Future Competitiveness

One of my favorite websites is the Globalist, which runs excerpts from new books. Earlier this month, they ran a piece from Kent Hughes’ new book > Global Economy” href=”http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=4595″> The Past and Future of U.S. Competitiveness. Kent is an old colleague and co-sponsor (in his position at the Woodrow Wilson Center) of our policy forum on the Intangible Economy. The book is both a history of the competitiveness debates of the 1980’s and a policy prescription for the future:

What should the United States do to remain the leading economic power in the 21st century?
The answer lies in the not too distant past when the United States responded to an earlier period of economic difficulties at home and rising international competition abroad.
As the United States entered the 1980s, it faced stagnant productivity growth, surging inflation and rising international competition. By the middle of the decade, Japan was scaling the heights of high-tech industry that the United States thought defined its own economic future.
The United States rose to the challenge. The private sector, political leaders and students of policy all responded. Private industry adopted and adapted lean production to meet and often beat the price, quality and pace of innovation set by Japanese companies.
. . .
the strategy that worked so well in the 1990s created a framework for policy that can – and must – be adapted to the new economic and geopolitical challenges of the 21st century.

I couldn’t agree more. For my own take on today’s competitiveness challenge, see “Info Age: Recast Issues Demand New Solutions

Looking at the US from outside

America for the Americans seems to be the cry in some quarters. After all, America is different and we can expect outsiders to understand — for example, our love affair with the automobile.
Wrong, as the story of the new Mustang shows:

“This is the best Mustang ever produced,” said Brad Barnett, who runs an enthusiasts’ Web site called TheMustangSource.com. “It’s all-American. Baseball, apple pie and Mustang are all-American.”
Which makes it all the more remarkable that the new Mustang is largely the creation of a Vietnamese immigrant named Hau Thai-Tang.
. . .
it was another Asian American — Larry Shinoda, held in internment camps for Japanese Americans during World War II — who designed the 1963 Corvette Sting Ray, arguably the top rival to the Mustang as the quintessential American car.

The rest of the story can be read at last Sunday’s Washington Post,
“Importing Ingenuity”. As the story points out:

Sometimes it takes a distant vantage point to see America quite that way. After all, it was Frenchman Alexis de Tocqueville who captured the spirit of American democracy in essays in the 1800s, and fellow countryman Frederic Auguste Bartholdi who created the great symbol of the Statue of Liberty. Think of the Eastern Europeans of the early 20th century who shaped American cinema — Samuel Goldwyn, Adolph Zukor, Louis B. Mayer. Or French designer Raymond Loewy, who created the Greyhound Scenicruiser, the Shell and Exxon logos, the streamlined S-1 locomotive that was the pinnacle of 1930s railroading.

Keeping an open mind to ideas from others is always a good policy (as some in this country seem to have forgotten).

File sharing not a threat – OECD

OECD has released a new study on music filing sharing: Report on Digital Music: Opportunities and challenges

Broadband access is now starting to lead to innovative creation and use of content and stimulating the rise of new technologies in PC and consumer electronics. These trends have lead to the rapid creation of online music services. Unauthorised sharing of copyrighted works and new commercial digital delivery possibilities have thus far been a disruptive technology for the music industry. Still, the outlook for the music market in 2005 is positive due to rapidly increasing sales of (mobile) digital music services. Digital music is also a driver for the global technology markets. Furthermore, the new digital music value chain produces an array of new digital intermediaries (e.g., digital rights management DRM). Finally, the availability of online technologies opens up possibilities for content created by network users. Music is thus an area in which the transformative impact of digital distribution, file-sharing and new online business models is strong for both the supply side (artists and the music industry) and on the demand side (new music lifestyles, users as content creators).
However, business and policy challenges analysed in the study need to be addressed if the full potential of online music distribution is to be reached. In sum, regulatory frameworks which balance the interests of suppliers and users, in areas such as the protection of intellectual property rights, and digital rights management, without disadvantaging innovative e-business models are called for.
* A key requisite for the creation of efficient online music delivery is a competitive and wide-spread access to broadband infrastructure. The delivery of online content also necessitates new technologies and an environment that facilitates the creation, acquisition, management and delivery of content. Effective and secure (micro)-payment systems are needed.
* Alliances between content providers, broadband and technology providers that come up with new business models play a critical role in driving the adoption of licensed content services.
* A diversity of interoperable content, standards and hardware are likely to prove most beneficial to efficient online content markets. With vertical integration, lock-in of consumers to certain standards, and difficult access to certain content, an environment where small and innovative players can compete should be maintained.
* The OECD notes the importance of government actions to take steps to address online piracy. Around one third of Internet users in OECD countries have downloaded files from P2P networks. While, in principle, file-sharing software is a new and innovative technology, piracy is an important impediment to legitimate online content services. The most important is to find equilibrium of available legitimate and innovative uses of new technologies and the necessary protection of associated intellectual property rights (i.e. copyrights).
* The Internet already provides new forms of advertising at lower cost, lower barriers to entry for artistic creation and lower costs of finding new talent. However, the effects of authorised and unauthorised file-sharing and digital music services with pay-per track offers on artists and the music supply are not yet obvious and need further study.

