1Q 2014 GDP – and intangibles investments revised up, again

Well, it is even worse than previous reported. GDP shrank by 2.9% in the first quarter of 2014, according to data released by the BEA this morning. The second estimate had shown a drop of 1.0% while the first estimate had the economy growing by a scant 0.1%. GDP had increased by 2.6% in the last quarter of 2013 and 1.9% for the entire year. Economists had forecast a drop of around 1.8%. But economists are forecasting the GDP will rise by 3.5% in the second quarter.
Once again investments in Intellectual Property Products (IPP – i.e. research and development; entertainment, literary, and artistic originals; and software) were revised upwards to an increase of 6.3% compared with a 5.1% growth rate in the second estimate and 1.5% in the first estimate. All other categories of gross private domestic investment declined – with equipment down 2.8%, non-residential building down 7.7% and investment down by 11.7% in total.
IPP percent 1Q14 - 3rd.png

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Perception versus action on entrepreneurial activity

My posting yesterday described the Thumbtack.com Small Business Friendliness Survey. That survey describe how some small business owners perceived their local and state government’s attitude toward small business. Specifically, were government policies and actions friendly to small business?
One question I have always had is whether impressions of business owners matter in terms of actions. The lesson that such survey’s seek to impart is that “business-friendly” states generate more economic activity. In this case, a reasonable extension of that argument would be that a more small business friendly location should generate more start-up, entrepreneurial activity. To test that question I looked at the Small Business Friendliness Survey versus the Kauffman Foundation’s Index of Entrepreneurial Activity.
And the answer is, yes, sort of. As the chart below shows, there is a general correlation between a state’s business friendly ranking and the amount of new entrepreneurial activity (as measured as the percentage of the adult, non-business-owner population that starts a business each month). But the relationship is not all that strong. States, as the chart shows, are all over the place.
Friendly v activity.png(Spreadsheet available here).
Of course, there are lots of disclaimers with this data. The measurement of entrepreneurial activity is start-up, which says nothing about the success rate of those businesses. Policies may be relatively easy/friendly with respect to starting a business but unfriendly when it comes to sustaining/operating the business. The discussion yesterday about the complexity of tax laws usually hits a business after it have been running for awhile. On the other hand licensing and regulatory policies can have an impact in the creation phase as well as during ongoing operations. Also, the Kauffman Index of Entrepreneurial Activity does not say anything about expansion of existing small business activity. Government policies and actions can have an impact on the growth of decline of existing businesses without affecting the rate of start-ups — and vice versa. And today’s existing policies may have a greater affect on entrepreneurship in the future than the present as policies often have a lag effect.
Still, the comparison of the two data sets revels some interesting points. Of particular interest are the outliers. California has high entrepreneurial activity but ranks low in small business friendly (with an overall grade of F and, more importantly a grade of F on the ease of starting a business). Iowa and Virginia have a much lower level of entrepreneurial activity than their small business friendly ranking (grades of A- and A+ respectively) would predict.
Clearly there is more going on than just the governmental environment. In California, a strong entrepreneurial culture seems to be driving its economic activities (the highest rate of per capita start-ups in the nation). In Iowa’s case, its grade of A on ease of creating a business has not seemed to translate into more start-ups.
The small business and entrepreneurial ecosystems are complex environments (and not necessarily the same). While there are many other elements to the ecosystem, perceptions are an important part of those environments. Perception are also part of the ecosystem within reach of policymakers so it would behoove them to pay attention. But policymakers need to keep in mind that perceptions are not reality and are just one element. As the weak correlation indicates, policymakers should focus on actions as well as perception – and understand the sometimes tortuous relationship between the two.

