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 . . .

Medical tourism

The Economist is running a story on Globalisation and health care — as it is also referred to “medical tourism.” For the most part, the story concentrates on how increased global competition will spur reform in bureaucracy heavy health care systems. From an economic development perspective, however, this might have been the most important paragraph:

Paul Mango, the chief author of a report by McKinsey, a management consultancy, disputes wild-eyed claims that millions of patients are already travelling abroad. Yet even he predicts that the future for medical travel is bright, and that in the long run it may even “largely dispel the idea that health care is a purely local service.”

Exactly — health care is no longer a purely local service. Yes, some health care will stay local (it does not make economic sense to fly to Singapore for your annual physical). But for major and expensive procedures, offshoring is making more and more economic sense.
So localities that are banking on localized health care as an automatic economic driver need to understand that this is not the case. As I’ve said before, if you have a jurisdictional advantage (like the brand of the Mayo Clinic or the Cleveland Clinic), then a health care cluster might make economic sense as your key export item. But even then, these locations need to understand that their competition, as the Economist points out, is increasingly global. And then need to strategize accordingly.

Pushing for stimulus – and a knowledge tax credit

The drumbeat for another economic stimulus package continues to get louder. An editorial in today’s New York Times (No End in Sight) describes the conventional wisdom on what the package should do:

The next package has to focus on actions that are known to yield big economic benefits: bolstered food stamps, which rapidly boost consumption; and aid to states and cities so they can continue to provide essential services. Lawmakers should also invest in infrastructure projects, like repairing bridges and roads. If not, projects that are already under way may have to be canceled, creating more unemployment.

But they also acknowledge that this may not be enough:

Congress also cannot wait to see if its anti-foreclosure measures work. It must begin to vet other ideas and be ready to move quickly if the crisis worsens.

Let me repeat a suggestion I have made before. Any stimulus package should include a knowledge creation tax credit – specifically a tax credit for worker training. That credit should cover not only the cost of direct cost of the training but also the wages paid to the worker while they are undergoing the training. Such a knowledge tax credit helps in a number of ways:
1) it addresses the macro economic stimulus of boosting individual spending;
2) it targets directly the problem of the involuntary underemployed (those who are part time for economic reasons), which is the hidden factor in the current slowdown;
3) it makes companies (and the economy) more competitive; and,
4) it facilitates the transition tot he I-Cubed Economy.
As I said before, in a time of slower production, rather than send workers to the unemployment office, let’s send them to the classroom. If we can give companies a tax break for a new piece of equipment (as we did in the first stimulus package), surely we can give companies a tax break to upgrade their most valuable asset: their workers.

When conventional wisdom gets in the way

Some times the conventional wisdom is part of the problem. Take this example (from today’s Wall Street Journal – Skilled Trades Seek Workers):

With the shortage of welders, pipe fitters and other high-demand workers likely to get worse as more of them reach retirement age, unions, construction contractors and other businesses are trying to figure out how to attract more young people to those fields.
Their challenge: overcoming the perception that blue-collar trades offer less status, money and chance for advancement than white-collar jobs, and that college is the best investment for everyone.

With the constant drumbeat of “higher education,” we forget that “education” and “skills” are not the same thing. We also forget that skilled trades are just as much a part of the I-Cubed Economy as the so-called creative workers.
But there is some good news – at least locally. The District of Columbia just opened its new Phelps Architecture, Construction and Engineering High School, which offers both college-bound and skilled trade related courses in those fields. [And no, it is not named after the Olympic swimmer Michael Phelps]. As such, it may provide a good model for how to blend the two.

Luggage as innovation

Financial Times columnist Michael Skapinker has an interesting piece about “The luggage revolution that passed me by”. A long time traveler (and former FT aviation correspondent) he has only now come to appreciate what other traveler have known for a long time – the benefits of luggage with wheels. But not just any luggage with wheels, the ubiquitous upright wheeled bag:

Then this summer, for the first time in many years, we went on a holiday involving movement from city to city and ticket office to train platform and I realised how horribly unsuitable my luggage was. My suitcase does have wheels, but not the sort that allow you to tip it upright. You do not pull the case along with a lead, as if it were a dog (even I am not that backward). Instead it has a short loop on the top corner, so that you wheel it along in the same position as if you were carrying it by its handle.
This allowed me to see the true genius of Mr Plath’s creation. It is not just the wheels that make his bags easy to move. It is turning the suitcase into the vertical position and equipping it with a long, broad handle that allows an even distribution of the weight. A small handle in the front, as I had, means the entire load is concentrated in your hand.

By the way, the Mr. Plath he refers to is Robert Plath. As Skapinker reminds us, the upright wheeled bag was a user-driven innovation:

It was only in the late 1980s that Robert Plath, a Northwest Airlines pilot who was tired of lugging his bag around, fixed wheels and a pull-up handle to a suitcase and turned it upright. Manufacturers were sceptical, but Mr Plath sold some wheeled bags to other airline crew members and then set up a luggage company called Travelpro.

Not a product of an extensive focus group and development process; not the brain child of some design shop. Just someone who had a better idea.
But you can probably bet that the suitcase Skapinker complains about (with the handle in front) was the result of a product development and design process – attempting to come up with an alternative. Not that it is necessarily bad. It is just not as good as what it is trying to replace.
Score one for user-driven innovation.