After geographical indicators

Earlier postings on this blog have talking about intellectual property protections for products from a specific region, such as Parma ham, Champagne, etc – called geographical indicators. Now, the Japanese are taking it one step further, according to a story in this morning’s Washington Post – Putting the Bite On Pseudo Sushi And Other Insults:

With restaurants around the globe describing themselves as Japanese while actually serving food that is Asian fusion, or just plain bad, the government here announced a plan this month to offer official seals of approval to overseas eateries deemed to be “pure Japanese.”

Apparently, they are not the only ones:

the mentality in Japan also echoes a similar movement by several nations — including Italy and Thailand — now offering guidelines and reward programs to restaurants abroad to regain a measure of control over their increasingly internationalized cuisines.

The target of these campaigns is the already-established, not-so-cutting-edge-anymore trend toward fusion. Fusion is the long standing practice of combining foods from different places, raised to the level of haute-cuisine. Not everyone is crazy about these combination. Thus, the Japanese government’s attempt to protect the purity of the Japanese cuisine from such barbarities as serving sushi and Korean bulgogi (barbequed beef) on the same menu.
However, the story points out that Japanese cuisine may not be so pure:

But some here have expressed caution about the launch of the government approval system, arguing that Japan is a country also notorious for adapting foreign foods to local tastes. Indeed, that rare talent gave birth to Japanese seafood and mayonnaise pizza.
In addition, many so-called Japanese foods have foreign influences or roots. Batter-coated and fried food known as tempura, for instance, was introduced to the Japanese by Portuguese missionaries during the 16th century.
“The question is, what can we really call ‘Japanese food’?” said Masuhiro Yamamoto, the Tokyo-based food guru. “Here in Japan, we believe that tonkatsu [fried pork cutlet] is essentially Japanese, but try and tell the French that isn’t porc paner.”

For now, the tools being used in this quest for purity are guideline and seals-of-approval. That is fine and probably useful to anyone who wants a “pure” experience. However, I think they would do us all a favor if they stuck to “good” rather than “pure.” There is enough bad sushi out there to police without worrying about whether it is correct or not.
And “correct” is in the eye of the beholder. After, all if we attempt to enforce strict tradition in all our intangibles, such as cuisine, there would be no innovation what so ever. So, for me, fusion beats purity – at least when it come to sushi.

What is the Dems agenda

David Wessel wrote a thoughtful piece in his column “Capital” in yesterday’s Wall Street Journal about the economic challenge facing the Democrats in the attempt to address the problem of rising inequity. One of the things he pointed out was the complexity of the problem.

Today’s inequality reflects a confluence of forces. Technology is increasing employers’ appetite for some skilled workers, while diminishing it for assembly-line workers in auto and textile factories. Imports and outsourcing are doing the same. Schools aren’t graduating enough of the workers in short supply, such as engineers. Immigration is contributing to a glut of others, visible wherever day laborers gather hoping for work. Unions are atrophying. Corporate boards, hedge funds and sports teams are increasingly willing to write super-sized paychecks to a chosen few.

The list of ideas is impressive:
Dems list.gif
Unfortunately, the list of alternatives proposed — while helpful — doesn’t get us to where we want to go. Yes, I agree with almost all of these. I can quibble with the exact formulation of some of them and disagree with one (raising the capital gains and dividends tax – I have long supported a sliding scale that reduces the tax on long run investments while increasing it on short term).
But there is something missing: the recognition that the nature of the economy has fundamentally changed. Too many of these ideas are based on the industrial era which will be most effective in only a portion of the economy. Yes, many will be effective for the I-Cubed Economy (such as the educational-oriented ones). However, they don’t go to the heart of the issue.
Gene Sperling’s quote is accurate – we must raise the tide as well as all boats. Where are the programs to raise the tide? Granted that the article was focused on inequality not growth. But the two go hand in hand. There is an ingrained fallacy in other thinking that treats them as separate (and generally as conflicting).
Actions that increase jobs and economic opportunity for all will promote both equality and growth. For example, where are the programs for entrepreneurship and business start-up, especially in the communities-left-behind and communities-at-risk? Where are the programs for on-the-job training, workers can keep their jobs and improve their own market able skills — rather than wait until they are out on the street? Where are the programs to help small and medium size businesses re-orient their businesses to this new innovation led, design-focused competition.
Those should be a no-brainer for either political party. But the GOP calls them “industrial policy” and complains that they are interference with the mythical automatic workings of the market. Democrats call them “corporate social welfare”.
Until both sides stop living in the past – and simply pulling out the same old solution, we won’t be able to attack this problem.
The list of idea that the Dems are talking about is a good start (better than the previous do-nothing alternative). But it is only a start. Let’s begin talking about the rest of the agenda.

