Counting Intangibles: The International View

hosted by
Athena Alliance and
the Project on America and the Global Economy of the Woodrow Wilson Center

Held at the Woodrow Wilson International Center for Scholars

Click here to get to the audio files.

Summary

Kurt Ramin, Commercial Director of International Accounting Standards Committee Foundation, presented the broad activities of the International Accounting Standards Board (IASB) in the area of financial reporting and intangible assets.1 After outlining the structure of IASB, he first described the Board’s current projects. Second, he spelled out some of the differences between the US Financial Accounting Standards Board (FASB) and the IASB – and the convergence between the two systems. Third, Mr. Ramin mentioned some of the work that the IASB is doing to develop standards in the field of intangibles. Specifically, he discussed how intangibles are currently treated under IAS 38 and how the forthcoming standards on business combinations will treat intangibles. He concluded with a description of how the new eXtensible Business Reporting Language (XBRL) might improve financial reporting.

In the discussion, Mr. Ramin and the participants noted that accounting rules have an enormous impact. Part of the Enron debacle could be traced to how little information Enron had to put in various financial footnotes to their reported accounts. The consequences of accounting standards can also have a significant impact on the process of innovation. For instance, under FASB rules, costs for research and development are expensed. That is, they are subtracted from reported earnings in the year in which they are incurred. Under IASB rules, however, only research costs are expensed, while development costs can be amortized or deducted over a number of years. Likewise the different treatment of internally versus externally acquired intellectual property could affect the R&D strategy and structure of a major company.

As the ongoing discussion over accounting for certain financial instruments, such as stock options, shows, accounting for intangibles is a complex and difficult activity. Establishing and enforcing the right rules will be critical to allocating capital to intangible as well as tangible investments.

The speaker at this policy forum was Mr. Kurt Ramin, the first Commercial Director of the International Accounting Standards Committee Foundation. A recognized expert on issues of the knowledge industry, Mr. Ramin served on the High Level Expert Group of the European Union on “The Intangible Economy Impact and Policy Issues.” A former partner at PricewaterhouseCoopers LLP, he has extensive experience as CFO to several different companies in the US and Germany. Mr. Ramin was expressing his personal opinions and not necessarily the opinions of the International Accounting Standards Board or the Foundation.

He was introduced by Dr. Kent Hughes, Director of the Project on America and the Global Economy at the Woodrow Wilson Center.

Mr. Ramin began by emphasizing the nature of the problem, including a large amount of the general catch-all accounting category “goodwill” still left in the financial system. He then went on to outline the structure and work of the London-based International Accounting Standards Board (IASB) and its organizational relationship with the Foundation. He emphasized the truly international nature of the Board and noted that a range of countries are represented on the various decision-making bodies of the IASB. He also noted that the Board of Trustees of the Foundation is deliberately geographically balanced, with Paul Volcker, former Chair of the US Federal Reserve Board, serving as Chair of Board of Trustees.

Mr. Ramin briefly discussed the various ways in which the standards under development by the IASB are beginning to be used. He reminded the participants that the European Commission requires listed EU companies to prepare consolidated accounts using the IASB’s International Financial Reporting Standards (IFRS) by 2005.

Mr. Ramin touched on broad activities of the IASB. Current projects include:

issues of first-time adoption of the new International Accounting Standards (IAS);
general and specific improvements in standards on financial instruments;
issues of business combinations, including accounting for intangibles; and
share-based payments; and,
the convergence of standards, especially between the IASB and the FASB.
The business combinations project is divided into two. The first set of standards (Business Combinations 1) will come out in March 2004. It will be followed by Business Combinations 2 in September. The project on business combinations will set definitions, outline application of the purchase method based on fair value, set standards for accounting for goodwill and intangible assets and for the treatment of liabilities, and define measurement of the identifiable net assets.

As part of these standards, intangible assets will generally be amortized over a definitive life. However, if the assets do not have a definitive life, an impairment test will be used instead. Of course, the assets must be measurable and meet other tests that define an asset. The big change from previous practice is that pooling of interest in acquisitions will not be allowed. As a result, companies will be forced to identify and value specific intangible assets. According to Mr. Ramin, a new industry appears to be developing to help companies value these assets more carefully.

In developing these business combinations standards, IASB is coordinating with the International Valuations Standards Committee, especially on using the same definitions and measures.

Mr. Ramin then went on to touch upon the issue of share- based payments (commonly referred to in the US as stock payments and stock options). The IASB is moving to require that these payments be recognized in financial statements as an expense. The final standard is expected in December. It will have significant differences from the current FASB standards.

Following up on that point, Mr. Ramin spelled out some of the differences between FASB and the IASB. US standards – Generally Accepted Accounting Principles (GAAP) – are actually now rule-based rather than principle-based. IAS and IFRS started off as principle-based. However, the number of pages of these standards has grown, now running to some 1600 pages, as problems with creating flexible principles surfaced. Still, IAS/IFRS remain a more narrow set of principles than the GAAP rules.

Another major difference between GAAP and IAS/IFRS concerns valuations, especially in business combinations. Fair value, as opposed to historic cost, is an overriding principle within IAS/IFRS, including the revaluation of property, plant and equipment. Standards concerning the basis of consolidation are also different, with IAS/IFRS looking at control rather than the GAAP rule of majority voting rights.

An important difference with respect to intangibles is in the area of research and development (R&D). IAS 38 allows a company to capitalize the development costs part of R&D whereas GAAP requires all of R&D to be expensed.

