November 2011 Archives

I was reading Strategy+Business's Best Business Books 2011: Strategy (registration required) when I came across this as part of a review:

Services, not just products (or platforms), the second principle, stresses the importance of offering services as an effective way to avoid the commoditization of products. Not only do services add revenue, often at a higher profit margin, but they are also harder to replace.

The second principle is that for many industries managers need to think in terms of services that complement their products and not just focus on the products or platforms themselves. Probably the best example of this is Apple. Apple continues to make great products, but the ipod, ipad and iphone are of little value without a very important service, the itunes digital media service. They are also not very valuable without an internet service. We can also take automobiles as an example of this as well. Most manufacturers over the last 15 years or so have made most of their money, not from the product, but actually from the services; financial services, such as loans and leases, warranties, insurance and after sale repair. General Motors has even rolled out telematic services in the form of the OnStar service. These are far more valuable than the actual products. The products become, in some way, a platform for delivering services. Once again, smart phones are pretty worthless without services. Another company that is very famous for 'servitising' their product and that is Rolls Royce. Rather than selling engines, they actually sell 'power by the hour', which is a different method of pricing and delivering the product. Many software companies have done this as well, for example 'cloud computing'.

How times have changed! 30 years ago, the fusion of manufacturing and services would not be an "enduring strategy." In fact, theory would be seen as polar opposite strategies: either you are a service company or you are a manufacturing company. Now we recognize the both/and transformation of the economy. Progress!

Apparently, Beyonce is getting all sorts of grief over her newest music video where she is accused of appropriating the dance moves of Belgian choreographer Anne Teresa de Keersmaeker's work in the 1990s (who complained that Beyonce should have at least tried to hide the similarities). But as an article in the Washington Post (Beyonce: "Countdown" video and the art of stealing) points out, appropriation is a long standing fact in the dance and music world. The article points to a rich tradition of artist borrowing each other's work - sometimes as homage, some time as straight forward imitation. The article goes on to partially defend the practice:

To be clear: I'm arguing for creative borrowing on epistemological and esthetic grounds, not legal ones. Copyright law is a whole different matter, and some recording artists have been sued for lifting too much. (Singer Rihanna settled a lawsuit last month brought by a photographer who claimed she copied his images in her "S&M" video.) Strictly from the point of view of enlarging awareness and fostering creativity, there are positives in dance appropriation. Beyonce's dancing has brought great attention to the name and work of an important choreographer little known outside the field of modern dance. Do we really believe de Keersmaeker would prefer that her moves be, to use her term, hidden?

. . .

The fact is, in our world of knowledge sharing, it is no easy thing to claim originality and hold on to it. Perhaps it's time to let go. Some of the greatest creative minds freely admit to a roving appetite.

"We have always been shameless about stealing great ideas," said Apple founder Steve Jobs in a 1994 interview, speaking about his company's creation.

With so much of the world's artistic output being tossed into the communal cook pot known as the Internet, the act of helping oneself to the bounty will only increase. You could look at it as stealing, or as Duchamp did: "new thought."

Or you can see it as Beyonce did: a golden opportunity to mash up something new.

This raises a number of issues -- including giving credit when using another's work. Sometimes it seems that the issue of appropriation is as old as the creative arts themselves. I wonder if the first person to do cave drawings complained that others were stealing his/her technique. But thief of intellectual property is a serious economic problem. The trick is finding the balance. As I noted in previous postings, there are some areas where sharing is allowed but controlled (such as the taboo of letting non-magicians in on the trick). There are others, such as comedy, where the use of others' material is ok within limits. And there are still others where it is argued that the industry advances by copying, such as fashion.

As I've said before, these examples of what has come to be called "IP negative space" point out that there is no one-size-fits-all solution to the innovation and protection of ideas question. What works in one area may not work in another. What is deadly in one area may be absolutely critical in another. We need an innovation policy that can tell the difference.

Normally, we hear stories about the coming demographic crisis of the greying of the population. The implication is that the elderly are a drain on resources and productivity. But here is a story in the Wall Street Journal about a possible change in approach by Maine (State's New Trick: Old Dogs):

State officials say they are a real asset. They volunteer, help pay for schools without using them and create demand for everything from medical services to home repair.

Now, there is a long history of luring retirees as an economic development strategy -- mostly in the south and west. But for the most part, they expect the retirees to just spend money. So it is good to see someone at least beginning to take the view that the elderly can be assets.

The mobile communications revolution has already touch off one scramble for intangible assets, i.e. patents for smart phone. Now the names of AT&T and T-Mobile may join Nortel and Motorola in the great intangibles boom.

As everyone probably knows by now, AT&T's takeover of T-Mobile is in trouble. According to Steve Lohr of the New York Time, AT&T may be considering selling up to 40% of T-Mobile's assets in order to get anti-trust approval for the deal. Some of those assets are tangible, i.e. equipment. But the most valuable are the spectrum rights. Without spectrum, the equipment is useless. And the second most valuable asset is likely to be the customer base.

Lohr notes that there are a number of ways that AT&T could sell off these assets as part of a merger. They could go to a rival mobile company (most likely not Verizon because of anti-trust concerns). Or they could attract the interest of other buyers: companies wishing to breaking to the U.S. market, cable companies, or even investment companies seeking to re-sell the spectrum either later on or in smaller pieces.

