recent posting over at BVR's Intellectual Property Blog -- "Appeals Court says Dish Network Corp. insurers must provide legal defense for patent infringement". As the title suggests, the posting tells of a recent court case on a liability insurance case where the terms of the coverage were in dispute. Their bottom line:

IP managers should work closely with risk managers and monitor insurance policy addenda that now might try to re-define "advertising injury."

Yesterday, Congressman Dave Camp, the Chairman of the House Committee on Ways & Means, unveiled his proposal for comprehensive tax reform. Most of the focus of attention on the proposal has been on reduction of the corporate tax rate to 25% and a shift to a "territorial" system (which would mostly exempt overseas earnings from US taxes). However, the proposal also address the issue of the taxation of intangible assets. As the summary of the proposal states, the legislation:

Address concerns expressed by commentators that under a participation exemption system, U.S. companies would have an increased incentive to shift income to foreign jurisdictions, especially through the migration of intangible property overseas. To this end, the Committee has included three possible antiabuse rules for consideration: (1) President Obama's "excess returns" proposal; (2) a variation on the low effective tax rate test used in other countries such as Japan; and (3) an option that would lower the corporate tax rate for all foreign intangible income (whether earned by a U.S. parent or its CFCs) to only 15%, but would treat a CFC's foreign intangible income as subpart F income if it is taxed at a rate less than 13.5% (90% of the U.S. rate). This last option combines the carrot of an "innovation box" and royalty relief with the "stick" of a current (subpart F) inclusion for intangibles-related income of CFCs in low-tax jurisdictions.

I would also note that President Obama's FY 2012 contains provision on taxation of intangible transfers (see posting early this year). This is the "excess returns" proposal referred to in the above summary of the Camp legislation.

The Camp proposal is just an opening shot in the debate over tax reform. Even the Congressman admits that any final package is a long way off. But, it is very interesting that the issue of taxation of intangible assets and the movement of intangibles to low tax countries (tax havens) is part of the debate.

Some good news on the economy today. The BEA's advanced estimate of US GDP shows the economy grew by 2.5% in the 3nd quarter of 2011. That is a much stronger growth that the 2nd quarter's 1.3%. Estimates earlier this week, according to the Wall Street Journal were for a growth rate of 2.7% with some economists thinking that it could be as high as 3%. Good news is that investment in equipment and software increased 17.4% in the 3rd quarter percent, compared with an increase of 6.2% in the 2nd quarter. That indicates that companies are ramping up production. Interestingly, data shows that while companies are increasing spending on capital goods, their uncertainty over the future of the economic is increasing (see Wall Street Journal story).

On the bad news side, state and local government spending continues to be a drag on the economy. With the failure of Congress to allocate funds to help struggling local governments, this is an overall negative for the economy.

Note: these are advanced estimates subject to potentially large revisions. The next revision will be released on November 22.

And, as I have noted before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.

A new study by Tony Carnevale and his colleagues (at the Georgetown University Center for on Education and the Workforce) on STEM (Science, Technology Engineering and Mathematics) makes an important point:

As the nature of innovation changes, the cognitive competencies traditionally associated with STEM are intensifying in a host of non-STEM occupations. The dispersion of cognitive competencies outside of STEM has resulted in an artificial shortage--not of workers, but of workers with STEM competencies.
. . .
The growing demand for STEM competencies outside traditional STEM occupations requires a more broad-reaching strategy in the American K-16 education system. The dialogue on the adequacy of our STEM workforce ultimately leads to the more comprehensive conversation about American education

I would even go one step further and argue that we need to associated with STEM rather than just on the traditional training in science, technology, engineering and mathematics.

The Appendix A to the full report goes in more detail as to the types of competencies associated with STEM, both skills and abilities. A shorted list of skills include:
• Critical Thinking: Using logic and reasoning to identify the strengths and weaknesses of alternative solutions, conclusions, or approaches to problems.
• Active Learning: Understanding the implications of new information for both current and future problem-solving and decision-making.
• Complex Problem Solving: Identifying complex problems and reviewing related information to develop and evaluate options and implement solutions.
• Operations Analysis: Analyzing needs and product requirements to create a design.

Abilities include:
• Problem Sensitivity: The ability to tell when something is wrong or is likely to go wrong. It does not involve solving the problem, only recognizing that there is a problem.
• Deductive Reasoning: The ability to apply general rules to specific problems.
• Inductive Reasoning: The ability to combine pieces of information to form general rules or conclusions (includes finding a relationship among seemingly unrelated events).

