Forbes on America's Most Inventive Companies

Here is an interesting story from Forbes on America’s Most Inventive Companies. What was most interesting was not the fact that companies with patent make money — but the differential among companies:

foreign electronics manufacturers dominated the Top 10 in patent awards, but didn’t come close to the earnings power of the top U.S. companies. Look behind the raw number of patents, and U.S. companies far outperformed their foreign competitors on return on invested capital, a measure of how after-tax operating profits compare to assets invested in the business.
. . .
Measured according to earnings per patent, General Electric led with $11.3 million per patent, followed by Cisco Systems at $6.6 million and Hewlett-Packard at $6.3 million.

The story also notes the companies not on the list (of “most inventive”):

Big chemical companies like Exxon and Dow, and drug makers like Pfizer and Merck, who arguably derive more value from a given patent than any other type of company.

So, in other words, it is not how many patents you have but what you do with them that really counts.

National Broadband Plan

Yesterday, the FCC sent its National Broadband Plan to Congress. The goals of the Plan are:

Goal 1: At least 100 million U.S. homes should have affordable access to actual download speeds of at least 100 megabits per second and actual upload speeds of at least 50 megabits per second.
Goal 2: The United States should lead the world in mobile innovation, with the fastest and most extensive wireless networks of any nation.
Goal 3: Every American should have affordable access to robust broadband service, and the means and skills to subscribe if they so choose.
Goal 4: Every community should have affordable access to at least 1 Gbps broadband service to anchor institutions such as schools, hospitals and government buildings.
Goal 5: To ensure the safety of Americans, every first responder should have access to a nationwide public safety wireless network.
Goal 6: To ensure that America leads in the clean energy economy, every American should be able to use broadband to track and manage their real-time energy consumption.

It is an ambitious undertaking – but one that I think is needed it the US is to remain competitive in the I-Cubed Economy.

For much, much more comment on the Plan, see the Benton Foundation’s reading list.

How better communications helps heavy industry

One of the bias’ out there is that heavy industries – such as shipbuilding – are the dinosaurs of the information age. They could not possibly be cutting edge on work processes or technology or any other intangible asset. But here is an interesting story in the Wall Street Journal on how one company is using its communications infrastructure (an intangible asset) to be more productive (High-Speed Wireless Transforms a Shipyard):

The challenge [of efficiency] is magnified at Hyundai Heavy, where more than 8,000 workers build as many as 30 ships at a time, using millions of parts as small as rivets and as large as five-story buildings. The shipyard sprawls over 4.2 square miles and includes nine drydocks, the biggest of which is longer than seven football fields.

But over the past few months, Hyundai Heavy deployed a high-speed wireless network across the yard, one of the first such installations in an industrial setting anywhere in the world. Data zips around the complex at four megabits per second, about four times as fast as on a cable modem that is common in U.S. homes.

Now, the company can use radio sensors to track the movements of parts as they go from fabrication shop to the side of a drydock and onto a ship under construction. Workers on a vessel can also access plans via notebook computers or handheld phones and hold two-way video conversations with ship designers in the office more than a mile away.

. . .

In large part, the new technology is designed to help Hyundai Heavy reduce expenses and streamline production. Mr. Hwang [Hyundai Heavy CIO] says the company estimates it will save around $40 million annually in reduced labor costs and improved efficiency.

. . .

As part of the network, Hyundai Heavy this month began testing a communications link with workers who are inside a vessel that is below ground or sea level. Previously, workers with a problem inside a ship had to climb up topside to talk to someone by phone or walkie-talkie.

To change this, the company connected its new wireless network to the electric lines in the ship, which then convey the digital data to Wi-Fi transmitters placed around the hull during construction. The Wi-Fi system can then reach PCs, independent Web cams and Internet-based phones used by workers.

Now, workers inside a ship under construction simply use Skype numbers to call their colleagues on the surface. Designers in an office building a mile or so away, meanwhile, can take control of Web cams to look in on problems.

