OECD paper on patent marketplace

I recently came across an OCED report from last December on The Emerging Patent Marketplace written by Tomoya Yanagisawa and Dominique Guellec. The paper covers some of the same ground as our two working papers: Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. The studies start at a very different place, however. Whereas our papers come at the issue from the financing and financial markets perspective, the OECD paper starts from the rise of open innovation and the need for knowledge flows. From that perspective, the report sees the role of IP intermediaries — brokers, analytic specialists, trading platforms, etc. — as key. They also see public policy as playing an important, and balanced role:

In order to facilitate the circulation of IP and promote innovation, it will be very important that policy makers maintain the order of the IP markets by carefully prohibiting anti-innovative activities, in addition to encouraging the development of markets for IP and businesses of IP-specialist firms. Since the characteristics of each IP exploitation activity regarded as anti-innovative are varied and differ in each case, there doesn’t seem to be a specific policy that can prohibit all anti-innovative patent exploitation activities. Therefore policy makers should develop comprehensive policies which include actions in various policy areas such as IP regime, competition and tax policy. In particular policy makers should explore ways of: enhancing transparency and predictability of IPR transactions (e.g. establishing a shared understanding of reasonable market prices by encouraging the disclosure of patent licensing and sales information); strengthening trust in technology transactions by securing the quality of patents; establishing properly tuned regulations against anti-innovative activities in IPR marketplaces (e.g. finding appropriate competition enforcement policies with respect to IPR transactions, and finding appropriate patent remedy policies).

As befits its title, the report is very IP-centric in it view. It does not look at whether patents are the best way of transferring knowledge. The OECD has a “knowledge markets” project underway to look at the broader range of knowledge diffusion mechanisms. I am looking forward to the findings of that broader inquiry.

Why Humanity Loves, and Needs, Cities – Economix Blog – NYTimes.com

Over at the New York Times Economix blog, Edward Glaeser has an interesting posting on cities and knowledge. The posting reviews an NBER conference proceedings (which Glaeser edited) on agglomeration economies. His bottom line:

Understanding the appeal of proximity — the economic advantages of agglomeration — helps make sense of the past and future of cities. If people still clustered together primarily to reduce the costs of moving manufactured goods, then cities would become increasingly irrelevant as transportation costs continue to decline.
If cities serve, as I believe, primarily, to connect people and enable them to learn from one another, than an increasingly information-intensive economy will only make urban density more valuable.

Other chapters reinforce that view. One is by Jed Kolko on services:

Mr. Kolko highlights a fundamental difference between manufacturing and services. For manufacturing firms it doesn’t much matter if suppliers or customers are in the same ZIP code or the same state. Goods are cheap to move. But services seem tied to suppliers and customers that are in the same ZIP code. Since face-to-face contact is so much a part of service provision, they are drawn to the extreme densities of cities.

Another is by Glaeser and Giacomo Ponzetto on “Did the Death of Distance Hurt Detroit and Help New York?”:

Improvements in transportation and communication costs made it cost-effective to manufacture in low-cost areas, which led to the decline of older industrial cities like Detroit. But those same changes also increased the returns to innovation, and the free flow of ideas in cities make them natural hubs of innovation. Since the death of distance increased the scope for new innovation, idea-intensive innovating cities were helped by the same forces that hurt goods-producing cities.

A few years ago I published a report on Knowledge Management as an Economic Development Strategy. In that paper I argued that clusters form because they are efficient knowledge management mechanisms. Clusters and agglomerations facilitate the transfer of tacit knowledge. So I agree with Glaeser that cities are likely to be more not less important in a knowledge intensive economy — advances in communications and transportation notwithstanding.

Advanced manufacturing background paper

And speaking of manufacturing (see yesterday’s posting), the White House Office of Science and technology Policy (OSTP) has a new background paper on Advanced Manufacturing. Be warned however, this is not a overview policy piece but a detailed analysis of the technical and economic issues. For does interest in the gritty details, it is well worth the read.

The paper is part of OSTP’s online manufacturing forum (which ends today). FYI — see my posting under “strategy” which summarizes our Policy Brief–Intellectual Capital and Revitalizing Manufacturing.