Wired had a more enthuisatic take on the study “Come On Music Biz, Embrace P2P” :

File-swapping networks alone are not to blame for the recording industry’s woes and might plausibly be converted into legitimate channels for distributing music, one of Europe’s most influential economic bodies has concluded.
In a report issued Monday, the Organisation for Economic Co-operation and Development — a Paris-based alliance of developed nations — also suggested that it’s difficult to establish a link between piracy and the music industry’s shrinking revenues.
The report said a “re-evaluation” of music distribution needs to happen to achieve a balance between consumers’ desire to access digital music and the industry’s copyright protection concerns.
“Online technologies could evolve in a manner in which unauthorized use of copyright works are finally transformed into legitimate businesses,” said Sacha Wunsch-Vincent, an OECD economist and one of the report’s authors.
The report said it is difficult to establish a causal connection between the rise of file sharing and a drop in music sales. While the music industry’s revenues fell 20 percent from 1999 to 2003, other factors, such as illegal CD copying, might have played a role in the decline, the OECD said.

Innovation in paint

One of the areas of innovation I find most intriguing is non-technological innovation, be it marketing, financing, design or simply a new use for an old product. In many cases, these innovations are married to a change in the technology. Take for example, the innovations described below in a Washington Post story last month on A Splashy Spectrum of Choices

Now I’m hearing the whispering of spring, a season of hope and promise, convincing me that it’s time to try again with that bedroom I never got quite right. That thought sent me into several paint departments, where I discovered that painting has become more high-tech than ever. I found myself staring longingly at an electric paint roller. It looks like an amazing contraption, pumping the paint right from the can to the roller, from which it glides onto the wall, for only $100, and the promise of easy cleanup.
One way to persuade me to buy paint is to make the job look simple. Today’s equipment looks pretty tantalizing, with pre-taped drop cloths and a variety of painting pads that can be attached to an extension pole and come in different sizes, designed to whip a layer of paint into a corner or onto trim like so much frosting on a cake.
Sherwin-Williams Co. has made its Dutch Boy paint easier to pour by putting it into a one-gallon plastic container with a lid and spout similar to a jug of liquid laundry detergent. The company also has a rectangular container with a built-in roller tray, which you can close and reopen without having to clean the tray. It holds 2 1/2 gallons of paint, which the company says is the amount needed for the average room.
Maybe you’ve seen the range of CDs that allow you to do a virtual paint job. Put the CD into your computer, upload a digital photograph of the room you want to paint and experiment by applying a few thousand or more colors onto it, as you sit in front of your screen.
Of course, one way of choosing a color is to match it to a color you know you like. Benjamin Moore & Co. has just put out a portable $299 paint-matching device, intended for architects, designers and contractors, called the Pocket Palette. Put it up against a painted wall or a piece of fabric and its digital readout will tell you the name of the matching Benjamin Moore paint color.
. . .
the latest method of marketing paint — the sample. Everyone seems to have them. For $5 to $6, you get a couple of ounces of paint, enough to put two coats on a two-foot-by-two-foot section of wall.
“They have been an extraordinary success,” says Eileen McComb, director of communications for Benjamin Moore. “Women will go and buy eight to 12, almost like nail polish. It’s so easy for them to see what it’s like on the wall.”
McComb says that the CD programs are useful in finding an appealing family of color and developing a theme but that a computer screen color will never look exactly like real paint on a real wall. “What we discovered is that people want to look at a color electronically and on a paint chip, but they also wanted to paint it on a surface,” she says.

In other words, to really be successful the virtual paint technology needed to be matched with a marketing device. Living in a household where walls are re-painted on a regular basis (which seems to me constantly), I have learned the value of the small sample. So why didn’t someone think of that before?
But all of those new process technologies leave me cold. I’ve long since learned (after an errant power-roller painted the hardwood floors blue) to leave that work to the professionals.

