Coincidently, I got an advertisement for a new journal after I wrote yesterday’s posting on the value of the “US” brand. The journal is Place Branding and has a strong international focus. We have long believe that how others perceive a location (its “brand”) is an important intangible assets (see my paper on Building on Local Information Assets and the paper by MaryAnn Feldman on Constructing Jurisdictional Advantage on our website. It is interesting to note that this concept has now reached critical mass to entice a commercial publisher into the field.
As has been discussed before in these postings, one of this nation’s most important intangible assets is the “US” brand. But, that brand is under continuing downward pressure. According to a story in today’s New York Times, “U.S. Companies Rethinking Their Marketing in Europe”:
For years, American corporations and the European companies that do business with them have faced anti-American sentiments from Europeans. But with the war continuing in Iraq and discomfort growing over United States dominance, the companies have been forced to further adjust how they do business in Europe.
The story goes on to describe how, according to a recent survey by Edelman Public Relations,
32 percent of Europeans polled in January said they were less likely to purchase products made by companies in the United States because of disagreements with American culture. The Coca-Cola brand, for example, was “trusted” by 69 percent of respondents in the United States but by only 45 percent in Europe and 46 percent in Canada. Procter & Gamble products, which include Vicks, Folgers, Charmin, Clairol and Pampers brands, were trusted by 74 percent of Americans but only 44 percent of Europeans.
I’m not particularly alarmed by this latest “trust” survey. Anti-Americanism in Europe waxes and wanes with the political and cultural winds, taking the value of the “US” brand with it. And, as I used to tell my international business students, a good international marketing strategy balances between localizing your product and building a global cachet (like Levi’s or Coke).
However, we can not be blind or sanguine about the effects of our international actions on our international commerce (and brand valuation). Right now, the hottest selling book in Turkey portrays a US invasion of that country. According to the Christian Science Monitor, even the authors of the book see it as more than a novel:
The book is clearly sold as fiction, but its premise has entered Turkey’s public discourse in a way that sometimes seems to blur the line between fantasy and reality.
. . .
[Co-author Burak] Turna does not see the book as fiction. “From our point of view, it’s a philosophical and scientific calculation,” he says. “It’s more than a novel.”
That has got to hurt sales of Levi’s and Coke, no matter how big the cachet.
Last summer, I wrote a piece for Rural Matters on “Building on Local Information Assets” (available at the Athena Alliance website). In that article I argued that rural areas have important local intangible assets upon which they can build economic development. Tourism is obviously one. But even I was taken aback when I heard a news item on the radio that wildlife-watching was an $85 billion industry (according to National Wildlife magazine).
And apparently growing. According to the 2001 National Survey of Fishing, Hunting, & Wildlife-Associated Recreation by the U.S. Fish & Wildlife Service, wildlife watching was a $40 billion industry. Adding in hunting and fishing brings the total to $110 billion annually.
That is a lot of spending on an intangible. It is about as big as the $110 billion in 2004 expenditures for computer hardware industry, about a third the size of the $326 billion in personal consumption in 2004 of clothing and about a quarter the size of the $450 billion in personal consumption in 2004 of autos and auto parts. [From BEA release of January 28, 2005 “Gross Domestic Product: Fourth Quarter 2004 (Advance)”]
As Jason Henderson of the Kansas City Fed wrote last April in The Main Street Economist:
Nature has always been a strong foundation for rural America . Now, wildlife recreation appears to be the newest opportunity. The industry may not be the answer for every rural community, but those with entertainment and wildlife may be able to leverage Mother Nature to spark new growth.
(thanks to John Chester, the afternoon host at WGMS – Classical 103.5 for passing on this news item)
The December trade figures came out this morning and show that our balance of trade in intangibles holding steady at slightly over $6.5 billion monthly. Both export and import have steadily increased. For the year, our intangibles balance is $76.4 billion up slightly from $76.2 billion in 2003 and $73.9 billion in 2002.
(As discussed last month, we are defining trade in intangibles as the sum of “royalties and license fees” and “other private services” – see the official BEA/Census definitions of these two categories below).
The overall trade deficit improved somewhat in December with a total trade deficit of $56.4 billion compared to the November deficit of $59.3 billion. But, the 2004 deficit was a record $617.7 billion, up significantly from the 2003 deficit of $496.5 billion.
I repeat what I said last month: intangibles are not, and can not, offset our huge and growing deficit in goods. While we are an intangible economy, trade in pure intangible will not save us. The power of intangibles is how they operate within all sectors of the economy, not as a separate sector. We need to harness our intangibles to re-invigorate our goods trade if we are to get our dangerous trade deficit under control.
BEA/Census Bureau definitions:
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.
One of the last unregulated parts of the financial markets is the operation of credit rating agencies. Yesterday, the heads of the major companies got a grilling from the Senate Banking Committee. The problems were summed up in a Washington Post investigative series last fall (Gatekeepers: Power of Credit Raters):
Dozens of current and former rating officials, financial advisers and Wall Street traders and investors interviewed by The Washington Post say the rating system has proved vulnerable to subjective judgment, manipulation and pressure from borrowers. They say the big three are so dominant they can keep their rating processes secret, force clients to pay higher fees and fend off complaints about their mistakes.
At stake is the credibility of the ratings. As the rating agency witnesses before the Banking Committee stressed over and over again, credibility is what they sell: independent judgments. But, the 2004 survey on corporate credit by the Association for Financial Professions found:
A third of corporate practitioners believe the ratings on their organization’s debt are inaccurate. Only 42 percent of corporate practitioners from organizations with rated debt believe that changes in their organization’s financials are reflected in their ratings in a timely manner.