Intangible are just as important in heavy industries as anywhere else in the economy — and are the key to making these sectors more productive. That is a lesson we need to continually keep in mind.

IP as trade retaliation heats up again — US v Brazil

As I mentioned last September, the WTO ruling on US cotton subsidies allows Brazil to impose counter penalties on US trade. Those countermeasures could include penalties on services and intellectual property. Now Brazil has announced that is exactly what it will do. According to the Economist (Brazil, America and trade: Picking a fight):

Brazil’s government says that it intends to do this with measures later this month, to the value of $238m–the “remaining annual amount of retaliation to which Brazil is entitled”–which will be applied to intellectual property and services.

Business Week (Brazil Raises Tariffs on U.S. Goods, to Break Patents) adds:

The government of President Luiz Inancio Lula da Silva plans to take additional steps and break U.S. patents as part of the $829 million retaliatory measures, [Brazilian Foreign Ministry official Carlos Marcio] Cosendey said. The ministry will publish a draft for public consultation of sanctions over intellectual property March 23, he said.

However, this may backfire. As Joff Wild at the IAM Blog asks:

if I were a US IP owner I would also be asking myself whether I wanted to have anything to do with Brazil in the future. Why on earth would I want to invest in a country that is prepared to use IP as a political football in this way when there are other countries I can go to where I will not have this problem?

Brazil seems to understand the dangers here. According to a story in Bloomberg:

“These measures don’t change policies or our commitment to protection of intellectual property,” Carlos Marcio Cosendey, head of Foreign Ministry’s economic department told reporters in Brasilia. “These are temporary measures aimed to force a change in the U.S.”

Given that the US seems to be in no hurry to change its cotton subsidies, that “temporary” measure may be around for a long time. And other nations may be tempted to use the same tactic in the future. It could get very interesting.

Manufacturing Innovations

Who says manufacturing isn’t innovative. Here is a list of Innovations That Could Change the Way You Manufacture from the Society of Manufacturing Engineers (SME):

• Printed RFID Tags
• Nanoporous Silicon Electrodes
• High-Temperature, High-Power Microelectronics
• Nanotube Inks
• Nano Fibers
• Self-Healing Agents
• Phase-Changing Polymers
• Bio-Based Products and Materials

Innovations Watch
• Small Gallium Nitride-Based Transistor
• Quantum Dots
• World’s Smallest Radio — Nano Radio
• Dip-Pen Nanolithography
• Method to Print Polymer X-Ray Sensing Panels

• High-Speed Sintering
• Buckypaper
• Synthetic Gecko Tape
• Micro-Laser-Assisted Machining
• Wireless Power Transfer
• Personal Fabrication

Innovations Watch
• Self-Healing Polymers
• Liquid Lens Imaging
• Foldable and Stretchable, Silicon Circuits

• Direct Digital Manufacturing (DDM) Part 1 & Part 2
• Ultracapacitors
• Self-Assembling Nanotechnology
• Intelligent Device Integration
• Integrated 3-D Simulation and Modeling/Desktop Super Computers

You can go on line to find out more about each — and to nominate manufacturing innovations for the 2011 list.

Latest financial reform bill

This morning Senate Banking Committee Chairman Chris Dodd introduced his long awaited financial reform legislation (see Dodd’s statement, the summary, the full legislation, and stories in the Washington Post, the Wall Street Journal, and (two stories) the New York Times). There is a lot in the bill — it creates a Consumer Financial Protection Agency Bureau, an Agency for Financial Stability Oversight Council and a Financial Institutions Regulatory Administration (which replaces the Comptroller of the Currency and the Office of Thrift Supervisions and takes on certain functions of the Federal Reserve and the FDIC) and streamlines the authority of the Federal Reserve and the Comptroller of the Currency. It also creates new regulations on credit rating agencies, corporate pay and governance, hedge funds, derivatives, insurance, investor protections, municipal securities, and securitizations.

