Innovation policy and the Obama challenge.

During the Presidential race, both campaigns put together lists of technology policy recommendations. Candidate Obama talked about the need to restore adequate funding for R&D, increase STEM education, make the R&D tax credit permanent, streamlining our patent system, promote the deployment of next-generation broadband networks, and develop next generation manufacturing technologies, among other things. He even proposed creation of a Chief Technology Officer (CTO) for the United States. (see Fact Sheet Innovation and Technology and Obama Science Plan)
But now President Obama has the opportunity to broaden the view from a technology policy to an innovation policy. That is not to say the Obama technology policy is wrong – it isn’t. It is just incomplete.
As I argued four years ago in National Innovation Policy: An Urgent U.S. Need:

To use a sports analogy, imagine an NFL coach who concentrates solely on the passing game–working only with the quarterback and the wide receivers. Granted, these are the players that produce many of the TV-highlights plays. But as any football fan can tell you, you don’t get to the Super Bowl if you neglect the running game, defense, the kicking game, and special teams.
We have equated innovation only with S&T and have neglected other parts of the game. Is S&T necessary? Yes. Is it sufficient? No.

In a number of postings over the years, I’ve highlight examples of what a broader innovation policy would look like. Two most recent posting highlight this point: the FT Climate Change Challenge and Husick’s Top 25 Innovations.
The FT Climate Change Challenge stated:

The innovation need not be technological, although such entries are certainly eligible. Creativity could equally come in marketing, financing, analysis or in an entire business model.

According to Husick’s From Stone to Silicon: A Brief Survey of Innovation:

“Innovation” is not just inventions; it is a process of making changes by introducing valuable new methods, ideas, or products. “Innovations” are the things themselves—the ideas, methods, and processes. It’s not simply that better mousetrap; it’s different ways of thinking and doing. Innovations may of course be inventions, but they may also be beliefs, organizational methods, and discoveries. An innovation is a value-creation mechanism. It is the way we humans manage to extract more value, generate more economic surplus and therefore more leisure time, and manage to get away from just hunting and gathering.

To help craft this broad innovation policy, the new Obama Administration will have a mechanism created for it by the previous Congress and Administration. Section 1006 of the America COMPETES Act creates a President’s Council on Innovation and Competitiveness (PCIC). Made up of the heads of the departments and agencies involved in the innovation and competitiveness agenda, it is chaired by the Secretary of Commerce. The purpose of the Council is to develop a comprehensive strategy and oversee the implementation of that strategy.
To seize this opportunity, it is important that this Council be given standing in its own right. While the legislation contains an “out” to allow the President to designate some other organization to handle the Council’s responsibilities, this would be a complete negation of the purpose of the proposal. As importantly, the Council needs to be staffed out of the White House, and specifically the National Economic Council (NEC). The NEC is the economic equivalent of the National Security Council and is the President’s mechanism for coordinating economic policy. PCIC should serve as its innovation policy compliment.
The America COMPETES Act very explicitly outlines a broad the innovation and competitiveness agenda for the Council. This agenda cuts across numerous departments and agencies; 16 are listed as members of the Council. Only staffing out of the White House can effectively manage this crosscutting agenda.
In addition, the broad nature of the Council’s mandate argues for staffing out of the NEC. There have been suggestions that the Council should be part of the Office of Science and Technology Policy (OSTP). I would argue that such a placement would seriously narrow the scope of the Innovation Council – and run the risk of turning it into a Technology Council. We already have a National Science and Technology Council as part of OSTP:

The National Science and Technology Council (NSTC) was established by Executive Order on November 23, 1993. This Cabinet-level Council is the principal means within the executive branch to coordinate science and technology policy across the diverse entities that make up the Federal research and development enterprise.

In fact, the America COMPETES Act specifically calls for the PCIC to coordinate with the NSTC, and obviously not duplicate it.
The Obama Administration may also wish to upgrade the status of the PCIC. Both the NEC and NSTC are Chaired by the President and included the Vice President as a member. The PCIC should have the same status. This could be done through Executive Order.
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The task before the Council is daunting. As it goes about its work, it must not only pull together the existing policies, programs and resources. The Council must also craft and innovation and competitiveness policy for the 21st Century. I have argued before (see “Competitiveness Revisited”) that we are in a very different situation than when competitiveness policy was created in the 1980:

Twenty years ago, the U.S. faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy. Then, the main financial challenge was reducing the cost of capital; today’s equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to an increasingly globalized and interconnected economy.
In the 1980s our focus was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services—as well as the suppliers of financial, scientific, and human capital—have the capabilities and resources necessary to prosper and grow in this new environment.

