A new report out by the OECD is continuing its path breaking work on the knowledge-based economy. As you will recall, earlier this month they released their large report on Supporting Investment in Knowledge Capital, Growth and Innovation (see earlier posting for highlights). Last week, the OECD release its Science, Technology and Industry Scoreboard report for 2013 (click here to download or select specific sections).
The report contains statistics on a number of economic measures and measures of science and technology. However, the report goes beyond these traditional measure to include data on innovation and knowledge-based capital (more on this below). The highlights from the report are as follows:
Investment in innovation remains a priority. 27 of the 34 OECD countries and a number of partner economies now indirectly support business R&D via tax incentives. In 2011, the Russian Federation, Korea, France and Slovenia provided the most combined – direct and indirect – support for business R&D as a percentage of GDP. In Canada and Australia, indirect funding of business R&D exceeded direct funding by a factor of five. New estimates show that the cost to a firm of investing in R&D depends on its size, location and balance sheet. In 2013, Australia, Canada, France, Korea, the Netherlands and Portugal are giving more generous treatment to SMEs.
Young, dynamic firms contribute more to job creation than previously recognised. Between 2008 and 2011, net employment in the OECD area fell by 2%, or 9 million people, two-thirds of them in the United States. The manufacturing and construction sectors were the hardest hit but information industries – ICT manufacturing, publishing or telecommunication services – suffered too. During the crisis, most jobs destroyed reflected the downsizing of mature businesses; net job growth in young firms (5 years old or less) remained positive.
Foreign consumers sustain jobs. As the interdependency of countries grows, consumers in one country sustain jobs in countries further up the value chain. In 2008, 20% to 45% of business-sector jobs in most European economies were sustained by foreign demand. Compared to 1995,these shares increased in all countries; in Germany it rose more than 10%. Shares are smaller in Japan and the United States owing to their relatively large size and lower export/import dependency. Nonetheless, initial estimates suggest that over 10 million US jobs were sustained by foreign consumers, with 2 million of these due to East and Southeast Asian consumers.
Trade in value added provides a new perspective on trading relationships. The OECD-WTO Trade in Value Added (TiVA) indicators reveal that export performance from countries has become dependent on imports from a greater number of economies. For example, in China, over 1995-2009, gross exports increased about 12-fold at current prices while the foreign value-added content of exports only tripled to over 30%.
Researchers are increasingly mobile. A new indicator tracks changes in the affiliation of scientists who publishing scholarly journals. The top nine international bilateral flows of researchers coming into and leaving a country involve exchanges with the United States. While total US inflows exceed the outflows, more scientists who start by publishing in the United States move to affiliations inching and Korea than vice versa. The United Kingdom is the second most-connected economy. On average, the research impact of scientists who move affiliations across national boundaries is nearly 20% higher than that of those who never move abroad. Raising the performance of these “stayers” to the level of internationally mobile researchers would allow many economies to catch up with leading research nations.
University hotspots are still concentrated in a few locations. Worldwide, the top 50universities with the highest relative impact over 2007-11 are highly concentrated geographically but less so than over 2003-09. Overall, 34 of the top 50 are located in the United States. The rest are in Europe, and, for the first time, two are outside the OECD area. The United Kingdom is second, with specific strengths in the medical and social sciences.
Emerging economies increasingly play a role in science and innovation. In 2011, China was the second-largest R&D performer after the United States, ahead of Japan, Germany and Korea. It was also the second largest producer of scientific publications, accounting for more than 74 000collaborations in 2011, up from 9 000 in 1998. Over this period, the number of Chinese publications co-authored with US-based institutions increased from nearly 2,000 to over 22,000.
Digging a little deeper into the report, I would like to highlight a few of the more interesting new statistics concerning intangibles and knowledge-based capital.
As the two graphs below show, investment knowledge-based capital is important in most OECD countries:
(Data available at dx.doi.org/10.1787/888932889820 and dx.doi.org/10.1787/888932889820).
Likewise, the knowledge-based capital related workforce is of major importance:
(Data available at dx.doi.org/10.1787/888932890618)
Publications cited in patents applications by discipline shows the range of knowledge inputs:
(Data available at dx.doi.org/10.1787/888932890352.)
Related is another new statistic is the value added by services in the production of goods that highlights the point I have been making about the fusion of manufacturing and services (note there is a section in the report specifically on the manufacturing/service linkage):
(Data available at dx.doi.org/10.1787/888932889915.)
As noted above, the report has many, many more interesting data points. It should serve as a valuable reference for our ongoing discussion of the intangible economy.
The delayed trade numbers for August are out and show a status quo economy. The deficit dropped by a slight amount ($0.2 billion) to $38.8 billion while exports dropped by $0.1 billion and imports were unchanged. Economists had forecast a rise in the deficit to $39.4 billion.
