Expanding MEPs business model

In yesterday’s posting on the America COMPETES Act, I mentioned that one of the provisions expands the Manufacturing Extension Partnership centers so that they can help companies with new product development. But more can be done to improve the MEP’s ability to help companies.
In October, MEP released a study on Re-examining the Manufacturing Extension Partnership Business Model (see summary and full report). The report offered a new direction for MEP:

This new vision and mission shifts the program from focusing only on efforts to enhance productivity through process improvement, to include those that generate growth and innovation. This new vision also shifts the focus of MEP to being a strategic advisor and connector to resources and skills, as well as a deliverer of technical assistance. This shift attempts to engage clients at a more strategic level to understand their critical needs and provide assistance in those areas, rather than delivering services in which MEP has capabilities, but which may not match the future direction and strategic priorities of the companies. It also recognizes the importance of more actively engaging in partnerships with other organizations that can provide additional capabilities needed by manufacturers.
The plan expands MEP’s scope to cover a broader range of services, focused around five service categories, all under the overarching objective of helping companies achieve profitable growth (see Figure 1). The five service categories include Continuous Improvement, Technology Acceleration, Supplier Development, Sustainability, and Workforce.

Specific recommendations include expanding the scale of the program, ways of better leveraging the federal investment and more coordination of national activities. What I especially like recommendation to “catalyze service expansion and innovation at centers.” By this they mean both expansion of the types of services offered and the mechanisms for service delivery. New mechanisms for service delivery could include peer-to-peer learning models, web-based tools, collaborations and partnerships with other public sector and non-profit entities and expanded use of outside service delivery partners.
On the types of services, centers should “expand the range of services to include new offerings in the areas of: Growth and Innovation, Leadership and Management skills, Export/International, and Green/Sustainability.” As I’ve argued before, this should also include better identification, fostering and utilization of intangible assets. Such a focus is implied in the report’s recommendations, but could be made more explicit.
The study lays out a clear path for improving the MEP business model. I hope its recommendations are now implemented

COMPETES Act reauthorization passes

Just a little while ago, the House of Representatives agreed to the Senate amendment version of the America COMPETES Act reauthorization (HR 5116) – clearing the bill for the President’s signature. The Senate passed the bill on Friday by unanimous consent. The bill is being described as some as a compromise, as it does not contain some of the provisions and the funding levels that passed the House earlier and were being supported by the Obama Administration. However, it does contain certain provision I have discussed in earlier postings.
The first of these (Section 404 of the bill) gets the Manufacturing Extension Partnership Centers into the product development game. Under the new Innovative Services Initiative, Secretary is to set up programs in MEP to assist SME in “accelerating the domestic commercialization of new product technologies.” I would note that the original Senate language said the Secretary “may” create the program (which I complained about earlier). The new language says “shall” set up the program — a big improvement.
In addition, there is a requirement for a study to “evaluate obstacles that are unique to small manufacturers that prevent such manufacturers from effectively competing in the global market.” I would argue that one of the problems is the inability of small manufacturers to effectively manage their intangible assets. This issue should be included in this new study.
The second provision (Section 602of the bill, which creates a new Section 23 of the Stevenson-Wydler Technology Innovation Act of 1980) is the creation of a program of loan guarantees for projects that “reequips, expands, or establishes a manufacturing facility in the United States to (1) use an innovative technology or an innovative process in manufacturing; or (2) manufacture an innovative technology product or an integral component of such product.” The program also uses MEP Centers as an outreach mechanism for the loan guarantees. I would hope that the definition of an innovative process includes organizational innovations.
The legislation also requires the Commerce Department to undertake a study on economic competitiveness and innovative capacity of United States and develop a National Economic Competitiveness Strategy. The earlier Senate version of this study had it being conducted by the Office of Science and Technology Policy (OSTP). As I noted earlier, I thought that OSTP was the wrong place to conduct the study and develop the strategy. Competitiveness and innovation are much broader concepts than S&T and R&D. Placing competitiveness and innovation strategy in OSTP will drastically narrow the view for such a policy.
Thus I am very pleased that the final version places this activity at Commerce. I am also very pleased that the final version also explicitly and significantly broadens the scope of the study and the strategy. For example the study is required to look at investment in human capital and ways to facilitate entrepreneurship.
The original law created a Cabinet-level President’s Council on Innovation and Competitiveness (PCIC) as a mechanism to “develop a comprehensive agenda for strengthening the innovation and competitiveness capabilities of the Federal Government, State governments, academia, and the private sector in the United States.” Since both the Bush and Obama Administrations ignored requirement, I am hoping that the new study requirement will spur some action (especially since it doesn’t contain opt-out loophole in the original law).
In sum, while the bill is not what everyone have hope for, from my perspective it is a good step forward. I congratulate everyone who worked so hard to finally enact this bill.