Patenting greenhouse gas exchanges

In a couple of earlier postings, I talked about greenhouse gas trading as a new financial innovation. Now, according to Bloomberg.com: News:

Fannie Mae, the biggest U.S. mortgage finance company, won a patent for a system to trade greenhouse gas-reduction credits earned by homeowners, securing a foothold in a $22 billion market while raising concerns that the government-chartered company is overstepping its mission.
Ousted Chief Executive Franklin Raines is listed in the patent as an inventor of a system for verifying cuts in household emissions of carbon dioxide and other greenhouse gases. The patent, granted on Nov. 7 and held jointly with a subsidiary of New York-based Cantor Fitzgerald LP, gives Fannie Mae proprietary control over a method for pooling and selling credits to companies that can’t meet emission reduction targets.

However, because of the concern over mission-creep, it is unclear what will happen to the patent:

Corinne Russell, a spokeswoman for the Office of Federal Housing Enterprise Oversight that regulators Fannie Mae, said the agency is reviewing the patent and wouldn’t comment further.

It is also unclear what the immediate effect of this business process patent might have on ongoing greenhouse gas exchanges — especially overseas. Given that this trading market has existed for some time, it will be interesting to see exactly what technique Fannie Mae has patented, whether they will try to enforce their patent, and whether the regulators will let them even try.

Financial competitiveness according to Paulson

The ability of the US financial sector to compete in an ever more global industry has become a hot topic of late (see my earlier posting). At noon today, Treasury Secretary Paulson gave what was billed as a major speech on the Competitiveness of U.S. Capital Markets. In it he asked the key question: “Does the decline in initial public offerings in U.S. capital markets signal potentially broader challenges to our competitiveness?”
His answer was a conditional yes:

Some observers cite the decline of foreign IPOs in the U.S. market as an indicator of the competitiveness of our capital markets. We should go beyond the numbers and examine some of the possible reasons for this decline. Several factors contribute to the recent trends, including public policies in other countries. But several other contributing factors offer a framework to assess our own capital markets. These include:
* The development of markets outside the U.S., particularly in London and Hong Kong – and the ability of U.S. investors to participate in these offerings;
* A legal system in the U.S. that exposes market participants to significant litigation risk;
* A complex and confusing regulatory structure and enforcement environment;
* And new accounting and governance rules which, while necessary, are being implemented in a way that may be creating unnecessary costs and introducing new risks to our economy.

Concerning the rise of markets outside the US, he was positive:

A number of foreign exchanges have also aggressively embraced technology and developed innovative business models that increase efficiencies and reduce costs to investors in their markets. These competitive forces have spurred responses in our country. In the most recent example, the Chicago Mercantile Exchange and Chicago Board of Trade announced plans to merge and offer investors a broader range of exchange-traded derivatives, with the goal of creating efficiencies in technology and operations.

On the legal system, he was less positive. He first mentioned the strength of the US:

A sophisticated legal structure – with property rights, contract law, mechanisms to resolve disputes, and a system for compensating injured parties – is necessary to protect investors, businesses, and consumers.

However, he ended with repeating an age old refrain:

Simply put, the broken tort system is an Achilles heel for our economy. This is not a political issue, it is a competitiveness issue and it must be addressed in a bipartisan fashion.