I would suggest that the reason why a certain level of STEM knowledge is so critical is because they teach these foundational skills. But a STEM education is not the only way to acquire this foundation and set of skills. Let's face it, there are students who are turned off by the traditional STEM educational experience. Rather than blindly push more and more math and science on these students, let's find away to provide the foundational skills directly. Not everyone needs to understand calculus. But everyone should have a strong grounding in critical thinking, problem solving and inductive and deductive reasoning.

This is not to say that we don't need to train more STEM specific workers - and give more workers STEM competencies. As the report points out, more and more non-STEM occupation require STEM skills such as the ability to use mathematical formulas and understand probability and statistics. [BTW -- probability and statistics is something that we don't seem to do a good job teaching right now - but that is another story.]

But focusing on the foundational skills for all -- and the STEM specific skills where appropriate -- will go a long way to strengthening our economic competitiveness.

The consulting company Booz & Company has released their latest Global Innovation 1000 (see also the article in Strategy+Business). No big surprises in the list - with Apple as #1 followed by Goggle and 3M. Facebook made it into the top 10. Consistent with previous reports, the study found that those who spend the most on R&D aren't necessarily the most innovative:

There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.

The elements that make up a truly innovative company are many: a focused innovation strategy, a winning overall business strategy, deep customer insight, great talent, and the right set of capabilities to achieve successful execution. More important than any of the individual elements, however, is the role played by corporate culture -- the organization's self-sustaining patterns of behaving, feeling, thinking, and believing -- in tying them all together.

As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies. Possibly even more surprising, nearly 20 percent of companies said they didn't have a well-defined innovation strategy at all.

The innovative companies get this. Apple is a case example of a company that fully exploits its intangible assets -- from great design to a strong customer experience. By the way, a strong orientation to customer experience was the top most innovative cultural attribute named in the report.

So -- where is the public policy to help companies understand and utilize their intangibles?

Something you may have missed: On Friday, President Obama presented the National Medals of Science and National Medals of Technology and Innovation to 12 individuals in a ceremony in the White House. That you may have missed this is because the news media essentially ignored it. Other than a few blogs and a short AP story, there seems to have been little coverage. And the AP story lead off with the President's comments on old science fair projects and baking soda volcanoes. Never mind that the President talked about how important STEM is to our economic future and how the achievements of these individuals improved our lives and strengthened American competitiveness.

In other words, science and technology is still about geeks -- not economics and standards of living. Sad.

For the record, this awardees are:

Jacqueline K. Barton, California Institute of Technology, won the 2010 National Medal Science for discovery of a new property of the DNA helix long-range electron transfer, and for showing that electron transfer depends upon stacking of the base pairs and DNA dynamics. Her experiments reveal a strategy for how DNA repair proteins locate DNA lesions and demonstrate a biological role for DNA-mediated charge transfer.

Ralph L. Brinster, University of Pennsylvania, won the 2010 National Medal of Science for his fundamental contributions to the development and use of transgenic mice. His research has provided experimental foundations and inspiration for broad progress in germ line genetic modification in a range of species, which has generated a revolution in biology, medicine and agriculture.

Shu Chien, University of California, San Diego won the 2010 National Medal of Science for pioneering work in cardiovascular physiology and bioengineering, which has had tremendous impact in the fields of microcirculation, blood rheology, and mechanotransduction in human health and disease.

Rudolf Jaenisch, Whitehead Institute for Biomedical Research and Massachusetts Institute of Technology, won the 2010 National Medal of Science for improving our understanding of epigenetic regulation of gene expression, the biological mechanisms that affect how genetic information is variably expressed. His work has led to major advances in our understanding of mammalian cloning and embryonic stem cells.

Peter J. Stang, University of Utah, won the 2010 National Medal of Science for his creative contributions to the development of organic super-molecular chemistry, and for his outstanding and unique record of public service.

Richard A. Tapia, Rice University, won the 2010 National Medal of Science for his pioneering and fundamental contributions in optimization theory and numerical analysis, and for his dedication and sustained efforts in fostering diversity and excellence in mathematics and science education.

Srinivasa S.R. Varadhan, New York University, won the 2010 National Medal of Science for his work in probability theory, especially his work on large deviations from expected random behavior which has revolutionized this field of study during the second half of the 20th century, and become a cornerstone of both pure and applied probability. The mathematical insights he developed have been applied in diverse fields, including quantum field theory, population dynamics, finance, econometrics and traffic engineering.

