Growth in knowledge-related business investment continues in 2Q 2021

While the GDP growth in the 2nd quarter of 2021 was not as strong as some expected, it was still a healthy 6.5%. Importantly, business (non-residential fixed) investment in knowledge-related areas continues its strong growth. Investment in software grew by over 12% while R&D spending was up by over 6.3%. In contrast, total business investment in all other areas remains the same – due in large part to a decline in investment in transportation equipment.

Knowledge related business investments did not suffer as great a cutback as other business investments in the COVID-19 slowdown and have been growing since 2Q20. They now account for 57% of total business investment (up from 50% in 3Q19). Looking at only the two digital-related investments of ICT equipment and software, this subcategory makes up 40% of business investments.

[Note: I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.]

Background paper on the new challenges facing IP

[Posting has been updated to correct links to event video]

The Global Federation of Competitiveness Councils (GFCC – https://www.thegfcc.org) has put out an excellent background paper on intellectual property (IP) as part of their “Frame the Future” series of discussions (registration at https://framethefuture.thegfcc.org/ and intro video at https://youtu.be/HmwZfbQB9ZQ?t=12). The background paper, “Intellectual Property Systems”, is available at https://drive.google.com/file/d/11AMnsQRtIt7zQPW8tt76oVnCP4N-aO3q/view. The full video of the event is available at https://www.youtube.com/watch?v=spiI0BLVwOc.

The paper outlines a number of trends affecting and challenges facing IP. Among those is the increasing importance of data leading to greater emphasis on data governance and stewardship.

The rise of artificial intelligence (AI) poses an interesting new challenge – both in the protection of AI algorithms and data as well as the application of IP to AI created knowledge. For example, how to you patent a non-transparent algorithm and who gets IP rights to AI-created content?

Not touched upon in the discussion but mentioned in passing in the paper is the trend of more countries look to IP taxes to boost IP applications and incentives for innovation. It would be interesting to hear more on this, especially in light of the recent agreement on global corporate taxation which has major implications for the location of IP ownership.

Then there are all of the ongoing operational issues of any IP system: global enforceability, the cost and time it takes to get a patent, the cost and time of licensing IP, barriers to successful technology transfer, the use of IP to block rather than facilitate innovation, the disproportionate burden on smaller firms, and the difficulty of any IP system keeping up with accelerating technology development.

A large part of the discussion looked at the perennial issue of what to share versus what to protect. This discussion is often framed as “open” versus “closed” or “strong” versus “weak.” But such an either/or view misses the complexities of IP. As the paper (and the discussion) noted, the real question is how to share and protect at the same time. This is becoming increasingly important as organization increasingly embrace concepts of open innovation and co-creation and as IP driven innovation becomes more collaborative, creative, and inclusive.

Balance between creator and user is part of the answer, as noted in the discussion. But as was also noted in the discussion, companies such as Lockheed both share and protect their IP depending on the business situation. I think a successful IP system must have this flexibility as well as balance.

And as I pointed out in the discussion, IP is just one part of intangible assets. And successful utilization of IP requires concomitant intangibles such as worker skills and organizational capacity. Thus, any IP system needs to be embedded not only in the context of an innovation strategy but also as part of a broader set of policies to facilitate investment in and utilization of intangible assets.

Today’s GFCC discussion was a good step forward in addressing IP systems around the world. I hope the discussions continue.

Pattern of intangible v. tangible jobs continues in June

June was a good month for jobs: the BLS announced that employment increased by 850,000. And there was a continued resumption of economic activity in two areas which have direct public contact that had been curtailed due to the pandemic. Employment in Accommodation & Food Services was up by 269,400 (2.2%), Arts, Entertainment & Recreation employment was up 73,600 (3.7%), and Personal & Laundry Services was up 28,200 (2.1%). Three sectors were down slightly: Telecommunications, Tangible business services, and Financial Activities.

More interesting to me is what the data says about employment in tangible-producing versus intangible-producing industries. As the chart below shows, from 2000 to around 2010, employment in tangible-producing industries slowly declined while employment in intangible-producing industries rose. And as a result, the share of total employment in intangible-producing industries passed that of tangible-producing industries some time in 2009. This was the continuation of a long trend in the growth of the intangible economy.

But around 2010 something happened. Employment in tangible-producing industries started growing at about the same rate as employment in intangible-producing industries. And the split between the two in terms of percentage of total employment stabilized. The pandemic reversed that trend with employment in tangible-producing industries dropping much faster than in intangible-producing industries. We now have enough post-crash data to clearly see that the 2010-2020 trend of equal employment growth is reasserting itself.

Thus, the question remains: what happened in 2010? Did the Great Recession somehow fundamentally change the structure of the economy? I suspect that part of the answer can be found in the changing nature of the tangible producing process. The long-awaited Information Society (or Post-Industrial Society if you prefer the older title) has finally arrived. The nature of the output between tangible and intangible may be different, but all production processes are becoming intangible-heavy. For example, manufacturing is now a knowledge-based activity. Another explanation may be the fusion of tangible and intangible output (often referred to as “servitization”). Companies no longer sell just tangible products but combine the physical with an intangible service (such as home alarms).

Likely both explanations are true. Both process and products throughout the economy have become more intangible-based. This is true even as we consume more tangible-based (physical) services. More on this later.

For more on the categories, see my explanation of the methodology in an earlier posting.