Re-purposing technology – insights for policy

The Financial Times has a great story on how to utilize old patents in new products – New profit from old patents. The heart of the story is about utilizing the core HP thermal printing technology for an alternative to the dreaded needle for drug delivery (using a transdermal skin patch). HP is licensing the technology to a small Irish company, Crospon.
The story is also about the importance role government can play in the process:

It was Enterprise Ireland, an Irish government agency charged with fostering innovation and technology links between multinationals and indigenous Irish companies, that brought the two together.

This type of matchmaking (usually thought of as part of a technology transfer function) is an important role that government agencies – or quasi-government, public/private partnerships — play in technology-based economic development. It is not just a matter of standing back and let the market work, as some like to claim. It is a matter of activity fostering a market in technology exchanges.
There was another part of the story that caught my eye, however:

At HP Labs, the company’s central research facility, it has an active programme to identify new uses for these old technologies. HP does not disclose how much it makes in annual royalties and fees from such arrangements, but it is believed to be about $500m(£272m).

Say what? HP does not have to disclose its royalty income? That can’t be completely right. Somewhere that $500 million has to show up on the books. The fact that it can’t be easily traced back to technology licensing (at least apparently by the FT) is an accounting and disclosure problem. And it is a problem that needs to be fixed.

Opportunity for intangible collateral lending – the auto industry loan

For the past few weeks, the idea of a loan program to the auto companies has been gaining momentum.
According to today’s Wall Street Journal, Overdue Budget, Auto-Maker Bailout Will Top Democrats’ Agenda. Here is their comment on the idea:

The proposal to throw a lifeline to Detroit’s auto makers could prove particularly challenging, and its future is unclear. Democratic presidential nominee Barack Obama has endorsed the plan, as has John McCain, his Republican rival. Both are battling to win Michigan in the race for electoral-college votes.
General Motors Corp. Vice Chairman Bob Lutz said Detroit’s Big Three have been hit by a “perfect storm” of rising gas prices, a slumping economy and new fuel-efficiency rules that will force them to invest heavily in new technologies. “The American auto industry is deserving of loans to get credit that it may well need,” Mr. Lutz said, noting that none of the auto makers would be able to get loans from financial institutions in today’s tight lending markets.
But the White House remains cool to the idea. Tony Fratto, a spokesman for President George W. Bush, said the administration is “very reluctant to consider government intervention.”

Last week, the Washington Post said basically the same thing: Car Makers to Press for Loans:

Automakers plan to urge Congress to support funding up to $50 billion in low-interest loans over three years to help them modernize their assembly plants and develop next-generation fuel-efficient vehicles.
Industry officials said the loans, which are twice the amount authorized in last year’s energy bill, are a top priority when Congress returns next month because of the declining fortunes of Detroit’s automakers and tightening credit markets.
Auto industry officials have argued that the loan program would not represent a bailout, but would be similar to aid lawmakers have given to Wall Street investment banks and struggling mortgage firms.
“We don’t see it as a bailout. We see it as government assistance to help retooling tied to the production of these advanced technology vehicles,” said Alan Reuther, legislative director for the United Auto Workers union.

This proposal generally would tie any financial assistance to creation and utilization of new energy technologies. Let me make two suggestions, however. First, that there are conditions similar to the Chrysler guarantee – which actually paid back the taxpayers after the company turned itself around.
Second, the US taxpayers get a part of the intellectual property. The companies should be required to put up their IP as collateral to the loan. This would both protect the taxpayers’ investment and give a jump start to the idea that IP is and should be treated as important collateral in financial transactions.
I would also require that there be some sort of technology transfer process on any new technology created as part of the program. I know that this will be unpopular with some – but it will be important to make sure that the technology does not get locked up.
If the taxpayers are going to assume the risk, the taxpayers should reap some of the benefits — both financially and in the introduction of new technologies.

Surprising GDP

When the preliminary GDP numbers came out last month, I cautioned that we need to be careful in our analysis, as the final trade numbers had not yet come out. Well, today BEA released the revised Gross Domestic Product and Corporate Profits with a very large revision upwards — from the advanced estimate of 1.9% to today’s preliminary estimate of 3.3%. According to BEA, higher number “reflected upward revisions to exports and to private inventory investment and a downward revision to imports.”
At least I got part of the issue right. The size and direction still surprise me, especially since the Fed’s July 23, 2008 Beige Book (which covered June and the first two weeks of July) stated that, “Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report.”
So I’m not sure we can take much solace from the new GDP numbers. They will, however, certainly spice up the political debate. At least for a week, since all eyes are more likely to be glued on the release of the latest Beige Book next Wednesday.