Our trade surplus in pure intangibles reflected the overall trend, staying a $16.1 billion. Exports and imports of business services both rose slightly while royalty receipts (exports) and royalty payments (imports) both declined slightly.
The good news is that the Advanced Technology deficit dropped to $5.9 billion from July’s $8.3 billion. The positive trend was generally across the board, with aerospace and information and communications technology showing the biggest improvements.
Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles reveals an overall surplus of $10.2 billion in August, compared to $7.9 billion in July.
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.
The delayed employment numbers for September were released by BLS this morning and, once again, indicate positive but little changed economy. The unemployment rate ticked down by 0.1% to 7.2% and payrolls grew by 148,000. The number of net new jobs was revised down for July but up for August. Economists has been predicting an increase of 180,000 jobs for September (see Bloomberg and WSJ).
A bit of bad news is that the total number of involuntary underemployed (part time for economic reasons) increased in September, reversing August’s dramatic declined. The number of those on slack work increased while the number of workers who could only find part time work dropped slightly. The increase in slack work may be due to cut backs due to the government shutdown. It is also unclear as to the effect of the ACA (aka ObamaCare). The drop in those who could only find part time work indicates that workers are not being shifted to part time. However, that shift to part time could be misreported in the statistics as part time due to slack work.
The slight good news is that even with the rise in involuntary underemployed in September, the trend line is down. As the chart below shows, however, we are still a long way from the pre-crash levels. Whether this is the remnants of a cyclical trend or reflects a structural change remains to be seen.
Today, the OECD released its new report on Supporting Investment in Knowledge Capital, Growth and Innovation. This final report of their project on New Sources of Growth: Knowledge-based Capital. (See also an OECD video describing the research).
I have a special interest in this report as the project kicked off at our New Building Blocks conference in 2011. For more on that conference see the Intangibles Conference Report September 2011 and my white paper New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value — Conference Observations. A one-page summary of the paper is also available and more materials are available at the conference archives. The report also references a number of Athena papers on the use of intangibles in financing.
We will be posting more on the report later, but here is a summary. To begin with, OECD is using the term “knowledge-based capital” (KBC) to describe intangible assets including R&D, data, software, patents, designs, new organizational processes, business models, workforce skills and firm-specific skills. The report looks specifically at public policy in the areas of innovation, taxation, entrepreneurship, competition, corporate reporting and intellectual property. Their findings and recommendations are as follows:
• Business investment in KBC helps boost growth and productivity. Studies for the European Union and the United States show business investment in KBC contributing 20% to 34% of average labour productivity growth.
• KBC is transforming what makes firms competitive. For instance, in the automotive sector, software is increasingly prominent in the cost of developing new vehicles, with high-end vehicles relying on millions of lines of computer code.
• Countries that invest more in KBC are also more effective in reallocating resources to innovative firms. As a share of gross domestic product (GDP), the United States and Sweden invest about twice as much in KBC as Italy and Spain, and patenting firms in the United States and Sweden attract four times as much capital as similar firms in Italy and Spain.
• Overall tax relief for R&D, when factoring in cross-border tax planning by Multinational Enterprises (MNEs), could well be greater than governments foresaw when their R&D tax incentives were designed. Countries may be losing tax revenue on the output from subsidised R&D and also losing out on domestic knowledge spillovers associated with production. We also need to recognise the risk that increasing countries’ reliance on tax incentives to boost R&D could increase the amount of foregone tax without a commensurate rise in innovation.
• Furthermore, firms that are not part of a multinational group of companies – often small and young firms – may be placed at a competitive disadvantage, relative to MNEs, in undertaking and exploiting R&D. In addition, more data are needed to estimate the amounts of income being shifted to low and no-tax countries through MNE tax planning involving KBC.
• Industries founded on KBC raise new issues for competition policy, particularly in the digital economy, where competition differs in some respects from other sectors.
• Intellectual property rights (IPR) are an increasingly important framework condition for investing in KBC. But IPR rules have not always kept pace with technological change – many copyright systems, for instance, were designed for a world of paper and print and may inhibit new digital services.
• Across countries, there is a positive correlation between the market value of firms and investment in KBC. But corporate financial reports provide limited information on companies’ investments in KBC. This may hinder corporate finance and impair corporate governance.
• A fuller understanding of innovation and growth, and better policy, require better measurement of KBC and common measurement guidelines.
• Growing business investment in KBC amplifies the importance of getting human capital policies right. Human capital is the foundation of KBC: software, for example, is essentially an expression of human expertise translated into code.