This last set of new regulations for securitization may have a direct impact on the monetization of intangible assets. Ever since the melt down of the asset-backed securities (ABS) market, use of the securitization to monetize intangibles has essentially become a dead practice. The proposed legislation requires issuers to hold 10% 5% of the risk. The legislation would also require the SEC to issue rules and regulations requiring a due diligence analysis of the assets underlying the asset-backed security and public disclosure of the results.

The point of these changes is to increase investor trust in the ABS financial instruments. Restoring trust in securitization should help restart the ABS market — and that should also revive intangible-backed securitization.

At least, that is how it should work in theory. We will have to wait and see if a) any financial reform bill dealing with securitization actually makes it into law, and b) whether it is enough to convince investors to return to the ABS market and, specifically the intangible asset backed securities.

New questions on intangibles in Kauffman firm survey

One of the best sources of data on new start-ups is the Kauffman Foundation’s Firm Survey, which is tracking 5000 companies that began operations in 2004. Each year, new questions are added to the survey. I’m happy to say that the survey is fully cognizant of the importance of intangibles. The 2009 survey specifically asked questions on the firms’ investments in intangibles. Data on the 2009 survey will be available in April but a preliminary discussion of survey was presented at the annual AEA meeting (see earlier posting):

The preliminary data shows that almost half of the new companies surveyed in the US invested in some form of intangible assets (almost 65% of “high-tech” companies). For US companies, the leading intangible asset was brand development, followed by investments in software or databases, worker training and then design of new and improved products and services. Organizational development investment was very low.

Now comes word that the 2010 survey will include more questions on intangible investments and innovation. One set of questions will focus on what debt financing the firms use. As part of that question, it will specifically ask whether companies used their intellectual property (patents, copyrights, trademarks) as collateral for loans.

I am especially pleased to see this in the survey as it incorporates the suggested question I submitted to Kauffman late last year in response to their call for new questions. In that submission I noted that a better understanding of how new businesses are financing their operations and expansion – specifically whether they are taking advantage of their intangible assets and intellectual property. It is becoming somewhat more common that the borrower’s IP is explicitly included in an asset-backed loan and that the value of these intangible assets are included in the loan analysis. In a very few cases, the IP is specifically used as the major form of collateral for the loan. However, collateral often takes the form of a blanket lien on all assets. Intangibles and IP would implicitly be including in such a lien. In this case, their value would not necessarily be recognized at the time of the loan or used to determine the conditions of the loan (i.e. the amount of collateral required and the loan-to-value ratio).

It will be interesting to see the results of the survey — especially if companies are explicitly aware that their intangibles might be part of their loan collateral. That data will not be available for over a year, however. In the meantime, I’m looking forward to more in-depth analysis of the 2009 data in investments in intangibles.

January trade in intangibles – and revisions for 2009

This morning’s BEA trade data for January had some welcome news that the deficit declined slightly to $37.3 billion, down from the revised December level of $39.9 billion. Both imports and exports declined. That does not speak well for the health of the recovery. The largest decreases in import were in automotive vehicles, capital goods, and consumer goods. Oil imports also dropped dramatically. According to the Wall Street Journal, economists had expected the deficit to rise to $41 billion.

Our trade surplus in intangibles also improved in January, growing slightly to $12.3 billion. Unlike the overall trade flows, both exports and imports of intangibles increased, with exports rising slightly faster than imports.

Intangibles trade-Jan10.gif
Intangibles and goods-Jan10.gif
Oil good intangibles-Jan10.gif
Our deficit in Advanced Technology Products also decreased in January, down to $3.3 billion from December’s $4.9 billion. The details reveal, however, that this is not necessarily due to good news. The improvement was due to $2.7 billion drop in imports of information and communications technologies. Exports of aerospace technologies and information and communications technologies declined substantially. And BEA and the Census Bureau note that exports were over stated by $558 million because of non-disclosure requirements. 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.