Moving to international accounting standards

Yesterday, the SEC gave the international accounting harmonization project a turbo charge when it proposed its Roadmap Toward Global Accounting Standards. The proposal does not guarantee that the US will switch to International Accounting Standard Board (IASB) rules. The SEC will have to make that determination in 2011 and the rules will not fully take effect until 2014. But it does move everything a big step closer.
The transition will have some impacts that may jar the system slightly. For example, as the Wall Street Journal points out, earnings will be affected:

Jack Ciesielski, an accountant and publisher of the Analyst’s Accounting Observer, says accounting under IFRS tends to lead to higher earnings. He examined filings from 137 foreign companies whose shares traded in the U.S. in 2006. That was the final year that U.S. regulators required these companies to translate their books into GAAP from IFRS. Mr. Ciesielski says 63% of the companies reported higher earnings under the international standard, and the median increase was 11.1%.

As I noted earlier, much of the differences have to do with treatment of things like taxes, pensions and financial instruments. Intangibles do play a part – mainly due to IASB’s rules for amortizing rather than immediately expensing R&D costs.
Accounting for intangibles may also eventually benefit from the shift — as the IASB has seemed more willing to take on the issue of recognition of internally generated intangible assets and the harmonization process appears to have drawn resources away from that effort. As the switch to IASB moves along, there may be more resources available for the intangibles project.
At least we can hope so.

Financial competitiveness

Remember all the talk about New York losing out to London as a financial center? Well, it has not turned out that way recently, according to analysis in today’s Financial Times — Northern Rock woes take toll on City’s reputation. The article points out that in the first half of 2008, the number of shares traded in New York went up while the number when down in London. And New York leads in a number of other areas (London does lead in the number of new foreign listings).
The reason? A regulatory system that promotes trust and security — building a reputation as a good place to do business:

“The brand of London has taken a hammering because of Northern Rock,” says Tim Linacre, chief executive of Panmure Gordon, a London stockbroker that also has a large US presence. “I don’t think it is terminal, but London needs to be absolutely on its toes.”
Meanwhile, New Yorkers are trying not to say “I told you so” now that financial woes have spread worldwide. They also are touting the benefits of tight regulation, saying that, with volatile markets, many investors value watchful regulators, tight listing standards and the right to sue.
“What Northern Rock demonstrates is that a business-friendly regulatory system may have its disadvantages as well,” says Kathryn Wylde, president of the Partnership for New York City, a business group.

So, as we work on the issue of revamping financial regulations (which probably needs to be done), lets be sure of what we are doing. Reputation is a critical intangible asset – especially in financial markets. Once it is lost, it is very hard to get back.

The organizational intangible

Yesterday’s Financial Times ran a profile of Wells Fargo’s had over from its former head, Dick Kovacevich to its new CEO John Stumpf (The Monday Interview – Wells Fargo cracks the whip). The bank is one of the few to have resisted the temptation of the subprime market — even though it is a major mortgage originator. Instead, Wells Fargo concentrated on the whole retail experience:

For the past decade, Wells’ knitting has consisted mainly of two patterns: selling as many products as possible to its existing customers, from bread-and-butter bank accounts to investment funds, and buying companies that sell financial goods it does not yet offer.
Cross-selling, often seen as the holy grail of financial services because it enables banks to reap more profits at a lower cost from consumers they know well, is a veritable mission at Wells. Mr Stumpf proudly reels off the average number of products purchased by Wells’ retail customers (5.64, well above the industry average) and says that nearly one in four have more than eight – the company’s long-term goal.
The economics of Wells’ strategy are indisputable. It costs it less to offer extra products to existing customers than to acquire new customers, so it can offer better deals on interest rates, lower premiums, and still make money.
Mr Kovacevich, who got his start at General Mills, the food company, stole that simple but powerful idea from the retail sector; it is no coincidence that Wells refers to its branches as “stores” and makes the most of its stagecoach logo and history as the bank that helped America conquer the West.