Rethinking the Valley of Death

Over at Andrew Hargadon’s blog, GreenTech Media, he has posted an interesting take on the Valley of Death problem. The Valley of Death is usually seen as a financial issue: how to get funds to move from early stage research to later stage commercialization. Hargadon points out that the issue is not just lack of money. There may be very good reasons why the project does not attract funding — it may lack other forms of capital:

In addition to financial capital, there are three other forms that at different times can be significantly more valuable: physical capital (the physical resources someone has already acquired and organized), intellectual capital (the knowledge and skills someone has acquired and organized), and social capital (someone’s social network, or access to the capital “stocks” of others). [Note that we normally refer to all three of these as parts of intellectual capital.]
While a startup’s balance sheet might clearly show where they stand with respect to their financial and physical capital, it does little to reveal their intellectual and social capital. And yet for companies to avoid their own untimely demise, they depend as much or more on knowledge, experience, and the ability to manage their company’s fortunes — and on their social networks to discover, guide, and acquire the critical resources they will need to succeed.

So the solution to the valley of death funding problem is not just more money — but a careful look at all the forms of intellectual capital needed to make the project work. For this reason, I have been advocating programs to do more to help companies and entrepreneurs better manage their intellectual capital. Those services could be offered as part of SBA and EDA programs, built into business incubator programs, and be the core services of a specialized center, such as Glasgow’s Intellectual Assets Centre and Hong Kong’s Intellectual Capital Management Consultancy Programme. And, as I noted last week, that analysis and evaluation can be tied directly to the funding process — as the Hong Kong center just announced.

One other point, Hargadon’s comments were made in the context of green tech.
As I noted earlier, the Department of Energy encourages applicants for the clean energy production loan to put up their IP as collateral. DOE is not necessarily looking to recoup funds by selling the IP if the loan goes bad. They what to control the IP and the technology if they have to step in and finish the project.

So the elements is understand the key role of intellectual capital are beginning to take shape. We need to push the process along.

Cloud manufacturing

Are you ready for “cloud manufacturing”? That is Tom Friedman’s new term for the global supply chains and contract manufacturing in low cost countries. In a recent column, he hails the ability of new US start-ups to utilize cloud manufacturing to quickly bring a product to market. Taken as a example of business success, that may be a good thing. Unfortunately, Friedman misses a bigger issue and continues to fall in the trap of thinking the US can survive on only a part of the value chain:

What’s in it for America? As long as the venture money, core innovation and the key management comes from here — a lot. If EndoStim works out, its tiny headquarters in St. Louis will grow much larger. St. Louis is where the best jobs — top management, marketing, design — and shareholders will be, said Hogg.

In other words, we don’t need manufacturing in the US, we can survive as executives. Again, possibly a workable strategy for a company; not a way to create a healthy and sustainable economy for a country.

A more realistic view come from the special report on innovation in The Economist: The World Turned Upside Down. It is clear from this report that the international division of labor implied in Friedman’s piece (we do the thinking; they do the making) will not save the US economy. First of all, the “developing” world is not interested in staying in its place — they want to and are actively working on moving up the supply chain. As the lead into to the special report says, “The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation.”

Second, value added and knowledge intensive activity can be found everywhere on the value chain — including manufacturing. As I have noted before, it is important to have manufacturing nearby in many innovation-driven activities. Manufacturing itself can be a source of innovative competitive advantage. Rather than secede manufacturing to the other nations (under some nice sounding phrase like “cloud manufacturing”), we need to make sure that startup companies can find the manufacturing resources close by. That will help the companies with the ability to continually improve the product and the process — something that the outsourcing to the “cloud” makes difficult. It will also help companies better manage their supply chain – which the recent grounding of air traffic has shown can be vulnerable.

Strengthen manufacturing in the US will require that we recognize that manufacturing is already an intellectual capital intense activity. As our recent Policy Brief–Intellectual Capital and Revitalizing Manufacturing outlines, there are many steps we can take in that regard.