Given the size of the deals here, the money involved could easily dwarf the Nortel $4.5 billion patent sale. The 2006 FCC spectrum auction brought in $13.7 billion. The AT&T/T-Mobile deal is worth $39 billion; 40% of that is $15.6 billion. Of course, only a portion of that would be spectrum and it is unclear how much spectrum AT&T would be willing to sell to make the deal acceptable to regulators (as little as possible, one assumes). Nevertheless, the numbers are significant.

And, who knows, such a sale could trigger a new feeding frenzy. So stay tuned.

UPDATE:

According to a story in the New York Time's Dealbook column, "AT&T is knee-deep in talks with Leap Wireless, a second-tier but growing wireless player, to sell it a big piece of T-Mobile's customer accounts and some of its wireless spectrum, according to people involved in the negotiations."

We will see if a) they can pull it off, b) it will satisfy the regulators, and c) how much the intangibles are worth.

Ross DeVol from the Milken Institute has a piece in the Atlantic's Secrets of Innovation special report on The 8 Best Innovation Ideas From Around the World. This are:
 • Singapore's education and human capital policies
 • Canada's high-skill immigration policies
 • Finland's R&D policies
 • Switzerland's tax policies
 • Israel and Germany's small business growth policies
 • Great Britain's technology transfer and commercialization policies
 • South Korea's business support policies

And as DeVol points out, there are surely others we could come up with. Now, I have to say I might not agree that all the policies from other nation's would be either appropriate or effective in the U.S. circumstance. Not is it clear that we could simple package this group of policies together in a coherent fashion. For example, I don't know if the Swiss tax system could support the Finnish R&D spending policy or Singapore's education system.

But are regular readers of this blog know, I consistently argue for looking at the innovation policies of others and adopting them as appropriate. In that regard, I completely agree with DeVol's bottom line: "If the U.S. can reformulate a group of strategies similar to those on this list, it could catapult itself to renewed preeminence in global innovation."

The problem, as he also points out, such an innovation strategy would require consensus visionary leadership. And regardless of what you think about our leaders' vision or lack there of, it is clear there is no consensus on a direction. To the extent we remain divided we will also be rudderless.

I recognize that the U.S. has always had its internal differences over policy. A 60% win by a President is considered a landslide and a mandate (no President has gotten more that 61.1% of the popular vote). But we now have a political system that rewards blocking action rather action.

Maybe we can forge consensus around some of these items. One example might be the recent bipartisan bill by Senator Coons and Rubio -- which includes a few of the elements listed above (see earlier posting). So, lets look at the list and see what we can accomplish - a step at a time.

Yesterday's posting discussed the job creation patterns of US multinational companies (MNCs) as analyzed in the most recent The Commerce Department benchmarking study "Operations of U.S. Multinational Companies in the Unites States and Abroad". That study also included data on R&D spending:

Another notable development in the operations of U.S. MNCs in 1999-2009 was the relatively rapid growth in research and development (R&D) expenditures. During that period, R&D expenditures grew at an average annual rate of 4.8 percent--nearly 2 percentage points faster than the 3.1 percent average growth in value added of U.S. MNCs and much faster than the 0.9 percent average growth in capital expenditures and the 0.6 percent average growth in employment. During periods of economic contraction and uncertainty, such as in much of 1999-2009, U.S. MNCs may continue to invest in R&D to remain competitive over the long run even when they are reluctant to hire workers or invest in tangible assets.

That doesn't mean these companies don't spend on capital equipment. According to the study, "The ratio of R&D expenditures to capital expenditures of U.S. MNCs was 0.4 -- meaning that they spent $400 million dollars on R&D for every $1 billion spent on capital expenditures."

R&D spending increased 7.1% between 1999 and 2009 by foreign affiliates of U.S. MNCs, compared to a 4.4% increase by the U.S. parent companies. The result was a gradual shift of R&D activities abroad. Not so much a movement of activities from the U.S. to other countries but an increase in activity abroad compared to the level of activity here. The biggest increase in R&D spending by foreign affiliates of U.S. MNCs was in India -- with an annual growth rate of over 50% between 1999 and 2009. That was followed by a 19% growth rate in Eastern Europe and a 17% growth rate in China. Interestingly, both Africa and the Middle East also had growth rates of almost 17% and over 16% respectively, which I believe mostly reflects spending in South Africa and Israel respectively.

The study also breaks down spending by industry:

By industry, R&D expenditures by U.S. parents were concentrated in three industry sectors--manufacturing ($146.9 billion), information ($20.1 billion), and "professional, scientific, and technical services" ($15.8 billion); together, these sectors accounted for 93.7 percent of total R&D by U.S. parents in 2009 (table 8). Within manufacturing, chemicals, transportation equipment, and "computers and electronic products" accounted for 82.5 percent of the R&D expenditures. Information accounted for 10.3 percent of parent R&D and was concentrated in publishing industries, primarily software publishing. "Professional, scientific, and technical services" accounted for 8.1 percent of R&D by U.S. parents, primarily "computer systems design and related services."
. . .
Between 1999 and 2009, the share of total parent R&D by U.S. parents in manufacturing fell 7.7 percentage points, while the combined share of R&D by U.S. parents in information and "professional, scientific, and technical services" rose 6.3 percentage points. Within manufacturing, the share of R&D by U.S. parents in computers and electronics products fell, but the share in chemicals rose. The share of parent R&D in information rose 5.0 percentage points, led by increases in publishing industries (including software publishing) and other information services.

