In my earlier posting on GDP, I noted that BEA is working on including intangibles in the data (see also the BEA article “Toward Better Measurement of Innovation and Intangibles“). As part of that effort, BEA has a GDP “satellite account” that treats R&D as an investment rather than an expense. This morning, BEA released its latest calculations for GDP in the past few decades as if R&D was counted as an investment (see previous posting for their earlier calculations):
Gross Domestic Product (GDP) would have been, on average, 2.7 percent, or $301.5 billion higher between 1998 and 2007 if research and development (R&D) spending was treated as investment in the U.S. national income and product accounts, the Bureau of Economic Analysis (BEA) announced today. The 2010 R&D Satellite Account updates and extends BEA’s estimates of the effect of R&D on economic growth through 2007, and now includes coverage of the most recent business cycle expansion.
R&D accounted for about 6.3 percent of average annual growth in real GDP–that is, GDP adjusted for inflation–between 1998 and 2007, and 6.6 percent between 2002 and 2007. To put the contribution of R&D in perspective, the business sector’s investment in commercial and other types of structures accounted for just over 1.3 percent of average annual growth in real GDP between 1998 and 2007.
Comments and analysis are coming in on the Supreme Court ruling in Bilski. Generally folks agree that the ruling was less expansive than many expected. The Court did not rule that business processes could not be patented, even though it threw out the specific Bilski business process patent. The majority opinion seemed punt the issue back to the Court of Appeals for the Federal Circuit — saying that the “machine or transformation” test was not the only criteria but also saying that the law does not necessarily support broad patentability and that the Appeals judges are free to come up with “other limiting criteria.”
The ruling was an outcome of a strong internal debate. Four Justices signed on to a concurring opinion that argued for a broader ruling against business process patents. As the New York Times notes “Court analysts suggested that Justice Stevens wrote his 47-page opinion in anticipation of its serving as the majority view, but lost to those who favored a narrower result.”
Since the result was not the bright line guidance hoped for, it is likely that the issue of business process patents will continue to be fought on a case by case basis.
For more comments, see the IAM Blog posting — – Mixed reactions to the Supreme Court’s Bilski decision and Steve Lohr’s NTY column Bilski Ruling: The Patent Wars Untouched
It was a busy morning for SCOTUS. In addition to the Bilski decision (see previous posting), the Court ruled on a number of other cases. One of those was the constitutionality of Sarbanes-Oxley. A lawsuit filed about two years ago (see earlier posting) challenged whether the way the Public Company Accounting Oversight Board was created was constitutional. The specifics of the issue was whether member of the Board, who are appointed by the SEC, have tenure or can be removed at will. Opponents of the law hoped to use this issue to have the law completely thrown out. However, the Court ruled that only the tenure part of the Board is unconstitutional and “the unconstitutional tenure provisions are severable from the remainder of the statute.” In other words, all the rest of the law remains valid.
The ruling, as the Wall Street Journal notes, “makes it unlikely that Congress will re-examine the full Sarbanes-Oxley legislation, as some opponents of the law had hoped. That reduces uncertainty for investors already grappling with looming changes in the financial-rules overhaul making its way through Congress.”
As I said before, gutting SOX would have a major negative effect on any attempt to create a financial market in intangibles. It would be a signal that the US is not serious in protecting investors from misleading claims and shaky accounting — and therefore investments in new assets such as intangible are extraordinarily risky. So, from my perspective, we dodged a bullet.
However, the case may have other ramifications. By ruling that the members of the Board can be removed at will by the SEC, the Court may have ruled that Commissioners and Directors all such “independent” agencies may not be independent but can be removed at will by the appointing authority, such as the President. That could make life for the regulatory agencies in Washington very interesting. And uncertain.
Here is the comment on the case from the Economist’s Schumpeter columnist:
But it is probably a good verdict from business’s point of view. Companies have spent millions on SOX compliance, and had just about got used to the legislation. Moreover, there is no guarantee that a broad reconsideration of SOX, in the current business climate, would produce better legislation. Far from it.
I couldn’t agree more — although maybe for a different reason. Our Schumpeter friend may fear a further tightening of accounting regulations. I fear that if SOX was opened up, the pressure would be for more loosing of accounting standards in the name of promoting growth (a la the market-to-myth controversy).
But the idea of every “independent” agency head or commissioner serving at the pleasure of the President still gives me pause.
