Shifting jurisdicational advantage

Yesterday, I talked about the importance of creativity in jurisdictional advantage. Clearly, communities need to understand the factors and forced that make their location a desirable place for economic activity. Some of those forces are internal – the creativity and entrepreneurship resident in the community. Others are external. And like a company’s competitive advantage, jurisdictional advantage can (and does) shift.
An example of that shift can be seen in two case studies – both of which focus on energy costs and regulation.
The first is about an aluminum plant in central Maryland — just north of Washington DC – “The Power of Rising Energy Prices”:

For 35 years, the aluminum plant surrounded by fields of soybeans and corn in Frederick County has provided high-paying, reliable jobs that lured workers from faraway states.
. . .
Years ago, when companies chose locations to build aluminum plants, they did it to be close to the country’s lowest-cost power providers. Eastalco long relied on cheap power provided by the Allegheny generating facilities that are close to cheap coal.

But with deregulation and nation-wide marketing of electricity, the price is the national price – not based on nearby resources:

If the market were still regulated, the company said, the price it pays would be more closely related to the price of coal, the dominant fuel for Allegheny’s plants. But the company said that the PJM market establishes prices that are more heavily pegged to the price of natural gas. The most expensive unit of electrical generation, the company said, is used to determine the market rate. And that price is typically for power generated with natural gas, whose costs have increased much more rapidly than coal’s.

So, with the disappearance of cheap local electricity, the plant is in trouble.
The second is the opposite set of regulations – an area that thought it would thrive because of cheap local power but was forced to export that electricity: the Columbia River basin. Tech Firms Go Mining for Megawatts:

There is cheap electricity here and lots of it. That is because the Columbia, the premier hydroelectric river in North America, flows nearby. Three publicly owned, local utilities own five large dams on the river, and they produce much more electricity than the sparse local population can use. With power prices soaring, the three utilities have become the hydroelectric emirates of the Pacific Northwest.
Until now, they have been obligated under 50-year-old contracts to sell about two-thirds of their power — without profit — to major utilities serving millions of people in Seattle, Tacoma and Portland. The arrangement helped keep monthly electric bills in the Northwest far below the national average.
Those old contracts, though, are expiring — a development that will help push up residential electricity rates across the region. And the mid-Columbia utilities are scurrying to sell their newly unleashed power to the corporate giants of the Internet — if they are willing to plant “server farms” in two-stop-light towns such as Quincy.
They do seem uncommonly eager.
Out in the bean field, Microsoft is rushing to complete what it says will be the largest data center it has ever built. It is scheduled to go online in February. Downstream in The Dalles, Ore., Google is building a data center that will go online within the next year and is reported by local officials to be scouring the region looking for other sites. Upstream in Wenatchee, Wash., Yahoo is expected to go online with another data center in the fall and is in negotiations for still others.

This was the original promise. The promoter of the Grand Coulee dam (local newspaper publisher Rufus Woods

boasted noisily in the pages of his newspaper that electricity from the dams would lure major industry to Wenatchee and the Columbia Basin. But the federal government broke his heart by stringing wires across the Northwest and setting up rules requiring dams to sell most electricity at a postage stamp rate, meaning that power had to cost the same in Wenatchee as it did hundreds of miles away in Seattle, Tacoma or Portland.
Although farming in the Columbia Basin boomed, thanks to irrigation water diverted by Grand Coulee, major industry, for the most part, ignored Wenatchee and towns such as Quincy for most of the past seven decades.
Companies could get plenty of cheap power in Seattle and Portland without having to build in the boondocks — until now.

In both cases, external forces are shifting the communities’ advantages – one positive and one negative. Those external forces may not be under the communities’ control, but the internal forces will determine how each community copes with the changes.
In his paper, Why the Garden Club Couldn’t Save Youngstown, Sean Safford talks about the social and political infrastructure needed for a community to respond to an economic shift. In this case, why Allentown was able to successfully respond to the shift and Youngstown was not. Often referred to as “capacity building,” this institutional infrastructure is just as important a jurisdictional advantage as cheap electricity or a skilled workforce.
It is also the most intangible of intangible assets – one that is often defined more by its absence and not considered until too late. Capacity building should be at the top of our economic development concerns. Unfortunately, it is not as sexy as luring the next plant or setting up a high-tech oriented partnership. But it is the foundation of all that other work – and we need to start treating it as such.