Both IASB and FASB have more detailed summaries available on the difference between IAS and GAAP. These summaries are available from IASB and FASB – see http://www.iasc.org.uk and http://www.fasb.org.

Various joint projects between IASB and FASB focus on these convergence issues. Two specific differences that will be subject to discussions between FASB and IASB concern segment reporting and post-employment benefits.

IASB’s goal is to have IASB and FASB standards similar enough that the 1200 plus non-American companies currently listed on American exchanges would not have to translate their European reports into American standards. To see the current differences, Mr. Ramin referred participants to 20F filings by European companies with the Securities and Exchange Commission.

Mr. Ramin then went on to detail IASB’s approach to intangible assets, as described in IAS 38. He emphasized that this standard will effectively be changed as the new standards concerning business combinations are developed.

For the IASB, an intangible asset is “an identifiable, non-monetary asset without physical substance held for use in the production or supply of goods or services, for rent to others, or for administrative purposes.” To determine an asset’s fair value, IAS 38 requires the price be that which would be used in an arm’s length transaction. The impairment loss is that which exceeds its recoverable amount.

IAS 38 governs both intangible assets internally generated and those externally generated but separate from goodwill. Something is only recognized as an asset if it is identifiable, controlled, has probable future benefits specifically attributable to the asset, and its costs can be reliably measured. The criteria of identifiable is often the most difficult; it is hard to describe the specific unit that is being classified as an asset or link it to a specific marketable product or process.

If the item cannot be recognized as an asset, its cost must be expensed as incurred if it is an internally generated item or included in the category of goodwill if it is purchased in an acquisition. Therefore, research (but not development), start-up, training and advertising costs must be treated as expenses.

In addition, IAS 38 specifically prohibits the recognition as assets of internally generated items such as brands, mastheads, publishing titles, and customer lists and items similar in substance. Thus, the costs of these items must also be expensed.

Intangible assets can be measured either using historical costs or fair market value. Currently, amortization assumes a rebuttable presumption that the useful life of the asset will not exceed 20 years. If a longer period is used, an annual impairment test is allowed.

The result of these standards will be greater emphasis on disclosure of intangible assets and more attention to their fair market value and useful life.

In general, a three-pronged approach is needed in the entire area of corporate reporting.2 The first is global GAAP. According to Mr. Ramin, this is achievable as we are right on the verge of convergence of standards. The second is industry-specific standards. This is especially important for intangibles, which are different in each industry. Third is the need for greater company-specific reporting.

Mr. Ramin then went on to describe the potential of eXtensible Business Reporting Language (XBRL) for improving financial reporting. XBRL allows for information to be tagged at the lowest possible level. The data can then be combined in whatever manner is most useful. Likewise, aggregated information can be disaggregated as necessary. Different data can be combined in different ways for different reporting purposes. Such tagging also improves data comparability, in part by forcing some common definitions. In addition, XBRL will allow for conversion of data – an especially important problem in the multi-lingual European environment. (For more information, see http://www.xbrl.org.)

With the push for greater disclosure, the ability to consolidate and disaggregate the data in various ways will be more and more important. For example, in the Enron case, the ability to disaggregate the data using XBRL would have been helpful in seeing through the various complex financial transactions.

Combining and linking data at the company and industry level is especially important for understanding intangibles. Taxonomies are needed for different industries – and are being created using XBRL tags based on the IASB standards.

Thus, according to Mr. Ramin, we are well on the way to more meaningful reporting data, including reporting on intangibles.

Dr. Kenan Jarboe, President of Athena Alliance, moderated the Q&A session. He opened with a question about the seriousness of the conceptual problems. A case in point is the difference in treatment between an intangible asset internally generated and one that is acquired from outside. He quoted from the April 2002 FASB Special Report on the new economy that there is no conceptual rationale for treating the two differently. That same report notes that “the rationale underlying FASB Statements 2 and 86 and IAS 38 does not provide a useful conceptual basis for a reconsideration of accounting for intangible assets.3 He also noted that the Garten Task Force on Strengthening Financial Markets essentially concluded that intangibles could not be measured, only disclosed. Given this lack of conceptual underpinnings, can we really hope to make progress in accounting for intangible assets?

Mr. Ramin stated that the first goal was to identify the intangibles. Progress has been made on the issue of amortization of goodwill – so that it is not simply uniformly written down over the life of an asset, typically between 20 to 40 years. However, more steps may be needed to force disclosure, which will aid in the identification process. It was noted that FASB had a disclosure project underway which was curtailed due to a lack of resources. The new IASB business combination standard will have the end result of forcing more disclosure.

A participant noted that the ability to generate revenues is already a criteria for determining an asset. Why is that revenue not used for the valuation of intangibles, even for internally generated assets? Mr. Ramin responded that the problem was the reliability of the data. Part of the problem is the mixed accounting model where some values are at fair market value while others are at historical costs. He believes that fair value should be used for all valuations.

Another participant, however, took exception to the use of fair value for intangibles. Fair value requires an estimate of future cash flows – which can change radically and differ from expert to expert. The value of the asset can fluctuate widely, making mush out of financial statements and further infecting the system with uncertainty. The result is greater investor confusion. Mr. Ramin’s response was that while it was very difficult to put a fair value on intangibles, the mixture of historical and fair value produces greater confusion for investors by creating data incomparability.

The question was raised about whether the financial markets are already capturing the imputed value of intangibles – whether or not they show up in the balance sheet or as an accounting footnote.