The intellectual history of intellectual capital and intangible assets

OK – no, this really isn’t an intellectual history of intellectual capital and intangible assets. But it is a fun look at how those terms (and the term “intellectual property”) has appeared in the past. Google has created a new application — Books Ngram Viewer — that allows you to chart how often a phrase is used in books from 1800 to 2000. Below are the results. For the phrases intangible assets and intellectual capital, there were spikes of interest around 1920 (with some earlier and later smaller spikes of interest in intangible assets). The phrase intellectual property really did start to be used until the mid-1980’s.
The application not only charts the use of the phrases, it gives you access to the searches as well. I would note that a review of this search for very early citation reveals that some entries are misdated. Still, plenty of raw information for someone who wants to look into the intellectual history of intellectual capital.
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More on intangibles and the recession

Earlier this week, I posted an item on how knowledge intensive sectors — professional, scientific & technical services, information industries and the educational services — grew during the recession but have declined in the “recovery.”
A couple of readers got back to me with what seems to be a plausible explanation: the structure of the business. Contracts for these types over activities are on more of a long term basis – or at least are such that there is a lag function. As companies cut back on professional services in the recession, the cuts didn’t actually hit these services until later as contracts were renegotiated.
The opposite seems true about financial services, however. They dropped in 2007 and 2008 and then rebounded in 2009. That makes perfect sense, however, since it is a financial crisis driven recession.
This raises an interesting point, however. Are knowledge creating industries partially countercyclical? Or is there at least enough of a lag that early stimulus support for these industries could dampen a downturn? One of the standard critiques of any stimulus package is that by the time the money gets spent, the upturn has already occurred. But if there are significant parts of the economy where the downturn is delayed or otherwise lags, then the stimulus might actually arrive at the right moment to be the most effective. An interesting thought to ponder (for the next time).

Taxes and intangible – a principle for reform

With the imminent passage of the tax deal, the focus of policy attention is shifting to the possibility of a larger tax reform package next year. Already, the idea is being teed-up of widen base (cut loopholes and special credits) and lower corporate rates.
From an economics point of view, that is a laudable goal. If you want to understand America’s dysfunctional industrial policy, just look at the tax code. The current tax deal is a microcosm of that situation with special treatment for a host of industries from movie productions to rum distillers to NASCAR tracks.
But there is another guiding principle of tax reform — and that is equal treatment. I would specifically extend that principle to treating investments in intangible assets the same as tangible. The tax code should not distort investment decisions by skewing it toward physical assets.
In this regard, the current tax deal is an example of how that principle should operate but doesn’t. In the stimulus bill (sec. 144(a)(12)(C)), there was a minor change to allow the use of industrial development bonds (IBDs) to finance facilities manufacturing intangible property. Before this change, only traditional factories were eligible for this program. The change would allow local government to support new facilities for software development or bio-tech research facilities, for example, as well.
That provision will expire at the end of the year — and was not included in the tax deal. This simply act of putting physical and intangible investments on the same footing was forgotten and ignored.
That is a mindset that needs to be changed as we go forward with broader tax reform.