In earlier postings, I discussed the recent data on the slowdown in job creation by start-ups. It has been taken as an article of both faith and data that small companies, especially new start-ups are the job creators in this economy and the large companies are dinosaurs. But, as David Wessel points out in today's Wall Street Journal, multinationals are adding employment but not in the U.S. ("U.S. Firms Keen to Add Foreign Jobs"):

U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported.

The study attributes the job growth patterns to companies expanding production locally in fast growing markets, rather than shifting to low-wage sites. However, there has been an interesting shift in U.S. trade patterns by multinationals, where "MNC-associated imports exceeded MNC-associated exports by 21.6 percent, a reversal from 1999 when MNC-associated exports exceeded MNC-associated imports by 12.9 percent." In other words, multinationals switched from being net exports to being net importers. I take this as evidence of offshoring of production, not just expansion of production in foreign markets to satisfy the demand in those markets.

I would note also that this is a study of U.S. multinationals, not foreign multinationals operations in the United States. Employment by foreign companies in the U.S. is also down. But that is more the result of the general economic slowdown in the U.S. rather than any major shift in production locations. For the latest data on these companies, see the BEA's report "U.S. Affiliates of Foreign Companies" in the August 2011 edition of the Survey of Current Business

So, in addition to policies for start-ups and helping existing companies grow faster, we need to look at ways to promote job growth in the US by the US multinational companies. There are no shortages of ideas floating around to do that -- from tariffs to taxes. I don't have an particular insights to any of these proposals. I do like the concept imbedded in the recent legislation by Senators Coons and Rubio to give a bonus (a Domestic Manufacturing Credit) in the R&D tax credit to companies who produce in the U.S. (see earlier posting). We need more thinking like that if we are to solve our jobs problem.

One point I keep making in this blog is that the intangible economy involves a mind set change as much as anything else. Here is a very minor example. There are bills in the House and Senate strengthening anti-corruption laws: H.R. 2572 Clean Up Government Act of 2011 and S. 401 Public Corruption Prosecution Act. With respect to intangibles, both make one minor change to the mail and wire fraud statutes to include licenses and other intangible rights along with "money and property" as things that can not be obtained by fraudulent means. It is a very technical change. But it illustrates my point: public policy and the legal code are full of small items that never took intangibles into account when they were first enacted which need to be changed. More importantly, we need to stop thinking the way we did in the past and stop using to old boilerplate for making our laws and policies. Intangibles are important and public policy, large and small, needs to that that into account.

One of the thing that drives me absolutely crazy is the narrow use of patent data as an indicator of innovation. Patents are important, but they are very misleading innovation indicator. Case in point is the new Thompson Reuters Top 100 Global Innovators -- which is solely based on patents. Yes, they use various aspects of patents, not just the number of filings. But they still equate patents as the sole indicator of innovation. Wrong, wrong, wrong.

They can't even use other criteria (such as every other study of innovation uses, like the percent of products that were introduced in the last 5 years).

As a result they end up with the predictable finding that the IT companies are the most innovative. And they end up with the ridiculous finding that pharmaceuticals are as bad at innovation as the petroleum industry. Why? Because different industries use intellectual property in different ways.

Analysis of patents tells us one thing -- about patents. It says little about innovation. And studies that use only patents as indicators of innovation do us all a great disservice

We all know that human capital is much more than formal education, even though most of the time we use levels of educational attainment as a proxy for human capital. We do this because years of formal schooling and educational certification (degrees awarded) can be easily measured and verified. But many of the skills needed in the I-Cubed Economy come through the process of life-long learning -- especially since the skills we need in our jobs today are not necessarily likely to have taught when we were back in school. Only through livelong learning can we keep up and continue to build our individual and group human capital.

But how to recognize that learning? Here is an interesting idea: Badges for Lifelong Learning. Sponsored by the MacArthur Foundation and supported by Mozilla, the project will create a series of digital badges that will validate the acquisition of knowledge or skills. The badges would be available on a person's website, Facebook page, etc and allow an employer to access detailed information about the individuals skills. The badge becomes a certification of skills learned both inside and outside of the formal educational degree and certification process. In essence, the badges help an individual build their brand and reputation through the compilation of their skill set.

The project is just beginning, with Stage One underway. According to the website:

The goal of Stage One is to identify compelling learning content, activities, or programs for which a badge or set of badges would be useful for recognizing and making visible learning that takes place in a particular area or topic. Badges may represent learning a set of skills, acquisition of competencies, achievements, interests, or affiliations. They can provide visible milestones on a learning pathway, support various types of community participation, signal achievement to a community of interest and outside stakeholders, support participation and further learning, and build identity and reputation.

The project is more than just the creation of these badges. It is also a way to promote livelong learning and drive new thinking as to how learning happens.

Let me throw in a different twist to the subject. Maybe these might also become a way of measuring human capital? The project supports are probably not thinking about this dimension of the issue. But if this takes off, looking at these badges might be a good compliment to looking at traditional educational measures (e.g. the number of BS degrees in engineering). Something to think about.