Rakesh Agrawal, Purdue University, won the 2010 National Medal of Technology and Innovation for an extraordinary record of innovations in improving the energy efficiency and reducing the cost of gas liquifaction and separation. These innovations have had significant positive impacts on electronic device manufacturing, liquefied gas production and the supply of industrial gases for diverse industries.

B. Jayant Baliga, North Carolina State University, won the 2010 National Medal of Technology and Innovation for development and commercialization of the insulated gate bipolar transistor and other power semiconductor devices that are extensively used in transportation, lighting, medicine, defense, and renewable energy generation systems.

C. Donald Bateman, Honeywell, won the 2010 National Medal of Technology and Innovation for developing and championing critical flight-safety sensors now used by aircraft worldwide, including ground-proximity warning systems and wind-shear detection systems.

Yvonne C. Brill, RCA Astro Electronics, won the 2010 National Medal of Technology and Innovation for innovation in rocket propulsion systems and geosynchronous and low Earth orbit communication satellites, which greatly improved the effectiveness of space propulsion systems.

Michael F. Tompsett, TheraManager, won the 2010 National Medal of Technology and Innovation for pioneering work in materials and electronic technologies including the design and development of the first charge-coupled device imagers.

The immediate thought that comes to mind when the phrase "monetization of intangibles" comes up is about the sale of patents. That is partly true. But the more important way to monetize your intangibles is internally - through better, newer, more higher value-added products and services. It looks like the owners of Hula have figured this out, as a story earlier this month (Hulu Owners End Efforts to Sell Online-Video Site) illustrates:

Abandonment of the sales process reflects in part a change of heart. Now, at least some of the media owners have come to see more strategic value in holding onto Hulu, and using to shape the online-video landscape, according to people familiar with their thinking.

"Since Hulu holds a unique and compelling strategic value to each of its owners, we have terminated the sales process and look forward to working together to continue mapping out its path to even greater success," the owners said in a joint statement Thursday evening. "Our focus no rests solely on ensuring that our efforts as owners contribute in a meaningful way to the exciting future that lies ahead for Hulu."

Clearly, Hula is of more value to the current owners than any external buyer is willing to pay. In part, I'm guessing, the joint owners of Hulu figured out that the value of Hulu's intangibles are increased when combined with their own. Such synergies of intangible assets are exactly what makes companies as whole worth more than the sum of the parts. And is a lesson that we too often forget when trying to understand the intangible value of a company by adding up the parts (such as the patents, brands, worker skills, relationships, etc.).

In the I-Cubed Economy, competitiveness is not based on low wages, but on high knowledge content -- as this story from the Wall Street Journal (Rolls-Royce Powers Ahead in High-Wage Countries) explains:

[Rolls-Royce] has factories in England, the U.S. and Germany, where it recently bought into an engine maker for more than $2 billion. In Asia, Rolls focuses on Singapore, where salaries dwarf those around the region. But few places can rival the operating costs around Alesund, a coastal town nestled amid fjords and fisheries.
Here, a can of soda costs about $4, an ordinary pair of jeans sells for $150 and hourly wages are roughly 75% higher than the European Union average. Yet Rolls runs a profitable marine operation, relying on a mix of science, local savvy and an expensive staff who can harness both. (emphasis added)

The story also highlights the risk of such a strategy -- recruiting and training that high skill workforce. So let's make sure that as we push for increased STEM training, we make sure that the training is up and down the production chain. We need skilled production workers just as much as engineers and scientists. So we need to remember to keep our training programs a focused on the tech school level as well as the B.S. and Ph.D.

I have often talked about the changing nature of manufacturing and the fusion between "manufacturing" and "services." For example, I noted in an earlier posting about Rolls Royce selling thrust out of back of a plane, not jet engines and Germany Mittelständler companies selling their knowledge, not machine tools. As part of my description, I have made the point that there will always still be commodity, economy of scale production of standardized things like light bulbs.

Turns out I may be wrong about light bulbs. A story in this weekend's Washington Post points out the changing nature of the industry - "Companies strive to build a better (more expensive) light bulb". Federal energy saving regulations are phasing out the old incandescent light bulbs causing companies to invest more in R&D to come up with new products. But some companies are going beyond just the new product:

Philips' strategy is also about more than just selling light bulbs. The company owns many brands of lighting fixtures and lamps, and it employs teams of designers who consult with big customers on lighting for office buildings, art museums and sports stadiums.
One executive at Philips said that the company looks to Wisconsin-based bathroom fixture maker Kohler for inspiration. "Kohler didn't sell toilets," he said. "It sold bathrooms."