IPR and trade

I find myself in the strange situation of agreeing (somewhat) with the Editorial Board of the Wall Street Journal as they complain about companies now using the trade laws to bring patent infringement cases – see the poorly titled article Smoot-Hawley’s Revenge:

The ITC was established in 1916 as the U.S. Tariff Commission. Smoot-Hawley gave it the authority to review claims of “unfair trade practices” based on patent infringement. If a company with U.S. operations believes a competitor is importing a product that infringes on its intellectual property, it can bring a Section 337 claim to the ITC. An administrative law judge then hears the case, and he can issue an exclusion order barring imports of the infringing product for the duration of the patent. The order is also subject to the review and approval by the six-member, bipartisan ITC board.
Incredibly, all of this takes place separately from normal judicial proceedings on patent infringement or validity. Most of the cell-phone cases mentioned above are also in court on patent-infringement grounds, but these cases can take years and are subject to lengthy appeals. The ITC tries to discharge Section 337 cases in about a year, and will not wait for the courts. Once the ITC votes on the judge’s order, there is only one avenue of appeal: The President has 60 days to override the ITC’s order. If he doesn’t act, the import ban takes effect.

One would think that the Editorial Board would be all in favor of strong IPR and use of trade law to crack down on “the theft of intellectual property.” In the past, they have complained about allowing developing countries to copy drugs under the guise of declaring a health emergency.
But on patents and copyright, the WSJ has been relatively consistent. In 2002, they urged the Supreme Court to overturn the 1998 Sonny Bono Copyright Term Extension Act which extended existing copyrights 70 years after the death of the creator. More recently, in their comment on the Blackberry case – “Patently Absurd”, they stated,

Patents are supposed to protect intellectual property and spur innovation, and once upon a time in America they did. But like everything else the legal system touches nowadays, U.S. patent law has been hijacked so that it now operates nearly in reverse, deterring research and penalizing innovation.

My agreement with the Journal in this case is only partial, however. The Journal get the problem right — concern over companies gaming the system — but picks on the wrong target. The Journal apparently would like to throw out the Section 337 process — thus depriving the US of its major tool to combat foreign counterfeiting. But the problem isn’t the ITC and Section 337. As the Journal admits (but dismisses), there are three levels to the ITC process: an administrative law judge; the Commission; and Presidential review. Any one of these can throw out a bad decision.
And there is judicial review (see ITC FAQ’s), even if it appears to be more circumspect than in patent law cases — as the law firm of Jones Day notes:

District courts are reversed by the Federal Circuit with regard to the meaning of patent claims from 38 to 50% of the time, depending on the statistical data gathered. See, e.g., Andrew T. Zidel, Patent Claim Construction in the Trial Courts: A Study Showing the Need for Clear Guidance From the Federal Circuit, 33 Seton Hall L. Rev. 711 (2003) (citing numerous studies showing the Federal Circuit’s high reversal rate on claim construction issues); Kimberly A. Moore, Are District Court Judges Equipped to Resolve Patent Cases?, 15 Har. J. Law & Tec. 1 (2001) (“The high reversal rate on claim construction is problematic. It creates uncertainty in patent cases and in patent claim scope analysis until the Federal Circuit review is complete.”). The ITC’s claim interpretations are, however, rarely reversed by the Federal Circuit. Thus, the uncertainty that accompanies claim construction rulings by federal district courts is greatly minimized in a Section 337 proceeding before the ITC where experienced, specialized judges conduct the investigations.

The real problem is our patent system — especially with the presumption of the validity of a patent even in the face of evidence of problems with patent quality. There are provisions in pending patent reform legislation that would deal with that problem. Specifically there are proposals for a pre-grant opposition process and a post-grant review procedure. These mechanisms would help determine the validity of a patent well before the litigation or Section 337 process began.
The Journal has highlighted a problem. I hope they will now start advocating for the correct solution.