See the video of the launch event (1:55 minutes) below:

Andrew Sherman gets it. The opening vignette in his book Harvesting Intangible Assets: Uncover Hidden Revenue in Your Company's Intellectual Property shows that:

My father's father, Morris Sherman, was a farmer in upstate New York in the 1930s and 1940s. When health complication arose in the 1950s that prevented him from working the land, he took inventory of his intellectual assets, which included deep knowledge of the regional farming community and strong and respected relationships with other farmers. He then shifted his business model to leverage those assets and refocused his attention on the family's farm equipment dealership, which grew each year for many moons until it was sold at a healthy profit.
The Tao of Morris Sherman is simply--understand the tangible and intangible assets that you have and make the most of them.

He uses that story as the set up for the rest of the book where farming is a metaphor for how business should think about their intangible assets. But this is not a book on intangibles. This is a book about business strategy where intangibles and innovation are key factors. Not a lot more Tao; a lot of practical advice. So don't expect to come away with a more in depth understanding of complexities of intangible assets. You will come away with a much better practical sense of how intangible fit into business strategy and how to develop that strategy.

The farming metaphor did generated a powerful new insight for me. Just like any crop, Sherman points out that intangible assets need to be harvested at the right time. Timing is important. An idea can be not ready (unripe) or too late (rotten). This is something that we often overlook in our studies of entrepreneurship especially. Along with that is the need to nurture your intangibles until the time is right. For some intangibles, you can just sit back and watch. Others need constant cultivation. In other words, intangible assets are dynamic, not static -- and need to be treated as such.

Now the farming metaphor does break down at the end of the book. The last chapter feels like a bunch of items thrown together that Sherman felt needed to be at least mentioned. But generally it cares the discussion in an entertaining and useful fashion.

The one criticism I have is how easily the book falls into a discussion of intellectual property, rather than the broad range of intangible assets. But I think that is a failing of the state-of-the-art in our thinking rather than of the author. IP is the most tangible of intangibles. Thus it this the one that is the easiest to get a handle on. BTW - one book I've found so far that does a good job of grappling with the broad range of intangibles in business development is Mary Adams and Michael Oleksak's Intangible Capital: Putting Knowledge to Work in the 21st Century Organization (see earlier posting).

That said, I would put Sherman's Harvesting Intangible Assets on my bookshelf right next to the Adams and Oleksak book. Sherman has made an strong contribution towards helping business develop strategies utilizing their intangibles. The book should be widely read.

Yesterday, Senators Chris Coons (D-DE) and Marco Rubio (R-FL) introduced a bipartisan jobs bill - the American Growth, Recovery, Empowerment and Entrepreneurship (AGREE) Act - S. 1866 (see press announcement and bill summary). The title of the bill is especially apt. The bill is a compilation of bills and proposals from both sides of the aisle -- designed, hopefully, to garner widespread support. In a nutshell, the bill will:

Extend 100 percent bonus depreciation through 2012 for the full cost of qualified investments such as equipment and property.
Extend Section 179 expensing levels for small businesses through 2012.
Eliminate taxes on certain small business stock through 2012.
Extend the Research & Development tax credit until 2013, increase the Alternative Simplified Credit (ASC) from 14 percent to 20 percent, and makes the ASC permanent.
Provide veterans with a tax credit equal to 25% of the fee associated with starting a franchise up to $100,000.
Provide a five-year exemption from Section 404(b) of Sarbanes-Oxley for the first five years of a company going public, or for those below $250 million in total gross revenue (whichever comes first).
Eliminate the per-country numerical limitation for employment-based immigrant visas and adjusts the limitations on family based visa petitions from 7% per country to 15%.
Protect intellectual property by clarifying the Trade Secrets Act, and making it explicitly clear that it is not a crime for federal officials, in the performance of their duties, to share information about suspected infringing products with the right holder of a trademarked good.

Most of these provision have been discussed for some time with general agreement as to their merits. One relatively new proposal (introduced as legislation by Senator Coons at the beginning of the year) is adding a domestic production credit to the R&D tax credit. According to the bill summary, "the Domestic Manufacturing Credit would increase incrementally to reward a higher percentage of domestic production - an additional 2 percentage points for 50% to 60% of sales from domestically-­‐produced goods; up to a 10 percentage point increase for companies with 90% to 100% of their receipts from domestic production." This is an important step forward in directly tying our research capacity to the goal of domestic economic growth.

There is a lot of talk in Washington on trying to do a "big deal" that always seems to beyond the ability of both sides to compromise because of what they would lose. Here is something that can be done quickly that everyone can agree on. It is the proverbial "win-win". I hope the rest of the Congress can follow the path that Senator Coons and Rubio have laid out.

Here some interesting news from the other side of the pond. IP Finance has a story about a British bank now lending money to finance patent litigation (IP finance: Investec to fund civil litigation: what does this mean for IP?):

A media release today informs IP Finance that Investec Specialist Private Bank has become the first UK bank to offer litigation funding to clients requiring specialist finance to pursue a civil claim in court. This is said to be "in response to increasing demand for innovative funding solutions from law firms and their clients".

It is unclear whether Investec Specialist Private Bank will also lend to acquire intellectual property in the first place. Or whether they would use the IP as collateral on any of these loans. Their website notes that they do asset based lending, but lists the traditional set of assets: receivables, inventory, plant and machinery, property, and cashflow. It also appears that the new litigation lending facility is coming out of their group with specializes in financing of law firms -- not their asset-based lending group.

