US innovation data — finally

Apropos of innovation metrics (see previous posting), the US is now beginning to collect innovation data as part of the NSF’s Business R&D and Innovation Survey — formerly known as the Survey of Industrial Research and Development. The survey (which started this year) asks questions similar to the European Community Innovation Survey and the OECD Oslo Manual — something that I have been advocating for years.

The new questions include whether the company introduced any of the following during the three-year period of 2006 to 2008:

New or significantly improved goods (excluding the simple resale of new goods purchased from others and changes of a solely aesthetic nature)
New or significantly improved services
New or significantly improved methods of manufacturing or producing goods or services
New or significantly improved logistics, delivery, or distribution methods for your inputs, goods, or services
New or significantly improved support activities for your processes, such as maintenance systems or operations for purchasing, accounting, or computing

It also asks new questions on patent licensing revenue.

Unfortunately, the 2009 data will not be available until spring since it is a new series of questions. In the following years, the data will be available in January with the publication of NSF’s Science and Engineering Indicators.

Next step, in my mind, is to tackle the question of “hidden innovation” – as mentioned in the previous posting. It will be interesting to see if we can use the new data to conduct a similar type of analysis.

Example of Hidden Innovation – not even on the survey

The previous posting mentioned NESTA’s reports on Hidden Innovation. I was at an event this morning with Digby, Lord Jones, the former UK Minister for Trade & Investment. When I mentioned the study, he remarked that even with the report it is difficult to ferret out these non-traditional innovations. He gave the example of the supplier of aggregate (sand, gravel) to the construction of London Olympic facilities. There is a motorway that runs from the quarry to the construction site. So, the standard way to haul the stone would be by truck (in part right through London). But since the construction site is on the Thames, the contractor decided to ship the stone by rail from the quarry to the river and then take in by barge to the site. This was better from both an environmental point of view and for traffic safety and congestion. Apparently the contractor won the bid based on this innovative idea. Yet, Lord Jones noted that when the company filled out the innovation survey, they checked the box on “no innovations.”

Of course the company didn’t think it was being innovative – since our mindset still equates “innovation” with “technology.” They are still blasting and crushing rock the same way. The innovation was much more subtle. But for all the people who won’t be trapped behind a large number of stone carriers on the motorway, it has a profound impact on their lives.

Therein lies the other problem with these hidden innovations: they can be invisible because of what they don’t do. How do we measure innovations that prevent a negative, and how does the policy (and political) system reward these innovations? The market can reward them through acknowledging the cost savings/expense reduction. For policy makers it is much more difficult. But that is the challenge of getting the innovation system right.

UK Innovation Index

The UK’s National Endowment for Science Technology and the Arts (NESTA) has released its new pilot Innovation Index
. As the press release states:

The aim is to make a significant improvement on existing metrics, both by making clear the contribution of innovation to productivity and growth, and by capturing ‘hidden innovation’.

The index is now in its pilot form with launch of its final form due in the fall of next year. The Index is actually three reports.

The first report provides a growth accounting framework, built in part on the measurement of intangible assets as formulated by Corrado, Hulten and Sichel in the US and Marrano, Haskel and Wallis in the UK (see previous postings).

The second report is a follow on to their earlier report of “hidden innovation” – that is innovation in industries where levels of traditional R&D investment are low. These include: architectural services: accounting; business and management consultants; legal services; software and IT services; automotive industry; construction; energy; and design services. The report shows that low R&D intensive industries are not necessarily low in innovation. And even in areas were industry wide innovation may be low, successful companies are more innovative than their peers.

The third report looks at seven clusters of what it calls the “wider conditions” for innovation:

• Public research. Both the amount spent on public research, and the strengths of business-industry links.
• Openness. How quickly and effectively good ideas can diffuse and be absorbed. This includes both the physical infrastructure for openness (such as broadband internet) and its social underpinnings (such as how hierarchical workplaces are).
• Entrepreneurship. How effectively new businesses spring up to take advantage of innovative opportunities, and how willing people are to take the risks necessary to innovate.
• Demand. Whether customers are willing to buy innovative products. An important part of this is government’s willingness to procure innovative products.
• Competition. The overall level of competition in the economy.
• Access to finance. Whether risky, innovative businesses can attract funding, in particular venture capital, but also other forms of finance such as business credit.
• Skills. Whether skilled workers are available to work in an innovative venture, and whether workforces have the necessary skills to innovate themselves.

The study concludes that the UK does well in competition and entrepreneurship, needs work in the areas of public research and openness and lags in access to finance, demand and skills.

These three reports are essentially refinements and follow-on to previous NESTA work. Taken together they point to a new direction of measuring and understanding innovation. As they show, innovation based on investments in intangibles assets occurs across economic sectors. It is not simply a function of what we traditionally see as R&D These report highlight that our industrial age notions of innovation are woefully out of date. As the hidden innovation report states: “One reason for this innovation gap is that traditional metrics do not reflect the nature of innovation in today’s economy.” New metrics will come from the new formulations of innovation presented in these report — and in turn the metrics will help us better the workings of the I-Cubed Economy.