In crafting a new policy, we must recognize three points:
1. the innovation model has changed,
2. its all about people and organizations, and
3. technology plays multiple roles.
First, we all need to recognize that the innovation model has changed. It is not the linear process of flowing from basic research to final product that sticks in everyone mind. It is a network process. There are many points on the network where innovation can come from. We have used a number of terms to try to describe parts of the new model: “open innovation,” “user-driven innovation,” and even “design thinking.”
It is also not solely about technology. Technology remains an important component. But, as noted earlier, social innovations, marketing, finance, design and business models are also key sources of innovation as well. As Christopher Hill points out in “The Post-Scientific Society”:

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.

Suffice it to say that innovation policy needs embraced this broader concept.
Second, innovation is about people and organizations. Skills, not just education, are critical. Likewise, both tacit and experiential knowledge, not just codified and science-based knowledge, are also important. In order to put those skills and knowledge to proper use, organizational structure comes into play. The old hierarchal systems of the industrial age are no longer adequate or appropriate. New adaptive organizations which encourage innovation are needed. What we used to call “High Performance Work Organizations” are needed to effectively utilize worker skills and knowledge.
Finally, any innovation policy needs to understand that there are multiple roles for technology. Technology can be a driver of innovation, a tool of innovation, and even sometimes not all that that relevant to innovation. As a driver, the creation of new technology is a major source of innovation – the kind we normally think of when we use the word “innovation.”
But technology is also a tool in the innovation process. Technology as innovation tool works in two ways. One is innovation as the absorption and utilization of technology. For example, the iPod contained no new technology. It utilized the technology in a new way. The other is technology as an enabler. This is especially true in the information technology (IT) area, where IT allows for a myriad of new applications and innovations.
The analogy I like to use is the railroad. The marrying of the steam engine to a carriage on iron rails brought about far reaching changes in many difference areas. The railroads spurred on development of a number of other industries, most notably the steel industry. They changed opened up vast new markets and changed the retail and wholesale industries. They even gave rise to new management practices and the shift from ownership capitalism to managerial capitalism.
And sometimes technology plays a very minor role in innovation, if at all. I often ask, which was more important in creating the American suburbs: the automobile, Levittown or the 30 year mortgage. One was technological; one was design; one was financial. All were important. As a nation we need to recognize and promote multiple forms of innovation.
This last point on financial innovation brings up an important issue left out of the talk on promoting innovation. Not all innovation is necessary beneficial. One of the tasks of the Council needs to be the encouragement of the study of innovation’s consequences. Some, such as Jagdish Bhagwati have called for a group of wisemen to vet financial innovations. I have noted that we used to have such a function:

the idea of analyzing the pluses and minus of innovation has a long history — which has fallen out of favor. It is called “technology assessment”.
In fact, for 23 years until 1995, Congress had its own Office of Technology Assessment (where I once worked). It was closed by the new GOP Congressional majority who, I guess, felt such activities were not needed. Over the past decade, a number of people have called for the re-creation of this function, if not the actual organization.

I’m not suggesting that the PCIC taken on the role of OTA. But it can be a catalyst and customer for this type of analysis.
Likewise, the Council will have to create an atmosphere that breaks through the “not invented here” syndrome. In an earlier posting, I described the importance of having an ability to absorb and utilize knowledge from outside. This open innovation model has been adopted by leading companies. But the concept is just as applicable to nations as well. As the UK’s NESTA (National Endowment for Science, Technology and the Arts) notes in a recent report Innovation by Adoption:

The capacity to absorb external knowledge was identified as early as the 1950s as playing a major role in bridging economic development gaps between places. The new ideas and innovations brought by migration, trade and foreign investment networks cannot be fully captured and exploited if a place lacks the internal ability to absorb external knowledge.
So, the capacity of places to innovate depends on internal and external sources of knowledge, which complement each other. Traditional innovation policy has ignored the importance of external knowledge in developing local innovation capacity. But a place needs both to be able to draw in good ideas from elsewhere – an innovation absorptive capacity (AC) – and to use them to create new products and services – an innovation development capacity (DC). This is what the report describes as the AC/DC model. Absorptive capacity allows a place to identify, value and assimilate new knowledge. The development capacity of a place allows it to exploit that knowledge. The extent to which different places draw on ‘AC’ or ‘DC’ to create new value differs across economic sectors.
Five main components are essential to any innovation system. Three of these elements form the ‘absorptive capacity’ components of the AC/DC model: (1) the capacity to access international networks of knowledge and innovation; (2) the capacity to anchor external knowledge from people, institutions and firms; and (3) the capacity to diffuse new innovation and knowledge in the wider economy. The two components of the ‘development capacities’ element of the AC/DC model are (1) knowledge creation and (2) knowledge exploitation.