With regard to footnotes, the observation was made that the degree of information complexity is increasing. The business environment and financial transactions are increasingly complex. Information that is disclosed in footnotes is often sketchy and hard to integrate with other financial data. The problem, as one participant phrased it, is not one of creating additional complexity, but revealing complexity.

One participant reminded the group of the different purposes of the information – especially for accounting and for financial analysis purposes. In the case of accounting, there needs to be a clear, understandable set of books in order to avoid the apples and oranges comparison problem.

Mr. Ramin observed that the system of multi-level reporting, as embedded in the XBRL system, may help overcome that problem.

The group then discussed the problems and differences of mark-to- market and fair value. In the case of some assets, such as financial instruments, a market exists that can be used to calculate value. For many intangible assets, no such markets exist.

In addition, even where a market for assets exists, it may give differing values due to short-term factors. The example of real estate values was given where the actions of the Federal government in settling the S&L issue drove down the value of real estate as the market was flooding with liquidated properties. Mark to market in this case would have resulted in a write-down in the American economy of 20% to 30%. However, another participant argued that if there had been a fair valuation process in place, the problem would have been manifest, and possibly avoided.

The other problem of mark-to-market concerns the thinness of some markets. For example, Enron was trading in a spot market for electricity, whereas most electrical contacts are long-term. To avoid volatility, especially in thinly traded markets, one participant suggested using moving averages or range of values.

The issue of companies’ responses to these changes was raised. Will the structure within a particular industry change as it becomes more or less advantageous from a financial accounting standpoint for a company to hold intangible assets?

It was noted that such responses may vary from industry to industry. The key is to identify the nature of a particular intangible asset and then determine how that asset is used in various industries. The rules need to be tied to the asset, not the industry.

One participant pointed out that the value of an intangible asset is not just based on factors within the company, but also external factors. A company located in an area known for specialized knowledge in that company’s product might be valued higher than one located elsewhere. How can those types of assets be valued?

Mr. Ramin responded that the approach for accounting is to break the situation down into units of value. The accounting problem concerning intangibles is in identifying the units. It was pointed out that these items used to be handled in the general category of goodwill – and that the task now is to add specificity. A number of countries are undertaking efforts to identify specific intangibles. But the problem remains difficult.

It was pointed out the differences between company-based intangibles and community-based intangibles are often referred to as social capital. Social capital, especially in innovative localities such as Silicon Valley, is a very real asset, but very difficult to capture in an accounting sense.

It was also noted that Enron was not simply an accounting problem but one of corruption and malfeasance. Enforceability of the rules is crucial, not just the understandability of the data.

A question came up about the IASB’s methods for calculating the value of fixed-price stock options, such as concern over use of the Black-Scholes model. Mr. Ramin stated that IAS requires use of fair value, but the specific requirements of the standard are still being developed. It was noted by one participant that FASB is just beginning to look at the specifics of the fair value method. A discussion followed of the various methods for calculating options, including problems of non-transferability of the option and lack of vesting.

The complexity of option pricing models raised an important question of transparency. Concern was raised as to whether investors and analysts would be able to “look through” the financial statements in order to be able to understand the assumptions and rationale for how certain assets were valued. Multilevel reporting helps in this area by giving investors and analysts better tools for understanding the financial details of a company. However, it may also raise the level of complexity. As a result, the role of the analyst as an information intermediary may increase in importance as we increase the complexity of the reporting system.

It was noted that the standard data building blocks as in the XBRL system would allow for multiple and competing reports by various analysts. The richness of the information would therefore be enhanced.

A question was raised about what is happening in other countries. Mr. Ramin noted that various countries have undertaken projects on intangibles for various reasons. For example, the European Union effort was focused on intangible measures in national economies, especially on knowledge workers, and on policymaking options.

One participant raised the issue of measurement and management (“what gets measured gets managed”). The concern is that intangibles are part of the larger system that may never be measured, especially the value of relationships – both internal and external. Thus, the value of the team is different from the value of the individual members – and the value of the team may never be adequately captured.

At this point, the discussion returned to the issue of how that measurement is defined, specifically as an asset or as an expense, and how companies react to those definitions. The case was raised of R&D. As discussed earlier, internal R&D is an expense. The results of external R&D, such as a patent, are assets that can be amortized over a number of years. This different treatment of internally versus externally acquired intellectual property could affect companies’ strategies and structures with respect to outsourcing R&D.

Participant discussed whether companies in some industries have spun off their R&D functions. The example was raised of a hypothetical pharmaceutical company. If the company develops a new drug internally, it cannot take a yearly charge against earnings to reflect the declining value of the patent. The situation can be quite different, however, if a company buys a small, innovative company with a valuable patent. Anything the company pays beyond the book value (including the buildings, equipment, and accounts receivable) will be recorded as goodwill – a broad category that includes many intangibles. In this case, GAAP allows the company to reduce taxable earnings (and hence increase cash profits) by amortizing (or deducting against earnings) the goodwill over time. In effect, the interaction of the accounting rules and the tax code encourage a firm to rely on outside research rather than innovating itself.

It was noted that the structure of R&D activities will follow the efficiencies of the transactions. Organizations form because internal transactions are more efficient than external. However, if there is an efficient market for intangibles, such as R&D, those assets will be acquired from outside.

