Kevin Hassett and Rob Shapiro have released an update of their 2005 report on intellectual property. The new study, What Ideas Are Worth: The Value of Intellectual Capital And Intangible Assets in the American Economy reports that the value of intellectual capital (really intellectual property) has grown from between $5 and $5.5 trillion in 2005 to between $8.1 and $9.2 trillion in 2011. They have also tried to extend that estimate to a broader range of intangible assets (without however, a clear definition of what that entails). [By the way, much of the report is a study on why stronger intellectual property enforcement is needed.]
I have to say that these estimates seem excessively high. They are derivative estimates based on an imputation from current stock market values and from ratios provided by the more extensive economic analyses of Corrado, et al. The stock market imputation is especially troublesome as it assumes all of the value between book value and market value is due to intangible assets (so intangibles get basically defined as everything left over, just like “goodwill”). An alternative method they used is also somewhat of concern in that it based on the assumption that “intangible and tangible investments have the same or very similar productivity and depreciation rates.” I am not at all sure that assumption holds.
But, in sheer dollar value, the analysis does demonstrate the importance of intangibles to the U.S. economy. And the concerns over the methodology point to the crying need to improve our measurements of intangible assets. The authors have tried to make a good faith estimate — and have shown just how hard that can be to do.
We know intangible assets are important. Now we need to better understand just how important and what we can do to better foster and utilize these assets to increase economic prosperity.
Bloomberg news is reporting that a group of Kodak lenders has sent the company Board a letter warning them of their fiduciary duty on patent sales:
The second-lien lenders, who are being advised by Akin Gump Strauss Hauer & Feld LLP, cautioned the company it could face lawsuits if it sells patents for less than market value, said people familiar with the matter.
However, as Joff Wild points out in his blog, if the lenders have a $3 billion price tag in mind (which some have speculated on), they are likely to be disappointed:
Nobody I have spoken to about the sale -who could express an opinion on it – believes that the Kodak patents will fetch close to that amount (though to be fair, no-one thought that the Nortel portfolio would raise close to $4.5 billion either).
He also references the recent report by M-CAM on the digital portion of the Kodak patent portfolio that found “at least 31% of the portfolio are impaired and unlikely to be of commercial value.”
Such an over expectation by the lenders of the patents’ “market value” could be the trigger for a massive lawsuit. That in turn would be a major wake-up call for all company Boards of Directors.
I have been saying for some time that intangibles will take center stage in Corporate America when a Board is first sued for failure to exercise their fiduciary duty on their intangibles. That day may be fast approaching.
One of the major topics at our New Building Block conference on intangible assets last May was the need to different parts of a company to work together on intangibles. Too many parts of a company see intangible assets as the blind men understand the elephant with each believing that the small part he could feel constituted the whole: one said it is a rope (the tail); another, a wall (the body); another, a water spout (the trunk); and yet another, a tree trunk (the legs). Like the blind men, people experience intangibles from different points of view depending on their role and expertise, whether they are business managers, accountants, lawyers, risk managers, investors, or public policymakers.
A clear example of the need for the different parts to work together can be found in a recent posting over at BVR’s Intellectual Property Blog — “Appeals Court says Dish Network Corp. insurers must provide legal defense for patent infringement”. As the title suggests, the posting tells of a recent court case on a liability insurance case where the terms of the coverage were in dispute. Their bottom line:
IP managers should work closely with risk managers and monitor insurance policy addenda that now might try to re-define “advertising injury.”
I would broaden that finding some what, that IP managers and risk managers should always be working closely to make sure that their assets are both understood and properly protected. And that is but one small example of how everyone in a company needs to understand intangible assets.
Yesterday, Congressman Dave Camp, the Chairman of the House Committee on Ways & Means, unveiled his proposal for comprehensive tax reform. Most of the focus of attention on the proposal has been on reduction of the corporate tax rate to 25% and a shift to a “territorial” system (which would mostly exempt overseas earnings from US taxes). However, the proposal also address the issue of the taxation of intangible assets. As the summary of the proposal states, the legislation:
Address concerns expressed by commentators that under a participation exemption system, U.S. companies would have an increased incentive to shift income to foreign jurisdictions, especially through the migration of intangible property overseas. To this end, the Committee has included three possible antiabuse rules for consideration: (1) President Obama’s “excess returns” proposal; (2) a variation on the low effective tax rate test used in other countries such as Japan; and (3) an option that would lower the corporate tax rate for all foreign intangible income (whether earned by a U.S. parent or its CFCs) to only 15%, but would treat a CFC’s foreign intangible income as subpart F income if it is taxed at a rate less than 13.5% (90% of the U.S. rate). This last option combines the carrot of an “innovation box” and royalty relief with the “stick” of a current (subpart F) inclusion for intangibles-related income of CFCs in low-tax jurisdictions.
This last option is similar to what I have suggested for tying a “patent box” with a tightening of intangible assets transfers (see earlier posting). However, I would also suggest crafting the patent box rate so that it applies only to royalties for new licenses for a limited time, such as a sliding scale for three years.
I would also note that President Obama’s FY 2012 contains provision on taxation of intangible transfers (see posting early this year). This is the “excess returns” proposal referred to in the above summary of the Camp legislation.