Barbie versus Bratz — who owns your ideas?

For those of you with young girls, you may be aware of the Barbie vs. Bratz issue. For the rest of us, it may seem like just a war of the dolls. However, it centers on an important concept in innovation and intellectual property: who owns an employee’s idea. In this case, Mattel (maker of Barbie) claims that Carter Bryant designed the Bratz dolls while he was an employee of Mattel. Therefore, Mattel says owns the rights to the Bratz doll (which they view as a direct competitor).

Here is the twist: Bryant says he designed the dolls on his own time. Mattel says it doesn’t matter since he signed an agreement that gave Mattel the right to anything he designed while employed. A judge and jury agreed with Mattel and ordered the Bratz makers, MGA Entertainment, to pay damages, turn over the Bratz product line Mattel and buy back and destroy all Bratz dolls still on toy stores’ shelves.

Now the case is moving up the judicial system. According to the Wall Street Journal, on Wednesday — just in time for Christmas — an appeals court has stepped in:

In addition to staying a lower court’s order, a panel of the Ninth Circuit Court of Appeals in Pasadena also ordered that the two companies enter mediation.
. . .
The appellate judges on Wednesday questioned whether the trial judge went too far by awarding MGA’s Bratz doll franchise to Mattel and wondered why he didn’t instead award Mattel a royalty or ownership stake in the company. The judges also questioned whether Mattel’s “inventions agreement” at the center of the dispute gave the toy company ownership of all ideas the designer came up with, even when he was not at work.

Sounds like this one may go all the way to the Supreme Court — and set a major precedent on who owns what ideas.

A look back at the ideas of the year

The end of the year is always filled with retrospective lists and reviews of the past 12 months. One of the most fun look’s back is the New York Times magazine’s Year in Ideas (on line now – will be published in this Sunday’s magazine). The review covers a number of categories, from arts to social sciences to technology – with business, politics, sport and culture thrown in as well.

One of my favorites is the rise of the “good enough” revolution, where functionality trumps technological sophistication:

High-definition televisions have turned every living room into a home cinema, yet millions of us choose to watch small, blurry videos on our computers and our mobile devices. Cameras capture images in a dozen megapixels, yet Flickr is filled with snapshots taken with phone cameras that we can neither focus nor zoom. And at war, a country that has a fleet of F-16 fighter jets that can cover 1,500 miles an hour is now using more and more remote-controlled Predator drones that are powered by snowmobile engines.
Lo-fi solutions are now available for a range of problems that couldn’t be solved with high-tech tools. Music played from a compact disc is of higher quality than what comes out of an iPod — but you can’t easily carry 4,000 CDs with you on the subway or to the gym. Similarly, a professional television camera will produce a higher-quality image than a phone, but when something important happens, from the landing of a jet on the Hudson River to the murder of an Iranian protester, and there are no TV cameras around, images recorded on phones are good enough.

Another is an art by subscription model:

At Kickstarter, creative types post a description of a project they want to do, how much money they need for it and a deadline. If enough people pledge money that the artists reach (or surpass) their financial goals, then everyone is billed, paying in advance as you would for a magazine subscription. For goals that aren’t reached, nobody is charged. [I wonder if you could have something like that for research projects?]

All in all, an interesting summary of the intellectual progress of 2009.

October trade in intangibles — and revisions

The US trade deficit improved slightly in October, according to this morning’s trade data from BEA. The deficit shrank slightly to $32.9 billion, down from the revised September deficit of $35.7 billion. Almost all of the improvement was due to a $2.6 billion drop in petroleum imports. The non-petroleum balance improved only slightly as both exports and imports grew. The good news is that non-petroleum exports grew faster than imports and have risen over the past few months. The bad news (for the trade balance) is that non-petroleum imports have surged a bit over the past three months. That is a sign of an economic recovery – but not a path to a sustainable trade balance.

Our intangibles trade surplus also improved slightly as exports of both business services and royalties rose faster than imports. The October trade surplus in intangible was almost $11.5 billion. Contrary to previous reports, the intangible trade balance has improved steadily in the past 6 months — based on revised data.

That revision is the big news in this release regarding intangibles. Both imports and exports of business services and royalties were significantly revised upwards. In some months the revision was over half a billion dollars and changed the data by over 8%. These revisions change the story from stagnation to upward growth. As I’ve state before, while I appreciate BEA’s efforts to improve the data, I remain concerned about these revisions. We really need a better way of incorporating the data into the monthly figures, rather than revising the numbers a half a year later.

Our deficit in Advanced Technology Products also improved slightly in October, dropping to around $5.6 billion. Increased exports in aerospace and biotechnology were enough to offset increased imports of life sciences, information and communications technologies, and optoelectronics. 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.

Intangibles trade-Oct09.gif

Intangibles and goods-Oct09.gif

Oil good intangibles-Oct09.gif

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.