The difference between FASB and IASB was once again noted. Under FASB rules costs for R&D are expensed, that is, they are subtracted from reported earnings in the year in which they are incurred. Under IASB rules, however, only the research costs are expensed while development costs can be amortized or deducted over a number of years. Because the impact of development costs on earnings is spread out over a number of years, the company operating under IASB rules will show greater earnings in its first year. If the American company is concerned about reporting higher quarter to quarter earnings, they may decide to reduce costs that must be expensed and instead buy additional capital equipment that can be depreciated over time.

One participant noted that this example points out the need to look at different industries. Some industries are more reliant on intangibles than others.

The discussion ended with the observation that accounting standards are under renewed scrutiny in the United States and around the world. One participant noted that degree of discussion over the pricing of financial instruments highlights how far we have to go with the problem of intangibles. Options, for all their complexity, are relatively well studied and well understood – especially when compared to other intangibles. It is therefore that much more difficult in defining and accounting for these other intangibles.

In a complex global economy, a single approach to accounting may conceal as much as it reveals. Multiple approaches and rules may be needed. Establishing and enforcing the right set of rules will be critical to allocating capital to intangible as well as tangible investments.

1. Please note that Mr. Ramin was expressing his personal opinions and not necessarily the opinions of the IASB or the Foundation.

2. Taken from Samuel A. DiPiazza, Jr. and Robert G. Eccles, Building Public Trust, John Wiley & Sons, New York, 2002.

3. Wayne S. Upton, Jr., Business and Financial Reporting, Challenges from the New Economy, Special Report, Financial Accounting Series No. 219-A, Financial Accounting Standards Board, April 2001, p. 108.

Downloand Audio files:

Introduction

Presentation 1

Presentation 2

Presentation 3

Discussion

The Invisible Advantage

Summary
Jonathan Low presented the findings from his research on intangibles as the drivers of company value. Financial markets are already using intangibles such as leadership, reputation, brands, human capital and intellectual capital as important factors in determining companies’ value. His research shows that there is a direct correlation between these factors and financial outcomes of companies. Companies need to do a better job of identifying and managing these intangible assets.

Policymakers also need to be aware of the importance of these factors. The current system of measuring what is driving business value – based on traditional financial measures – is seriously broken. New systems that account for intangibles are needed if we are to properly allocate capital or develop effective economic policy (such as tax policies).

In his role as respondent, John Mitchell raised the basic question of finding a balance between corporate and individual rights over these intangibles assets. The discussion that followed raised a number of questions including: how to account for non-controllable intangible assets, the role and priority for public policy in this area, and the barriers to and need for greater disclosure of this type of information.

The speaker for this first Issues Dialogue on Owning and Counting Intangibles was Jonathan Low of the Cap Gemini Ernst & Young Center on Business Innovation. Mr. Low is the co-author of Invisible Advantage: How Intangibles are Driving Business Performance. He was introduced by Dr. Kent Hughes, Director of the Project on America and the Global Economy at the Woodrow Wilson Center.

Mr. Low began by outlining the two topics he wished to cover. The first was to summarize both his research and the research of others in the area of intangibles. The second was to discuss some of the policy implications. A number of agencies, including the SEC, the Federal Reserve Board and the Financial Accounting Standards Board (FASB) are looking into this issue in the United States while the EU and the International Accounting Standards Board are also involved in policy-making on the subject. It is an issue that affects a number of public policy areas, such as intellectual property rights, tax policy, and others.

Mr. Low’s basic message is that markets are already valuing intangibles. Markets are already looking at factors such as leadership, reputation, and credibility as important factors in determining companies’ value. His research shows that there is a direct correlation between these factors and financial outcomes of the company. Company managers need to be aware of these factors – as do policymakers.

Many business leaders and government officials already recognize the importance of intangibles in decision-making and capital allocation. However, most officials have not taken a proactive stance in the management of intangibles.

Mr. Low’s list of intangibles include:

  • Management
    • Leadership
    • Strategy Execution
    • Communication & Transparency
  • Relationships
    • Brand Equity
    • Reputation
    • Alliances & Networks
  • Organization
    • Technology and Processes
    • Human Capital
    • Workplace Organization & Culture
    • Innovation
    • Intellectual Capital
    • Adaptability

Contrary to the belief that intangibles can’t be measured, most companies are already capturing 70 percent of this data. Yet, a recent survey conducted by Mr. Low’s organization of chief financial officers revealed that they believe that financial information they are required to capture and disclose by regulatory agencies is “utterly worthless” to the managers. The challenge is marry the traditional financial information with the data on intangibles.

Mr. Low’s research into intangibles was sparked by an interest in the increasing gap between book value and market value of companies. That gap has continued to grow. This suggests that the current system of measuring what is driving business value is seriously broken. It also reinforces the belief that economic activity has less and less to do with the production of tangible goods and more and more to do with intangibles. If we are to properly allocate capital or develop tax policy, for example, it is important that we understand and can properly measure these intangibles.

The role of intangibles as value drivers continues to grow relative to the value of tangible assets. Research shows that market value is less and less correlated with the value of tangible assets (plant and equipment). Companies are clearly getting more market bang for their investment buck in intangible assets rather than in tangible assets.

