Copyright in fashion

In a number of earlier postings, I discussed the role of IP in fashion. Here is a new TED talk on from Johanna Blakley, arguing for the open creative system, user-driven and the “culture of copying” now in place in the fashion industry — and lessons other industries can learn.
For more, see the Ready to Share project at the Annenberg School.

Intangibles and National Security

This morning, President Obama released a new National Security Strategy. This Congressionally mandated report gives the President an opportunity to articulate his approach to national security. President Bush submitted two reports, in 2002 and 2006, that outlined his view of national security. According to this new report, the Obama approach takes a much broader definition of national security based on 4 major enduring American interests:

• The security of the United States, its citizens, and U.S. allies and partners;
• A strong, innovative, and growing U.S. economy in an open international economic system that promotes opportunity and prosperity;
• Respect for universal values at home and around the world; and
• An international order advanced by U.S. leadership that promotes peace, security, and opportunity through stronger cooperation to meet global challenges.

As one can see from that articulation of American interests, intangibles play a major role. First of all, traditional military strength is more and more based on the application of knowledge, as opposed to simply overwhelming firepower. And as the report notes, security also means the ability to domestic emergencies. That requires the application of intangibles assets such as organizational capital as well as knowledge.
Second, “soft power” elements of American international influence are grounded in the bedrock of our national intangible assets – such as our values and culture.
Third, the report makes the explicit link between domestic economic prosperity and international influence. As the report states, “The foundation of American leadership must be a prosperous American economy.”
In that regard, the report articulates an export-led economic strategy:

Save More And Export More: Striking a better balance at home means saving more and spending less, reforming our financial system, and reducing our long-term budget deficit. With those changes, we will see a greater emphasis on exports that we can build, produce, and sell all over the world, with the goal of doubling U.S. exports by 2014. This is ultimately an employment strategy, because higher exports will support millions of well-paying American jobs, including those that service innovative and profitable new technologies. As a part of that effort, we are reforming our export controls consistent with our national security imperatives.
Shift To Greater Domestic Demand Abroad: For the rest of the world, especially in some emerging market and developing countries, a better balance means placing greater emphasis on increasing domestic demand as the leading driver of growth and opening markets. Those countries will be able to import the capital and technologies needed to sustain the remarkable productivity gains already underway. Rebalancing will provide an opportunity for workers and consumers over time to enjoy the higher standards of living made possible by those gains. As balanced growth translates into sustained growth, middle-income, and poor countries, many of which are not yet sufficiently integrated into the global economy, can accelerate the process of convergence of living standards toward richer countries–a process that will become a driver of growth for the global economy for decades to come.
Open Foreign Markets to Our Products and Services: The United States has long had one of the most open markets in the world. We have been a leader in expanding an open trading system. That has underwritten the growth of other developed and emerging markets alike. Openness has also forced our companies and workers to compete and innovate, and at the same time, has offered market access crucial to the success of so many countries around the world. We will maintain our open investment environment, consistent with our national security goals. In this new era, opening markets around the globe will promote global competition and innovation and will be crucial to our prosperity. We will pursue a trade agenda that includes an ambitious and balanced Doha multilateral trade agreement, bilateral and multilateral trade agreements that reflect our values and interests, and engagement with the transpacific partnership countries to shape a regional agreement with high standards.
As we go forward, our trade policy will be an important part of our effort to capitalize on the opportunities presented by globalization, but will also be part of our effort to equip Americans to compete. To make trade agreements work for Americans, we will take steps to restore confidence, with realistic programs to deal with transition costs, and promote innovation, infrastructure, healthcare reform and education. Our agreements will contain achievable enforcement mechanisms to ensure that the gains we negotiate are in fact realized and will be structured to reflect U.S. interests, especially on labor and environment.

In this area, I must say I am somewhat disappointed. A strategy of “rebalancing” and increased exports is correct as far as it goes. We cannot go back to the unsustainable consumer-debt driven economy of the past. But shift demand growth to others is not enough. Sustained prosperity will only come from harnessing the economic transformation.
The National Security Strategy does include the important areas of scientific and technological research and education. It talks about clean energy technologies and industries. And the President emphasized those points yesterday during his visit to Silicon Valley.
That does not, however, add up to an innovation-driven economic strategy. Nor does it fully harness the power of intangible assets and intellectual capital.
So the new National Security Strategy is a step in the right direction — especially its broad understanding of what constitutes national security and America interests. It given us something to build upon – not the final product.

Statement to OSTP/NEC on Intangible Asset-backed financing

As I noted in earlier postings, in March OSTP and the NEC published a Request for Information on the commercialization of university research. One of the questions asked concerned alternative financing mechanisms. Below is the statement I submitted in response to that question (also available on line).

China's intangibles strategy

Here is an interesting quote from a story in today’s Washington Post:

“We’ve lost a bucketload of money to foreigners because they have brands and we don’t,” complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. “Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast.”

