Post-scientific Society

Yesterday’s New York Times ran an interesting story on “How Scientific Gains Abroad Pay Off in the U.S.” The gist of the piece is how scientific advances in other countries could help US competitiveness. The story uses the example of Seagate Technology is using research findings developed in other countries to commercialize products.
The story illuminates the discussion going on in the technology policy community about the role of basic research. The standard argument is that the US needs to be the predominate nation in science. But some have been questioning that argument. They raise the point that the US should better utilize research done abroad.
As the NY Times piece puts it:

Americans have long profited from low-cost manufactured goods, especially from Asia. The cost of those material “inputs” is now rising. But because of growing numbers of scientists in China, India and other lower-wage countries, “the cost of producing a new scientific discovery is dropping around the world,” says Christopher T. Hill, a professor of public policy and technology at George Mason University.
American innovators — with their world-class strengths in product design, marketing and finance — may have a historic opportunity to convert the scientific know-how from abroad into market gains and profits. Mr. Hill views the transition to “the postscientific society” as an unrecognized bonus for American creators of new products and services.
Mr. Hill’s insight, which he first described in a National Academy of Sciences journal article last fall, runs counter to the notion that the United States fails to educate enough of its own scientists and that “shortages” of them hamper American competitiveness.
The opposite may actually be true. By tapping relatively low-cost scientists around the world, American innovators may actually strengthen their market positions.

I support the idea that the US should do a better job in utilizing foreign research. But, ironically, that does not mean that the US can back off of its commitment to increased R&D. In order to utilize that foreign research, the US must have top notch researchers here at home to interpret and modify the findings. The NY Times story points this out in the case of Seagate:

Last October, the Nobel Prize for physics, for instance, was shared by French and German scientists for their basic discovery of what is known as the “giant magnetoresistance” effect, which enables much more digital data to be stored on a disk drive. The breakthrough, by Albert Fert and Peter Grünberg, had essentially no commercial impact in Germany or France. But by using open scientific literature and attending conferences, Seagate found ways to capitalize on the breakthrough, which had been financed by European governments.

Commercializing science isn’t easy, which is the main reason that rising scientists from India, China and other countries can’t readily achieve business success. In the case of the magneto effect, Seagate engineers ended up using different materials — at different temperatures — than the Nobel winners.

By the way, Chris’s paper “The Post-Scientific Society” is more detailed than simply an argument for using global research:

In the post-scientific society, the creation of wealth and jobs based on innovation and new ideas will tend to draw less on the natural sciences and engineering and more on the organizational and social sciences, on the arts, on new business processes, and on meeting consumer needs based on niche production of specialized products and services in which interesting design and appeal to individual tastes matter more than low cost or radical new technologies.

I couldn’t have said it better myself.

Innovative companies

Business Week has released is annual list of The World’s Most Innovative Companies. Apple leads the list (although I can’t find the promised interactive list anywhere on the website yet) – followed by Google (which just reported a surprising profit increase of 30%). Surprising parts of the list are Tata from India and GM. One other surprise (according to an interview with the list’s creator) was a focus on business process and business model innovation. Interestingly, the interview also touches on the issue of medical tourism as a major change in the health care industry business model (see earlier postings).
The story also looks at how to maintain innovation during an economic downturn: how to get more bank for the research buck and how to use innovation to improve products and services to gain market share during the downturn. Always good advice.