Over at the blog The Low-Down, our colleague Jon Low draws our attention to a new way of protecting your reputation -- and an ironic one as well:
Takes One to Know One: AIG Offers Reputation Crisis Insurance:

Having mostly recovered from that near-death experience, AIG is attempting to turn pain into profit by proffering insurance that will help corporations pay to protect their reputations. The idea is that is that PR firms (called corporate communications experts in more polite company) will be on retainer to identify potential problems and then shape strategies to deal with them, ideally prior to senior executives finding themselves perp walked in handcuffs before an appreciative global audience.

FYI -- Fed Chairman Bernanke's keynote address at our New Building Blocks for Jobs and Economic Growth has been published in the Summer issue of the National Academy's Issue in Science and Technology, which is now available online. More information on the conference (including the video of Bernanke's speech) is available at our New Building Blocks forum.

The August trade deficit numbers released this morning were, according to the BEA, "virtually unchanged from July, revised." The deficit in August was $45.6 billion with exports and imports were down ever so slightly -- by $0.1 billion each. The deficits in both goods and petroleum remain basically the same as last month. This was slightly better than economists' estimates (by the Dow Jones Newswire) of a $46.0 billion deficit. By the way, the revisions to the July data showed that the deficit for that month was slightly worse than first reported -- originally reported at $44.8 billion and revised higher to $45.6 billion. That is still a large improvement from the June deficit of almost $51.6 billion.

The same general statement of little change applied to our deficit in advanced technology goods in August. Minor changes in exports and imports in some sectors were all balanced off. The one exception was aerospace where exports grew. 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.

However, the surplus in intangibles continued to improve, rising to $14.4 billion from last month's revised figure of $14.2 billion. Exports and imports of both business services and royalties increased with exports rising faster than imports.

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.

Here is a great quote in a recent story in The Economist on why companies from "developing" countries are buying into "developed" country markets:

Building a brand can take years and pots of money; buying an established one is often cheaper. Acquiring a rich-world company can also be a quick way to get hold of technology as well as the tacit know-how that comes with operating a firm in mature markets.

Today the President's Council on Jobs and Competitiveness is releasing its interim report. [Note on Sunday, the Council's head, Jeff Immelt of GE, talked about the jobs issue on 60 Minutes -- for the clip, see the story on GE Reports or directly at 60 Minutes]. The Jobs and Competitiveness Council's report Taking Action, Building Confidence outline five sets of recommendations:

Invest Aggressively and Efficiently in Competitive Infrastructure and Energy
The Jobs Council recommends a set of proposals to accelerate public and private investment in U.S. energy and infrastructure. Upgrading the nation's transportation and energy infrastructure is a win-win for the United States. It creates jobs in the near term, at a time when more than one million construction workers are out of work, and improves America's long-term competitiveness by enabling a more productive economy.

Nurture the High-Growth Enterprises that Create New Jobs
Startups and small firms are the key to U.S. job growth. Over the last three decades, high-growth enterprises less than five years old have created 40 million net new jobs, accounting for all the net new job creation in America. The Jobs Council recommends that the Administration, Congress and the private sector implement a comprehensive package to unleash startups and empower small businesses.

Launch a National Investment Initiative
The U.S. became the largest economy in the world by being the best place for companies to invest and grow. In the late 1990s, the U.S. attracted nearly 26% of global foreign direct investment (FDI), but that figure has dropped roughly a third, to about 18%, today. The Jobs Council recommends that the U.S. create a National Investment Initiative (NII) comprised of a number of proposals aimed at regaining America's place as the premier destination for foreign and domestic investment. The primary goal we propose for the NII is to attract one trillion dollars of foreign direct investment over the next four to five years, which would be a 20-25% increase over recent trends.

Improve and Balance Regulatory Review and Streamline Project Approvals
To make the U.S. competitive and to speed the creation of jobs already in the pipeline, we need to adopt global best practices to streamline approval processes and use common sense metrics to measure progress. The Jobs Council has focused on several areas of substantial impact - broad areas of regulatory reform that could accelerate job creation - and has worked closely with the administration on a number of specifically targeted initiatives to create an immediate impact.