As Mr. Low and his colleagues began to look into this issue of the gap between market and book value, they first surveyed institutional investors to better understand what these investors look at in companies. This survey revealed that 35 percent of their portfolio allocation decisions were based on non-financial (intangible) factors. Interestingly, information gathered by institutional investors on intangibles comes from sources other than companies themselves. A study of sell-side analysts (those who work for investment banks, brokerage houses, etc.) showed that the more they referred to intangible factors, the more accurate were their quarterly earning projections. The top ten list of the intangible factors that investors and analysts look at are:

  • Strategy Execution
  • Management
  • Credibility
  • Quality of Strategy
  • Innovativeness
  • Ability to Attract Talented People
  • Market Position
  • Management Experience
  • Quality of Executive Compensation
  • Quality of Major Processes
  • Research Leadership

Another study by Mr. Low’s organization of initial public offerings (IPOs) showed that intangibles were the only significant difference between the successful offerings and those which failed to increase in value. Traditional financial measures had no statistical correlation with future stock value. But intangibles did. The most important intangible was the alignment between corporate strategy and employee interests – something that in fact can be measured.

A survey of senior executives came to the same conclusion: the most important factors they were concerned about were intangible. However, there were significant gaps between the importance of the information and the quality of the information these managers were receiving from their own companies. According to Mr. Low, 81 percent of the senior executives surveyed said that the information they were getting on these intangible factors was not very good.

Yet, there is strong statistical evidence that if you can close the gap between the importance of the information and the quality of the information, you can improve stock market performance, compound annual growth and return on investment. This presents an important opportunity to both business managers and policymakers in that better capturing, measuring and managing intangibles can greatly increase company performance.

Interestingly, investments in technology were not found to be a differentiating factor in performance. The markets had already discounted technology investment. Technology is considered as the ante needed just to be in the game. What separated the winners from the losers are the organizational factors needed to effectively utilize technology.

When grouped together into a value creation index, these intangibles explained as much of companies’ market value as do traditional financial performance measures. In addition, improvement in this value creation index has a specific result in improvement in market value.

These value drivers include innovation, quality, knowledge of the customer, human capital, alliances, technology, brand equity, leadership, and environment. Alliances, brand equity, technology, and human capital were the most important drivers of value in non-durable manufacturing.

Each of these drivers can be measured using the number of specific indicators. Most of this data is already collected by companies. It is therefore possible to describe a company’s specific value drivers and then manage the company to improving those intangibles.

Case studies have shown over and over the importance of intangibles such as reputation, intellectual property and R&D, intellectual capital, and leadership. For example, Coca-Cola learned the value of reputation during the contamination scare in Europe.

While the rest of the world is already moving ahead with accounting principles to capture intangibles, the U.S. is moving somewhat slower. A number of European nations have specific proposals on measuring intangibles. The International Accounting Standards Board recently released their proposal, International Accounting Standard (IAS) 38.

According to IAS 38, an intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Under IAS 38, an asset is recognized only and only if:

The asset is identifiable
The asset is controlled
Future benefits specifically attributable to the assets are probable
The cost can be reliably measured

As Mr. Low’s research shows, intangibles are identifiable, future benefits can be determined and cost can be measured. Control of intangibles can be a somewhat more difficult subject.

It follows from the recognition criteria that all of the following costs should be recognized as expenses:

All expenditures on research, not development
Start-up costs
Training costs
Advertising costs

According to Mr. Low, it is important for both business leaders and those interested in public policy to look at and understand the IASB guidelines since they are defining the nature of the discussion.

In summary, Mr. Low stressed the need to determine your critical intangibles, measure and benchmark those intangibles, undertake initiatives to improve your performance on key intangibles and communicate what you’re doing.

The last point is often forgotten. Right now there is a great opportunity to improve the information available to investors by including information on intangibles. It is to a company’s advantage to disclose this information and be as transparent as possible.

By including intangibles, we can do a better job in allocating capital – which is the key to future economic growth.

top


Dr. Kenan Jarboe, President of Athena Alliance, outlined his organization’s interest in the subject of intangibles. Information assets are the fuel of the information economy. There is no separate group of workers involved in the creation of intangibles – everyone in every location is involved in creation and use of intangibles. The key issue is understanding how we utilize intangibles so that everyone benefits from the transformation to the information economy. Both accounting and intellectual property rules are necessary for the utilization of these information assets, as a market requires both being able to value an asset and to own that asset. For that reason, it is important at we get the rules correct to make sure that the market works for the benefit of all.


Dr. Jarboe then introduced the respondent, John Mitchell, who addressed the controllability or ownership issue. Mr. Mitchell is the principal of the law firm Interaction Law and was formerly Legal Director for Public Knowledge, a public policy organization concerned with issues of the public information commons. He began by pointing out his interest was more on the human side of the human capital formulation and on the intellectual side rather than the property side of intellectual property.

Mr. Mitchell’s basic question is where do we draw the line. Implicit in our understanding of the importance of education in building human capital is the notion that the individual acquiring that capital cannot sell it. Yet implicit in some of the notions about increasing and protecting intellectual property, human capital and other intangibles, is a transfer of human capital from the individual to the corporate balance sheet. There are already a number of ways to capture employees’ intangible assets and human capital so that it does not leave the company, such as trade secrets and non-compete covenants. Such protection is consistent with accounting requirements, such as those under IAS 38, for controlling an asset. The danger is that these types of protection could go too far, and decrease the value of these assets to the individual, such as someone who had a marketable skill but can no longer market that skill because of these types of restrictions.
He went on to point out that there may be a tension between these attempts to protect intangibles and the ways in which intangibles are used. For example, being considered one of the “best places to work” is considered a positive intangible of a company. Yet restrictive clauses on employees in an attempt to capture and protect their human capital would undermine a company’s rating as a “best place to work.”