Monetization of Intangible Assets

This morning Athena Alliance released its new report, Intangible Asset Monetization: The Promise and the Reality. The following is the Executive Summary:
The economy of the United States is now largely driven by intangible assets. These assets include worker skills and know-how, innovative work organizations, business methods, brands, and formal intellectual property, such as patents and copyrights. They are producing an economy very different from the one of the past. As the U.S. moves away from a manufacturing-based economy and toward a technology-and-innovation driven one, intangible asset investments are becoming vital to economic growth and sustainability. Just as physical assets were used to finance the creation of more physical assets during the industrial age, intangible assets should be used to finance the creation of more intangible assets in the information age.
Intangible assets show up in the financial system in various ways. They are valued are already valued – often implicitly, sometimes explicitly – in financial markets by analysts, in stock prices, in ratings by credit agencies and for private lender programs. Mechanisms for raising capital based on intangibles already exist, including securitization, lending, licensing, and outright sale. Recent financial innovations have better captured intangibles in the financial markets.
But the evolution of robust capital markets that both utilize and support intangibles has been slow. Intangibles are still not can be considered on the balance sheet nor given due credit for playing a vital role on the income statement. Intangible assets have no standardized financial tools to capture their value. Each intangible asset financing deal seems to be a unique, one-off event employing differing models to determine the assets’ value. The associated perceptions of risk—in some cases exacerbated by actual events, such as the subprime mortgage meltdown—have greatly hampered the utilization of intangibles in capital markets.
As a result, companies are missing substantial capital resources that could be used for business expansion or innovation investment. To effectively realize the significant potential of intangibles, industry standards and government regulations need to promote the acceptance, use, and dissemination of intangible assets in the economy.
A number of factors must be considered by the financial markets to determine the suitability of an asset, including asset recognition, valuation, separability, transferability, duration, and risk. However, management and capital markets have failed to solve the very real problem of valuation, which severely undermines attempts to create financial leverage for the asset. This valuation deficit must be remedied for businesses and the economy to remain fully viable and sustainable over the long term.
Despite these drawbacks, intangible asset monetization could be the key that unlocks a vault of unexplored, exciting, and extremely useful sets of financial risk-mitigation instruments.
A secure, open, transparent, fair, and efficient capital market for intangible assets depends on government and independent regulatory bodies playing an active role .Yet very little public or private research exists that clearly explores this asset class. Thus, the greatest potential contribution from public policy may be to raise awareness and encourage utilization and better understanding of all facets of intangibles.
Beyond this basic need, numerous other actions are required to change the situation. There is no magic bullet; no single government or industry action will resolve all the issues. But policymakers play a key role in promoting acceptance, use, and dissemination of intangible assets in the market. Areas in need of attention include patent reform, securities definitions, banking regulations, perfection and bankruptcy laws, technology policy and tax policy. Industry standards and procedures also need attention, especially in valuation.
Some key policy actions include:
• Reinstate the joint Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) research project on expanded disclosure guidelines for intangibles.
• Convene a special FASB/Securities and Exchange Commission (SEC) task force on the valuation.
• Create a safe harbor in financial statements for corporate reporting of intangible assets.
• Explore the creation of an Intangibles Mortgage Corporation (Ida Mae) to regularize the intangibles-backed securities market, either as a limited government-sponsored enterprise (GSE) or as an independent organization.
• Create a national central registry of intellectual property security interests.
• Create a permanent knowledge tax credit that would increase investments in intangibles.
• Explore lowering the tax rate on intangible asset royalties, in conjunction with stricter regulations on international transfer pricing mechanisms and cost-sharing arrangements and on passive investment companies.
• Enact patent reform legislation and include a review of patent litigation and patent liability insurance.
• Review how the federal technology transfer system, including Bayh–Dole, does or does not facilitate the creation of intangible assets.
• Review the Basel II Accords to better understand their implications for intangible-backed lending.
• Review federal government business loan programs, especially in the small business arena, to ensure that intangible assets can be used as collateral.
• Coordinate with ongoing efforts at market reform, such as the President’s Working Group on Financial Markets, to ensure that intangible-backed assets are properly included.
Perhaps the single most important step is the recognition that intangible assets are not covered in existing financial structures. Our economic policies and regulatory systems, public and private, are still largely set up to accommodate the tangible assets of the industrial era—buildings, fixed resources, and machinery. This is not surprising; these systems have evolved over the past couple of centuries as the industrial revolution unfolded.
Today, intangible assets—knowledge, ideas, skills, relationships, and organization—have come to underpin value creation; their monetization is now essential. But this will require newly relevant policies and structures that unleash the economy from the strictures of the past and pave a new way forward for financial success in America and around the world. The opportunities they portend make the recognition, valuation, and utilization of intangibles essential to the success of U.S. enterprises and prosperity of the U.S. economy.

