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.

Restoring competitive position in finance

Last month, I posted an item about the competitive position of US financial markets. New York seems to be losing out in the IPO race and Mayor Bloomberg has commissioned a study on how to restore the US position. In my posting, I hoped that the study would do more than just repeat the standard line about less regulation and looser oversight. It appears that the New York Times shares my concerns, based on Sunday’s editorial The Corporate End Run:

United States markets lost their dominance of initial stock offerings for numerous reasons that had little to do with regulation. Some of last year’s biggest deals were Chinese and French privatizations. Markets elsewhere are bigger and more liquid than they once were. There are also intangibles, such as America’s recent unpopularity, increased barriers for visa seekers and extraordinary budget and trade deficits, which might make an issuer think twice about a dollar-denominated stock.
The London Stock Exchange, one of the leading beneficiaries of the American decline, commissioned a study showing that underwriting fees in London are just 3 percent to 4 percent of a transaction, compared with an average of 6.5 percent to 7 percent in the United States.
When workers confront globalization, they are told to adapt, take their pink slips and go to night school. It is the harsh downside of an integrated world economy that has on balance significantly enriched the country. When financiers feel the pinch from competition in Hong Kong and London, they run to the Bush administration for rule changes.
America’s investor protections and corporate regulations have made it a nation of share owners, with almost 57 million American households owning stocks either directly or through mutual funds. The Securities and Exchange Commission has already signaled that it will smooth the implementation of Sarbanes-Oxley, especially for smaller companies. And abuses of the private litigation system like pay-to-play should be stopped. There is room for reform. But over all, the system is working. It may need tweaks, but it does not need a revamping.

London fees are twice what they are in the US? Mr. financial entrepreneur, call your office — there is market opportunity here (and it doesn’t have anything to do with regulation).

Is your name IP?

Is an actor’s real name protected under intellectual property rights? A case in Wisconsin may answer that question, according to the Washington Post — Andy of Mayberry, Wisconsin?:

The star of “The Andy Griffith Show,” who as Andy Taylor portrayed the sheriff of the fictional North Carolina town of Mayberry, has sued a Wisconsin man who unsuccessfully ran for the Grant County post after legally changing his name to Andrew Jackson Griffith.
The lawsuit, filed Nov. 3 in U.S. District Court in Madison, alleges that William Harold Fenrick, 42, violated trademark and copyright laws, as well as the privacy of actor Andy Samuel Griffith, when he used his new name to promote his candidacy for sheriff in southwestern Wisconsin.
The lawsuit says the former Fenrick changed his name for the “sole purpose of taking advantage of Griffith’s notoriety in an attempt to gain votes.” It asks the court to order him to go back to his original name.

We will have to keep an eye on this. The way things are going, it may make it all the way to the Supreme Court.

September trade in intangibles

After last month’s horrendous trade numbers, this morning’s BEA trade data comes as a welcome relief. The overall deficit declined by $4.7 billion to $64.3 billion as imports declined and oil prices fell.
But, while this is good news, it is not great news. It just means that we are just digging ourselves into a deep hole at a slower rate.
Our trade in intangibles is helping to stem the tide – but not by very much. The intangibles surplus rose almost insignificantly by $44 million to $8.16 billion in September. The monthly surplus is still below what it was earlier this year. Imports and exports grew at about the same rate.
The deficit in Advanced Technology Products increased to $4.2 billion as imports outpaced exports, mainly due to an increase in aerospace imports.
Bottom line: pretty much of a status quo report. A little better, but nothing dramatic.

Intangibles trade-Sept06.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.

Election over . . . now get some work done

The election is over (finally – I was involved in some local DC races and slept in this morning). But Congress is not done for the year. The House and Senate reconvene tomorrow (Thursday Nov 9). Facing the lame-duck session are a number of left-over items. Foremost is the funding of the US government. Only a few appropriations bill have been enacted into law – the rest of the government is running on what is called a continuing resolution that expires shortly. So Congress will need to quickly get to work on an overall spending bill.
But also something that should be on the agenda is the competitiveness legislation. Just before they left town, the Senate leaders Frist and Reid introduced S. 3936 – A bill to invest in innovation and education to improve the competitiveness of the United States in the global economy.
Chances that this piece of legislation will become law this year are slim. There are too many details to be worked out – especially with the some-to-be Democratic House. But a discussion of the issue on the floor of the Senate and passage of the bill there would be a good set up for next year’s agenda.

Patent battles continue

Now NTP Inc. is going after Palm — Palm hit by patent suit

Patent holding company NTP Inc. said on Monday it filed a patent infringement lawsuit against Palm Inc., maker of the Treo mobile phone, in a U.S. court, sending Palm shares down more than 7 percent.
The suit alleges that Palm’s products and services infringed NTP’s patents and seeks recovery of monetary damages resulting from Palm’s direct and indirect infringement, the intellectual property firm said in a statement.
Specifically, NTP said it is targeting services and systems primarily used or adapted for use in e-mail systems with radio frequency communications to mobile processors and related services.
A Palm spokeswoman was not immediately available for comment.
NTP said it would prefer to resolve the issue via a negotiated license agreement.

About a $612.5 million agreement? And are these the patents which were already invalidated?
Will Palm be able to fight back in court or is the 7% hit on their stock price already too painful. And how will the e-Bay case that limits the injunctive relief mechanism affect any trial or negotiation strategy?
If this isn’t taken by Congress as a real wake up call to fix the patent problem, then nothing is.

Andy Grove on IPR reform

From the latest Business Week – Andy Grove’s Wish List for Congress

Q: What laws need changing?
A: Intellectual property law, for one. Patent as well as trademark law. You have to ask, “Are these the laws—if we didn’t have any laws—are these the ones we would or should have?” I don’t think if you did that you’d get a yes answer today.

Interesting. But, then again, Grove has been calling for patent and IPR reform for years. Maybe in the next Congress (people keep telling me that we are getting close).