New state rankings and economic indices

I’m often skeptical of surveys that purport to rank states on some economic indices. These can be ways of simply touting a particular agenda (e.g. low taxes). However two recent rankings have come out that are likely to be useful for state and local policymakers.
The first, which I will touch upon very briefly, is the ITIF 2014 State New Economy Index. This is the 7th iteration of the report, which began in 1999. It continues to provide a solid look at state economies. I can quibble with the indices used and how the questions are phrased. For example, does state location of a patent really say anything about the innovation occurring in that location (or more about the location of the administrative units). And I have always had a problem with the use of number of patents granted as a measure of innovation. I would reiterate what I said about the 2008 report (and what the report itself noted) that we need new and better data on the “New” economy. Given the budget pressures that the government statistical agencies are under, I fear it is up to the academic community and the private sector to generate better economic indicators.
The second report is the Thumbtack.com Small Business Friendliness Survey done in partnership with the Kauffman Foundation. Thumbtack.com is a web-based services where consumers can go to find professional services. Now in its 3rd year, the report is based on the responses to a survey of businesses that use Thumbtack.com to reach customers. In a refreshing move, they readily admit the issues with their sample and the limitations of the answers — specifically bias toward the professional and nonprofessional services sectors. As they point out, “good quality infrastructure and friendly environmental regulations might be more important to a small manufacturer than to a web designer or a wedding planner.”
Still, the survey is generally representative (although not all states are included) and the answers are enlightening. For example, one of the findings is that the complexities of laws is of more concern than the amount of taxes or regulation (see a Christian Science Monitor story on this point as well). Awareness of state training and networking programs was also a significant factor in a positive rating.

The strongest factor correlating with self-reported perceptions of small business friendliness was the friendliness of licensing forms, requirements, and fees, followed by the friendliness of the tax code and tax-related regulations.
Interestingly, while those two factors had the strongest correlations to overall perceptions of small business friendliness, the factor with the weakest correlation coefficient was whether or not a license is required – this suggests that it isn’t the presence of a licensing regime but how easy it is to comply with such a regime that matters most to businesses. The level of taxation as measured by self-reported perceptions of the “fair share” of taxes also matters less than then friendliness of complying with a tax regime. Both of these may suggest that it is more important for business friendliness that a municipality make compliance simple and easy rather than eliminate a regulatory regime altogether.
. . .
Business owners who said their state or local governments offered training and networking programs reported significantly higher overall state friendliness scores than business owners who were not aware of such training programs, and these business owners who were aware of training programs were much more likely to rate their local government as friendly.

These finding should be important guideposts for state and local policymakers.
Both the 2014 State New Economy Index and the Small Business Friendliness Survey have a lot more information. Both should be read carefully by policymakers and business leaders alike.

Law, technology development and learning – the case of Silicon Valley

All too often we view innovation and technology development as Athena-like — springing from the head of Zeus (in this case the inventor/engineer/entrepreneur). However, scholars (such as Nobel-laureate Douglas North) remind us that economic activity (and invention/innovation is economic activity) takes place in the context of institutions. One of those important institutions is the law. That case is made forcefully in Anupam Chander’s piece in the Emory Law Review, “How Law Made Silicon Valley”:

The story of Silicon Valley is not only a story of brilliant programmers in their garages, but also a legal environment specifically shaped to accommodate their creations.

Chander argues that free speech and the First Amendment, not IP protection, is what makes up that accommodating legal environment:

Law played a far more significant role in Silicon Valley’s rise and its global success than has been previously understood. It enabled the rise of
Silicon Valley while simultaneously disabling the rise of competitors across the world. In this Article, I will argue that Silicon Valley’s success in the
Internet era has been due to key substantive reforms to American copyright and tort law that dramatically reduced the risks faced by Silicon Valley’s new
breed of global traders. Specifically, legal innovations in the 1990s that reduced liability concerns for Internet intermediaries, coupled with low privacy
protections, created a legal ecosystem that proved fertile for the new enterprises of what came to be known as Web 2.0. I will argue that this
solicitude was not accidental–but rather a kind of cobbled industrial policy favoring Internet entrepreneurs. In a companion paper, Uyên Lê and I show
that these aspects of copyright and tort law were not driven by commercial considerations alone, but were undergirded in large part by a constitutional
commitment to free speech. As we argue there, a First Amendment-infused legal culture that prizes speech offered an ideal environment in which to build
the speech platforms that make up Web 2.0.
[Note: Companion paper is “Free Speech”]
. . .
This Article upends the conventional wisdom, which sees strong intellectual property protections as the key to innovation–what the World Intellectual Property Organization calls a “power tool” for growth. Understanding the reasons for Silicon Valley’s global success is of more than historical interest. Governments across the world, from Chile to Kenya to Russia, seek to incubate the next Silicon Valley. My review suggests that overly rigid intellectual property laws can prove a major hurdle to Internet innovations, which rely fundamentally on empowering individuals to share with each other. This study helps make clear what is at stake in debates over new laws such as the Stop Online Piracy Act (SOPA) and its relatives, highlighting the effect of these laws on Silicon Valley’s capacity for innovation.

