Sometime I wonder what our collective vision of the economy really is. Has it become completely divorced from reality? Take for example this story in the Washington Post that “Hurricane Sandy proves that an Internet economy is far from reality.” The story tried to make the point that the physical infrastructure still matters:
As far as the country has traveled toward online commerce, the economy still depends very much on physical highways, not just Internet highways, as well as century-old networks for physically moving people and goods.
Did anyone really think the physical infrastructure didn’t matter anymore? If so, that is news to companies like Amazon who have invested heavily in warehouses and “fulfillment centers” as well as “server farms.” As the story points out, people have gotten used to ordering goods online rather than going to the store. But that is the focus of the difference — going to the store or going to your computer. The goods still have to physically move somehow.
On the other side, there are examples of how the virtual world has changed. For example, as the Wall Street Journal reported (“Sandy–The Social-Media Phenomenon” and “Technology Softens Sandy’s Impact for Advisers, Clients“), millions relied on Facebook and Twitter for information on the storm — especially on smartphones and tablets as power went out. And companies used both mobile and shared (“cloud”) technologies to continue to conduct financial business even though the markets were closed. The Post story notes that the financial markets thought about trying to stay open electronically, but decided the infrastructure (including the supervision and regulatory infrastructure) were not yet adequate. I suspect that the lessons of Sandy will push the financial markets more toward virtual and away from physical.
The point here is simple: both virtual and physical are real. We are developing the an economy where each compliments the other. It is similar to the evolution of the economy to a fusion of “manufacturing” and “services” (but that is another story).
Once again, both/and is a better description of reality than either/or.
The U.S. economy picked up speed in July-August-September time period (3Q 2012) according to news from BEA this morning. GDP grew by 2% in the third quarter, compared with 1.3% in the second quarter. GDP grew by 2& in 1Q 2012 and 4.1% in 4Q 2011. The 3Q 2012 growth rate was slightly higher than economists’ forecast of 1.8% (according to the Wall Street Journal).
Much of the increase was a sharp increase in government spending on national defense and in residential construction. Business investment in equipment and software was flat (0.0% change) compared with a 4.8% increase in 2Q 2012. 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.
As I’ve also mentioned before, BEA has plans for a major revision in the GDP calculations next year. Two big changes will help make the GDP data more accurate: capitalization of research and development (R&D)and capitalization of entertainment, literary, and artistic originals (movies, music, books, art work, etc.) Currently, both R&D and the cost of creating entertainment, literary, and artistic originals are treated as a direct expense. Under the new system, they will be treated as investments, as they should be since they have long paybacks not just immediate returns.
As part of this shift, investments in these items with be specifically captured in the nonresidential fixed investment data. There will be separate data for software (now a subcategory of equipment), R&D, and entertainment, literary, and artistic originals. This should allow us to get a better picture of the I-Cubed Economy.
Final note: the BEA data on GDP is the “advanced estimates” subject to potentially large revisions. The next revision will be released on November 29.
Over at Inc. magazine there is a great little piece on the “6 Reasons Layoffs Are Really Dumb.” Each of the 6 is a way in which layoffs reduce intellectual capital (especially a regular practice of layoffs):
Innovation loss: Innovation is a group process. Break the group dynamics, you break the innovation process.
Intellectual property loss: Should be obvious, know-how is what makes IP work.
Business relationships: Losing that relational capital
Cost: It costs to rebuild the lost intellectual capital
Trust: Key part of your structural and human capital that affects morale, employee effectiveness, and productivity.
Turnover of important talent: Layoffs and lack of trust drive everyone to look for other jobs. “In other words, you chase your top talent off to your competitors.”
As I’ve said many times, company executives mouth the words “people are our most important asset” but continue to treat people as a cost. The above are 6 reasons why that is a bad business decision. Just ask Circuit City.
For all you data geeks out there, an international group of researchers has put together a cross-country intangible investment data website based on the Corrado, et al. framework (see the latest version Carol Corrado, Jonathan Haskel, Cecilia Jona-Lasinio and Massimiliano Iommi, (2012), “Intangible Capital and Growth in Advanced Economies: Measurement Methods and Comparative Results.”) The data comes from work of the EU’s INNODRIVE project (Intangibles and Innovation), the COINVEST project and The Conference Board.
Note that the data relies on existing sources of government and private sector data. That data can be difficult to obtain and not completely internationally comparable in some cases. For example, the EU collects data on investments in apprenticeship programs; the US apparently does not. Analysis using data from existing sources has shown the importance of intangible assets. We now need more attention to data collection — maybe along the lines of the various OECD statistical manuals (such as the Frascati Manual for R&D data and the Oslo Manual for innovation data). How about a Washington Manual for intangibles data?