April trade in intangibles

The overall trade deficit rose significantly in April as both imports and exports surged to record levels, the BEA reported this morning.
Early news reports of the deficit had a mixed tone. On the one hand, the New York Times reported “U.S. Trade Gap Widens, but Less Than Expected”:

The U.S. trade deficit widened less than expected in April to $57.0 billion, as both exports and imports set records, the Commerce Department said on Friday. The monthly trade gap expanded 6.3 percent from March, but was below the median forecast of $58 billion from a group of 35 economists surveyed before the report.

On the other hand, the Washington Post reported “Trade Deficit Shoots Up to $56.96B in April”:

The U.S. trade deficit shot up 12 percent in April to $56.96 billion, reflecting a surge in oil imports to the second highest level on record, the government reported Friday.
The Commerce Department said the new trade imbalance increased from a $53.56 billion deficit in March as imports rose 4.1 percent to a new record, swamping a 3 percent increase in U.S. export sales, which also set a record.
So far this year, the trade deficit is running at an annual rate of $686 billion, 11 percent higher than the record $617.58 billion deficit set for all of 2004.

Both exports and imports of of intangibles grew to record levels, exports by .54% and imports by 1.3%. But the balance of trade in intangibles stayed essentially the same at a revised $7.2 billion.
We also continue to run a deficit in Advanced Technology Products. The deficit was larger in April than in March – but not as large as during January or Feburary. The last monthly surplus in this category was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Intangibles trade-Apr05.gif

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.

Is the US Patent System Endangering American Innovation?

Is the US Patent System Endangering American Innovation?

a Congressional briefing luncheon with

Adam B. Jaffe, Professor of Economics, Brandeis University
co-author of Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, And What To Do About It

Susan DeSanti, Director of Policy and Planning, Federal Trade Commission

David J. Kappos, Vice President, Assistant General Counsel, Intellectual Property, IBM.

Moderated by Congressman Jim Cooper (D-TN).

hosted by
Athena Alliance and
the Congressional Economic Leadership Institute

Held at the Rayburn House Office Building, Washington,
DC
June 8, 2005



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The session began with welcome and preliminary remarks by David Klaus, President of CELI. Next, Kenan Jarboe, President of Athena Alliance, set the stage with a quote from Dr. Jaffe’s book:

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears.

Congressman Jim Cooper then introduced the speakers.

Professor Adam Jaffe began by noting that most of his presentation is discussed in detail in his book, co-authored with Josh Lerner of Harvard University: Innovation and Its Discontents. (A shorter summary of the book is available as a paper with the same title.)
According to Professor Jaffe, two changes have occurred in the past few years in the patent process. Patents have become easier to get. At the same time, court decisions have made patents easier to enforce, and increased monetary damages and other rewards from enforcement. This combination creates strong incentives to wield patents as offensive competitive weapons, rather than defensive protectors of innovative products.

The result is an increase in market uncertainty – and a less than optimal level of investment. Patent litigation is expensive and uncertain. The threat of litigation can force innovators to pay substantial royalties to others, or to abandon development of new products and processes altogether. Companies’ attention and resources are diverted from innovation to litigation strategy, thereby undermining U.S. competitive advantage in developing innovative new technology.

The problems stem from both the operation of the US Patent and Trademark Office (PTO) and the incentives for litigation.

Patents are supposed to be granted only if the invention is “novel” and non-obvious. However, the combination of underfunding/understaffing at the PTO and court decisions on legal standards has resulted in significant dilution of these standards over the last 15 years.

The underfunding problem is exacerbated by the diversion of funds (in the form of patent fees) from the PTO to other uses (see Chart 1).

Chart 1: Fees collected by USPTO, but diverted by Congress to other uses

The main problem is not just “silly” patents, e.g. the self-buttock-kicking-machine. More important than silly patents are patents granted to “inventions” which are obvious. This creates uncertainty for investors and inventors facing possible infringement claims.

As a result, a vicious cycle has been created: an overwhelmed PTO, along with lower standards, means that patents are easier to get. Since patents are easier to get, there are greater incentives to file for more and more patents (for things that would not have been patented before). As a result, the PTO is even more overwhelmed (with dubious applications).

Until 1984, there was a decline in the number of patents per capita. Since then, patents have dramatically increased (see Chart 2). Some of this is a real increase in invention; a major source of the increase, however, is more marginal patents.