But the first and foremost we need to remember that manufacturing matters. All else follows.

Intangibles and M&A

Thanks to Joff Wild over at the IAM blog for a heads up on a new report: The silver bullet of success: Winners and losers in the M&A game. The report, by the consulting company the Hay Group, surveyed corporate executives on M&A activities and intangibles. Their findings should not surprise any regular reader of this blog: “Companies that reviewed intangibles during due diligence are more than twice as likely to consider their merger a success compared with those who did not.”

The good news is that a majority of the executives get it: “Two thirds of respondents (66 per cent) believe an increased focus on intangible capital would improve merger success.”

The bad news is that they don’t know how to do this: “Most business leaders (61 per cent) plan to increase their focus on intangibles but need guidance on how to capture data about intangible capital during M&As.” This shows the need for intangible asset /intellectual capital management services for both ongoing businesses and for M&A analysis (which is probably the point this consulting company is trying to make with this report in the first place).

I do have a concern with the report on the data on valuation. The study finds that “executives typically value intangible capital – including culture and customer relationships – at just 30 per cent of market capitalization.” They compare this to the figure used by some of intangibles as 75% of market capitalization. They then assert that this proves that executives are undervaluing intangibles. It may however prove the opposite. I have always been skeptical of the 75% numbers. That was generated in the height of the stock bubbles, so I’ve never been sure how much is real intangible wealth and how much was market froth. The 30% estimate seems low to me, but it may be one of the closest numbers we have to actual market data. This is an area for further work.

I have one other quibble with the study. I cringe at the hype about intangibles being the “silver bullet” in M&A. Of course, as I acknowledged above, this report is a sales tool for the consulting. Therefore the hype is to be somewhat expected. However, my concern is that sets up intangibles as the fall guy for any failed deal — any executive can simply say the deal failed because “insufficient attention to intangibles”, rather than the fact that the deal might have been a stupid idea in the first place.

A standard problem with intangibles is that some define it as such a broad category that it includes everything — which means for analytical purposes it is nothing. In fairness to the report’s authors, they use the intellectual capital framework of organizational, relationship and human capital, so there is an analytical backstop to their claims. But we should be careful to not over hype intangibles — making them into a meaningless concept.

Overhead and who counts in health care

Here is an interesting tidbit from the New York Time Economix blog — One Reason U.S. Health Care Costs So Much. The blog has a chart by Harvard economics Professor David Cutler:

As the blog puts it:

The takeaway: For every doctor, there are five people performing health care administrative support.

An eye-catching statistic — one sure to be bandied about in debates as evidence of excessive overhead. But misleading at best.

If you look at chart, you also see a large number of nurses. According to the data from the BLS, 43.8% of health care workers are in the service delivery area, which includes nurses, doctors, social workers, paramedics, clinical laboratory technicians, etc. Only 17.7% are in office and administrative support and 4.3% in management/financial.

So yes, there is a 5 to 1 ratio of doctors to support administrative support staff. But doctors are only a small part of the health care delivery system — 3.6% of total employment. There is a huge number of other health care professionals, especially nurses. In fact there is a 5 to 1 ratio of doctors to nurses as well.

There are inefficiencies in the health care system. But this is unclear from the occupation data. The 17.7% office and administrative support is high but not unusually high. 15% of workers in auto dealerships are office and administrative support. The number is 9.6% in computer and electronics production companies. But in computer companies, 16.2% of employment is in management/financial whereas only 4.3% of health care employment is management/financial. By this measure, one of the most efficient operations are food service and drinking places, where only 2.4% of employment is in management/financial while 91.3% are in direct service delivery.

What really troubles me about this posting, however, is the underlying assumption that only the high-end workers — physicians and surgeons — count in the worker to support ratio. I’m sure the author did not mean to down play the role of nurses. But that comment on the 5 to 1 ratio does just that.

Unfortunately, this is an all too common occurrence. We talk about “high-tech” as if only it matters and non-tech activities and innovation are meaningless. That is an attitude we need to resist. In a knowledge economy, all levels of skills and knowledge matter — and all forms of innovation are important.