End of Doha?

The Wall Street Journal is running a story that the WTO trade talks have collapsed — Global Trade Talks Falter. The speculation is that this was the last chance for the Doha Round (so named because the talks began with a meeting in Doha). Of course, this is not the first time that the trade negotiations have been said to be at the end. I can’t count the number of posting on this blog about the “end” of the Doha Round.
Part of the problem is what the Round was trying to accomplish. Originally, the Round was supposed to be the “services round” — the so-called Millennial Round which fell apart in Seattle in 1999. But it quickly became the “development” round at the meeting in Doha. The idea was that developing countries would gain access to markets in the developed world, especially of agricultural products. As the Journal story puts it:

The nine-day meeting, the longest trade summit diplomats in Geneva could recall, aimed at concluding a simple bargain: The European Union and U.S. would lower farm subsidies and tariffs in exchange for China, India, Brazil and other emerging economies opening up their markets for industrial goods like chemicals and cars.

Boiled down to this trade off, the Round has become less and less relevant to the world economy as the talks have stretched on. The Round seemed premised on an international division of labor that long longer exists: “developed” nations make products and “developing” nations have an advantage in agriculture. It seems that this trade off is not worth it to India and China. Rather than wanting to lower agricultural barriers in the US so that they can export more farm products, India and China are more worried about a surge of agricultural products coming into their markets. They want surge protection clauses in the agreement on sugar, cotton and rice. India’s trade and commerce minister, Kamal Nath, the Indian Trade and Commerce Minister, reportedly said, “I’m not risking the livelihood of millions of farmers.” The proverbial shoe is apparently on the other foot now.
More importantly, the nature of global economic activity has shifted. Let me repeat my comment back at the beginning of the Round in 2001 (in After Doha: What The WTO Is Not Talking About), many of the real issues weren’t even on the table:

Slightly less than a decade ago, I played a small part in the implementation of the Uruguay Round and the birth of the WTO. As a Senate trade policy staffer, I had fly-on-the-wall view of the pushing and shoving. At the time, I could not help but think that I was witnessing the last major trade round. I may be proven wrong. But, regardless of whether a new round is launched and successfully completed, it will be outdated before it begins. As we engage in the first war of the 21st century, we may be entering into the last trade negotiations of the 20th Century.
This is not to say that the negotiations are unimportant. There are numerous areas, ranging from agricultural subsidies to the dispute settlement process, that need to be addressed. These are, however, the loose ends of trade in the Industrial Age – not the emerging issues of the Information Era.

Maybe the new Administration can move beyond the past and craft a new approach to trade negotiations. Clearly, the current one isn’t working.

The intangible in a very basic industry

Our normal habit (or should I say bias) when thinking about intangibles is to divide the world into intangible and tangible producing industries. Services and manufacturing is the crudest form of this breakdown. However, we forget that intangibles are a fundamental input in all industries, even the most basic of them such as mining.
The IBM Institute for Business Value has released a report reminding us of this —
Unlocking the DNA of the Adaptable Workforce: The Global Human Capital Study 2008/Metals and Mining Edition:

Today, the metals and mining industries are rapidly changing. As business becomes more global and competitive, companies are being challenged to reassess where and how products are made and marketed. A less understood challenge, however, is how to make the best use of the enterprise’s most important asset: the workforce.

The key factor is effectively utilizing the knowledge of the workforce:

Our findings suggest that three key capabilities influence the workforce’s ability to adapt to change.
First, workers must be able to collaborate across their organizations, connecting individuals and groups that are separated by organizational boundaries and different physical locations. Only 7 percent of the metals and mining survey respondents say they are very effective at collaboration – the ability to bring together workers to solve problems and to innovate, either formally or informally. To address this, a number of leading metals and mining companies are actively using technology enablers today for collaboration, knowledge sharing and learning. However, our evidence indicates that the real hurdles to collaboration are not technology, but issues of the company culture.
Workers also need to effectively identify and locate experts. Only a small number of metals and mining respondents (14 percent) believe their companies are very capable of identifying individuals with specific expertise.
And last, organizations must be capable of predicting their future skill requirements to keep ahead of changing conditions. Only 13 percent of metals and mining respondents said that their organizations have a very clear understanding of the key workforce skills required in the next three to five years.