The Camp proposal is just an opening shot in the debate over tax reform. Even the Congressman admits that any final package is a long way off. But, it is very interesting that the issue of taxation of intangible assets and the movement of intangibles to low tax countries (tax havens) is part of the debate.
Some good news on the economy today. The BEA’s advanced estimate of US GDP shows the economy grew by 2.5% in the 3nd quarter of 2011. That is a much stronger growth that the 2nd quarter’s 1.3%. Estimates earlier this week, according to the Wall Street Journal were for a growth rate of 2.7% with some economists thinking that it could be as high as 3%. Good news is that investment in equipment and software increased 17.4% in the 3rd quarter percent, compared with an increase of 6.2% in the 2nd quarter. That indicates that companies are ramping up production. Interestingly, data shows that while companies are increasing spending on capital goods, their uncertainty over the future of the economic is increasing (see Wall Street Journal story).
On the bad news side, state and local government spending continues to be a drag on the economy. With the failure of Congress to allocate funds to help struggling local governments, this is an overall negative for the economy.
Note: these are advanced estimates subject to potentially large revisions. The next revision will be released on November 22.
And, as I have noted before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.
A new study by Tony Carnevale and his colleagues (at the Georgetown University Center for on Education and the Workforce) on STEM (Science, Technology Engineering and Mathematics) makes an important point:
As the nature of innovation changes, the cognitive competencies traditionally associated with STEM are intensifying in a host of non-STEM occupations. The dispersion of cognitive competencies outside of STEM has resulted in an artificial shortage–not of workers, but of workers with STEM competencies.
. . .
The growing demand for STEM competencies outside traditional STEM occupations requires a more broad-reaching strategy in the American K-16 education system. The dialogue on the adequacy of our STEM workforce ultimately leads to the more comprehensive conversation about American education
In other words, we need to focus on the STEM competencies not specific STEM occupational training.
I would even go one step further and argue that we need to associated with STEM rather than just on the traditional training in science, technology, engineering and mathematics.
The Appendix A to the full report goes in more detail as to the types of competencies associated with STEM, both skills and abilities. A shorted list of skills include:
• Critical Thinking: Using logic and reasoning to identify the strengths and weaknesses of alternative solutions, conclusions, or approaches to problems.
• Active Learning: Understanding the implications of new information for both current and future problem-solving and decision-making.
• Complex Problem Solving: Identifying complex problems and reviewing related information to develop and evaluate options and implement solutions.
• Operations Analysis: Analyzing needs and product requirements to create a design.
• Problem Sensitivity: The ability to tell when something is wrong or is likely to go wrong. It does not involve solving the problem, only recognizing that there is a problem.
• Deductive Reasoning: The ability to apply general rules to specific problems.
• Inductive Reasoning: The ability to combine pieces of information to form general rules or conclusions (includes finding a relationship among seemingly unrelated events).
I would suggest that the reason why a certain level of STEM knowledge is so critical is because they teach these foundational skills. But a STEM education is not the only way to acquire this foundation and set of skills. Let’s face it, there are students who are turned off by the traditional STEM educational experience. Rather than blindly push more and more math and science on these students, let’s find away to provide the foundational skills directly. Not everyone needs to understand calculus. But everyone should have a strong grounding in critical thinking, problem solving and inductive and deductive reasoning.
This is not to say that we don’t need to train more STEM specific workers – and give more workers STEM competencies. As the report points out, more and more non-STEM occupation require STEM skills such as the ability to use mathematical formulas and understand probability and statistics. [BTW — probability and statistics is something that we don’t seem to do a good job teaching right now – but that is another story.]
But focusing on the foundational skills for all — and the STEM specific skills where appropriate — will go a long way to strengthening our economic competitiveness.
The consulting company Booz & Company has released their latest Global Innovation 1000 (see also the article in Strategy+Business). No big surprises in the list – with Apple as #1 followed by Goggle and 3M. Facebook made it into the top 10. Consistent with previous reports, the study found that those who spend the most on R&D aren’t necessarily the most innovative:
There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.
Rather, it is the intangibles that matter:
The elements that make up a truly innovative company are many: a focused innovation strategy, a winning overall business strategy, deep customer insight, great talent, and the right set of capabilities to achieve successful execution. More important than any of the individual elements, however, is the role played by corporate culture — the organization’s self-sustaining patterns of behaving, feeling, thinking, and believing — in tying them all together.
Strikingly, the report highlighted the failure of many companies to understand this:
As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies. Possibly even more surprising, nearly 20 percent of companies said they didn’t have a well-defined innovation strategy at all.
To my mind, this problem is indicative of a larger failure of the standard mindset of the innovation blackbox — R&D spending it; “innovation” out. Apparently, a fair number of companies don’t know how dig any deeper to recognize or utilize their intangibles assets. And public policy doesn’t know how to foster anything but the flawed linear model of innovation as represented in the blackbox approach.
The innovative companies get this. Apple is a case example of a company that fully exploits its intangible assets — from great design to a strong customer experience. By the way, a strong orientation to customer experience was the top most innovative cultural attribute named in the report.
So — where is the public policy to help companies understand and utilize their intangibles?