BTW – the Corrado report cited about opens with the Bernanke quote from our New Building Blocks conference in May 2011. The issue of data was one of many topics discussed at the conference. For conference reports, see Intangibles Conference Report September 2011, and New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value — Conference Observations. These reports and other conference documents are available at the New Building Blocks Forum.
Crowdfunding is the hottest thing in entrepreneurship and finance. Earlier this year, Congress passed the Jumpstart Our Business Startups (JOBS) Act that legalized the ability to use crowdsourcing platforms to raise investor funds. The industry has already formed
the Crowdfunding Professional Association and the recent Crowdfunding Bootcamp drew enthusiastic response (see “Crowdfunding is the Real Deal – a Report from the Crowdfunding Bootcamp“). As that editorial said:
Crowdfund investing (as part of the JOBS Act) passed both houses of Congress with one of the largest bipartisan votes of the current congressional session. It represents not just Democrat and Republican ideals about how the security markets should operate in 2013 and beyond but the WILL OF THE AMERICAN PEOPLE to create jobs and support small business, entrepreneurs and innovation. If regulators chooses to delay or throttle the opportunity that Congress and the President signed into law, they are reversing what both houses of Congress and The President have passed. Crowdfund Investing is Web 3.0 where social networks meet community financing. As we learned at the event, it has been operating in similar but limited fashion in Australia and the UK for up to 7 years, and has been operating free from fraud.
On the other side is this piece in Forbes: “Crowdfunding: Potential Legal Disaster Waiting To Happen” that predicts “plenty of lawsuits” both for fraud and for failure:
Many crowdfunding investors will not be able to provide useful feedback since many of them will be seeking a “get rich quick” scheme; and they will be sadly disappointed when the business they invest in fails since many do within the first 5 years. For every Facebook, there are ten Friendsters.
Such business failures will inevitably result in litigation as people attempt to recoup whatever money they can from a failing crowdfunding entity.
Unfortunately, I think both sides are talking past each other. Crowdfunding represents a tremendous opportunity for funding entrepreneurs. But there will be failures and there will be fraud. Already there is an issue of so-called “blank check” companies attempting to use the law to circumvent standard regulations (see earlier posting). How the system copes with these issues will determine if crowdfunding lives up to its potential (it will never live up to its hype).
In an earlier posting, I made the point that the JOBS Act needs to be seen as a regulatory experiment. However, I don’t think either the supporters or critics see it that way. Too bad.
Gary Pisano and Willy Shih (of Harvard Business School) have a new book out Producing Prosperity: Why America Needs a Manufacturing Renaissance. The book is a follow on to their influential HBR paper “Restoring American Competitiveness” (see earlier postings). You can also listen to a recent interview with Pisano and Shih on The Takeaway.
According to the summary of the book on the HBS blog Working Knowledge:
Pisano and Shih maintain that their proposals are intended to encourage the regeneration of the “industrial commons”-the “R&D and manufacturing infrastructure, know-how, process-development skills, and engineering capabilities”-resulting from the clustering of universities, suppliers, and manufacturers in industries such as biotechnology, electronic components, and semiconductors in which rapidly-developing innovations in processes and process technologies are taking place.
They are many of the same industries in which constant interaction between R&D and manufacturing are most important, industries where the outsourcing of manufacturing to another country can not only prove to be destructive to the innovative process but to the industrial commons as well. It can lead to the demise of entire industries.
Note that Pisano and Shih are not calling for the return to the US of jobs in mature industries or those in which product innovation can be separated from manufacturing. Nor are they claiming that this will create many new jobs, since (1) manufacturing will probably never again amount to more than about 10 percent of total employment in any of the world’s developed economies and (2) the return of manufacturing activity to the US will have to be accompanied by increased productivity, probably through investments in technology that eliminates jobs.
Their argument is more basic. It is that the innovative capabilities critical to maintaining industrial leadership are being threatened and need defending.
Rebuilding the industrial commons will, they argue, require efforts by both government and management. Government will contribute by providing support for the educational system, with incentives to encourage advanced study in engineering as well as information and manufacturing-related technologies. In addition, they call for a national economic strategy for manufacturing, with an emphasis not on “picking winners” among companies or even industries, but on providing support for basic process-oriented innovation that can be utilized by competing companies in several industries.