Authentic innovation

Bruce Nussbaum says, For Innovation, Forget Milan And Go To Santa Fe’s Indian Market.
It has been over a decade since I visited the Indian Market (when I was working for Senator Jeff Bingaman) – but I still have some nice creative pieces I bought there. So I would second Bruce’s suggestion that:

If you are interested in the method of combining the authenticity of tradition with the creativity of innovation, you need to go and talk to the artists at Indian Market. Awhile back, Xerox Parc experimented with bringing artists and engineers together to promote creativity. It’s time to do this again–on a much bigger scale.

I would also second his second suggestion about bringing engineers and artists together. My impression is that this is one of the goals of some of the more innovative design school programs – like the Stanford d-School. That works for design students, but maybe we need a bigger program for working engineers and artists to meet on a regular basis.

Creative Toronto . . . and other cities

Toronto has just released a new report on the future of the city, entitled Imagine a Toronto …:

The goal of this project is to produce a strategy that addresses the current needs of Toronto’s creative economy, that promotes its future growth and that leverages these creative assets to enhance economic and social opportunity.

The report sets out a “Credo for Creative Cities”:

Creativity owns imagination. And imagination is what builds our cities. Creativity commands the allegiance and love of the creative person as a way of being, living, thinking. The imagination that comes of that allegiance is powerful, self-renewing, and tireless in delight. It permeates all aspects of civic life. It is the only limitless resource.
To know this is to release an industry in perpetual motion. Allegiance to true creativity defines imagination against the myopia of market greed. For the ethos of creativity left unchecked, by its natural genius, instructs all witnesses to the shared project of wonder. This is what makes a city great, a society great and, yes, even productive.
Creativity must become a way of life. It is not a question of sustainability but of survival, and the beauty that inspires it. And the kinds of risks that true creativity demands are crucial to that end.

The Toronto report has laid down an important marker. Energizing our cities is a key component of a national competitiveness strategy. As Business Week recently pointed out in Slicker Cities:

America is losing its competitive edge. That premise has been pounded into our heads so often by pundits, and reinforced with each report on the rise of China and India, that it’s almost taken as a given. But can a nation that has averaged 3.4% growth for three years and keeps posting sterling productivity gains really have a competitiveness problem? Or is that problem much more local?

The BW special report Pushing For Growth: How Cities Succeed goes on to describe what a number of cities are doing:

Even with globalization, location still matters in economic competition. But it is more important than ever for communities to offer distinctive advantages.

Creating that jurisdictional advantage is something that we at Athena Alliance have been stressing for a long time – see our session on the topic with Professor MaryAnn Feldman.
Creativity is part and parcel of that advantage. But it is not necessarily the differentiating factor. All locations need to tap into their creative and innovative capabilities – but how they utilize those capabilities and the direction that their creativity takes them will provide that differentiation. It is not enough to simply say “be creative.”
As Business Week illustrates, cities can take different routes:

Stockholm shows how to succeed in the Knowledge Economy: It serves as a base for major companies and tech universities, it subsidizes broadband, and it offers a vibrant urban environment that lures young talent. Orlando has diversified its economy by nurturing a new industrial cluster: digital media. Singapore thrives by persuading multinationals to use it as a base for R&D and as regional headquarters, and even anticipates companies’ needs five years out.

Edinburgh is an example of a city that has successfully taken the “creative route,” as Lorna Jack of Scottish Development International pointed out in a comment on the BW story:

I was interested to read that as the international marketplace becomes more globalized by innovative and competitive communities, regions are shaping unique infrastructures to meet the need. Edinburgh’s strong creative and digital media industry was built upon a hub of academia, an expert labor force, and the wildly creative Edinburgh Festival. Paired with support from economic development agencies within governments, it’s no wonder business flocks to these communities.

But this route – what I call the traditional arts path – is not for every location. Just as every city can’t be Silicon Valley, every city can’t replicate the Edinburgh Festival. Each location needs to understand and build upon its own strengthens and resources. The creativity of individuals, companies and communities is a part of that mix. “Creative industries” aka, the arts, may also be part of the mix depending upon the location. But the two are different.
As the Toronto report stated “creativity must become a way of life.” Let us foster creativity in all its forms and manifestation – and in all industries and sectors. And let us help communities discover the creative forces in all of their economic activities.