According to Mr. Mitchell, it has been a recognized public policy goal to find a balance between corporate and individual rights. For example, many states place limits on non-covenants so as not to deprive the general economy of certain skills and knowledge.

In the last few years there has been an increase in areas covered under the rubric of intellectual property rights. For example, while the copyright on a book prohibited reproduction and distribution, it did not restrict the owner of that book from getting it or lending it to someone else. Nor did the copyright holder have any say over the technology used to produce the book. Now in the digital age, these concepts are under review. Copyright is being used to leverage control over digital technologies which may be dangerous both to corporations and to society at large. In addition, intellectual property rights are being asserted in areas where traditionally they have not been. For example, there is the case of a major retailer attempting to assert copyright over when announcements of future sale prices can be released.

Parenthetically, tied in with issue of control is the issue of who is placing the value on the asset.

Mr. Mitchell cited the video rental market as an example where more flexible control over intellectual property led to the creation of a revenue stream for the movie studios that would not have otherwise existed. The asset of the rental rights of videos could not be controlled by the movie studios and therefore could not be booked as an asset under the accounting rules Yet, that market has become a major source of revenues.

A more current example is the issue of open source software. Open source software has become both a major investment and a revenue source for companies such as IBM and HP. How will the accounting rules cope with this asset that is not under the control of the company?

In these cases, the lack of control over intangible assets may be more valuable to companies than having complete control. There is a parallel with the role of public goods, such as the highway system. No individual company owns or controls the asset, yet it is vital to companies’ prosperity. These public assets can end up helping one company more than another. But it is important to society at large that public investment in these assets continue. The same is true in human capital, where we cannot simply rely on companies seeking to identify and invest in the best and the brightest in exchange for exclusive rights to that human capital.

A key question is to identify which assets are best left to the public. We must then resist over-privatizing those assets which are better left to the commonwealth.

top


During the question and answer period a number of issues were raised:

Dr. Jarboe began the discussion by raising the difference in managing intangibles as expenses, which traditionally is something business leaders attempt to minimize, and managing intangibles as an asset, which require long-term investments. This issue is tied in with the complicated issue of taxes, where assets must be depreciated over a long period of time and expenses are written off immediately, thereby lowering taxes. It also ties into accounting concepts of assets versus liabilities.

Mr. Low stressed that the key for management of intangibles is the ability to identify and measure the intangible, regardless of whether it gets classified as an asset or expense. Understanding how intangibles work, how they can be created and how (and to what extent) they can be controlled is important.

The question was asked specifically which countries have done the most work in this area. Mr. Low pointed to the Scandinavian countries, southern European countries and Asian countries (China, Korea and Taiwan) as examples.

One participant pointed out that we have always accounted for these intangibles, lumping them into the category of “goodwill.” Mr. Low noted that often-times the category of goodwill covers a variety of concepts that are not really drivers of value. He raised the example of the notion of synergy in mergers. According to his research, the true underlying values in mergers are intangibles such as brands, reputation, human capital and the like. The key is to identify the specific intangibles rather than simply utilize the inarticulate category of goodwill. Dr. Jarboe pointed out that we may be in the same situation economists found themselves a number years ago in studying productivity, where much of the gains were found to come from the catch-all residual category.

Another participant raised the issue of the nature of human capital, specifically how human capital is increased through learning. That improvement increases the market value of that human capital. Presumably, that potential increase in value would be reflected in compensation. In addition, the trend towards contingency work and independent contractors would undercut the notion of non-compete agreements. Thus, the market would presumably be correcting the balance between company and individual control over their intangible assets.

Mr. Mitchell pointed out, however, that there may be external benefits to society not captured in these market transactions. The danger may be that non-compete agreements may lock up that intangible asset so that it doesn’t get fully utilized, to the detriment of society as a whole. It is also difficult to separate out what is the public and what is the private investment in an intangible such as human capital. In addition, it is more difficult for individuals to be able to value and measure their intangible assets – leading to information asymmetries that distort the functioning of market.

He went on to point out the danger in relying upon private agreements by using the example of some entertainment companies that are attempting to circumvent the first-use rule (the restriction on the right of a copyright holder to prevent further sale or rental) through end licensing agreements. The market might correct for this by providing a discount to those who agree to, for example, not resell a book. But society may suffer from the restrictions on the used book market this would impose.

As an aside, Mr. Low mentioned that there is a software package being developed for bank loan officers to be able to incorporate educational levels as an intangible in making loan decisions. Dr. Jarboe pointed out the importance of making sure this software captures all forms of human capital and skills, both law degrees and plumbing skills. Such a broad definition of human capital would give poorer communities and individuals better access to financial assets needed to power economic growth.

It was also mentioned that for airlines, airport landing rights are important intangible assets. What is the role of the market vs. the government in the allocation of this asset?

A question was asked about policy priorities. Mr. Low stated that he believed the top priority was in the area of comparability of data. While the issue of comparability of data for accounting purposes covers a number of topics, it includes the ability to identify and measure these intangible assets. It also includes issues as to what information companies are required to disclose, so that investors get a clearer picture of companies’ situations. According to Mr. Low, we need to reform the accounting system which is no longer adequate to supply the information needed to value and manage today’s companies and to make informed public policy. One role for the Federal government would be to sponsor better research on these issues.

He also emphasized the need for increased interaction between U.S. agencies dealing with these issues and the activities of international bodies such as IASB.