The result is that some in the banking industry are now willing to finance patent litigation but not to provide funding based on the patents themselves. Maybe at some point bankers may connect these dots. But apparently, not yet.

In an earlier posting, I highlighted a report from the Kauffman Foundation (Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation) which showed there has been a decrease in the average number of jobs being created by new firms.

Now comes further evidence of this phenomena in a paper from Labor Department economist The Declining Average Size of Establishments: Evidence and Explanations:

The average size of establishments rose through the expansion of the 1990s, and then fell slightly during the expansion of the 2000s. These trends suggest that the U.S. economy has changed in some fundamental way during the past two decades.

On a more technical note, I'm not sure looking at capital-labor ratios will provide the answer, as there has also been shift in IT usage. Start-up companies no longer need to invest in building their own IT infrastructure (servers, website, CRM software, etc). They can essentially just rent it from "the cloud." To the capital needed to start a company in the IT using sectors is lower than what it was just a few years ago.

So I have two bottom line takeaways from this report:
1) we need to look more carefully at the shift occurring in small companies and start ups, especially with respect to their intangible assets
2) as I state in the earlier posting, this new look at the data tells me we need to focus more attention on the growth phase. There are a number of things we could be doing to help established business grow faster. For example, we could expand the Manufacturing Extension Partnership (MEP) programs to encompasses a broader range of business assistance services (including management of intangible assets) to a broader range of companies. We could also increase funding for high-growth intangible-rich companies by allowing intangible assets (such as patents and other IP) to be used as collateral for loans. Creating a pilot program on IP backing lending at SBA would be the first step.

FYI -- the Labor Department paper was presented at a recent conference hosted by the Federal Reserve on Small Business and Entrepreneurship during an Economic Recovery

Here is a disheartening piece of news from a new report by Accenture ("Accenture Study Finds U.S. Workers Under Pressure to Improve Skills, But Need More Support from Employers"):

The majority (55 percent) of workers in the U.S. report they are under pressure to develop additional skills to be successful in their current and future jobs, but only 21 percent say they have acquired new skills through company-provided formal training during the past five years, according to a study released today by Accenture.

Even more disheartening was this finding:

The study suggests that employers may be hindered by not be having a complete picture of all of the skills they have within their organization to handle specific jobs. Just over half (53 percent) of respondents said their employers document their skills, but more than a third (38 percent) said their employers look only at specific job experience and education to match employees to jobs rather than looking at all of their talents and capabilities.

Like the plot line from the movie Kramer v. Kramer or, more likely, the movie The War of the Roses, this could get nasty. A nasty fight is developing between internet companies and TV/movie/music companies over pending legislation on online piracy. The House bill (Stop Online Piracy Act [STOP] - H.R. 3261 ) and the Senate bill (PROTECT IP Act - S. 968) would crack down on internet sites that distribute copyrighted material without permission (or payment).

As the story in today's Politico ("Shootout at the digital corral"), both sides are appealing to the concept of innovation to make their case:

"This is a jobs bill, and we're happy to do our part to cut through the confusion, make the truth known and enable U.S. innovation, creativity and technical invention to continue to support U.S. job growth," NBCUniversal general counsel Rick Cotton told POLITICO in a statement.
. . .
"There is more to this issue than meets the eye. While we support targeted approaches to solving the problem of foreign rogue sites, some of these bills could truly hamper innovation on the Internet, so we are working hard to raise awareness of the potential for unintended consequences," said Amber Allman, a Yahoo spokeswoman.

In essence, this is a case of intangibles versus intangibles. The entertainment industry wants to protect its intellectual property. The internet companies worry that the provisions will weaken one of its intangible assets: its relationship with its customers. Internet companies are already under fire for online privacy and other issues are afraid the bill will require them to become the internet's de-facto censor.

It appears that both sides have a lot to lose on this one. Like the movies cited above, this clash between intangible assets and intangible assets is not likely to have a happy ending.

Here is an example of some muddled thinking -- from a blog writer at the Wall Street Journal. The story -- "Architecture, Not Autos, Should Be Exports' Future" -- is on Brad Jensen's new book Global Trade in Services: Fear, Facts, and Offshoring (see earlier posting). Not to pick on these article's author, but the headline is an example of old industrial thinking. The headline misses a key point of trade: the answer is not either service or goods, but both services and goods.

First, the size of the goods deficit is large and the size of the intangibles surplus comparatively small (one-quarter of the size of the goods deficit). Before the recession, growth in intangibles -- business services exports and royalty payments received -- was about 10%. To begin to solve our trade deficit, we would have to see a growth in service exports of orders of magnitude great than that. And remember that we also import a lot of services -- it is not a one way flow.

More importantly, "services" (really knowledge and intangible assets) are embedded in goods -- especially complex goods. Selling the package of complex goods is what spurs economic and technological advancement. Germany's Mittelstand companies are a perfect example (see previous postings). They essential sell their technical expertise in two forms: product and follow up service. This fusion of goods and services is the future structure of an advanced economy - not stand alone services or goods production. Thus, what we really need is an export promotion policy that understand the role of complex goods and services in this new economy.