However, the key to success has been much more than its retail focused strategy:

But in addition to its Coca-Cola-like focus on customers and branding, Wells appears to have succeeded where many would-be financial one-stop shops have failed: getting different parts of the bank to talk and share customers with one another.<br
Mr Stumpf’s explanation of how the company pulled off such a feat would sound wishy-washy were it not for the fact he has the evidence to back it up. “Financial services is the ultimate team sport,” he says, recalling how he learned teamwork first growing up as the second of 11 children and then spending much of his youth playing table football. “We think of ourselves not as a hierarchy but as a series of concentric circles with the customer in the middle.”
He maintains that banks are wrong to assume that co-operation between different parts of the organisation can be fostered simply through monetary incentives for customer referrals and joint selling. Unless there is a common sense of purpose, bonuses alone cannot eliminate internal rivalries and jealousies, he says. That is why Wells asks Gallup periodically to measure the ratio of “happy to grumpy” employees. At the last count, it stood at 8.5 to 1, compared to 2 to 1 for the US population.
A strong balance sheet, an enviable competitive position and a satisfied workforce: Wells is such an outlier in the ravaged US financial sector that rivals have begun to wonder if it has a secret formula.
Mr Stumpf shakes his grey-haired head: “It’s about culture. I could leave our strategy on an aeroplane seat and have a competitor read it and it would not make any difference”.

Corporate culture has long been recoginzed as an important intangible asset. It is also one of the hardest to analyze and, as Mr. Stumpf recognized, to replicate. As such it remains an individual company’s competitive advantage. But from a public policy perspective, it raises a fundamental issue. How can a nation (state, region, city) foster this asset in order to remain competitive? Or are locations simply dependent on the idiosyncratic nature of corporate culture, i.e. this company located here is competitive and this company over there is not – for reasons having nothing to do with the location?
Some might argue that corporate culture is out of the realm of public policy. But if education—the betterment of the individual—is an important economic and social goal worthy of public policy attention, then isn’t organizational improvement as well?
Something to think about in waning dog days of summer.

Inequality and its causes:globalization and technology

Two newspaper stories today worthy of juxtaposition. The first is a summary of a discussion of 4 Noble Prize winners as covered in the Wall Street Journal – Nobel Laureates Say Globalization’s Winners Should Aid Poor:

Globalization and technology have increased income inequality around the world, four Nobel Laureates in economics argued, and governments should intervene to try to help those at the bottom.
Meeting on a picturesque island in southern Germany, the Nobel laureates focused Saturday on the growing gap between rich and poor, which has become a big issue in elections around the world, including the U.S. presidential race. The discussion focused more on broad themes than detailed solutions. But the main thrust was clear: Free markets aren’t always fair, and economists should help governments figure out how to make them fairer. (See video of the panel discussions.)

The second is a Financial Times review of a new book, The Race Between Technology and Education by Goldin and Katz contained in an article entitled The lesson of US income inequality:

They [Goldin and Katz] dismiss the populists’ two favourite culprits – immigration and trade – in short order (possibly too short; my only quibble with this work is that I would have liked to read more on trade). Instead, Goldin and Katz are persuaded by a view common amongst professional economists – that technological change is a major driver of the growing gap between rich and poor.
But Goldin and Katz give a twist to the assertion that “computers did it”. The real point, they say, in an argument buttressed by historical comparisons and technical analysis (if you cannot quite remember what a logarithm is you may want to skip this part) is the race between the demand for skilled workers, as created by new technologies, and the supply of them, as created by the educational system.

Neither of these takes on inequality seems to mention the link between trade and technology. As I’ve pointed out before — taking my lines from Frank Levy – if your job can be routinized, it can either be automated or done by someone in a lower wage area following instructions. In other words, technology enhances globalization. On the other side, as many other have pointed out, globalization enhances technology development. It is a two sided coin – and policy needs to address the consequences of both.

Tough time dealing with intangibles

The International Institute for the Unification of Private Law (Unidroit) is trying to come up with a model international law covering leasing. Sounds like a straightforward activity (if anything concerning international law can be considered straightforward). However, the activity has highlighted an interesting problem — how tough it is to deal with intangibles.
The summary of the 2007 meeting makes clear the intangibles, such as intellectual property and software are not included in the definition of an asset:

First, it was agreed that, because intellectual property was more commonly licensed than leased and because leases of intellectual property involved unique issues, it would not be appropriate for the preliminary draft model law to make any specific mention of intellectual property.

In part, this is due to the problem of how to treat software:

One State also noted that the model law does not specifically mention whether it covers leases of software, which are of growing importance. This is consistent with other international instruments, such as the Vienna Convention on Contracts for the International Sale of Goods (“CISG”). By not mentioning software explicitly, the model law recognizes that sometimes, software is an “asset” like other physical assets. But sometimes, software is much more like a “service,” designed and maintained for a particular user. Just as under the Vienna Convention, courts applying the model law will decide on a case-by-case basis whether particular software qualifies as an “asset” or a “service.”