As expected, the Supreme Court ruled against Bilski, upholding the Appeals court that a patent must be tied to a particular machine or be transformative — see the Court’s “Slip Opinion” on the case and the Wall Street Journal story Supreme Court Rules Against Inventors in Patent Case. Expect a flood of ink over the next few days as everyone weights in on what this means. I will try to summarize later.
Many of the stories published today about Senator Byrd will highlight his mastery of the Senate rules. I was a small part of one such example. As a staffer to Senator Jeff Bingaman in the late 1980’s I helped draft part of what became the Omnibus Trade and Competitiveness Act of 1988. Part of the bill created the Competitiveness Policy Council — an institution that help formulate policy recommendations during the 1990s and is sadly no longer with us. During the Senate floor debate, opponents of this provision moved to eliminate it from the bill. Senator Byrd, in his role as Majority Leader, pointed out that the provision had already been subject to an amendment (in order to amend some other part of the bill, the provision was deleted and reinserted) — and therefore was not subject to further amendment. When the Senator who offered the motion to delete complained, Senator Byrd told him that you need to understand the rules and suggested that he go work out the issue with my boss, Senator Bingaman, who was the sponsor of the provision in question. “I’m just trying to help you out” was Senator Byrd’s words to his colleague. Needless to say, we worked out the issue, the provision stayed in the bill (even through it was named in President Reagan’s original veto of the bill) and the CPC went on to produce some important reports.
Senator Byrd understood the Senate and its ways better than anyone. And he used that knowledge to his advantage. He understood the use of both knowledge and power. He also understood the need to work things out. The Senate is a very different place than when Robert Byrd entered it. One can argue whether the changes have been good or bad (probably some of both). But no one can argue that an era has ended.
Here is an interesting story in today’s Wall Street Journal — IBM Sues To Block Oracle Management Hire. According to the story IBM claim that Joanne Olsen violated a one year noncompetition agreement when she took a senior position with Oracle. The suit was filed in New York.
As we noted in our report, Intangible Asset Monetization: The Promise and the Reality, FASB recognizes noncompete agreements as a marketing-related intangible asset. However, noncompete agreements are considered illegal in California under Business and Professions Code Section 16600. Agreements made in other states are also generally found to be unenforceable in California. Nevada, Arkansas, Washington, Montana, North Dakota, Minnesota, Wisconsin, Connecticut, West Virginia, and Oklahoma are also seen as jurisdictions that do not enforce these agreements. Other states usually apply a reasonableness test. I don’t know about New York.
So this case could be an interesting case example of when is an intangible an asset. Is it still an asset if some courts say it is and other say it isn’t?
And should IBM be required to book the value of the noncompete agreement? Under existing FASB rules, since it was an internally generated intangible, no. But what about the other way around. Does Oracle also have noncompete agreements — especially with former Sun executives? Since Oracle’s purchase of Sun presumably included those intangibles, are these supposed to be on Oracle’s books?
More questions than answers.
In Joff Wild’s summary of the the recent IP Business Congress, he made the following point:
There is more to IP than patents. And there is more to intangible value than IP. At previous IPBCs, almost all the talk has been about patents. This year it was very noticeable how many more people were speaking about brands, intellectual assets and capital, and intangibles in general. Patents are just one part of one part of the equation. What is the point in owning potentially great patents if no-one wants to buy into the brands that you build around them and/or you do not have the distribution know-how to get branded products in front of potential buyers? And who is going to buy anything from you if your reputation stinks? For IP professionals the next big challenge could be about contextualising their roles and expanding them into areas that are not necessarily obvious fits right now. Expect to see a lot more about all of this over the coming years.
That is good news. While IP is important, intangibles are more important.
Joff also made another interesting point:
The debate about IP needs to be less about processes and procedures, and a lot more focused on what IP enables – jobs, health, a cleaner environment and so on. It’s when you start talking about these t[h]ings and demonstrating the facilitative role IP plays that you get the attention of the top policy makers. David Kappos and Gary Locke in the US are teaching the IP world a lot of lessons at the moment. They need to be learned.
I would broaden that to cover all intangibles. The value of intangibles is how they affect outcomes in terms of productivity and innovation leading to economic prosperity and higher standards of living. Thus, it is not simply how well the US produces intangible assets — but how well we use them. For policymaker, and everyone, that should be the bottom line.