By the way, this report is a part of a larger series/study with the same title: Unlocking the DNA of the Adaptable Workforce.
The full report opens with this wonderful quote:

“The only sustainable competitive advantage is the type of people you have and the way they work together.”
– Klaus Kleinfeld, President and Chief Operating Officer, Alcoa

(The quote is from an interview conducted by Patrick Foster in The Times“In a world that technology has made flat, where do firms find a competitive edge?”.)
The study and this quote reinforces what I have been saying for sometime: there is no separate “intangible” or “knowledge-intensive” sector of the economy. All industries and sectors need to embrace intangibles, innovation and information in order to compete. The distinctions we make between old and new industries , between high-tech and basic, between services and manufacturing are out of date. They may tell us about certain characteristics of the sector. But they tell us little about what companies and individuals are doing to add value and foster competitiveness. In my mind, it’s not old versus new; its companies who understand the I-Cubed Economy and those who don’t. Those who do will be able to make (and remake) themselves into prosperous institutions. Those who don’t will fail, even if they are in so-called “new” sectors.

Under reporting of intangibles

The brand valuation firm Intangible Business has produced two studies on reporting of intangibles under US and international accounting rules. Those rules (SFAS 141/142 and IFRS 3) require companies to break out the value of acquired intangible assets from the overall category of “goodwill.” The US report (SFAS 141: The First 5 Years) concluded that goodwill is substantially over reported and intangible assets under reported. Some examples:

Disney
Bought PIXAR for $7.5bn and allocated only 3% to intangible assets. 75% was goodwill.
Conoco Phillips
Bought Burlington Resources for $35bn allocating just $0.1bn to intangibles, 0%.
Chevron
Bought Unocal for $20bn and determined that intangible assets had no value at all.
Google
Bought YouTube for $1.2bn and allocated $0.2bn to intangibles and $1.1bn to goodwill, 92%.
JPMorgan
Bought Bank One for $95bn. Only 9% was allocated to intangibles but 36% to goodwill.
Wachovia
Bought Golden West for $75bn with intangibles like customers, brands, contracts valued at 1%.

On the international side, the results appear to be somewhat better (Goodwill Reporting Internationally):

IFRS3 disclosure requirement on the components of goodwill is just about adequate for stakeholders’ needs. USGAAP is still some way short of even this level of disclosure and, most disturbingly, compliance frequently consists of “going through the motions” and sometimes doesn’t happen at all.
Auditors seem unwilling to make an issue of this, and perhaps this is because compliance still results in such woolly, ‘motherhood and apple pie’ type statements. The attitude seems to be that if disclosure requirements are considered to be bland and uninformative, it doesn’t matter if they are overlooked altogether. The absence of any effective monitoring of compliance with IFRS by reporting companies and their auditors, along the lines of the SEC in the United States, means that the quality of disclosure is likely to remain poor.

Not a good result. Maybe SEC needs to do its own analysis of the impact of the 141/142.

Fragility of reputation

A few years ago, I was at a conference on intangibles in London listening to an executive from BP (the UK energy company). He was explaining how the recent deal to invest in Russia was based on an intangible asset. Russia was seen then as a very risky place to invest. This investment would work because of BP’s reputation — that reputation alone increased the value of the joint venture.
In the short term, that seems to have been true. However, in the long term this case illustrates the fragility of reputation as an intangible asset. Yesterday, the head of the joint venture TNK-BP, Robert Dudley, was forced to leave Russia because he was denied a work visa. (For details, see stories in New York Times, Wall Street Journal, Financial Times and Washinton Post.)
The deal may have been doomed from the beginning. As the Post story explains:

The marriage of British oil giant BP and a group of Russian-bred tycoons in a joint venture in 2003 was strained from the start.
“The first risk . . . is mutual distrust,” the joint venture’s executive director German Khan warned his colleagues in the company newsletter when the deal was signed.
Mistrust has curdled into open hostility, despite the fact that the 50-50 joint venture, called TNK-BP, has doubled or tripled in value — and paid out a staggering $18 billion in dividends to its shareholders in just five years.