Develop Talent to Fill Today's Jobs and Fuel Tomorrow's
There are roughly 3 million jobs openings today, many of which have gone unfilled for a significant period of time because workers do not have the required skills. The Jobs Council believes there is an urgent near-term agenda on talent that can help ease today's jobs woes, and a broader long-term talent agenda to renew America's competitiveness. In this report we focus on progress already being made in the near-term through private-sector led initiatives.

Many of the suggestions are things that have been talked about elsewhere. But one of the new big ideas in to increase direct foreign investment in the US. In part, according to the Council, this will require a look at broader tax and regulatory reform -- which the Council has put off until its report at the end of the year on American competitiveness.

I am very pleased to see emphasis in the report on high growth companies. For the most part, this section seems to echo the June report of the Commerce Department's National Advisory Council on Innovation and Entrepreneurship (see earlier posting).

One pet peeve however: the chart on the Innovation Ecosystem presented in the report perpetuates the old linear model of innovation -- where R&D is starting point of all innovation.

And there is something a little more confusing about financing of high growth companies. There is a very important discussion in the report on high growth companies' taking the IPO route versus being acquired by a larger company. There is a chart showing the ratio of IPOs versus mergers & acquisitions (M&A) as the exit strategy. The percentage of M&As deal grew in the late 1980's and early 1990's to about half. It jumped to 90% in 2001 and has remained above 80% since. The report blames this shift on Sarbanes-Oxley (SOX) and the "Spitzer Degree" (New York State Attorney General's Global Research Settlement). The problem with this analysis is that SOX did not become law until mid-2002 and the "Spitzer Decree" was not until 2003. Therefore, they cannot explain the dramatic switch to the M&A route in 2001.

The report does mention the dot.com bubble as a contributing factor in decline of the IPO market. I would suggest that the bubble bursting was more than just a contributing factor -- but the major reason why the IPO market has been changed. Modifications to regulations to help the financing of high growth companies may be useful. But to place the onus on the regulations is a mis-diagnosis of the problem -- and can lead to a less that successful solution.

Also on the issue of IPOs versus M&A, the report states that IPOs create jobs while the acquisition of smaller companies hurts jobs grow. The report indicates there is data on this, but does not cite the data or any other report on this issue. The question of the interaction between start ups and larger companies was one raised at our conference on New Building Blocks for Jobs and Economic Growth. The effect of this interaction, including IPOs and M&A, on jobs, innovation and productivity should be explored further.

Finally, a word on something left out of the Council's report: the use of intellectual property as collateral for loans. Let me repeat what I said in my earlier posting on the Innovation and Entrepreneurship Council. As readers of this blog know, I have long advocated for the use of intellectual property (and some other intangible assets) as collateral in debt financing. The irony of this missed opportunity is clear when looking at the SBA announcement (as part of Start Up America) of their Early Stage Innovation Fund. They note that "Early-stage companies face difficult challenges accessing capital, particularly those without the necessary assets or cash flow for traditional bank funding." This statement is correct in one sense and completely off track in another. It is correct when it states that these companies don't have assets that traditional bank funding would accept as collateral. It is completely wrong in its implication that the companies don't have assets. These companies are often sitting on intangible assets that could be used in debt financing. The key is not necessarily to expand the equity route -- but to change how the "traditional bank funding" treats these assets.

As I've argued for before, there are two action that SBA could take:
•  Develop SBA underwriting standards for IP. SBA should work with commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards. Allowing IP to be used as collateral will increase the amount of funds a company, such as one in the high-tech sector, would qualify for.
•  Create an IP-backed loan fund. Other nations have developed special programs to encourage IP-based finance. The U.S. should set up similar programs on a pilot basis, ideally run by the SBA to take advantage of its lending expertise. Technical support could be provided by the SBA's Office of Technology, which already coordinates the Small Business Innovation Research (SBIR) program. The SBA technology office also works with the U.S. Commerce Department's National Institute of Standards and Technology (NIST) on its Technology Innovation Program and has a hand in other federal science- and technology-related initiatives. Such a direct lending program would be a step beyond SBA's current loan guarantee programs--direct lending is needed to jumpstart the process. Once the process of utilizing IP as collateral is fully established, the program could be converted to a loan guarantee structure.

These two action would begin to unlock the debt financing option for high-growth companies. It is an option the President's Council on Jobs and Competitiveness should not ignore.