• The rise of KBC also has profound implications for employment and earnings inequality. A KBC-based economy rewards skills and those who perform nonroutine manual and cognitive tasks, but may also reward investors (who ultimately own much of the KBC) over workers.
Key policy recommendations
• Getting the key framework conditions right for investment in KBC is essential and can be a low-cost step for policy makers in fiscal terms. Appropriately crafted framework conditions are important for the creation and retention of high-value jobs in global value chains (GVCs).
• Well-functioning product and labour markets, and systems of debt and early-stage equity finance, are essential to encourage KBC investment. Bankruptcy laws that do not overly penalise failure are also important. Reducing the stringency of bankruptcy legislation from the highest to the average level in the OECD could raise capital flows to patenting firms by around 35%.
• Policy makers should adopt an enlarged concept of innovation, beyond the conventional view in which R&D is pre-eminent. Other forms of KBC, such as design, data and organisational capital, should also be policy targets.
• Policy should make it easier for firms to develop and commercialise new ideas by lowering the costs of failure and encouraging firms to experiment with potential growth opportunities.
• Improved design of R&D tax credits, such as greater targeting to stand-alone firms without the cross-border tax planning opportunities available to MNEs should be implemented, alongside reducing the unintended tax relief for MNEs on KBC use.
• Governments can take steps to facilitate companies’ reporting of investments in KBC. In the near-term, countries are encouraged to develop additional measures via satellite accounts so as to maintain the international comparability of GDP.
• Competition policy should: properly account for competition among platform providers; eliminate unnecessarily anti-competitive product market regulation; and effectively enforce competition law, which will protect and encourage innovation.
• Creating economic value from large data sets is at the leading edge of business innovation. OECD governments must do more to implement coherent policies in the fields of privacy protection, open data access, information and communications technology (ICT) infrastructure and ICT skills.
• In economies increasingly based on knowledge assets, IPR systems must be coupled with pro-competition policies and efficient judicial systems. Steps should also be taken to address the erosion of patent quality (whether patents reflect genuinely novel innovations, for example). There is a need for greater mutual recognition and comparability across IPR systems internationally.
There is a lot more detail in the full report. As I mentioned above, we will be posting more on the report in the coming days. But for those who care about economic growth (and that should be everyone), a full reading of the report is recommended.
One of the constant questions about additive manufacturing (aka 3D printing) is whether it is truly a game changer or simply a niche technology. Right now, the discussion seems focused on two questions. The first is the extent to which additive manufacturing can compete with mass production. The second is whether there are enough specialize products to make the technology widespread (beyond the hobbyist). For the first question, many (including proponents of the technology) argue that the technology will be too costly to replace mass production for standard products – such as cars or light bulbs. They see additive manufacturing as making certain parts – such as certain airplane parts that can be made lighter using additive manufacturing. This is obviously related to the second question, where specific (and usually customized) products are made better using additive – such as hip replacements. But to move beyond these specialized and limited uses requires what is often referred to as a “killer app.”
A killer app is a use that makes the technology essential. Personal computers were hobbyist and semi-novelty items until there were business applications. One of the killer apps for the PC was spreadsheets. The first was VisiCalc followed by the ubiquitous Excel. These spreadsheet programs allowed number crunching work activities to be done much faster and more accurate than before. Whereas word processing programs were a step beyond typewriters, spreadsheet programs were light years past calculators. And whereas companies could get away with sticking with typewriters, everyone wanted/needed a PC with a spreadsheet program.
So, what will the killer app for additive manufacturing be? A recent article by Brian Proffitt, “How We’ll 3D-Print The Internet Of Things” may provide part of the answer. The “Internet of Things” is where products, devices, and sensors are all connected to the Internet. This is the practical step beyond the iconic “smart refrigerator.” In order for that smart refrigerator to know that the milk is about to go bad or is just about gone, there needs to be a sensor in the milk carton. Putting a such a sensor in every milk carton using conventional techniques is very (prohibitively?) expensive. But printing a milk carton with a sensor embedded could be a more practical solution.
Ok, smart milk cartons are not a game-changing product like a spreadsheet program. More along the lines of using a home computer to store cooking recipes (an early suggested use). But substitute airplane wings or engines for smart milk cartons. Or any other product where failure could be catastrophic. Then you can see the value of being able to cheaply print an embedded tag.
Tags don’t even need to be sensors. As Proffitt notes, passive tags would allow other products to recognize and deal with other objects: “That might be a vacuum cleaner trying to avoid some toys on the floor, or a factory robot seeking the exact part it needs to deliver to the assembly line. For all kinds of robotics applications, that kind of functionality would be phenomenal.”
Will the Internet of Things be the killer app that launches additive manufacturing in to the “must do” category? We will have to wait and see. But the potential for embedded tags via 3D printing looms large.