Three out of five organizations believe the ratings that they use for investment decisions are accurate. Only 38 percent of the same organizations believe the ratings that they use for investment decisions are timely.
The issues of subjective judgments and the transparency of the analytical methods are at the heart of the intangible economy. Dealing with intangibles requires some level of subjectivity. That subjectivity and judgment needs to be backed up with a true understanding of the intangible factors involved.
While the rating agencies maintain that their methodologies are publicly available, critics complain that process is non-transparent. Each credit report does contain a rationale section describing the key factors in the rating decision. And there some information available on the rating agencies’ websites. But it appears to be general in nature. As S&P’s 2001 report Rating Methodology: Evaluating the Issuer states:
Bear in mind that ratings represent an art as much as a science. A rating is, in the end, an opinion. Indeed, it is critical to understand that the rating process is not limited to the examination of various financial measures. Proper assessment of debt protection levels requires a broader framework, involving a thorough review of business fundamentals, including judgments about the company’s competitive position and evaluation of management and its strategies. Clearly, such judgments are highly subjective; indeed, subjectivity is at the heart of every rating.
This issue of transparency – what are the methods – has now become a political issue, with Congress looking into the matter. The EU is also looking at greater regulation of rating agencies.
There have been a number of studies as to how stock analysts make their decisions and the role of intangible assets. However, there seem to be few studies as to what the debt analysts look at. Sounds like a fruitful area for future research.
The Bush Administration released its FY 2006 budget yesterday. Budgets are all about priorities as reflected in resource allocations. As such, this budget will be parsed, dissected and analyzed in a hundred different ways over the next few days, weeks and months. Part of the priority mix is the trade off between immediate consumption and longer term investment. One of the ways we should look at the budget, therefore, is how it allocates funds for long-term investments, especially the development of intangible assets. The US government does not split out such investments in a separate capital budget and a full detailed analysis of Federal investments in intangibles is beyond my scope at this point. But there is an existing background analysis on investments already prepared by the Office of Management and Budget (OMB) which offers some tantalizing glimpses. Section 6 (“Federal Investments”) of OMB’s Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006 discusses physical capital investments, the conduct of R&D and the conduct of education and training.
According to this analysis, Federal investment in the conduct of research and development will increase slightly from $122.4 billion to $124.9 billion. Defense R&D makes up the majority, increasing from $71.4 billion to $73.5 billion; non-defense R&D goes from $51.1 billion to $51.4 billion
Note: By another measure in Section 5 of the Analytical Perspective, scientific investment will decline. The Federal Science and Technology budget (which does not count funding for defense development, testing, and evaluation) is down by roughly 1% from $61.7 billion to $60.8 billion.
Investment in the conduct of education and training declines dramatically from $92.9 billion in FY 2005 to $86.7 billion in FY 2006. According to Administration officials (as quoted in the Wall Street Journal) this decline is actually a savings due to program consolidation, not a cut in actual services delivered. Needless to say, critics disagree.
The budget analysis also includes a summary of spending on government statistics (section 4 of the Analytical Perspectives). The FY 2006 budget shows small increases for most of the statistical agencies. No agency was cut.
So, by this very rough cut, the Federal investment in intangible assets is $211.6 billion (down from $215.3 billion in FY 2005). And add in roughly $2.3 billion for statistics.
These numbers, however, are only imperfect measures of Federal investments. They do not include other spending on intangible assets, such as arts & humanities funding, other government information creation activities such as the weather service and the Library of Congress, the government standard setting activities, training of government personnel (including non-combat related military training), organizational capacity building & technical assistance programs, export promotion activities and funding, agricultural brand promotion (marketing boards), and government sponsored awards, such as the Baldrige Quality Award. While they do include the subsidy value of direct loans and loan guarantees for education, they don’t include tax expenditures, such as the R&D tax credit (valued at $4.2 billion in FY 2006) and the tuition tax credit ($5.3 billion in FY 2006).
By contrast, OMB calculates major public investment in physical capital at $183.5 billion.
In addition, the Corporation for Enterprise Development has estimated that other assets building programs (homeownership, retirement savings, savings and investment, and small business development) make up another $335 billion (in FY 2003) of Federal funds. (See their 2004 report Hidden in Plain Sight.) All most all of this comes in the form of tax expenditures and never shows up in the budget.
Given the amount of these funds, maybe it is time to take a closer look at our investment budget. I understand that there are budget process issues with creating a separate capital budget. The most salient concern is over the political games that can be played: every program will be categorized as an investment in order to take it off-budget and to protect it politically. However, that concern should not prevent us from doing a better job of analysis. We can create a standard set of expenditure categories that we all can agree are investments in intangibles. Using that set we can get a better handle on what we are investing in and where that investment is going.
Anyone out there interested in taking this on?
A California kindergarten teacher is now $15.6 million richer due to a previously unknown intangible asset: his photo. As a story in the LA Times relates, it turns out that this gentleman was a former model and actor who
happened to come face to face with himself on a label for Nestle’s Taster’s Choice.
“What am I doing on this jar?” he thought as he looked at the picture of a clearly satisfied coffee drinker peering into his cup.
Then he remembered: In 1986, he had posed for a photographer on assignment for Nestle. He was paid a modest amount for his time and assumed that nothing ever came of the two-hour shoot.
As the result of a lawsuit, a jury awarded him $330,000 for use of the photo and 5% of the profit ($15.3 million) in damages.
Before you start yelling about frivolous lawsuits, think about this. Apparently, Nestle first tried to claim that he had been paid in full for the photo shoot and then tried to claim it wasn’t even him. My guess is that their stonewalling significantly upped the price tag.
Moral of the story: your intangible assets may be worth only what a court says they are worth.