The United States needs to embrace this concept of absorption and development as well as a key feature of our National Innovation System.
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These are some of the challenges in moving from a technology policy to an innovation policy. They are challenges that must, however, be overcome if we are to create a globally competitive economy. Other nations are not standing still. They understand that innovation is the driving force in economic prosperity. They also understand that innovation is more than technology.
Give these challenges, the President’s Council on Innovation and Competitiveness can be a potent tool in making America more prosperous. It is a tool that must be used to its fullest capability. The Obama Administration has a unique opportunity to set a new path for this country. Part of that path should be an innovation policy. But creating such a policy will only come about if the Administration embraces the true concept of innovation and commits the resources to making it happen. Making the President’s Council on Innovation and Competitiveness a working White House operation is essential to that undertaking.

Competitiveness of a city’s financial sector

No, it is not another report about New York. According to the Wall Street Journal:

Echoing warnings from some bankers, London’s mayor’s office said the City faces serious threats to its status as a financial center.
In a rare official admission, a report commissioned by Mayor Boris Johnson concluded that London position is under threat as it loses business to “competitor cities that have developed aggressive strategies to steal business away.”
Citing taxes and regulations, Mayor Boris Johnson is worried about London’s role in finance.
. . .
Among other problems, the report, which canvassed industry executives, found the British capital suffered from too much U.K. and European Union regulation, a lack of proficient science graduates, and a creaking infrastructure.
Mr. Johnson’s soul-searching mirrors a similar approach by New York City Mayor Michael Bloomberg, who commissioned a report to look at threats, in particular from London, to his city’s financial services sector which concluded in 2007.

I’m glad to see that London is looking at its competitive position. Every city/region/state/nation needs to be doing that constantly. I do, however, grow concerned when I hear the financial sectors complaining of “too much regulations.” The problem may be wrong or ineffective regulations – not “too much.”

Will the recession boost virtual work?

In a column in last week’s FT, Lynda Gratton (of the London Business School) made an interesting observation about how recessions change things — Recessions give space for new ideas to flourish:

Next, past recessions have often served to accelerate the development of practices and processes that had limited popularity pre-recession. Before the 1990s recession, for example, off-shoring was seen to be too complex and difficult an option. It was only with the cost imperatives of the recession that off-shoring was initially pushed and then eventually became a norm, later to be broadened and deepened into its current application. The same is true of group-ware technologies, which have had limited uptake as people said they would prefer to meet face to face. Now, however, those who last year would have jumped on a plane to attend meetings have had their travel budgets slashed. They are being forced to use video conferencing and webcasts. Once the cost-cutting is relaxed, some will return to the airports. Others, however, will have fundamentally changed their habits and begun to build working communities that are virtual.

I think she is exactly right. Last week, Athena Alliance issued a new working paper on Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness. That report describes how these new collaborative work tools can changed the product development process, improve training and strengthen after sales support (see earlier posting). The result will be a change in organizational structure–including the rise of “fourth wave” industries and the emergence of guild-like organizations.
The current economic downturn may, as Gratton suggests, foster the adoption of these new tools. While the cost cutting climate may seem a barrier to new expenditures to support such activities, those same pressures will force some to try new things. As collaborative work technologies result in cost savings as well as increased organizational efficiency and effectiveness, their use will spread. It will take a few leaders, willing to invest the time, effort and resources to make these new technologies work. But as the paper points out, a number of uses by major companies are already underway. Those examples should spread as others learn from these pioneers.
Part of the role of government, therefore, should be to help spread the word. For example, the federal agencies, such as NASA, the Department of Defense, and the Department of Health and
Human Services (HHS), could sponsor demonstration projects using the technology to improve collaboration between suppliers, manufactures and end-use customers. There are other importance government activities we need to be pursuing, such as standard setting and increased education and training so that the workforce is prepared to utilize these tools.
The current economic downturn is seen by most as a time of troubles. That is true. But it is also a time of opportunity. One of those opportunities is to reshape how we work together. By using this as an time to adopt a new generation of collaborative work tools, including virtual worlds, US companies and workers could come out of this recession stronger and more competitive. Achieving this will take leadership in both the public and private sectors. Let us make sure we take advantage of that opportunity.

“Patent ambush” punished by courts

Here is an update on the latest on the patent wars – from our friends at Patent Ambush Costs Qualcomm:

The U.S. Court of Appeals for the Federal Circuit agreed Monday that Qualcomm should be punished for what has in other cases been called a “patent ambush” — not disclosing patents to a standards-setting body and then suing adopters of the standard. In this case, Qualcomm’s target was Broadcom.
. . .
The opinion helps clarify what is legal behavior in the murky area of standards-setting organizations, which are widely used in the technology industry to ensure, for instance, that all lamp plugs can fit into the same electrical outlet, said Joseph Miller, a Lewis & Clark Law School professor.