It is important to note that this argument builds upon the work of Ronald Gilson and Annalee Saxenian in the 1990’s on the differences between Silicon Valley and Route 128 (Boston) concerning non-compete agreements: they are illegal in California but legal and utilized in Massachusetts. The argument is that such agreements stifle to flow of information among companies (via the interchange of workers) and inhibit entrepreneurship (new start-ups). The argument also grows out of analysis of copyright cases (such as those of Pam Samuelson), especially of the landmark 1984 Sony v. Universal VCR case.
It should also be noted that article is a comparison of the legal environment in the U.S. versus Europe and Asia, including on privacy. Given the recent EU ruling on “the right to be forgotten,” it will be interesting to see how these national differences play out with respect to the future development of the technology.
This legal argument fits with the economic argument I discussed in a previous posting on the learning economy. As I pointed out, there is a strong case to be made (as Nobel-laureate Joseph Stiglitz does) that the key factor for prosperity is the ability of an economy/society to continually learn. Thus, the most important question to ask of any proposed policy is “does this facilitate or inhibit broad economic and societal learning?”
Chander’s argument makes the case for asking the same question in the courts.

Redefining "tech transfer"

Last month, the Commerce Department released its Annual Report on Technology Transfer: Approach and Plans, Fiscal Year 2013 Activities and Achievements. As the press release noted, the report highlighted activities of three federal laboratories: the National Institute of Science and Technology (NIST), the National Oceanic and Atmospheric Administration (NOAA), and the Institute for Telecommunication Sciences (ITS) of the National Telecommunications and Information Administration (NTIA). Featured in the press release was the new NIST test for firefighter breathing equipment.
What is especially interesting in the report, however, is NIST’s adoption of a broad definition of “technology transfer.” Traditionally tech transfer has meant the sale or licensing of patents and, for government labs, Cooperative Research and Development Agreements (CRADAs) with the private sector (i.e. joint research projects). In the case of government labs, scientific publications are also considered technology transfer. Under the broader definition NIST recognizes two parts to tech transfer:

1) knowledge transfer, the act of transferring knowledge from one individual to another by means of mentoring, training, documentation, or other collaboration; and 2) commercialization, the adoption of a technology into the private sector through a business or other organization.

As a result, NIST will be revamping how it measures technology transfer:

NIST will expand how it considers collaborations beyond the number of CRADAs into a comprehensive metric that encompasses the broad range of NIST formal and informal collaborations. NIST will implement this by (i) developing a definition of a credited “collaboration,” (ii) developing processes and procedures to capture credited collaborations, and (iii) conducting a feasibility study on whether impact data can be generated.

It will be very interesting to see what they can come up with for measuring the inform collaborations. The report indicates some direction – with sections on postdoctoral researchers, guest researchers, start-up companies, education outreach programs and partnerships, and conferences, seminars, and workshops.
Given that NIST is the nation’s premier standard setting organization, one might assume that other tech transfer organizations — such as in other government labs and in universities — might adopt the same metrics. Such a broad set of metrics might help universities better understand and integrate their tech transfer activities into the university’s tradition three-fold role of education, research and community service.

Some findings on patent investing from the UK – and a lesson for the US

Earlier this year, the IP Wales project at Swansea University released a report on Patent Prospecting on the Alternative Investment Market (AIM) that indirectly points out a problem with the U.S. financial system.
First a note of explanation. The Alternative Investment Market (AIM) is, as its website points out, “the London Stock Exchange’s international market for smaller growing companies.” Companies listed on the AIM face lower listing and regulatory requirements than those on the main exchange and they tend to be seen by some as more speculative investments. While technology companies are listed on the AIM, so are a number of companies from other occasionally speculative sectors such as oil & gas and mining.
The study looked at patenting activity of 79 selected companies on the AIM. What is especially interesting to me is their finding on use of patents for collateral.