Brad Jensen has released a new book on Global Trade in Services: Fear, Facts, and Offshoring (see his lecture on YouTube). Jensen has done yeoman's service in analyzing the role of business services in the US economy and our trade in business services (both domestically and internationally). [BTW - these are areas that I track every month as trade in intangibles.] Jensen does a good job of pulling out the data and uses that data on education and skills to make a case that the US has a comparative advantage in business services.

I wish, however, he had been able to look more carefully at the specifics of business services imports (but understand the limitations of the data). The analysis indicates that the trade is generally equal. As he points out, most of our business service imports are from high-wage countries. Thus, our competitors are other countries who may have a similar comparative advantage as us. And as Jensen points out, skill and education levels in low wage countries, especially China and India, are increasing.

Given that we are facing tough competitors with similar national competitive advantages and a potential rising challenge from others, I am not as sanguine that we have a huge opportunity to expand our business services export. It is not, as Jensen seems to indicate, as simple as opening up markets to services trade by getting other nations to remove barriers. We may well succeed in removing those barriers and see our competitors take the market.

So the policy should to both remove barriers and continue to improve our competitive advantage in intangibles. Years ago, I was involved in a project at the Congressional Office of Technology Assessment on International Competition in Services: Banking, Building, Software, Knowhow. That report argued that government policy needs to continually pay attention to maintaining our competitiveness in service sectors. That finding is just as relevant today as it was back then.

Hopefully Jensen's book will spur more attention and analysis -- and better data on these sectors. As he points out, we do a good jobs of collecting data on manufacturing and a not-so-good data on services.

Interestingly, he appears to sets aside questions about certain types of sales of what he calls headquarters services. I would also note that he tends to look at the traditional definitions of services. Thus, he doesn't deal with the question of knowledge and intangible assets that is embedded in goods. Nor does he deal with the problems of the goods/service dichotomy (i.e. is software a good or a business service).

I think Jensen would agree this is a good start. And a good indicator of future work. I would urge, however, that follow on analysis would attempt to break out of the old goods/service dichotomy and come up with a better intellectual framework.

According to a story in the Wall Street Journal, the high-tech patent landscape may be changing ("Tech Start-Ups Rethink Worth of Patents"). The story makes three points:

1. With companies like Apple becoming more aggressive in asserting infringement, smaller companies are ramping up their defensive patenting.


2. With the Nortel auction, companies are looking more carefully at patents and patent valuations.


3. With the coming shift to first-to-file, companies are seeing a risk in delaying patent filings for fear others might get there first.

As a result, more patenting in Silicon Valley and more patent litigation. Is that a good thing or bad thing? From an innovation policy and economic growth perspective, I'm sure there are people who will argue for either side. Regardless of what you think, it seems to be a change in the Silicon Valley mindset.

Some good news in today's release from BEA of the September trade figures: the deficit declined by $1.8 billion to $43.1 billion. Exports rose by $2.5 billion while imports were up by $0.7 billion. Economists had expected the deficit to grow to $46 billion.

The data for August was also slightly better than earlier reported (see previous posting). Rather than no changed in the trade deficit in August, the deficit actually declined slightly as exports grew, rather than declined as previously estimated.

The deficit in advanced technology goods also improved somewhat in September. The biggest change was an increase in exports and a decrease in imports of information and communications technology -- which offset an increase in imports and a decrease in exports in aerospace. Interestingly, imports of nuclear technology and opto-electronics also increased significantly while imports of biotechnology decreased significantly. 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 small bit of bad news is that the surplus in intangibles declined ever so slightly to $14.372 billion. This is the first decline in our intangibles surplus since February 2010. The change was due to a drop in exports of business services (imports of business services declined as well but not by as much as exports). The surplus in royalty payments increased by a very minor amount with exports (payments received) rising faster than imports (payments sent out).

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.

Many years ago, I was the staffer for a Senate subcommittee that had jurisdiction over government data collection. When I would visit the Chairman's home state (which staffers do a lot), I would be called upon to explain to people, mostly farmers, why they needed to fill out all this government paperwork. Why did the government need to collect all this information? It was just a useless nuisance, they would complain.

Fast forward 25 years to this story in the New York Times - "Agriculture Department Cuts Reports on Crop Inventories". As the story points out, farm groups are not happy with the cut backs in data collection:

Farmers say such data is crucial -- and not just because it helps them decide how much to plant or how many animals to raise. Potato farmers use reports on potato stocks to decide when to sell. Hops farmers use the data to persuade bankers to lend them money for costly processing facilities. Restaurant chains watch catfish numbers to anticipate price changes. With the Texas drought forcing farmers to send their sheep herds to other states, wool and lamb buyers would normally use federal data to see where the animals went.

So farmers are now begging the federal government to collect information that they used to complain to me about. The fact that farmers have gone from complaining to valuing says a lot about our switch to the I-Cubed Economy and the rise in the importance of intangible assets. The farmers may not recognize the crop information as an intangible asset. They just know it is valuable.

The same can be said for many others. Business people don't necessarily realize what they have are "intangible assets." They do know when something is valuable. This has huge implications for public policy. The market failure here is that many businesses don't recognize their intangible assets and don't know how to utilize them. As a result, the economy is less innovative and productive than it can be and economic growth suffers. For that reason, I have long advocated that government programs that provide technical advice to business be expanded to include intangible asset management (see our Policy Brief--Intellectual Capital and Revitalizing Manufacturing).