The final question concerned why companies don’t make information on their intangibles more readily available. Mr. Low stated it was a classic case of information asymmetry. Part of the problem is that there are too many factors to focus on. In part, this speaks to the issue of corporate governance, especially concerning the combined role of chairman and CEO. One of the arguments that has been made for splitting these positions is the problem of information overload.

Mr. Low ended the session with a positive note that increasingly he finds companies understand the need to both capture and disclose information on their intangible assets. Progress is being made.


Download audio files for The Invisible Advantage: Owning and Counting Intangible Assets in the Post-Enron Era

Questions & Answers

The Intangible Economy: About this forum series

The information, intangibles and innovation (I3
or I-Cubed) economy is now a reality. Information, knowledge and other
intangibles now drive economic prosperity and wealth creation. Intangible
assets – worker skills and know-how, informal relationships that
feed creativity and new ideas, high-performance work organizations,
formal intellectual property, brand names – are the new keys to
competitive advantage. Intangibles and information power our innovation
process, which is a combination of formal research and informal creativity.
These elements combine to produce the productivity and improvement gains
needed to maintain prosperity.

In this I-Cubed Economy, the rules have changed. But public policy has
not caught up with this new economic environment. Governments are struggling
with ways to utilize information, foster the development of intangibles
and promote innovation and competitiveness in the new global information
economy. Policy makers are grappling with the urgent need to frame policy
questions in light of the changing economic situation.

Issues of developing and managing intangibles underlie discussions on
a variety of subjects, such as intellectual property rights, education
and training policy, economic development, technology policy, and trade
policy. Crafting new policies in these areas will require infusing a
better understanding of intangibles and the information economy into
the public debate.

To help expand the dialogue, Athena Alliance and the Project on America
and the Global Economy of the Woodrow Wilson Center are co-sponsoring
a series of discussions on policies for the Intangible Economy. This
discussion series will explore the concepts and controversies surrounding
the issues of the I-Cubed Economy, including managing and regulating
intangible assets, fostering innovation and creativity and improving
international competitiveness. Our goal is to increase the understanding
of how we utilize intangibles so that everyone benefits from the transformation
to the information economy.

“Putting Information Back into the Information Economy”

ICT in Development: Four Vital Policies for 2002, INET 2002 (Internet Society), by Kenan Patrick Jarboe

Click to view as PDF

A funny thing has happened on the way to the information society. We got sidetracked. We became distracted by the technology: mesmerized by the whiz-bang nature of the Internet. We forgot that information and knowledge are what improve people’s lives and drive innovation. Computers, telecommunications equipment and software are tangible outputs of the process. They are also the facilitators and tools for development, utilization and communication of information and knowledge. That is why everyone buys them. But the social and technological innovation that spurs human growth and economic development comes from information and knowledge. And innovation is what drives economic growth and development.

Thus, my answer to the question of the most important policy issue is information policy – in the broadest sense.
Our traditional concept of “content” is part of my broad definition of information policy. Information must be made available and few, if any, restrictions placed on access to that information or to one another. As Vinton Cerf has eloquently stated, “the Internet is for everyone.”

This raises issues of censorship and lack of information freedom. It also raises questions about intellectual property rights. Private control over information can be used to cut off its access and availability. Payment for use of intellectual property is fine; discrimination and control over use is not. As has been said, the issue is “free” as in “free speech,” not “free beer.”
I include “applications” in my broadest definition of information policy. Applications are the use of content, or the way content is structured in order to be useful. Applications must be specifically useful in development and in rural areas. One exciting area is in education, where technology can be used to enhance both formal and experiential learning (a key point discussed below).
The power of advanced ICT is the combination of information and communications. Interaction – with both the information and the sources of information, i.e. other humans – is what makes this technology different. Thus, the potential for ICT as a learning tool is tremendous.

The interaction potential has another powerful characteristic. It allows users to become producers. ICT is not just a consumer technology; it is also a production technology. To be successful, telecenters must be more than access points. They must be production points and mechanisms to facilitate entrepreneurship and home-based businesses.

This is a more subtle point than simply using telecenters as code factories or website production points. If you ask professionals in the field of knowledge management – the folks in companies who design systems to capture and utilize knowledge – they will tell you the most important resource is tacit and social knowledge. It is also the hardest knowledge to get at because it is different. It is not formal “book” knowledge – the type created in universities and research institutes. It is what’s inside people’s heads (tacit) and shared collectively by the group (social). It is often experienced, not taught – transferred from one person to another by show-me more than by tell-me.

Tacit and social knowledge is key to successful economic development. It must be utilized in combination with formal knowledge. Yet, we tend to look toward the formal (“content”) and forget about the informal in making public policy.
The next phase of the Information Revolution is upon us. In this phase, we need to focus on utilization of technology, not just its creation. We need to focus on the value of information, not just on hardware and software. And we need to focus on informal and tacit knowledge as well as on formal and codified knowledge.
My policy initiative is to turn telecenters into learning centers – which can capture and harness local tacit and social knowledge for sustainable economic development.

Extending the Information Revolution: A White Paper on Policies for Prosperity and Security

Athena Alliance whitepaper by Kenan Patrick Jarboe et. al.

Click to view as PDF

Introduction:

America has a grand opportunity to lay the foundations for a prosperous and secure future. Our task is not just reviving the weak economy or increasing security – as important as those are. Real sustainable economic growth and international security will come from expanding the information revolution to all parts of our society. Metcalfe’s Law states that the value of a network increases exponentially in relation to the number of users. The same is true for markets and economic activity. By leaving some behind – both at home and around the world, we impoverish not only those individuals; we also impoverish ourselves.

