National Innovation Foundation

Earlier this week, the Brookings Institution and the Information Technology and Innovation Foundation released a new report on Boosting Productivity, Innovation, and Growth through a National Innovation Foundation:

Innovation drives America’s economic growth and ultimately determines its living standards and those of its metropolitan areas. However, the nation faces a growing innovation challenge in today’s global economy. To respond, the federal government should establish a National Innovation Foundation (NIF)—a new, nimble, lean, and collaborative entity devoted to supporting firms and other organizations in their innovative activities. By enhancing America’s world-class entrepreneurial and market environment, NIF would boost the nation’s innovation leadership for the 21st century and raise productivity and incomes. Moreover, by supporting workforce development and performance improvement in firms, NIF would help create better jobs for high school graduates in manufacturing and “low tech” services as well as those with advanced degrees in high technology industries.
America’s Challenge
* Global competition is increasing. Like manufacturing, call centers, and software production, corporate R&D is also shifting overseas. Over the last decade, the share of U.S. corporate R&D sites declined from 59 to 52 percent within the United States, while it increased from 8 to 18 percent in China and India.
* American innovation leadership is slipping. The U.S. ranks only seventh among OECD countries in the percentage of GDP devoted to R&D expenditures.
* Private markets suffer innovation inefficiencies. Private firms tend to under-invest in innovation because no single business can capture all the economic benefits arising from new technologies, products, or business models.
Limitations of Existing Federal Policy
* There is no national innovation policy. Rather than comprising an explicit, focused, national agenda, federal innovation efforts are scattered throughout government.
* There is little focus on services innovation and commercialization. Existing federal innovation activities pay little attention to the service sector and to the important roles that smaller firms and universities play in the commercialization process.
* There is no systematic innovation partnership between the federal government and state and local governments. Federal policies do little to support the effective, albeit underfunded, innovation efforts established by state and local governments.
A New Federal Approach
The federal government should establish a new National Innovation Foundation (NIF) with the sole mission of promoting innovation. The NIF’s proposed budget would be $1-2 billion per year. The new entity could exist as a new agency within the Commerce Department, a government-related public corporation, or an independent federal agency like NSF. The NIF would:
* Catalyze industry-university research partnerships through national sector research grants.
* Expand regional innovation-promotion through state-level grants to fund activities like technology commercialization and entrepreneurial support.
* Encourage technology adoption by assisting small and mid-sized firms in implementing best-practice processes and organizational forms that they do not currently use.
* Support regional industry clusters with grants for cluster development.
* Emphasize performance and accountability by measuring and researching innovation, productivity, and the value-added to firms from NIF assistance.
* Champion innovation by promoting innovation policy within the federal government and serving as an expert resource on innovation to other agencies.

The report points out something that I have been harping on for years — we have no national innovation policy. It also points out that we have no policies or programs on services innovation.
The report recommends remedying that fault but pulling all the current innovation programs into a National Innovation Foundation — which would be the focal point of our innovation policy.
I support that concept. But I would push it even farther. To have a true innovation policy we need to recognize the broader nature of innovation. As Chris Hill has said in his 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.

(See also my earlier posting.)
Similarly, the Secretary of Commerce’s Advisory Committee on Measuring Innovation in the 21st Century Economy defined innovation as:

The design, invention, development and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers and financial returns for the firm.

(See also this earlier posting.)
So while there is a discussion of services innovation, the focus of the NIF is still largely on technology development and diffusion with only passing reference to organizational and other innovations. That is, in part, because we have yet to come up with a range of policies to support this broader type on innovation. We have decades of policy development in the technology area. We have almost no policy development in the area of organizational and other non-technological innovations.
One starting point in that policy development would be a greater understanding of the role of design as an innovation-catalyst (see for example an earlier posting) and of non-technological innovation. Let me also suggest that an NIF might be combined with an Intangible Asset Investment Corp — an “Ida Mae” — which would provide a secondary market for investments in intangible assets like patents (see new Athena Alliance working paper Intangible Asset Monetization: the Promise and the Reality).
A National Innovation Foundation would be a great beginning. Our next step is to come up with the policies to support non-technological innovation to add to the already development tools that the NIF would have in its tool box.

Earth Day and Green Jobs

From the Cetner for American Progress:

GREEN JOBS: At a time when the economy is at the forefront of Americans’ minds, the appeal of “green-collar” jobs is reaching beyond the traditional environmental crowd. “The green revolution isn’t just creating new and different jobs,” said David Foster, executive director of the Blue Green Alliance, a joint venture between two unlikely bedfellows, the Sierra Club and the United Steelworkers. “It’s revitalizing and creating new investment in a lot of the jobs we already have.” Bracken Hendricks, Senior Fellow at the Center for American Progress, explains, “If we are smart about it, building a green economy will mean new economic development, greater prosperity, and more opportunity for those who need good jobs most.” While much of the hype surrounding green jobs has focused on entrepreneurs, most of the jobs are being created in less glamorous sectors: weatherizing homes and offices, installing solar panels, and retrofitting factories with energy-efficient technologies. “This is not an eco-elite, eco-chic movement for people who can afford to buy hybrid cars and shop at Whole Foods,” says Van Jones, founder of Green for All, a California-based organization that promotes green job training for low income people. “The green economy to come is going to be a broad-shouldered, mass movement of American labor.” Although the development of new technologies is part of the story, green jobs are also about job security. “Making homes, offices and factories more energy efficient not only saves money, it also represents a huge growth opportunity for the people who build our communities and keep them running,” said Frances Beinecke, President of the Natural Resources Defense Council. “We’re talking about architects and engineers. Drywall and lighting contractors. Electricians and carpenters. Everything from construction to computing. And these are jobs that cannot be shipped offshore, and pay lasting dividends to the American economy.”

Well, some of the jobs can effectively be shipped offshore — in design and in manufacturing of the hardware. But, if we do this right, the US can gain a competitive advantage — and become an exporter of green technology and expertise.

An innovation in innovation

Here is a great idea in how to spread great ideas — Planet Eureka!. Planet Eureka is a new web site for exchanging ideas.
As today’s Wall Street Journal explains:

Next week, Eureka Ranch Technology Ltd. of Cincinnati plans to unveil the USA National Innovation Marketplace — an online registry where researchers and inventors can post ideas they’ve developed. Businesses can then browse through those ideas by category, much like searching through résumés at a job-hunting site. If the companies see something they like, they can contact the inventor to buy the idea or collaborate on it.
Companies of any size can use the registry. But small companies will be able to view new innovations first. They also can list ideas or products that they’ve developed and want to pitch to big businesses.

The website registry is funded in part by the Commerce Department’s Manufacturing Extension Partnership (MEP). MEP certified companies get first crack at the ideas. Then the data is opened up to everyone.
That is the way the public-private partnerships to foster innovation should work!

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.