Likewise, government needs to understand the role it plays in creating intangible assets that the private sector uses. We all understand that government funded R&D and education programs are government provided intangible assets. In fact, the White House Office of Management and Budget (OMB) puts out a special analysis of federal investments that includes investments in physical capital, R&D and education and training (see previous posting). However, spending on data collection and information creation is not seen as an investment.

It should be. After all, as the farmers now recognize, there is value in them numbers.

Here is good description by the Wall Street Journal on the changing economy, seen from the point of view of jobs.





The analysis reinforces what I have been saying for some time -- the recession of the 1970s were the last industrial age recession and the recession of 1980s and 1990s were information age recessions. The analysis also makes another important point: the the "aughts" (2000-2009) was a lost decade. The growth in the Bush years was an illusion -- an illusion we are still paying for.

Regular readers of this blog will know that every month I publish data on US trade in intangibles (imports and exports). And frequently in those postings I try to make a certain point: that trade in pure intangibles (royalties and services) is not enough. Intangibles are important in international trade for what they do to the competitive advantage for goods trade as well, if not more so.

Here is a fun piece from last night's ABC World News broadcast that illustrates my point -- Made in America: Bourbon Boom in the Heartland. As the video notes, bourbon is a distinctive product. By definition it comes from a very specific area. And the distillers have used that trait to market bourbon -- as the video says, increased exports by "improving quality and leveraging difference." Use of such a place specific production for intellectual property protection is called geographical indicators (see earlier postings).

But, not all geographical indicators are successful. Others end up creating a created more of a generic brand that is hard to then have people associate with a specific geographically produced product. The classic example is the French campaign to have the term "champagne" used only for the product that comes from Champagne.

The bourbon makers are trying to overcome that problem by selling America. They are very aggressively making clear that bourbon and America are inseparable. So far, judging by the ABC report, it seems to be working. There are, however, already stories about fake whiskey, including bourbon, cropping up in overseas markets, like in China. After all, Chinese Bourbon Chicken has become a standard recipe.

[By the way, as a bourbon drinker (Markers Mark is my choice), I have to point out that there is an ongoing controversy as to what is "bourbon." For example, there is a debate as to whether Jack Daniels is a bourbon or a sour mash whiskey.]

According to a new IBM study (Inside the Midmarket: A 2011 Perspective), middle market companies are shift their strategic mindset away from a heavy emphasis on efficiency and cost control to more attention on innovation and customer focus. That is not to say that efficiency is not a goal -- just that other issues are a greater priority than in 2009:

The strategic mindset of midsize firms has dramatically shifted during these challenging times to place more emphasis on growth, innovation, and customer value. Midsize businesses are taking the steps needed to make better use of the information and resources available to them in order to increase productivity, attract and retain customers, and improve competitive positioning - all within a cost-effective business model.

The IBM paper concludes, not surprisingly, that these priorities can be met by and will result in greater investment in IT.

I would argue that it also means companies need to pay more attention to better management of their intangible assets. If companies are going to be more innovative, reach new customers, improve productivity, and all the other priorities, the path is through utilization of intangibles. Midmarket companies have a special advantage when it come to utilizing their intangibles. These companies have the flexibility to adapt and innovate faster than most large organizations. They also usually have a range of intangible resources already developed - but underutilized.

However, midmarket companies are also in special need of help with managing their intangibles. Large companies have the resources to conduct holistic strategic reviews and put in place management systems to track intangibles (even if they don't always create such systems or can't implement the review's recommendations). Midmarket companies are usually too busy trying to run the day to day operations. For this reason, I have long advocated that government business support programs -- such as the Manufacturing Extension Partnership (MEP) -- expand their services to include intangible asset management. MEP has done great working in spreading the concepts of lean manufacturing and quality control (Six-Sigma, TQM). We need to harness that system for the challenges of the new information age in managing intangibles.

[For more on how intangible assets/intellectual capital can revive manufacturing, see our Policy Brief--Intellectual Capital and Revitalizing Manufacturing.]

From TIME blog on The Curious Capitalist: "What's Really At Risk in a Greek Default":

As Greeks decide the fate of Prime Minister George Papandreou around midnight Athens time tonight, it's good to remind ourselves what our interest in this latest Balkan mess is: credit. Not the numeric version in your monthly credit card statement, nor the alphabetic label Standard and Poor's attaches to corporations and countries, but rather the intangible social force those numbers and letters are trying to approximate, a force that binds communities, economies and countries together.

. . .

But managing measurable credit--ensuring that Italy has enough of it, and that Greece's loss of it doesn't extend too far abroad--is not the same as managing intangible credit. Greece is on the verge of tearing itself apart. On the one hand, Greeks oppose austerity and don't want to pay collectively for the sins of their dysfunctional state, even though many in the country bear collective responsibility for the mess, whether through abetting corruption or dodging taxes. On the other hand, Greeks want to stay in Europe. The question is will Greeks reinforce their social contract with each other and begin to rebuild credit in their society, or will they opt for an every man for himself race to the bottom.

What do we care if the Greeks make a bad choice? Unfortunately, irrational Balkan behavior, though technically contained, has affected Europe and the world in the past. What would it mean in the early 21st century to have a country that is nominally part of the stable West, tearing itself apart?
. . .