Finding value in an old brand?

According to this morning’s New York Times, Tower Records Will Auction Its Assets. The action raises two questions:
1) is this the death knell for brick-and-mortar music stories, and if so 2) what value do those assets really have. As the story says:

Phil Leigh, a senior analyst for Inside Digital Media Inc., said that the Tower brand had value and would find a buyer, but that its stores were not likely to survive this latest bankruptcy. The company emerged from another bankruptcy in 2004. “I think they’ll sell off the name and liquidate the inventory,” Mr. Leigh said.
Tower Records, however, said it had seen “substantial interest among potential buyers” and hoped to find a buyer willing to continue operating its stores. The company said it was actively negotiating with one potential buyer and had received another offer on the eve of its bankruptcy filing.
It is “absolutely our intention to keep the Tower brand alive,” a spokeswoman, Lisa Amore, said.

There are two intangible assets here that may be of value: location of the stores and the brand. Interest by other major retailers in the stores is one thing; interest in actually operating those locations as record stores is something very different. Likewise with the brand: it is one thing to buy the brand to sell records, it is something else to buy the brand to morph it (and the stores?) into a different product line.
It will be interesting to watch what happens.

Future of the tangible economy

While this blog makes much of the shift to an intangible economy, it is good to remind ourselves that the tangibles – hard goods – will remain an important part of the economy. To keep this in perspective, I would point to the words of Toyota North America President Jim Press on the future of the automotive industry – as reported in Manufacturing & Technology News:

“If you ever wonder about the future of the auto business, you could do what I do on a Sunday. It’s kind of fun,” Press said. “Go to the hospital maternity wards. Do you ever do that, just go up there? You don’t know anybody. They’re all friendly, right? Everybody’s having a good time and big smiles and while you’re there in this happy place, just remember, each one of those little blue and pink baskets is 13 or 14 purchase cycles. It’ll cheer you right up. It’s a wonderful opportunity.”

Press is right: 13 to 14 purchasing cycles per new born — that is a lot of cars to be sold over the next century or so.
To see Press’s prepared remarks, see the Toyota website

Going for the short term hit

Business executives and academics have been calling for an increase in government funded R&D as a key part of our competitiveness strategy (see “Rising Above the Gathering Storm” and the National Innovation Initiative – as I discussed earlier this year). Part of their reason has been the shift over the past 50 years in corporate spending from basic research to strictly applied research. One of the effects of deregulation has been to focus companies on the bottom line – and long term research does not pay off quickly to the bottom line. The shift is perfectly illustrated in today’s Wall Street Journal story – – With Its Future Now Uncertain, Bell Labs Turns to Commerce:

Lucent Technologies Inc.’s Bell Labs, the birthplace of the transistor and the laser, has been through a decade of turmoil during which it was reduced to a third of its size. Now, some of its scientists are warily embracing a former submarine officer and entrepreneur as perhaps the laboratory’s best hope of maintaining its relevance.
Jeong Kim took over last year with a direct plan for saving the storied laboratory: Make it profitable. Among his first moves, he set more of its scientific stars to work on breakthrough technologies that could turn quickly into businesses — the opposite of the pure research many live for.
Each of these projects is expected to make back six times what it spends on research. Those with the biggest financial potential get the most funding. Researchers often condense their work into eight-minute PowerPoint presentations. Mr. Kim also seeks more government research grants and is aiming to speed the transformation of technology into products by seeking corporate partners and venture capital.
. . .
An example of the new approach involves metal detectors made of silicon the width of three human hairs — technology for which Lucent long couldn’t find a use. Under the new regime, Bell Labs is working with a small company to develop it into a device that could help the military detect snipers. Called a magnetometer, the device also could be used by doctors to measure blood flow through subtle changes in the heart’s magnetic field.