Licensing is not the only way to address investor demands to extract added value from a companies’ patent portfolio and we found interesting evidence to demonstrate that patents can and have been used in the raising of capital. Whilst the number might be comparatively small it is worthy of note that over 10% of the patent investment prospects we identified related to patents in which a security interest had been taken. Although the majority of the companies holding these patents were not based in the US, all related to US patents and the vast majority related to US State security agreements. This finding needs to be read in conjunction with a recent report commissioned by the UK Intellectual Property Office Banking on IP? The role of intellectual property and intangible assets in facilitating business finance (2013). Whilst this Report does not advocate changes to the current UK legislative framework it does recommend changes in practice when it comes to the registration and tracking of security interests in intangible assets. Our Report provides evidence to suggest that the US practice of ‘perfecting’ security interests in patents demonstrates a good understanding of these issues.
[Note: for more on the UK IPO study Banking on IP?, see this earlier posting.]

Unfortunately, the study does not give any detail. It is unclear exactly what type of security interest was involved. Was this part of an all-asset lien? Was the patent specifically used as collateral? At what loan to value ratio?
I also have to take exception with the last statement that the U.S. system of perfecting security interests “demonstrates a good understanding of these issues.” The study unwittingly highlights a problem with the U.S. system. As we pointed out in our report Intangible Asset Monetization: The Promise and the Reality, recording of a security interest in a piece of property is handled at the state level under the terms of Article 9 of the Uniform Commercial Code (UCC). This requires the filing of a UCC-1 financing statement in the state. The footnotes to the UK study give us an example of how recording of security interests are spread among various states, including the need to record the security interest in multiple states. For example: “Environ. Recycle (ENRT) Oklahoma & Illinois security agreements in patent records US5277758A, US5268074A, US5285973A, US5351895A, US5213021A & Georgia security agreements in patent records US5540244A, US6149012A & Ohio security agreement in patent record US6387175B1.”
The security interest may also be recorded at the US Patent and Trademark Office (USPTO), but is not required. However, since there is some continued confusion about federal preemption over the UCC in the case of patents, it is considered best practice to record the security interest at both the state-level and with the USPTO.
Because of this system, it is not always clear that an investor can find all the security interests that lay claim to a particular patent. Those claims may be recorded at the USPTO, or may not be. The only way to be sure is to search the records in every state.
Whether this has created a disincentive for banks to lend on patents is unclear. After all, banks have been dealing with the state-level recordation of liens for a long time. But there is a difference between recording a security interest on a house or a car where the physical location of the owner (and hence the state in which the security interest is recorded) and a patent (which could be “located” anywhere). At a minimum we should think about ways to link state UCC filings on IP to a centralized databank at the USPTO. Such a database would remove at lest one small bit of uncertainty in the process of utilizing intangibles in the financial system.
Tip of the hat to the IAM blog for highlighting this report.

Virtual worlds and the altered reality of physics

A couple of years ago, we published a report on Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness. The report described how virtual worlds could streamline and shorten design and testing of new products, improve training and learning, and provide important new ways to involve consumers in product design, performance, and after-sales support (see earlier posting). Virtual worlds are already being used in the collaborative design process (see for example our earlier posting).
For the most part, virtual worlds simulate the real world. For example, the laws of physics generally apply. In part, this is what makes virtual worlds such a powerful tool for innovation as we described in the report. Parts of an engine being assembled in a virtual world have to fit together the way they would in the real world. Virtual patients have to react to injuries and treatment as real people would. Others wise the simulation loses its value.
However, as a new article in MIT’s Technology Review explains, those laws of physics can be re-written in virtual worlds. The article (“Experiments in Second Life Reveal Alternative Laws of Physics”) describes how the ability to change the laws of physics in virtual worlds can be a powerful research and education tool. Alternative theories can be tested. Students can gain a greater understanding of the laws of physics by making modifications. Besides, it is just plain cool.
The tool is not without issues. As the full paper (upon which the article is based) explains, “implementation of simulations in SL [Second Life] is not without drawbacks like the lack of experience many teachers have with programming and the differences found between SL Physics and Newtonian Physics. Despite of that, findings suggest it may possible for teachers to overcome these obstacles.” Specifically the paper recommends a more user-friendly interface for builders of simulations.
As we noted in our Virtual Worlds report, government policies can encourage the development of innovative training programs that educate businesses and employees about how to use these technologies and integrate them into traditional disciplines. Research and teaching of physics is clearly one of the areas that could benefit from such programs.