Chart 2: The Increase in Patent Applications and Grants

The review process should be strengthened and the quality of patents improved, so that only truly innovative inventions are granted patents. Two steps toward reforming the patent granting process are more resources for the PTO and the injection of more information into the process (from the outside world).

The key to patent quality is information. In today’s complex and fast-changing world, patent examiners simply cannot, acting on their own, adequately “search” to determine if a pending patent should be granted. There is a need for incentives and opportunities for third parties to come forward with information showing that the idea behind a pending patent is not new or was obvious to people in the field. This could occur both in a pre-grant submission of what is called “prior art” (evidence that the invention existed before) and a post-grant re-examination process.

Reforming the “continuations” process, which allows applicants to keep patent applications going and continually modify them over time to keep the application pending even though it was originally denied, would be another improvement.

The other part of the problem is litigation. The litigation process aggravates the problem because of the presumption that a PTO-issued patent is valid. It is harder to invalidate the patent than it is to prove infringement. “Clear and convincing evidence” is needed to prove invalidity; only “preponderance of the evidence” is needed to prove infringement. But the evidence is clear that patents cannot necessarily be assumed to be valid. Given this presumption, there is a greater danger of attempting to fight an infringement claim. In addition, the alleged infringer is subject to triple damages for “willful infringement,” even if no copying occurred, and may be subject to injunctions which shut down entire operations.

The playing field between parties in patent litigation needs to be level, so that the threat of litigation based on dubious patents is not so frightening. Some ways of doing that include: switching to “first to file” rule while requiring publication after 18 months, so people can know what patents are out there; increasing protection for people who unknowingly use patented technology (protection for “prior use”); and creating a right to request re-examination within the PTO to permit more cost-effective and reliable determination of the validity of contested patents.

However, there will always be patent litigation. Mistakes will occur and there are inevitably close cases in which no one can know for sure if a patent will be held valid. Because of this, there is a need to reduce the financial danger posed by pursuing new products in the shadow of murky patent situations. This would include strictly limiting triple damages and creating some notion of apportionment of damages so that a small component does not endanger entire product investments.

Professor Jaffe closed by noting that these are difficult issues involving important trade-offs. Making it easier to prove patent invalidity levels the playing field between patent holder and alleged infringer. But it also undermines the value of patent protection for those who really deserve and need it. Making it harder to get injunctions shutting down infringers reduces the risk associated with threats of litigation. But it also alters, perhaps fundamentally, the meaning of patents as “intellectual property.” These are the important balances that need to be reached as the process of patent reform moves forward.

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Susan DeSanti then described the work of the FTC. The FTC got involved in the issue of patents because of the rising importance of intellectual property as a business asset. After an extensive set of hearings, the FTC came out with a report, To Promote Innovation, The Proper Balance of Competition and Patent Law and Policy in October 2003. During early 2005, the FTC co-sponsored a series of three town meetings with the National Academies’ Board on Science, Technology, and Economic Policy (STEP) and the American Intellectual Property Law Association (AIPLA). STEP had published its own report on patent reform, A Patent System for the 21st Century in April 2004. The AIPLA had issued extensive comments on both reports. This series of meetings was to conclude with a conference in Washington, D.C., on June 9, 2005. (A summary of those town meetings can be found at the FTC website.)

From the FTC’s perspective, the issue is innovation. There are two competing mechanisms for promoting innovation: competition and patents (which are anti-competitive grants of limited monopolies). Public policy should be to only grant monopolies when there is an overall gain to society. Since granting patents limits competition, there needs to be a clear understanding of the trade-offs involved.

The problem from the FTC perspective is that right now there are too many questionable patents – which get in the way of competition in those areas.

She then gave examples of how patents work in two different sectors: biotech and software. In biotech, a company faces a tough set of options if it wants to get into a new area of research where there may be questionable patents:

1)  It
can do nothing – not do the research;
2)  Since it can’t question the validity of the patents until there is an infringement case, it can go ahead but face the risk that it will be involved in costly litigation later on; or,
3)  It can license the questionable patents – which is in effect a tax on innovation.

The situation is more complex in software. In biotech, everyone generally knows what all the patents are. Software companies operate in an environment where there are hundreds of overlapping patents. The only way to know what is out there is to go ahead with product development and see if an infringement case appears. At that point, the companies can negotiate their way through the patent thicket.

These differences point out the problems in crafting solutions. Software and biotech companies agree on the need for a post-grant review process (as advocated by Jaffe and others). They disagree on the length of time that the process should be open. Biotech would like a nine month period for post-grant review challenges. After nine months, patents can no longer be challenged in the administrative process, but only through litigation in infringement cases. Biotech wants this certainty so that they can take their patents to investors for financing.