In other words, we may have more riding on the Greeks' ability to believe in each other--their underlying social credit--than the firewalling of their financial credit makes it seem.

While this analysis is focused on Greece, one would not have to stretch it beyond credibility to apply to other countries -- such as what might happen in the US if we can't get our own act together. We know on a high level of economic understanding what needs to be done: invest now and trim over the long run. The question -- which will be partly answered by the "supercommittee" in a few weeks -- is whether we can act rather than pontificate.

Enough said.

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Some mixed news from this morning's employment data. BLS reports that 80,000 jobs were created in October. This is slightly below what economists expected (see Wall Street Journal and New York Times estimates) and is being characterized as "mediocre." The unemployment rate declined slightly to 9%. The good news is the large upward revisions of the August and September data. Earlier reports for August indicated no (zero) net job creation. That was revised to an increase of 104,000 jobs in August. Job creation in September was revised upwards from 102,000 to 158,000 net new jobs. The other good news is that there were 104,000 private sector jobs created last month -- the reason why the net job creation was only 80,000 was due to a large loss of government jobs. The largest job increases were in health care, food services and administrative and support services (especially temporary help services). The biggest loss was in construction jobs -- mostly in the narrow category of nonresidential specialty trade contractors (residential construction jobs were up).

The news on involuntary underemployed was somewhat positive as well. 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 declined slightly.

Two things to update my earlier posting on the auction of Solyndra's non-core assets. 1) Solyndra has filed its list of assets and liabilities. It lists a number of patents and many more patent applications -- as well as tradenames, logo, and domain names. Of course, given current accounting rules, the value of these intangible assets is booked as "unknown." 2) The auction of the core assets will be held November 18 (bids due November 16). The company is seeking to sell the assets on a "turnkey" basis -- meaning that one bidder gets the whole business. These assets listed in court documents are:

all of Solyndra's assets utilized in the ordinary course operation of its business (or any portion thereof), including Solyndra's manufacturing plant and land, all associated fixtures and equipment, intellectual property, rights under executory contracts and leases, and any other business assets necessary for a sale of Solyndra's enterprise.

Documents are available on-line at https://www.solyndra-info.com/.

There is an interesting new financing tool for small and medium size enterprises (SME) emerging in Germany: the bond market. A recent story in the Economist (Financing Germany's Mittelstand: A crisis-born fledgling) notes:

Finding those hidden treasures, the mid-size mostly family-run companies--known as the Mittelstand--which power Germany's export machine, is getting a little easier for would-be investors. That is because more of them are beginning to issue public bonds. In the past 12 months, four of Germany's eight stock exchanges have started their own markets for Mittelstand bonds. The issue sizes range from €15m to €225m ($21m to $311m) and the competition between exchanges to attract the best names is fierce.

As I pointed out before, the Mittelstand companies are in the business of selling their specialized knowledge. It would interesting to know if that knowledge is used in any way to collateralize those bonds. The article points out that the bonds are paying a coupon of 7% to 9%, "which is cheaper than many bank loans." Given the risky nature of the market (as the story points out, "the issues are small and illiquid; there is no true market-making; and few of the issuers have a track record") use of collateral would be a good idea.

Here is an interesting (and entertaining) video from the Kauffman Foundation







This is one part of the presentation that I disagree with. Economic growth is not just the number of new firms but the growth of existing firms as well. The key, as the presentation points out, is finding ways to help companies grow -- not just start. That magic sauce would apply to existing companies as well as start ups. Taking a established company from 100 people to 1000 employees is how to grow the economy.

I would submit that the magic sauce is all about understanding and exploiting a company's intangible assets. Once we know better how to do that we can put tools in place to help that process of discovery -- for all companies: start-ups and established, big and small. That would be the magic sauce of economic growth.

Tomorrow the auction house of Heritage Global Partners (HPG) is starting the bidding for the assets of the bankrupt solar company Solyndra. The auction covers Solyndra's high-tech research and manufacturing equipment as well as their office furniture, inventory of solar panels and spare parts/raw materials. In other words, much of their tangible assets. These are consider by the company and bankruptcy court as "non-core." (FYI -- documents related to the case are available on-line at https://www.solyndra-info.com/.)

The question I asked in an earlier posting (Solyndra -- who gets the IP?) seems to still be unanswered. And a related question -- what are their IP assets -- is also still unanswered. As I understand it, the company was supposed file their financial schedule of assets and liabilities yesterday.

In any event, it will be interesting to see how much the auction raises -- and what percentage that is of the overall debt. The companies reportedly has secured debts of $783.8 million.

And for those of you looking to pick up some high-tech solar energy related tangible assets cheap, stay tuned. As the New York Times reports, there are a number of additional auctions coming up.

A couple news items concerning appraisals of intangible assets:

American Society of Appraisers Business Valuation section is now offering a Intangible Asset Specialty Designation. According to their website:

Factors considered in the development of this designation include:

• The increasing importance of intangible assets to business strategies and profitability


• Expanded financial reporting requirements regarding intangible assets


• Increased review of intangible asset valuations by regulatory groups including the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB)


• The increased uncertainty regarding asset values as a result of the recent Financial Crisis


• Complexities associated with the identification and valuation of the many different types of intangible assets.