Looks like the courts are continuing to sort out patent policy on their own. Last week, Chief Judge Paul R Michel, of the Federal Circuit Court of Appeals, basically told Congress and the Administration to stay away from patent reform (see earlier posting).
A copy of the ruling is available at the Federal Circuit’s website.

New business innovation and R&D survey

The National Science Foundation is about to launch a new Business R&D and Innovation Survey (BRDIS)) which replaces the old Survey of Industrial Research and Development. According to the announcement:

The survey will collect a broad range of research and development (R&D) data from both manufacturing and service companies and will begin to collect innovation data with an eye toward increasing the number and breadth of innovation-related items in the future.

The new survey an effort to update the statistical system so that it “better reflects the changing nature of business in the United States.” As the FAQs summarizes it:

Essentially times have changed. The landscape in business has changed dramatically since the 1950s when the Survey of Industrial Research and Development was created. The way R&D is conducted has changed and so have R&D operations. Incremental updates to the survey have not kept pace with these changes. The new Business R&D and Innovation Survey is designed to better capture information on R&D as it is conducted now.

Much of the new survey is a more detailed look at R&D funding, including detail on R&D done for others and areas such as clinical and prototyping.
But what is really exciting is the new data collection on measures related to IP, technology transfer, and innovation. These include:

• Participation in activities that introduce new or improve existing goods, services, methods of manufacturing, distribution, or support systems
• Patent-related data
• Licensing to outside parties
• Participation in specific technology-transfer activities

So, finally we will get a direct measure of corporate innovation – new or improved goods, services and processes. We will also get data on patent, licensing and tech transfer.
Collection will begin in January 2009 for 2008 data. So we should have some interesting results sometime next year.

October trade in intangibles

This morning’s BEA trade data showed the trade deficit increased in October by $600 million to $57.2 billion. Both exports and imports fell, but the decline in exports was larger than that in imports. The increase was also due to continued oil imports. The increase was somewhat unexpected. The New York Times notes, “Analysts had been looking for the deficit to decline to $53.5 billion on lower oil prices.”
The intangibles surplus decreased slightly in October by $128 million to just under $13 billion. The September surplus was $13.1 billion (revised). Receipts (exports) of royalties increased while payments (imports) dropped. Exports of business services declined and imports increased. Thus, the trade surplus in royalties increased slightly while the trade surplus in business services declined.
Once again there were revisions to the data, reflecting more complete information. As a result, our intangibles trade surplus was actually slightly lower than previously reported, by about $200 million. Receipts (exports) of royalties were revised upwards while payments (imports) were revised downward. Both imports and exports of business services were revised upward. Thus trade in intangibles was greater that previously reports, even though the surplus was slightly smaller.
There was also bad news on the high-tech front. Advanced Technology Products trade was virtually unchanged, with the deficit increasing by only $119 million to $7.87 billion in October. This level, however, is significantly higher than the average monthly deficit. This reflects continued weakness in aerospace exports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Next month’s data will likely be even more interesting. Yesterday, China announced that its exports declined in November — for the first time since June 2001. Yet, the drop in export is only part of the picture. China’s trade surplus actually rose. As the Wall Street Journal notes:

Imports suffered an even steeper drop, down 17.9% in November from a year earlier. They had risen 15.6% in October and more than 20% last year. The import figure signals weakness in domestic consumption, bad news for companies that export to China, and also falling demand for manufacturing components — which spells trouble for China’s future exports as well.

In other words, forget about China being the engine of economic recovery and forget about the US being able to count on exports to rekindle growth. Right now, the biggest concern might be how to stop a downward trade spiral if everyone tries to export their way out of recession.

Intangibles trade for October 08

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

FTC hearings on IP – update

As an update to an earlier posting on the FTC hearings on the IP marketplace, the newsletter Intellectual Property Watch has published a summary of Friday’s hearing. The big news seems to have been a statement by Chief Judge Paul R Michel, of the Federal Circuit Court of Appeals telling Congress and the Administration to stay away from patent reform:

“We will probably make more progress in the courts through case law” than by asking the US Patent and Trademark Office (USPTO) or Congress to wade deep into intellectual property conflicts.
“Everyone should make their own choice about who is the right actor to make fine balancing decisions,” continued Michel, adding that “this is what courts do all the time, probably way better than Congress.”

That is pretty heady stuff. Something tells me that Congress and the Administration may have other ideas. The seems especially true give how many times recently the Supreme Court has ruled against the Federal Circuit.
One attendee told me that the most insightful comment of the entire workshop was when someone noted that the recent Supreme Court and Federal Circuit rules changing the rules have not yet really had an impact. In other words, the real change has yet to felt. Given this, I wonder if we will see a pause in reform efforts to digest what has already happened.
For those interested in the entire workshop, copies of some of the presentations — and a link to the webcast — are available at the workshop website: 2008 FTC Workshop: The Evolving Intellectual Property Marketplace.