Even with that success, it appears that the partners are fighting over control of the goose, not content with having a share of the golden egg. As the Journal article points out, the Russian’s don’t necessarily want BP’s reputation anymore. In fact, they bridle at what they see as the treatment of the joint venture as a subsidiary of BP:

“TNK-BP is an independent oil company in which BP is not a controlling shareholder,” Mikhail Fridman, chairman of the TNK-BP board, said in a statement. He insisted that BP nominate a “new independent CEO who would be based in Moscow and manage TNK-BP in the interest of all shareholders.”

Reputation is only as good as the actions that back it up. And protecting reputation is often a difficult task, even when you are in the position to act. BP is in an awkward position of having their name on the line without necessarily having the power to control events. Such is the case that others can also find themselves in. This is why reputation is one of the most powerful yet precarious of intangible assets – and one that needs to often be given special attention.

Source of innovation

The Information Technology and Innovation Foundation has published an important new report — Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970-2006, written by Fred Block and Matthew Keller of UCal, Davis. The report describes the shift in technological innovation over the past few decades:

Whereas the lion’s share of the R&D 100 Award-winning U.S. innovations in the 1970s came from corporations acting on their own, most of the R&D 100 Award-winning U.S. innovations in the last two decades have come from partnerships involving business and government, including federal labs and federally funded university research. Indeed, in the 1970s, approximately 80 percent of the award-winning U.S. innovations were from large firms acting on their own. Today, approximately two-thirds of the award-winning U.S. innovations involve some kind of interorganizational collaboration—a situation that reflects the more collaborative nature of the innovation process and the greater role in private sector innovation by government agencies, federal laboratories, and research universities.

The report has a nice overview of both the innovation policy debate (specifically on the role of government) and the shifts in the economy since the 1970’s. They describe five:
• mounting competition from foreign firms
• deregulation that lowered barriers to competition for entrenched firms.
• computerization
• shifts away from mass markets to niche markets
• increasing short-term performance orientation of financial markets.
The result was the breakdown of the old large industrial system to a more networked approach.
The data they use is based on R&D Magazine’s annual “Best 100 Inventions” awards. The authors readily admit that this is somewhat “gizmo” oriented. But still it is good data source to support the underlying conclusions about the success of technology policy over the past three decades:

The federal government has created a decentralized network of publicly funded laboratories where technologists will have incentives to work with private firms and find ways to turn their discoveries into commercial products.
. . .
Complementing these decentralized efforts are more targeted federal government programs that are designed to accelerate progress across specific technological barriers.

That does not mean that everything is fine. As the authors point out, there are still major problems:

In our view, the system of federal support for innovation has enormous strengths, but it also suffers from three major, interconnected weaknesses. First, the system carries decentralization to an unproductive extreme. Under current arrangements, it is entirely possible that five different government agencies might be supporting 30 different teams of technologists working on an identical problem without a full awareness of the duplication of efforts. This situation is a particular problem if different groups are unable to learn from each other in a timely fashion. Second, because the importance of the federal role in fostering innovation is not widely recognized, federal programs in support of innovation lack the broad public support that would be commensurate with their economic importance. Third, the budgetary support for the current system is inadequate and uncertain. Funding for more collaborative research and commercialization efforts are relatively limited, and total federal levels of R&D spending have been declining in real terms since 2003. These declines put the entire U.S. innovation system at risk.

Those are all good points — especially the second point of a lack of understanding of the positive role of the government.
I do have one not so minor critique of the report. It has nothing to do with the actual study, but the framework. The authors keep describing this as a study of the “national innovation system.” It is not. It is a study of the R&D/technology system. As I have said many times (and it is a wall I will continue to beat my head against, I guess), there is more to innovation than technological innovation. As this report shows, we have a pretty good idea of the role of government policy in technology innovation. We need to do much more to understand the role in innovation in general.