The other news is that the 2009 data has been revised. The new data shows higher levels of exports and lower levels of imports in the second half of the year. As a result, the intangibles trade surplus for 2009 is $4 billion higher than previously reported.
Intangibles trade-2009rev.gif
Intangibles trade-total 2009rev.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.

Education's common core

This morning the National Governors Association Center for Best Practices and Council of Chief State School Officers released their draft K-12 Common Core State Standards for comment. The standards are the latest attempt to set some form of national standards, in this case in English-language arts and mathematics. According to the groups announcement:

These standards define the knowledge and skills students should have within their K-12 education careers so that they will graduate high school able to succeed in entry-level, credit-bearing academic college courses and in workforce training programs. The standards are:

  • Aligned with college and work expectations;
  • Clear, understandable and consistent;
  • Include rigorous content and application of knowledge through high-order skills;
  • Build upon strengths and lessons of current state standards;
  • Informed by other top performing countries, so that all students are prepared to succeed in our global economy and society; and
  • Evidence-based.

These common standards seem to me to be a step forward in boosting effective investments in one of our most important intangible assets: education. I have somewhat wary of the standardized test approach to education. It seem that approach is more suited to the old industrial era than the current information age. People have different learning styles and different forms of “intelligence” that can be hard to capture in standardized test. However, a common core of expectations of the foundational skills that children should have seems to me to be an important starting point.

For example, I support efforts to improve STEM (science, technology, engineering, math) education — not because I think we should try to make everyone into a techie (that would be a disaster on so many levels). I support STEM because math and science are foundational skills needed for many activities — including critical thinking and deductive reasoning.

In my quick look at the materials, I did find one slightly amusing note. The reading standards for kindergartners includes the following:

1. Demonstrate understanding of the organization and basic features of print.

a. Identify the front cover, back cover, and title page of a book.
b. Follow words from left to right, top to bottom, and page by page.
c. Understand that words are separated by spaces in print.
d. Recognize and name all upper- and lowercase letters of the alphabet.

I wonder in a future electronic print world if the ability to recognize the front cover of a book will be a foundational skill.

The draft standards are out for comment until April 2.

Productivity and Job Growth

As noted in my previous posting, productivity growth is the key to sustainable long term economic growth. But the productivity data needs to be looked at with a careful eye. And not all productivity growth in the short run helps with other economic issues, such as employment. The Wall Street Journal’s Real Time Economics blog raised this point yesterday in a posting “Productivity Surge May Hurt Job Growth, Fed Paper Says”. The posting describes a study by two San Francisco Fed economists Mary Daly and Bart Hobijn on Okun’s Law and the Unemployment Surprise of 2009. The study found that:

In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun’s law. If Okun’s law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.

So, productivity is bad for employment – right? Not necessarily. It is not uncommon for productivity to rise in a downturn. Remember that productivity is a measure of output per unit input. In times of growth, productivity measures how much additional output is generated per input. In a recession, companies frequently shed the least productive inputs first while trying to at least hold output steady. If inputs shrink faster than outputs, productivity rises. As the paper notes:

Some of the surge in productivity growth in 2009 was likely due to such cyclical factors as layoffs of least productive workers, greater intensity of work effort, and shifts away from producing intangible capital, which is not measured in output statistics.

Thus, the short term productivity increase may have little to do with increased investments in knowledge, technology, business processes, and other intangibles. Those investments still need to be made if, from a long run perspective, will want to see productivity increases creating growth and employment.

But, as the paper warns, “Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy.” As a result, the link between GDP growth and employment is not as strong as it was. This result is also evident in the decade long stagnation of wages and the pattern of “jobless” recoveries. In every recession in the past few decades has resulted in structural adjustments, not just cyclical changes. Workers are not on temporary layoff subject to recall–jobs are permanently eliminated.

Such a shift in economic structure and business strategy is part-and-parcel of the shift to the I-Cubed Economy. It is one that we need to build new labor policy mechanisms to address.