Since software companies don’t know all of the patents that are being issued in the area and whether they might be infringing or not, they want the post-grant review process to be more open- ended. In this case, the process would be an alternative to litigation that can be used whenever an infringement claim pops up.

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David Kappos then spoke from the perspective of a company that is involved in both sides. IBM has the world’s largest patent portfolio (which it seeks to protect) but is also facing a record number of infringement claims and litigation.

He sees the topic becoming more and more important worldwide with growing international tension between intellectual property rights and the needs of innovative economies?. He stressed the need for balance. There should be strong patents that are enforceable – but they need to be correct patents.

From IBM’s perspective, the innovation system is changing. There are still the two models of innovation that we normally think of: scientists working in university, government or corporate labs and individual inventors. But there is also a new model of collaborative innovation. This new model comes about because of the complex nature of the problems. No individual or company has the ability to address all aspects of the problem. So companies and individuals are forced to work together. The classic case in point is the open source movement, which has been successful in software development and is now moving into other areas.

However, the intellectual property system is not in tune with this model of innovation.

The patent system is not completely broken, but it does need reform. A few of the areas he suggests for reform include a post- grant review to ensure quality and a pre-grant submission of “prior art” to create better information for the patent examiners. He noted that these changes will likely create a mini-industry on patent research and information brokering – which will also create better information for the system.

However, even with pending patent reform ideas, the patent system will still be in conflict with the open collaboration model. Therefore, IBM is taking steps to strengthen that model. These include pledging to donate 500 patents to an open source commons (a “patent commons”) and pushing for royalty-free use of patents that are part of standards for software interoperability, through OASIS (Organization for the Advancement of Structured Information Standards).

He concluded by noting that in the end legislation will be difficult because of different needs of different industries.

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Congressman Cooper then moderated a short question and answer period. The first question from the audience concerned the differences between biotech and software. It was stated that software does not follow all the patents issued in their area. Is this because the standard of obviousness is too low? And is the result of this unitary system of patents (same rules for all industries) a bias of investment to biotech (where they know the patents) away from software (where they don’t)?

Professor Jaffe answered that the obviousness standards are too low – the Amazon one-click patent being the classic example. But he is unclear as to how to fix that specific problem. The post-grant review and the pre-grant submission of prior-art will help. These processes will also create a system where people will pay attention more.

Ms. DeSanti mentioned that companies have been reluctant to use the existing system of submitting prior art. Currently, they don’t know if examiners will pay attention to it. And they don’t want to take the chance later on during litigation that the court will rule since the prior-art was submitted, the patent must have taken it into account already and it therefore can’t be used in an infringement case.

Mr. Kappos noted that this is exactly why legislation to change the process is important. Companies need to be able to submit commentary on why the prior-art is relevant to a patent – not just the existence of the prior art.

Two audience members made brief comments. One noted that the key issue was disclosure, reminding the audience that the purpose of granting a patent is to disclose information to the public that would otherwise be treated as a tradesecret.

The other, who identified himself as a former patent examiner, noted that more funds for the PTO would not necessarily solve the problem. Because examiners need to use the prior- art to determine obviousness, the key is not just getting the prior-art but learning how to determine obviousness.

A question was asked about proposed solutions. What was the appropriate mix of legislative solutions versus changes in PTO practices?
Professor Jaffe answered that the legislation must be predicative. Legislation can result in behavior changes. For example, increasing submission of prior art with commentary and other changes to bring in relevant information from outside the PTO will help change examiner behaviors by giving them better information.

With that question, Congressman Cooper noted that time for the session had run out, and thanked the panelists and audience for their participation.

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US brand irrelevant?

From the “on the one hand” department comes this from Ad Age Magazine – AMERICAN CONSUMERS LARGELY IGNORE ‘MADE IN USA’ PITCH:

The good news for beleaguered U.S. manufacturers: Americans believe “Made in the USA” stands for quality and value. The bad news: Consumers — especially young adults entering their prime buying years and richer households who have money — aren’t inclined to look for products made at home.

So American companies have finally won the quality wars (from the 1980’s). But for American consumers, that is sooo 80’s.
As I have been saying — it’s not the old competitiveness challenge we faced before (see Competitiveness Revisited). We have move from quality as a selling point to quality as the starting point. The name of the game is design, customization, speed and responsiveness to customer needs. And our public policy needs to get with the game.