Today's CEO summit

This morning, President Obama is meeting with a number of business leaders to discuss the economy. Billed as a “CEO Summit” I suspect the agenda will be the standard rhetoric of cut taxes and cut regulations. There will be the obligatory mention of education and “promoting innovation.” All of which will probably be a great hand-waving exercise — until and unless we get serious about fostering and managing our intangible assets.
I doubt a proposal to create a knowledge tax credit (let alone make the R&D tax credit permanent) will be on the table. Or the proposal to double the Federal R&D budget. Or a proposal to make the investment and spend the money to create a real worker training system (as opposed to the current throw-money-at-the-unemployed-and-hope-they-can-find-a-job system).
And while the phrase “strengthening intellectual property protection” will likely be tossed around, I doubt that the summit will say much about confronting China’s forced transfer of intangible assets (technology and know-how). Yesterday’s New York Times had a detailed story on the issue — China in Push to Dominate in Wind Power. The story outlines exactly how local content requirements can be used in a catch up economic strategy to build a world-class, globally competitive industry. And, no, it has nothing to do with lack of enforcement of patent rights — these are not cases of patent infringement but forced technology transfer. It has everything to do with industrial policy.
So while I’m glad the President and the business leaders are talking, I am doubtful much meaningful will come out of it. That is too bad – since there will be a number of real leaders in the group. Maybe it will be the start of a true dialog on solving our competitiveness problems. But to do so, it needs to get beyond the macro-economy obsession and dig into the weeds of how our economic structure is changing and what to do about it. And I’m not sure this group is ready to do that.

Intangibles take a hit in the "recovery" from the Great Recession

This morning the BEA released its revisions of the industry-by-industry GDP data for 2007-2009. And it has a startling fact:

Downturns in durable-goods manufacturing and professional, scientific, and technical services along with the continued contraction of construction were among the leading contributors to the decline in U.S. economic growth in 2009 (emphasis added).

Professional, scientific, and technical services — those quintessential knowledge industries — declined by 3.4% in 2009. Information industries declined by 2.4% and the educational services sector was down by 1.4% in 2009.
Remember, the Great Recession officially lasted from December 2007 to June 2009. So 2009 was a partial recovery year.
Yet, these knowledge services actually grew in 2008 — in the heart of the downturn. Professional, scientific, and technical services grew by 4.2%. Information industries were up by 4.1% and the educational services sector was up by 1.7%.
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Why intangibles would do well in the heart of the recession and falter at the recovery is a mystery to me. Yes, I know that the recovery has been weak. But the comparison between 2008 and 2009 is striking.
By the way, the data on manufacturing is more explainable. Durable goods grew slightly in 2008 while non-durables dropped sharply. In 2009, non-durables continue to decline but durables dropped dramatically. This makes sense if you think about the lag time in purchase decisions on durable goods. People can cut back on immediate purchases on non-durables, but commitments to buy durables have a little more forward time involved.
Is the same true for intangibles? Any thoughts anyone?

October trade in intangibles

October’s trade data released this morning showed a slight improvement. The monthly trade deficit declined dramatically to $38.7 billion from September’s $44.6 billion. Exports rose by $4.9 billion while imports actually decline by $0.9 billion. The surge in exports caught economists by surprise, as they has anticipated a $44 billion deficit. This good news was due to two factors: increased goods exports and decreased oil imports. Imports of non-petroleum goods actually increased slightly.
Our intangibles trade surplus also moved in the right direction, rising ever so slightly by $70 million. Similar to last month, every category of trade increased: exports and imports of private services both increased as did royalty payments coming in (exports) and royalty payments going out (imports). Exports rose slightly faster than imports in both cases.
The big story concerning intangibles is the latest revisions in the data for the last 6 months. Over the past 6 months, exports were overstated. Royalty payments (imports) of were also slightly overstated but imports of private services were slightly understated. As a result, the intangibles trade balance was overstated by about 5% (roughly $3.5 billion total over the 6 month period). While this does not seem like a large revision, it does change the view of the situation significantly. The old (incorrect) data indicated that our intangibles surplus had finally growth past its earlier levels. The new data shows that our surplus remains lower than earlier in the year. In other words, we thought we were on a stronger growth path that we were.
Obviously there is a continuing need to improve our data collection system — especially on intangibles.
Our deficit in Advanced Technology Products decreased slightly in October to $8.5 billion as export grew faster than import. This is hardly good new, however, since the Advanced Technology Products deficit remains at near record levels. The September figure of almost $9 billion was the worst monthly deficit since the government started publishing data specifically on Advanced Technology Products. 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.
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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.