What has always been an important point in Pisano and Shih argument is the focus on the evolution of manufacturing. This is not the mass production factory or the 1950’s but a highly technologically sophisticated organization tied closely to the entire value-chain and highly dependent on intangible assets. As I have argued too many times to count in this blog (including in our Athena Alliance Policy Brief–Intellectual Capital and Revitalizing Manufacturing), manufacturing is an integral part of the new I-Cubed (Information-Innovation-Intangibles) Economy. Pisano and Shih’s work underscores that point in an rigorous and important way.
Our friends over at BVR’s IP Management & Valuation Wire have an interesting tidbit in their posting “Does this conveyance include trademarks of the seller?” They tell the story of a court case where a trademark was kept by a seller, even though all goodwill assets were sold:
The case is Axiom Worldwide, In. v. HTRD Group Hong Kong Ltd., No. 8:11-cv-1468-T-33TBM (M.D. Fla. July 18, 2012), and the decision hinged on whether “goodwill” included the trademarks under which the seller did business, a question analysts could readily answer in a valuation context. The court found that since the agreement did not specifically represent a sale of all of the assets, the seller retained some assets, and the seller used the trademark after the sale in question, the trademark was not part of the deal.
So maybe those “all asset” liens which everyone assumes includes all intangible assets really don’t include all intangible assets.
See also Pamela Chestek’s blog, Property, Intangible, posting for additional comments.
Following on yesterday’s posting about the importance of human capital, here is a story from Time indicating that many companies still don’t get it — “Health Changes Spur Test of More Part-Time Workers.” According to the story, some companies are moving workers from full-time to part-time status so they don’t have to pay for health care costs. In other words, workers are not an asset — they are just a cost to be reduced whenever possible and by whatever means legally available. In all fairness, the story’s example comes from a restaurant chain where part-time work is the norm. But it is a view that seems all too prevalent across the economy, especially in the retail and hospitality sectors. As the story notes: “In fact, Paul Keckley, executive director of the Deloitte Center for Health Statistics, noted that follow-up legislation might be needed to ensure that companies do not shift more workers to part-time status to avoid providing coverage.”
Is this the best way to manage a key asset?
Late last month, the Government Accountability Office (GAO) released a new report on government training — Federal Training Investments — that critiqued both agency practices and Office of Personnel Management (OPM) oversight. Most telling to me is that the report documents the inability of the federal government to know how much it spends on investments in human capital. Only 16 of 27 agencies surveyed tracked training investments. The report looked specifically at the problems of existing data collection systems in four departments – Energy, Homeland Security, Interior and Veterans Affairs. The findings are dismaying: “officials from all four agencies were unaware of the total amount their agencies invest in federal training and stated that they could not provide reliable training data to OPM, which requests these data to address its government-wide training responsibilities.” And two of those, Energy and Veterans Affairs, were among those claimed in the survey to train training investments agency-wide. Problems ranged from incompatible information technology systems across parts of the organization to “inconsistencies in how agency components capture and code workforce training into their system because they lack a common definition for what types of activities should be considered training or have varying coding schemes or tools for capturing the cost.”
The federal government has long been involved in workforce training. The Government Employees Training Act of 1958 recognized the need for continuous training of the workforce. In 2002, the bill that created the Department of Homeland Security also mandated a Chief Human Capital Officer (CHCO) within each agency and created a Chief Human Capital Officers Council. One of the functions of the agency Chief Human Capital Officers specifically stated in the law includes “applying methods for measuring intellectual capital and identifying links of that capital to organizational performance and growth.”
However, measuring intellectual capital is difficult when your internal systems for tracking investments in intellectual capital are non-functioning. That clause in 2002 Act gave CHCOs a big mandate for understanding and promoting intellectual capital in general and human capital specifically. As the GAO report notes, there is still much to be done to even start addressing the mandate.
The WSJ Real Time Economics blog has a chart showing the slow down of US exports (“Vital Signs Chart: Slowing Export Growth“). The chart indicates that export growth has slowed dramatically since the middle of 2011. Is the story the same with respect to intangibles?
The answer, as shown in the two charts below, is yes. Except for a period roughly between 1998 and 2000, the trends in intangible exports (the blue line) generally tracks total exports (the red line) and the export of goods (the green line). The point is that trade in intangibles is not separate from trade in general. Exports of intangibles and goods are linking. The idea that trade in just intangibles (or “services”) will solve the trade deficit is not defensible. We need to use our intangible assets and intellectual capital to reinvigourate all parts of the economy through improving the competitiveness of US based production of goods and services. The result will be boosting exports and reducing imports and thereby reducing and eventually eliminating the trade deficit.