The health care economy – update

In earlier postings, I’ve discussed the rise of health care as local economic development. Today’s Wall Street Journal is running a page 1 story on this economic trend — Factories Fading, Hospitals Step In:

Growth in health care is fueling local economies across the country, as medical facilities replace factories. In Duluth, Minn., 20% of the jobs are in health care, compared with 14% a decade ago. In the Canton, Ohio, area, which lost the maker of Hoover vacuum cleaners and dozens of other manufacturers, the health-care industry is expanding rapidly. A similar story is unfolding in Anderson, Ind., once a major producer of cars and car parts.
There are downsides to health care’s ever-increasing role. A community that relies on health jobs can end up with a weaker economy, one overly dependent on government programs like Medicare and Medicaid. Greater inequality is a risk, too. In health care and other service industries, there tends to be a wider income gap between what the highest- and lowest-paid workers earn than there is in manufacturing. Surgeons can have salaries in the high six figures, while personal-care attendants often make little more than minimum wage.

The Journal story misses two of the other problems with relying on health care as an economic driver. The first is the rise of medical offshoring (as I’ve discussed in a couple of earlier postings). Health care is not locally rooted any more. People can travel — either to major facilities in the US, such as the Mayo Clinic, or to cheaper facilities abroad. The second is the need for this type of “export” to be helpful to the local economy. Every local economy needs to produce something it can sell to others. Unless the health care facility brings in patients from outside the local economy, it can not replace the factory as an economic driver.
Therein is the problem with the health care economy (and the service economy in general). If localized services are to be an economic engine, they need to be tradable to earn export revenues. But if they are tradable, they are subject to the same competitive pressures as goods trade. In other words, a shift to a service economy doesn’t solve the trade problem. You still have to be globally competitive – that is the nature of the economic treadmill we are on.

Patent bill update

From Intellectual Property Watch (IPW)– US Patent Reform Stalls as Senate Negotiations Break Down:

Judiciary Committee Chairman Patrick Leahy, Democrat-Vermont, intended to announce that a revised version of the measure would be brought to the Senate floor this week, the Intellectual Property Owners Association reported last Friday. The plan derailed when Leahy failed to agree on several provisions with the panel’s ranking member (lead of the opposing party), Senator Arlen Specter, Republican-Pennsylvania.
“The principal sticking point is the issue of how to assess damages in patent infringement lawsuits,” Specter said on 9 April. The lawmakers thought they had reached agreement, but “the language continued to shift, so we do not yet have a deal on the package,” he added.

According to IPW, the bill may still come up this year — so stay tuned.

Automated customized research

The New York Times is running a story about an automated book “writer” — He Wrote 200,000 Books (but Computers Did Some of the Work):

Philip M. Parker seems to have licked that problem [of actually writing]. Mr. Parker has generated more than 200,000 books, as an advanced search on Amazon.com under his publishing company shows, making him, in his own words, “the most published author in the history of the planet.” And he makes money doing it.

However, what Parker is selling is not books, but customized research:

these are not conventional books, and it is perhaps more accurate to call Mr. Parker a compiler than an author. Mr. Parker, who is also the chaired professor of management science at Insead (a business school with campuses in Fontainebleau, France, and Singapore), has developed computer algorithms that collect publicly available information on a subject — broad or obscure — and, aided by his 60 to 70 computers and six or seven programmers, he turns the results into books in a range of genres, many of them in the range of 150 pages and printed only when a customer buys one.

For more, see his video: YouTube – Patent on “Long Tail” for automated content authorship.
So, at this stage I don’t think authors have much to worry about. Researcher (like me), however, might be in trouble. On the other hand, maybe people like me are actually the customers for this type of customized, on-demand reports. They might provide the basic information that a research assistant would normally come up. So it may be the lower level research assistant that is displaced. Yet another example that if your job can be routinized, it can be either done offshore in a low wage country or automated (see Levy and Murnane, The New Division of Labor: How Computers Are Creating the Next Job Market).
By the way, Parker thinks that authors might be displaced by his method in the future. According to the Times story:

He has extended his technique to crossword puzzles, rudimentary poetry and even to scripts for animated game shows.
And he is laying the groundwork for romance novels generated by new algorithms. “I’ve already set it up,” he said. “There are only so many body parts.”

Somehow, however, I don’t think that major authors have anything to worry about (unless, of course, it is true what writing instructors tend to deny — best selling novels are all based on a standard formula). We will see.