From the Institute for New Economic Thinking -- William Lazonick - How Government Helps, and Wall Street Hurts, the Innovative Enterprise. A great discussion of how innovation is about overcoming technological, market and competitive uncertainty -- and how the financial system doesn't necessarily help to deal with these risks. And on the importance of understanding history and organizations to understand economics.

Lazonick is heading up a project on Financial Institutions for Innovation and Development and heads the U Mass Center for Industrial Competitivenes

Three UK business professors -- James H. Love (University of Birmingham), Stephen Roper (University of Warwick), and Priit Vahter (University of Birmingham) -- recently published a paper (based on company innovation data from Ireland) on "The Continuing Payoff from Open Innovation". According to the write up in Strategy+Business:

Openness not only pays off now, the authors say, but paves the way for even bigger dividends down the line. Firms that stay with the model become more adept at picking partners and managing joint projects, which improves the odds of coming up with new products and services. But the model goes only so far, the researchers warn -- trying to maintain too many external links can be counterproductive and costly after a certain point.

This morning's news on September's employment data was a little better than expected. Nonfarm payroll employment grew by 103,000 -- although the unemployment rate stayed at 9.1%. Employment numbers for July and August were also revised upwards. Economists had expected had expected an increase of only 60,000 jobs (Dow Jones Newswire estimate). Employment in professional and business services, health care, and construction increased, while manufacturing and government employment (mostly local) declined. The biggest event affecting the numbers was the return to work of the striking Verizon workers - which may have skewed the numbers upwards.

The news on involuntary underemployed was negative, however. The total number of workers part-time for economic reasons, the number of workers part-time because of slack work and the number of workers who could only find part-time work all increased. The increase in slack work is especially worrisome as it indicates a fall off in production. Slack work had reached a two year low back in March. The increase in involuntary underemployed is about the same as the total increase in the civilian labor force.

Does this qualify as user-driven innovation?
"Low-impact Hobbit home only cost US$4,650 to build" - from Gizmag:

Simon Dale, with the help of his father in-law, has single-handedly built this low impact Hobbit house in the woodlands of West Wales. The eco-house, which rose from a muddy hole in the ground and took three months to complete, came in at under US$5,000 (GBP3,000) - demonstrating that you don't need to be architectural school graduate to come up with the goods. There's no need to be envious, however, because Dale will give you the plans and know-how to build your very own.

What is it that fosters or retards the adoption of user innovations in construction? Is it the decentralized, small scale nature the industry? After all, even the biggest of the home builders only have a small portion of the market. And many of those companies tend to be local or regional in nature (there are a few exceptions). This would make an interesting case study on diffusion of innovation.

In an earlier posting in August, I speculated that Steve Job's stepping down as Apple CEO did not necessarily mean the end of his influence over the future course of the company. He would still remain Chairman of the Board. Alas, that was not to be.

That does not mean, however, that his influence over the company is gone. As I noted before, Jobs created a company with a strong culture of creating a "customer experience" that feeds customer loyalty. This relationship with its customers (aka fan base) is a strong intangible asset in and of itself (see earlier posting). That ethos drove the ability of Apple to continually break the mold. We will see if the company can continue and build upon the Jobs legacy.

This morning I attended an event at the Information Technology & Innovation Foundation on their new paper, Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation by Rob Atkinson and Scott Andes. A "patent box" is the name for a reduced tax rate for income derived from a patent. A number of countries, mostly in Europe, have various forms of a patent box -- with Ireland being the first back in the 1970s. As I noted in our 2008 report Intangible Asset Monetization: The Promise and the Reality, countries with a low tax rate on IP income are often seen as tax shelters with companies moving their IP to subsidiaries in those countries as a tax strategy. For that reason, the issue of transfer pricing -- how much a subsidiary pays the home country for the asset -- is such a large issue. In fact, OECD has an ongoing intangible transfer pricing project

The Atkinson and Andes paper make a good case for why having a lower tax rate on patent-related income is a good idea as part of an innovation strategy:

First, a patent box reduces the financial risk involved in innovation, better matching firm rewards with societal benefits, including the creation of high-wage jobs. If a patent box is designed in a way that links the incentive to the conduct of R&D and production of the patented product in the United States, it would go even further in spurring the creation and location of more innovation-based jobs in the United States. Second, a patent box would lower the effective corporate tax rate for knowledge-based establishments located in the United States, making it easier for them to compete against establishments in nations providing robust innovation incentives.