This morning, BEA released its “third estimate” (what used to be called “final”) data on 1st Quarter GDP. The number has been revised downward to a growth rate of 2.7% – from the advanced estimate of 3.2% and the second estimate of 3%. According to BEA:
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by negative contributions from state and local government spending and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Unfortunately, some have gotten the story wrong — concentrating on revisions rather than the change from the previous quarter. While consumer spending was less than previously reported, it was still greater than in the previous quarter. And durable goods sales were actually up by a healthy amount. The slowdown was due to a decline in state and local government spending, a significant increase in the trade deficit and a large decline in housing.
Unfortunately, with at least two of those areas, things are only going to get worse. Latest data on housing is not good. State and local spending is set to decline further and Congress is being blocked from doing anything about it. Trade is still a wild card – since we only have data through April.
The good news is about business investment going up, specifically equipment and software. And capital spending by business seems to be continuing.
However, the GDP number do not measure investments in intangibles assets. So we don’t know about that part of the equation. I know that BEA is working on this, but a measure of intangibles in the GDP is badly needed if we are to understand the direction of the I-Cubed Economy.
In a number of previous posting, I’ve argued that in the I-Cubed Economy manufacturing it tied closely to other production activities, such as product development and services. All of that argues for keeping manufacturing local. Here is another reason — financing (from the Your the Boss blog on the New York Times):
When you source your product from China, and need to wait up to 90 days for each order, you have to carry extra inventory as stock-out protection — another big hit to your cash flow. When you use a domestic supplier, you can turn to FedEx or UPS to solve your problem overnight. That means you don’t have to carry as much extra inventory.
With a long supply chain, an entrepreneur faces tough choices because the company’s cash is tied up with suppliers and customers. With credit still tight, companies can end up struggling to cover the inevitable cash shortfalls that come from growth. Some companies resort to doing things like factoring — borrowing off their accounts receivable at interest rates that can top 20 percent — or bringing in outside investors and private equity money, decisions that cut into either net income or equity.
On Tuesday, the White House released its new 2010 Joint Strategic Plan on Intellectual Property Enforcement (see also the White House blog and the write up in Intellectual Property Watch). The document seeks to lay out a clear message on piracy while sidestepping some of the controversies — for example with this statement on fair use: “Strong intellectual property enforcement efforts should be focused on stopping those stealing the work of others, not those who are appropriately building upon it.”
I applaud the coordinated approach to enforcement. But I would also note that balance is necessary. The following is the recommendation from our December 2008 report Crafting an Obama Innovation Policy:
Strengthening the White House role in reviewing and balancing intellectual property policy as broadly defined. The merits of infinitely expanding and strengthening intellectual property protection–patents, copyrights, trademarks, and trade secrets–to accelerate innovation and promote investment are no longer the articles of faith they were for a generation beginning in 1980. Witness the pending patent reform legislation–most of the provisions of which command broad private sector support–and recent Supreme Court and Federal Circuit Court of Appeals decisions in patent cases involving injunctions, patentable subject matter, obviousness, and willful infringement. But there has been no White House leadership on these issues, contributing to a congressional stalemate on patent reform. Moreover, within the Executive Office of the President there is a growing need for balancing the views of the Office of the U.S. Trade Representative (USTR), which has consistently favored ratcheting up intellectual property protection and enforcement–a stance likely to be reinforced by the new Office of the Intellectual Property Enforcement Coordinator.
Balance is key — since IP is only one part of the broader intangible-asset base that drives economic prosperity. Thus, what we need is not just an IP enforcement policy — but an innovation and competitiveness policy based on intellectual capital and intangible asset.
So if the Administration can produce a joint IP strategy – why can’t it produce a joint innovation strategy? Looking at the IP enforcement strategy, there are a number of like actions that could easily be taken with respect to intangibles. For example, one action in the strategy is to assess U.S. Government resources spent on IP enforcement “through a Budget Data Request (BDR), whereby agencies reported the amount of resources they dedicated to human capital and programs, identified metrics used in measuring intellectual property enforcement successes, and planned and estimated expenditures for future years.” Why can’t we do the same thing for our investments in intangibles?
Another action item in the report is to assess the economic impact of IP-intensive industries. Why not expand that to the impact of intangible-asset investments?
IP enforcement is good. But IP enforcement is one narrow silo of the innovation process. If we are to promote economic prosperity in the I-Cubed Economy we need to be tearing down silos. The IP enforcement strategy shows how actions can be coordinated across government agencies. Let’s now do the same for innovation.