By the way, the story is on how the Chinese are “stuck doing the global grunt work in factory cities while designers and engineers overseas reap the profits.” I find that spin fascinating — an example of the “stand-alone-intangibles-will-save-us” trap many fall into. If all the profit is in design and engineering, then why is China running such a large trade surplus? Let me re-iterate a point I’ve made many times before: intangibles are key. But they key to intangibles is how they are used to increase productivity and innovation across the board- not simply how we sell (license) them to others.
The story also goes on to talk about how China is behind in innovation and the development of internationally recognized brands. That maybe true right now, but don’t bet on it in the future. As the above notes, official China is pushing the development of intangibles. That is a development we need to take seriously.

Tracking the recession by industry

This morning, BEA released industry-specific data on the recession. According to the press release,

Downturns in durable-goods manufacturing and finance and insurance and a continued contraction in construction were the leading contributors to the downturn in U.S. economic growth in 2009, according to preliminary statistics on the breakout of real gross domestic product (GDP) by industry from the Bureau of Economic Analysis. The economic downturn was widespread: 15 of 22 industry groups contributed to the decline in real GDP growth.

• Manufacturing value added–a measure of an industry’s contribution to GDP–fell 5.9 percent in 2009, a sharper decline than the 3.6 percent drop in 2008. Durable-goods manufacturing turned down for the first time since 2001, decreasing 7.5 percent after growing 0.3 percent in 2008. Nondurable-goods manufacturing fell 3.8 percent, a slower decline than the 8.2 percent drop in 2008.
• Construction value added fell 9.9 percent in 2009, reflecting declines in residential and nonresidential activity. Construction contracted for the fifth consecutive year.
• Finance and insurance value added dropped 2.7 percent in 2009, after increasing 3.2 percent in 2008.

– – –
Of special interest to me, however, is which industries did not contract in 2009. These include: utilities, information (which covers publishing, software, film and sound recording, broadcast, information and data processing), real estate, professional & technical services, education, health care, accommodation and food services, and government. The data is not yet available at a lower level to be able to, for example, break out software from publishing. But it is clear that at least some intangible-based industries did OK in the recession.

Invest in intangibles

Here is a tidbit from a new report from the Booz & Company magazine Strategy+Business — Growth through Focus: A Blueprint for Driving Profitable Expansion (registration required):

Too often, when companies rationalize and focus, they slash expenses across the board. Two areas that take the brunt of cost cutting are people-related expenses (recruitment, training, travel) and brand advertising. However, talent and brands are the two most valuable assets for driving growth. We recommend increasing investments in hiring and developing talent, even ahead of the company’s needs. We also recommend increasing investments in building brands.

Amen to that.
But where are the resources for that investment? As the article goes on to say:

The good news is that the growth-through-focus approach yields significant cost savings through elimination of management layers, reduction of overhead, and elimination of marginal businesses. Focus frees up resources that can be used to invest in the future.

It’s actually an old strategy — focus on what you do best (once known as “core competencies”). The new twist on this is the explicit recognition that intangibles should be part of core competencies.
But you knew that.

Organizations and wealth creation

Uwe E. Reinhardt, a noted economics professor, has posted a series of essays at the Economix blog on wealth creation — the latest being Who Creates the Wealth in Society? In this essay, he expands upon the basic theme:

It is now well recognized that the wealth of modern societies is dictated not so much by the natural resources at their disposal, but by their human capital — the knowledge and skill of human beings and their ability to learn and apply new knowledge on their own.

This leads him to the important role of the family – as the original institution for fostering human capital.
I would push this a step further. It is not just human capital — “knowledge and skill of human beings and their ability to learn.” It is the organizations and the other framework conditions that allow for that human capital to be used. As I hinted at in the previous posting, too many organizations focus only on certain parts of their human capital. All parts of facets of an organization’s human capital need to be fully engaged. We used to call this the “high road” strategy of high skills and high wages.
But that is not enough, the organizational structures themselves need to promote knowledge creation, sharing and utilization. At one point, we called these high performance work organizations or learning organizations or innovative organizations.
No matter what we call them, the point is the same. The way in which human capital is organized is just as important as the human capital itself.
Reinhardt ends his essay with the following:

Governments everywhere in modern societies provide the legal and much of the physical infrastructure on which private production and commerce thrive. Imagine a world in which private contracts can be adjudicated and enforced only by private thugs rather than in the civil courts.
Just as sports contests could not be fairly conducted without a strict set of rules and referees with power, so private markets could not thrive without regulations and regulators with power. A truly laissez-faire market economy would be apt to be a mess, as what Wall Street made of its own business in recent years reminds us.
. . .
A nation’s wealth is truly a joint creation in which individuals, families, business and government all play crucial parts. Finding just that mix of efforts and regulations that will maximize society’s well-being is a tricky and never-ending quest.