But it was the regulatory and accounting systems which were his focus, including Sarbanes-Oxley. Unlike some, he did not put all the blame on Sarbanes-Oxley, but looked at the balance needed to operate the entire system.
Most importantly, he did not advocate any specific short term fix. Instead, he laid out broad principles and announced a Conference on Capital Markets and Economic Competitiveness to be held next year. Those principles include:

First, it is necessary to take a global view. We don’t operate in isolation, so it is very important to consider how changes we make affect the ability of our companies to compete globally and how these changes affect our interaction with markets and regulators around the world.
Second, our regulatory structure should be more agile and responsive to changes in today’s marketplace.
Third, to stand the test of time, rules should be embedded in sound principles.
Fourth, regulators should take a risk-based approach to regulation, weighing the cost to shareholders against the benefits.
Fifth, our enforcement regime should punish and deter wrongdoing and encourage good behavior without hindering responsible risk-taking and innovation.
And, lastly, the best way our business leaders can protect the integrity and competitiveness of our markets is to exert moral leadership, where the threshold question is, “Is this right?” not “Do the rules allow us to do this?”

I am especially heartened to hear of the conference. There are a number of issues which the financial markets need to confront that have not been on the so-called “reform” (i.e. the anti-regulation) agenda. These include the short-term nature of the markets in the face of the need for long-term, patient capital and the rise of intangibles as a new asset class.
As we move deeper into the I-Cubed Economy, intangible assets will become more and more important in the financial markets (which is the subject of an ongoing Athena Alliance research project). The conference will need to confront this new reality if it is to be anything more than a look back at the past.
The Secretary has laid out a path. It is up to the rest of the financial community to follow.

Seeking foreign R&D

Last week, I posted a description of a recent Swiss study on informal innovation. Using the same data from the Swiss Innovation Survey, Heinz Hollenstein look at the behavior of companies seeking foreign R&D. He identified four strategies:

• Strategy 1: Firms pursuing a broad-based foreign R&D strategy in terms of motives, with tapping into knowledge available at foreign universities and embodied in specialists as the core elements;
• Strategy 2: Firms strongly embedded in networks of highly innovative companies and transferring a substantial part of the knowledge obtained abroad to the domestic headquarter;
• Strategy 3: Firms pursuing a strongly focused strategy, with foreign R&D almost exclusively used as a means to extend local markets;
• Strategy 4: Firms pursuing, in terms of motives, a rather narrow-based foreign R&D strategy that aims at reducing R&D costs and gaining access to highly skilled personnel.

His findings:

Foreign R&D still is based to a very significant extent on the traditional efficiency- and market-seeking motives: clusters 3 and 4, which primarily reflect these types of motives, dominate foreign R&D activities, at least in terms of employment (65% of employment). However, knowledge-seeking, which is a core ingredient of the other two foreign R&D strategies, has become a very important driver of the internationalisation of R&D in the Swiss economy: 51% of firms (although only 35% of employment) pursue these two types of foreign R&D strategies.

Given that the Swiss economy and Swiss companies are highly internationalized, it is interesting the extent to which companies’ foreign R&D strategy are still relatively traditional. However, the growth in the more knowledge-seeking strategies portents a coming shift.
This is the subject of a number of on-going studies (most notably by my colleague Hal Salzman at the Urban Institute). It will also be the subject of a conference next year at the National Academy, which Athena Alliance is a co-sponsor. More on that as details become available.

Measuring informal innovation

Two Swiss academics – Marcel Bogers and Stéphane Lhuillery – have taken a close look at their nation’s 2000-2002 innovation survey and have teased out a measurement of informal innovation. Informal innovation is that which does not come from formal R&D. As they define it, informal innovation includes “marketing, design and engineering capabilities, training and learning (e.g., by doing), monitoring external sources of innovation, development new production facilities, acquiring of new technologies and technical information or know-how, and organizational investment and change” and is “generally embodied in people and organizations.” This is the type of innovation that often does not get captured in standard OECD innovation surveys — and is completely overlook in the US tech-centric discussion of innovation policy. [In fairness to the work of the OECD, this paper seems to be focused on the previous generation of the OECD innovation surveys. The 3rd Edition of the Oslo Manual on innovation does a much better job at looking at marketing and organizational innovations.]
The paper’s findings are very interesting:

Our results show that around half of all the (innovative) firms in the sample could be considered as being informal innovators, in line with our definition. In particular, service firms were confirmed to be mostly involved in this informal innovation whereas high-tech firms are less likely to be (exclusively) involved in non-R&D innovation. Furthermore, we show that non-R&D innovation is associated to product innovation as well as process innovation. The process innovation side is contended to rely on learning-by-doing or learning-by-using. Non-R&D (innovative) firms account here for more than one third of the total reduction of production costs due to process innovation, which in particular holds for smaller firms and service industries. Non-R&D innovations are thus important substitutes for R&D-based innovation. These results show that a large part of the economy is not considered by Science and Technology (S&T) policy makers, as they focus on one side of the knowledge production in enterprises.

The importance of informal innovation has recognized for quite some time. Nobel-prize winner Ken Arrow pointed out the role of “learning-by-doing” back in 1962. Subsequently over the past 40 years, we have heard discussions of “learning-by-using” and “customer-driven” innovation.
These are the areas upon which we need to build our broader national innovation policy. Unfortunately, they are also the areas which are the most difficult to affect with public policy. Funding R&D and training more scientist and engineers is easy. Finding ways to spur informal innovation is hard.
But that is exactly what we must do.

National branding: the good, the bad and …

Beginning with the ugly. The latest issue of the Economist has a story on the struggles and pitfalls of National branding: A new sort of beauty contest:

For 15 years you have tried to make the world aware of your newly born country. It is huge—the size of western Europe—rich in natural resources, modernising fast. But progress is frustratingly slow. Then a pestilential foreign comedian makes you (in)famous overnight, for grotesque but fictional squalor, cruelty and vulgarity. Should you be pleased, cross or both?
That is the puzzle facing Kazakhstan, thanks to “Borat!: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan”, a new film that has proved a surprise box-office hit in America. A mock documentary, it portrays Borat, a lecherous, racist Kazakh (but actually a British comedian) visiting America, with assorted misapprehensions on both sides that are comical or tasteless depending on your viewpoint. Kazakh officials are now grimly trying to show they share the joke; Russia says it will ban the “humiliating” film.

[Not yet having seen Borat – it is on the Thanksgiving movie fest list – I am given to understand that it makes as much fun of America as of Kazakhstan]
According to the story, experts on national branding are divided as to how Kazakhstan should respond: lie low or make lemonade of out lemons. In any event, national branding is a difficult task if all one has is image. As the Economist states, “nor can money spent on glitz and schmooze easily make up for dire political realities, such as a bad record on free speech, or an amnesiac approach to history.” Like any brand, there has to be more substance under the perception.
Part of the process of national branding has to go hand in hand with an underlying economic strategy. In the private sector, this is known as leveraging the brand – moving into related products and services. You hook the customer on one level and then offer more. An example of a nation doing this is an article in the same edition of the Economics on Marketing New Zealand: From fantasy worlds to food:

New Zealand famously promoted itself as a tourist destination using the dramatic landscapes seen in “The Lord of the Rings” films. Now that the magic has faded, it has started emphasising its food and wines in addition to its natural beauty. One approach is to reach out to potential visitors in other foodie hubs. At last year’s “Maori Art Meets America” event in San Francisco, New Zealand pinot noirs, breads, meats and cheeses were served. “All this helps grow the food and wine sector tremendously,” says George Hickton of Tourism New Zealand. Michael Hall, professor of tourism at the University of Canterbury, predicts that saffron, walnuts, truffles and olive oils will be the next Kiwi foods to be marketed abroad in an effort to develop food tourism.

In this case, New Zealand is actually going back to an older marketing strategy of pure air/water and pure food, updated to use the recent spotlight of the movies.
And finally, brand loyalties change – even for countries. According to the Economist:

The American administration is also spending heavily on public diplomacy. But apparently to less effect. Polls show unparalleled hostility around the world not just to the administration but to the country itself. “America spent 300 years building a powerful, rich, globally adored brand,” says Mr. Anholt [Simon Anholt, a branding specialist and author of the forthcoming Competitive Identity: The New Brand Management for Nations, Cities and Regions]. “It is leaking away very quickly.”

As I’ve remarked before, time to do something about that.