Innovation in India

Today’s New York Times has a good article entitled In India, Anxiety Over the Slow Pace of Innovation. While the piece talks about the barriers India faces in becoming an “innovation powerhouse,” it also ends with a positive note:

Until early this decade, the Indian market was too small and isolated to make it very lucrative for businesses to develop products here, so most technology companies focused on selling services to the West, said Girish S. Paranjpe, joint chief executive of Wipro’s information technology business. “That will change dramatically because the Indian market has become bigger,” he said.

So American companies need to run even that much faster — because everyone else is following the same strategy of innovation.

An Innovation Agenda in the New York Times

It looks like the innovation issue may really be gaining some attention in Washington. David Brooks, the in-house conservative political columnist for the New York Times devoted today’s column to the subject. He even mentioned in passing the Obama white paper (see earlier posting). While supposedly looking at the recommendations from the paper, interestingly enough he ignored that paper’s central conclusion: that we need an activist innovation policy – complete with ways of addressing grand challenges. Brooks instead took the tack of advocating a set of high level government interventions. The included reforming education, increasing R&D spending, a National Infrastructure Bank, support for regional innovation clusters and rebalancing exchange rates. He also through in a few of the standard conservative positions: cut the deficit, lower the corporate tax rate and “Don’t make labor markets rigid. Don’t pick trade fights with China.” (Although I’m not sure that “rebalancing the exchange rate isn’t picking a huge trade fight with China.)

So, this ends up being less of an innovation policy and more of restatement of some generally held views. But the mere fact that he has address these issue raises some hope that we can keep innovation on the national agenda – and at least get some of these items accomplished. As he concludes:

This sort of agenda doesn’t rely on politicians who think they can predict the next new thing. Nor does it mean merely letting the market go its own way. (The market seems to have a preference for useless financial instruments and insane compensation packages.)
Instead, it’s an agenda that would steer and spark innovation without controlling it, which is what government has done since the days of Alexander Hamilton. It’s the sort of thing the country does periodically, each time we need to recover from one of our binges of national stupidity.

While I disagree with his implied return to the unhelpful rhetoric of “picking winners and losers”, I agree that we need a return to an activist government policy in this area. And by the way, Hamilton’s idea was a very explicit industrial policy.

10 red balloons – and social science research

By now you have probably read all about DARPA’s 10 red balloon challenge (see also the Washington Post, the New York Times, and many others). For the 40th anniversary of the Internet, DARPA posted 10 red balloons in public places in the continental US and put up a $40,000 reward for the team that could locate the balloons the quickest. The winning team took a little under 9 hours. The whole exercise was a big experiment in social networking — what are the best ways to mobilize social networks. As the Post story explains:

“It’s a huge game-theory simulation,” says Norman Whitaker of DARPA’s Transformational Convergence Technology Office. The only way to win the hunt was to find the location of every balloon, but a savvy participant would withhold his sighting until he’d amassed the other nine locations, or disseminated false information to throw others off the trail.
Over the weekend, Twitter and Facebook were all abuzz with offers to sell coordinates for alleged sightings. There was much excitement over the red balloon in Providence, R.I. There was no red balloon in Providence — just a Photoshopped decoy circulated by a conniving player.
The winning team was spearheaded by Riley Crane, a postdoctoral research fellow at MIT’s Media Lab. MIT’s team set up an elaborate information-gathering pyramid. Each balloon was allotted $4,000. The first person to spot one would be awarded $2,000, while the people who referred them to the team would get smaller amounts based on where they fell on the info chain. Any leftover money, after payment to spotters and their friends, will be donated to charity

Now, I expect most commentators will focus on the enormous information power of social networks that the experiment illustrates. That is true — IT-enhanced social networks are an integral part of the I-Cubed Economy. But I would to focus on the “experiment” part of the experiment. When I studied game theory many years ago, experiments were confined to small groups. This activity shows the power of using social networks for massive social sciences research. That too is an integral part of the I-Cubed Economy.

November employment

Earlier I commented on the expectations game in economic data. Well, this morning’s news from BLS on the November employment data should be a big shock to the system — especially the political system. BLS reports that the unemployment rate went down to 10%, and the number of jobs lost was “essentially unchanged” at only 11,000. Part of the story is that the size of the civilian labor force fell slightly and the number of people not in the labor force grew slightly. But the total number of employed persons rose and the number of unemployed actually dropped.
The number of involuntary underemployed (part time for economic reasons) and those part time because of slack work also both declined. I would not put too much emphasis on a single month’s numbers — positive or negative. But the trend (as the chart below shows) is in the right direction. Involuntary underemployment essentially peaked in March.
The BLS release had one other shocker, however. As the New York Times also notes, “the government also significantly revised September and October numbers. September was adjusted to show a loss of 139,000 jobs instead of 219,000, and October 111,000 instead of 190,000.” The release gave no reason for the revision. That is a very large change in the data and one that needs at least some explanation.