Innovation tax credit – an incomplete idea

From the Kaufman Foundation newsletter – NDE-news: April 14 – 20, 2008:

New Bill to Simplify R&D Tax Credit
Many of America’s leading innovative companies utilize the popular research and development tax credit, but unfortunately, the process for using the credits has become much too complicated and cumbersome. A new legislative plan from Congressman Jerry McNerney (D-CA) seeks to remedy this situation. His bill, the Innovation Tax Credit Act (H.R. 5681) would address these challenges by making the R&D tax credit permanent. At present, the credit is temporary and requires regular renewal by Congress. This process has the effect of increasing uncertainty about the credit’s future existence. Computing the credit is also quite complicated. HR 5681 would simplify the process by consolidating the current batch of five related credits into one simplified tax credit that will ultimately provide a credit for up to twenty percent of the cost of qualified R&D expenditures.
Learn more about HR 5681, the Innovation Tax Credit Act of 2008.

Simplification may be fine. But we really need to expand the definition. Innovation is not just R&D. We need to be investing in all aspects of innovation. That means we need a complete knowledge tax credit that couples the R&D tax credit with a training and education tax credit.

Getting it — kind of

I’ve been posting a number of pieces complaining about how companies fail to recognize the value of their front line employees. Here is an opposite story from today’s Washington Post — Security Guards Get Union Contract – washingtonpost.com. According to the story:

The agreement, signed last week by the Service Employees International Union and Admiral Security, AlliedBarton, Guardsmark and Securitas, is the first union contract for private security guards working in commercial buildings in the District.

While the wages and benefits are not high, the agreement does provide for higher wages than required by DC law and greater benefits. More important seems to be the attitude of some in the industry. For example:

Todd Carroll, a senior vice president with Admiral Security Services, said, “I think it is good for the industry. There are a lot of companies that don’t give the wages and benefits they should to their officers.”

Mr. Carroll seems to get it. If you want steady employees, you have to treat them fairly. Remember, when Henry Ford increased his wages to the unheard of level of $5 per day in 1914, he didn’t do it because he was a nice guy. He did it to reduce the turnover and absenteeism that was disrupting the assembly line.
In the case of a security guard, I want someone on duty that treats the job seriously and is paying attention. Paying a decent wage is one step in ensuring that outcome. I’ve glad to see that the local security industry has recognized that.

Banking patent update

A couple of months ago, I posted a piece on one of the battles being fought as part of the patent reform legislation — in this case a provision inserted in the bill in committee with little discussion that would grant banks immunity against a pending patent lawsuit. The Administration strongly objected to the provision. And as I stated earlier , I tend to agree. think this is the wrong way to address the issue.
Now comes word, via a Washington Post story — Immunity Plan for Banks Loses Backer — that the sponsor of the amendment, Sen. Jeff Sessions (R-Ala.), has withdrawn his support:

Sessions announced his decision in a letter last week to Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.). In the letter, he noted that the U.S. Patent and Trademark Office said his amendment to a larger bill could affect more patented check technologies than originally thought and might undercut U.S. patent-protection efforts with trading partners.

This may remove one hurtle to the pending bill. But the banking industry is almost sure to put up a fight to keep the provision in the bill.
Stay tuned.

Recognition of intangibles

I came across this phrase in Steven Pearlstein’s latest column, Getting Away From the Dollar. Pearlstein talks about how and why we need to shift away from the dollar as the world reserve currency. Then he says:

It would require the United States to take decisive and politically unpopular steps to bring down its trade and budget deficits, and to be willing to allow foreigners to continue buying companies, real estate, patents and other productive assets. (emphasis added).

The fact that a Pulitzer prize winning commentator would casually refer to an intangible assets in the same breath as traditional assets says a lot about how far we have come.
One other point – on the substance of Pearlstein’s comment. If he is correct (and I believe he is), it means that the continued trade deficits will mean that we will have to sell off our assets–including intangible assets–to pay for our debt. Selling off our intangibles means that we get less royalty revenue, which means a higher trade deficit. It becomes a vicious circle. It also undercuts the argument that somehow services and “innovation” alone will save us–by allowing us to live on the fees and royalties. Innovation and intangibles help only if we use them to boost our productive capacity in all areas and industries. We can not continue to run huge trade deficits in goods (with more and more embody intangibles and innovation) and expect to live off the intellectual property.