But governments need to do much more than play the referee. They need to be involved in helping create the intellectual capital that makes the economy work. Part of that is active assistance in fostering the organizational capital needed for the I-Cubed Economy.
In that regard, I have been advocating for changes in public policies to foster greater utilization of intellectual capital (see our Policy Brief Intellectual Capital and Revitalizing Manufacturing). These include:

Expand the Manufacturing Extension Partnership (MEP) to Boost Intellectual Capital. The Administration’s budget appropriately calls for doubling the MEP budget, but the scope of this assistance to manufacturers needs to be expanded to include innovation, new product development, and utilization of intellectual capital. Manufacturing companies have a wealth of intellectual capital that they often do not recognize or manage well. MEP services must include intellectual resource management that covers a broad array of assets, beyond help with intellectual property. The program’s budget increase should be used to expand services and staffing in areas such as marketing, finance, and business model development, in addition to new product development and process adoption.
Help Entrepreneurs Manage Intellectual Capital. The Administration’s A Framework for Revitalizing American Manufacturing specifically cites efforts by the U.S. Small Business Administration (SBA) to provide entrepreneurship training and to foster partnerships with community colleges, universities, and others. It also mentions the U.S. Economic Development Administration (EDA) program of supporting business incubators. But most of these training programs do not explicitly recognize the importance of managing intangible assets and intellectual capital. Programs that support entrepreneurs need to incorporate these topics as part of their activities and impart these essential skills to would-be innovators.

We need to move ahead with programs like this if we are to truly restore wealth creation in this country.

Investing in people pays off – all the way down the hierarchy

How often have we heard the cliché, “our people are our most valuable asset”? Of course, those of us who have been studying the knowledge economy have known that for a long time. But too often, we see company executives mouthing the phrase without any real understanding. For them, what they mean is “our highly paid workers, like me, are our most valuable assets.” Hence the rationale for CEO compensation scheme, bidding wars for “talent” and “key individual” insurance policies.
A new report should help break that mindset — Profit at the Bottom of the Ladder: A Summary Report on the Experiences of Companies that Improve Conditions at the Base. The report outlines a number of steps companies can take to increase profitability by investing in line workers. That includes increased attention to workers’ health, training, incentives, and engagement. As the report notes, companies need to better understand who is actually performing the work and realize that these workers are key to both the ongoing success of the company and future productivity and efficiency.
One of their conclusion is something I have been advocating for years:

As practices on Wall Street and in firms are being rethought, along with the role of the public sector in rendering the investment process more transparent, one of the areas needing a new approach is the evaluation of and reporting on long term investments in employees. (Emphasis in original).

For a summary of the research, see this recent piece in the New York Times Economix blog — Finding Profit From Investing in Workers.

Using bank loans to finance innovation

There is a new paper on the role of bank loans in innovation — Beg, Borrow, and Deal? Entrepreneurship and Financing in New Firm Innovation by Sheryl Smith of Temple University. Using data from Kauffman Firm Survey (KFS), she looks at the financing of start-up. She also reviews the theoretical literature of why entrepreneurs would choose equity or debt financing and the relationship of that decision to innovation and risk. The findings point to why fostering the opportunity for debt financing may benefit innovation:

With regard to debt financing, the evidence in this paper suggests that information asymmetry combined with technical risk influences the ability to secure bank financing. Banks, unlike providers of equity finance, do not share in a potential upside of a high growth firm. However, there is evidence that as information asymmetry is lessened over subsequent periods, banks are more likely to lend to high tech firms. As the riskiness of a high-tech firms decreases, they are increasingly likely to receive business bank loans over time, suggesting the likelihood of business bank loans targeting the firms, over time, with higher growth potential. This is consistent with the literature on bank lending to new ventures, and in particular the role of monitoring and risk reduction in bank lending to entrepreneurs.

The results of the probit [a statistical technique] estimations in this paper suggest that increasing leverage over time might provide nascent technology entrepreneurs with financial slack that may enable with innovation. This implication bears closer attention in further work. The entrepreneur launching a new technology venture faces significant resource constraints, and the attendant need to secure financing. For firms with adequate financial resources, lower leverage, i.e. debt relative to total debt plus equity, is associated with greater financial slack and enhanced innovation. In this case, lower leverage would be necessary for firms competing significantly on the basis of innovation (O’Brien, 2003). However, when financial resources are highly constrained, as in a new entrepreneurial venture, the relationship between slack and performance is nuanced (George, 2005). While traditionally the finance literature associates increasing leverage with lower innovation, it seems highly plausible that in truly nascent technology firms additional debt relaxes the major capital constraints faced by the entrepreneur.

From a public policy point of view, that conclusion begs the next question: how can we help those nascent technology firms access that debt as appropriate? We have long advocated the use of IP and other intangibles assets as collateral on loans. As noted in an earlier posting, the KFS will be asking more in-depth questions on company borrowing, including whether they are putting up their IP as collateral. That will give us some idea to the extent of the practice. More survey’s would also be useful — specifically of banks and other lenders. And we need to move forward on creating underwriting standards for intangible-backed loans. Smith’s research point the way toward understanding the positive role debt financing plays in innovation. We should build upon and expand that work.