[A variation on this was presented in the recent testimony of Michael Rashkin at the Senate Finance Committee (see earlier posting).]

In our Intangible Asset Monetization report, I suggested that we should explore lowering the tax rate on intangible asset royalties, in conjunction with stricter regulations on international transfer-pricing mechanisms and cost-sharing arrangements and on passive investment companies:

Providing a more direct tax incentive to the licensing of intangibles by lowering the rate on intangible asset royalties, such as to the capital gains rate, is a more controversial proposal. This lower rate could be crafted to apply only to royalties for new licenses for a limited time, such as a sliding scale for three years. In crafting such an incentive, safeguards would need to be established to prevent the incentive from being used for simply transferring existing licenses to SPEs and to ensure that the incentive went to new licensing activities only.

In conjunction with such a tax incentive, the problem of tax havens should be addressed. Transfer pricing mechanisms and cost sharing arrangements need to prevent those transfers that, as the IRS describes, are "for inadequate consideration." The issue (some would say the abuse) of "passive investment companies" should also be handled.

The notion of tax havens and loopholes is often a matter of perspective. One person's loophole is another person's incentive. However, there is a growing concern that the tax code has become overly complex and that rates could be lowered in conjunction with the elimination of certain specific provisions. Any such tax reform, including the possibility of closing loopholes currently applied to intangibles and lowering the tax rate on royalties, should be looked at very carefully in the context of the impact on the creation and utilization of intangible assets.

As I noted in a posting early this year, President Obama's FY 2012 contains provision on taxation of intangible transfers. This provision would raise almost $22.5 billion over 10 years. That would be a good down payment for the Atkinson/Andes patent box proposal.

In an earlier posting, I noted that the privacy issue was raises in sale of the Border's customer data to Barnes & Noble. Last week, however, the judge in the case went ahead with the sale after both sides agreed to give customers the right to opt out. As Publishers Weekly and AP are reporting, that email went out today. And just to highlight the sensitivity of the issue, already, the Attorney Generals of Massachusetts and Pennsylvania have issued statements warning customers that this is an opt-out system.

Here is an interesting quote from a financial analyst on intangibles. The person in quoted is John Higgins of the London firm Capital Economics. The story in the Financial Post ("The value of intangibles in an overvalued market") is all about how the US market is not necessarily overvalued once intangible are taken into account. But it is this quote that I found especially telling:

"Admittedly, expenditure on intangible assets is riskier than expenditure on tangible assets, and may turn out to be worthless. But shareholders are still likely to assign some value to expenditure on intangible assets," he said.

Therein lies one of the most salient factor in assessing intangibles: what is the risk. Will this investment pay off -- or will it be worthless? In the industrial age, the investment in plant and equipment was also seen as risky. But the question was basically a market risk: will there be enough demand for this level of production? With intangibles, the risks are multifold. And the task that much more difficult.

The New Yorker has an interesting article on brand naming, i.e. how those brands get named -- Famous Names: Does it matter what a product is called? (subscription required). The story focuses on the work of David Placek and his company, Lexicon.

As the article describes, brands have been around forever. But the art of coming up with that perfect name is relatively new:

During the sixties and seventies, companies looking for brand names increasingly turned to Madison Avenue advertising agencies, with their professed expertise in the collective unconscious of the buying public. Snappy, "Mad Men"-style initialisms became popular: A.T.&T., 3M, I.B.M., G.M. With the mergers-and-acquisitions boom of the nineteen-eighties, brand names took on a new importance. "A lot of value that was being paid for companies was for their brands," Kevin Lane Keller, a professor of marketing at Dartmouth College says. "There was no other way to justify paying x billions of dollars for this company from just the physical plants, equipment, and everything else. It was intangible assets." In 1982, amid this new interest in brand naming, Placek launched Lexicon, which was among the first companies in the United States dedicated solely to the practice.

I would also take issue with Professor Keller's implication that the brand was the sole intangible asset in play during the M&A boom. A number of other intangibles, such as technology and customer relations, are also factors. Technology may be a bigger factor today. There was also what I would refer to as froth: companies buying up and bidding up other companies for the sake of buying up and bidding up other companies.

Still, the name is important. And the New Yorker piece is a fascinating insight on how the naming game works.

PS -- for a fictional take on the subject, I would recommend the novel Apex Hides the Hurt by Colson Whitehead. It is the account of a nomenclature specialist brought in to decide the name of a town split among three factions.