In other words, international law is still trying to figure out the difference between an off-the-shelf software programs (like Microsoft Word) and a customized software program (such as the design of my website). One is an intangible good; the other is an intangible service.
In all fairness, this can be a tough question: is the design of this blog an asset or a service? I used the standard Movable Type software, but customized the details.
The underlying problem is that the Convention on Contracts for the International Sale of Goods excludes services from its coverage. Declare software an “asset”, then it is covered; declare it a service, then it is not. As the states Wikipedia entry states:

With some limited exceptions, the CISG does not apply to domestic goods, nor does it apply to auctions, ships, aircraft or intangibles and services.] The position of computer software is ‘controversial’ and will depend upon various conditions and situations.

The situation is nothing new. Over a decade ago, Karen Giannuzzi pointed out the problem with this approach in an article
The Convention on Contracts for the International Sale of Goods: Temporarily out of ‘Service’?:

It is surprising that in the present global economy, this monumental international convention applies only to “contracts for the sale of goods” and, by its own terms, fails to account for the ever-increasing role of service industries and service-related contracts. As a result, the CISG is an inadequate medium for the constantly changing international legal environment and therefore only has limited utility with respect to international transactions.
International transactions are no longer limited to those involving the sale of goods. Rapid advances in technology, communication services, and information systems allow multi-national companies to extend their businesses throughout the world, globalizing regional economies and changing the manner in which business is conducted. In the international context, simple contracts for the sale of goods are now mired with service-oriented provisions as issues concerning the licensing of technology and know-how, various distribution, agency and franchise requirements and restrictions, sales performances, and the transfer of trademarks and trade secrets create a more complex and intricate relationship between what has been traditionally known as the “buyer” and the “seller.” Services are becoming an increasingly important part of international transactions, and contracts are no longer clearly categorized into separate groups either as “contracts for the sale of goods” or “contracts for the performance of services. “
The international business community needs a predictable structure to govern legal issues–regardless of whether a contract is for the sale of goods or for the provision of services.

Just one more example of how we let increasingly artificial definitions of service versus good get in the way.

That pesky accounting valuation problem

Its not just intellectual capital and intangible assets that often run afoul of the accounting valuation rules. Here is a case of a financial assets with similar problems (from Bloomberg):

National City Corp., the Ohio bank whose market value fell 70 percent this year on investor concern that capital may run short, has a $1 billion stake in Visa Inc. that doesn’t get counted on its balance sheet.
National City gained $532 million by selling Visa stock when the credit-card company went public in March and still holds 19.7 million Class B shares, according to an August filing by Cleveland-based National City. The stake is probably worth about $1 billion and is carried at zero because sales are restricted, Treasurer Thomas Richlovsky said.

As Richlovsky points out, if the bank needed to raise capital in this stock, they could find a way. Yet the accounting rules don’t account for that — for probably good reasons. None the less, how these “difficult-to-value” assets are treated is a major problem throughout the business world. Maybe we can all get together to find a solution that will encompass all asset classes, including intangibles.

Digital Promise

To catch up on something – before it went out on recess, Congress passed and the President signed the Higher Education Opportunities Act of 2008. Included in that bill is the creation of a National Center for Research in Advanced Information and Digital Technologies:

The purpose of the Center shall be to support a comprehensive research and development program to harness the in creasing capacity of advanced information and digital technologies to improve all levels of learning and education, formal and informal, in order to provide Americans with the knowledge and skills needed to compete in the global economy.

This have been the long standing goal of our friends over at Digital Promise. Originally conceived of as DO-IT (Digital Opportunity Investment Trust), the Center is a major step forward toward creating an educational system for the I-Cubed Economy. As Digital Promise explains:

Advanced information technologies such as virtual reality, visualization, digital modeling, digitization, simulations and intelligent one-on-one tutoring systems are proven to dramatically enhance and accelerate teaching and learning difficult and abstract concepts by translating abstractions into real-world contexts and providing customized tutoring and individualized assessments. “Educational Games” and virtual reality training simulations are examples of technology-based learning tools that could be used to teach higher-order thinking skills such as strategic thinking, interpretative analysis, problem solving, plan formulation and execution, and adaption to rapid change. These are skills more American must have to compete with lower cost knowledge workers in other nations. In addition, at present, we have no systemized way to research and produce content for learning in a way that is replicable on a national level.

Congratulations on that big step forward.
Of course, now comes the funding issue . . .