Clearly a focus on product innovation should be a priority for companies like Lucent. But changing that focus requires someone else to fill in the gap in basic research. Hence the push for greater government investment in basic science. Hence also companies’ expanded search for research results from whatever source. As other nations improve their scientific capabilities, companies will logically look to tap into those resources.
A key to US competitiveness is whether that basic scientific activity needs to be physically nearby the applied work that Bell Labs is now doing. Or does formal scientific knowledge easily transfer in this wired and networked economy. It has been a standard answer that world class basic research facilities are needed locally to produce the applied spin-offs. But if scientific knowledge is easily transferred, then a more important goal is having a local workforce with the education and ability to absorb and utilize that scientific knowledge rather than a goal of having the top creators of basic research.
While basic research will always be important, it becomes a matter of finding the right allocation of resources. Finding that balance will require us taking a hard look at how the innovation and technology creation process really works. As companies move further and further away from basic research, we need to clearly understand what it takes to keep that pipeline of scientific knowledge flowing. We can no longer simply assume it works the way it worked in the past – especially clinging to the linear factory-type flow of knowledge from new science to new product. We need a new understanding. But our understanding of innovation lags the changes occurring in the economy.
We need to do better.

Still using book value?

I ran it to the following short article from a week or so ago on stock market indexes – Ellen Simon: New indexes aim at old benchmarks – The article describes how financial companies are trying to create indexes to mirror the market, and then sell exchange traded funds (ETFs) to track those indexes. But what caught my eye were the following two statements:

The emphasis on stock price in most indexes is “how a stock like Google can become the 20th largest position in the S&P 500 even though its current revenue, earnings and book value wouldn’t even place it among America’s top 200 companies,” the July issue of “The No-Load Fund Investor” explained.
. . .
The other big player in fundamental indexing is Research Affiliates LLC. Its indexes weight companies according to earnings, revenue, dividends and book value.

Book value? Someone is still using book value as a measure of anything?
As Investopedia says in Value By The Book:

Thanks to conservative accounting rules, book value completely ignores intangible assets like brand name, goodwill, patents and other intellectual property created by a company. Book value doesn’t carry much meaning for service-based firms with few tangible assets.

Given that much of our economy is based on intangible assets that don’t necessarily show up on the accounting books, how could anyone be still be using book value to weight stock indexes?
For more on the problems of accounting for intangibles, see the Athena Alliance working paper Reporting Intangibles: A Hard Look at Improving Business Information in the U.S.

NGA almost gets it

The Chair of the National Governors Association is making innovation the focus during her term with an Innovation America initiative. Incoming NGA Chair Arizona Gov. Janet Napolitano announced the initiative at the NGA’s annual meeting earlier this month. Goals for the initiative include to:
   • raise national awareness of the urgent need to embrace innovation as the U.S. path to maintaining competitiveness;
   • share examples of best practices and provide a “tool box” of effective policies and strategies;
   • present each governor with an economic profile specific to their state, including high growth innovation centers and science and math proficiencies;
   • host regional learning labs and workshops to help states improve education in the areas of science, technology, engineering and math; and
   • create new science and math academies to improve student achievement and grow a workforce in emerging occupations.
Most important the initiative seems to realize the need for a broad view of innovation. According to the brochure:

The term “innovation” is defined broadly. In the 1990s, innovation was about technology, but today it involves much more. Innovation is about reinventing strategies, products and processes and creating new business models and new markets. It also is about selecting the right ideas and executing business strategies quickly and efficiently.

Unfortunately, when it comes to solutions, they fall back on the old stand-bys: math & science education and R&D hot spots:

The Innovation America initiative will highlight two areas that are critical to our future success. First, we will focus on increasing student proficiency in math and science by modernizing the teaching force, benchmarking academic standards and aligning assessments and creating new models for math and science education. Second, we will strive to enhance innovation by implementing state wide strategies as well as those that target existing high growth regional centers of innovation; together these approaches will reduce existing barriers to innovation, support entrepreneurship, fund research and development and create 21st century university systems.

The seeds of a breakthrough to a full-blow innovation agenda are in the NGA proposal. Over the next year, they have a golden opportunity for creative thinking and policy making. That is the challenge facing Governor Napolitano. The states have been very active in new approaches to innovation-led economic development. The Innovation America initiative would do well to catalog and evaluate those new approaches, rather than fall back on the old stand-bys. Such a compilation of state activities would be a great help in moving innovation policy forward.