The information revolution has reached a critical juncture. It is no longer a phenomena of the dot-com bubble. Economic growth in the information age comes not from physical strength or even the creation of information technology (IT) equipment. It is the creation of knowledge and information that drives growth. In the information age, the output of workers is more likely to be an “intangible” – such as software, ideas, services, music, literature, etc. – rather than a physical good.

Information and knowledge are transforming even traditional industries. Information helps both manufacturing and services companies better tailor their products to meet specific customer needs (customization), improve the product and the process (productivity), and create new products (innovation). These information assets are the new wealth of nations. All companies are becoming information-driven and all workers are becoming information workers. Yet, not all companies have made the transition and not all workers are benefiting.

Macroeconomic policy – either fiscal or monetary – plays a key role, especially in creating an environment that is conducive to investment. But if the information revolution is to be wide, deep and sustained, policies and programs must create a framework in which the information revolution can thrive and all can participate.

Actions are needed in a number of areas. This is not simply a question of technology deployment, although we must do more to get IT into the hands of all users. It is a broad package to help all Americans benefit from the shift to an information economy. Such a package must range from expanding the technological infrastructure to education and training to financing.

This paper lays out a series of recommendations in a number of areas from a number of experts. It is based on some shared principles:

the critical importance of inclusion and true participation by all;
technology is, and should be, a tool – the means to an end, not the end itself;
open and competitive economic systems work best;
and a more economically prosperous world is a more secure world.
This set of recommendations is not, by any means, complete. Nor do all of the authors of this white paper necessarily agree with all the suggestions. What we present is, however, evocative of the range of issues that must be addressed to continue to extend the information revolution to all. The following is a summary of the recommendations.

Telecommunications Infrastructure:
Enforce the requirement of an open telephone network. Reject proposals to deregulate and lessen competition. Instead increase enforcement of the pro-competition provisions of the Telecommunications Act of 1996. Free up more of the radio spectrum for “third generation” broadband mobile wireless. Consider subsidies for certain low-income users or rural communities.

Internet Access and Community Demand:
Maintain or expand federal, state, or local programs that provide funds for community technology, including the Technology Opportunities Program (TOPS) of the U.S. Department of Commerce. Help form public-private partnerships to bring advocates of low-income people into contact with people from the technology and business sectors for community development.

IT Utilization by Non-Profits & Community Groups:
Focus on helping community groups and non-profit organizations use technology in their day-to-day operations – not just on the role of these organizations in providing access to the technology. Identify, assess and coordinate existing initiatives involving non-profits in order to eliminate duplication and encourage replication. Support innovation in technology and related means by non-traditional and/or non-commercial players, while fostering an environment of innovation that can target challenges specific to the non-profit sector. Encourage interest in and adoption of technologies and tools to facilitate public and social participation, including attacking the problems of reluctance and unfamiliarity

Education:
Federal, state and local education departments and agencies should set up specific projects to demonstrate the practices they wish the nation’s educators to accept. The use of technology should be a part of the standards that we are asking teachers to teach and test to. Schools should work with informal learning places (museums, science centers, television stations, newspapers, etc.) that have demonstrated an ability to use technology in learning.

Post Secondary Education and Training:
Create programs that help workers learn more about career opportunities in their industries and elsewhere and to support informed choices about their education and training, such as Lifelong Learning Accounts. Utilize technology in the form of self-paced learning tools and access to on-line learning to better help the unskilled. Support sectoral programs that unite industry and educational providers in developing curriculum, internships, training programs and career pathways. Include computer literacy and problems-solving skill in the basis for funding of all literacy projects.

Economic Development:
Increase our research on how to identify and cultivate information assets as a driver of local economic development. Increase capacity building to help local organizations to identify and tap into local information assets. This should include increasing the size and number of local planning grants available from the Economic Development Administration (EDA), to create new programs similar to the TOPS program for communities to identify and develop information assets. Also, increase the funding and analytical support by state governments and regional planning organizations to local governments in this type of planning activities. Develop a best practices data base to help communities share their experiences specifically in the development of information assets.

Entrepreneurship:
Expand the pool of capital available for new and growing firms, especially those seeking funding in the range of $250,000 to $2 million, an area where chronic capital gaps exist. Expand the pool of scientific and technology workers via training, scholarships and the like – especially for women and minority groups. Increase support for programs that provide technical assistance to entrepreneurs and expand technical assistance for rural entrepreneurs. On the state and local level, existing programs like incubators, entrepreneurial networks and seed capital programs should be continued and expanded.

IT Infusion in Small Manufacturing Firms:
Expand the mission and resources of the Commerce Department’s Manufacturing Extension Partnership Program (MEP) to help small manufacturers integrate information technology effectively into production process improvements. Provide additional funding and flexibility for programs that provide skills upgrading for workers on the job. Make H-1B training funds accessible for on-the-job training in small firms. Provide employer tax credits for skill enhancement in manufacturing and technology-dependent occupations. Improve collaboration among agencies and programs, such as the EDA, the Small Business Administration (SBA), Small Business Development Centers, etc. Help industry associations and community-based organizations raise the level of “common practice” in small firms regarding technology utilization and create linkages among employers, technology vendors, and other training providers.

Financing and Community Renewal:
Assure that the federal agencies responsible for implementing and administering the New Markets Venture Capital and the New Markets Tax Credit move quickly and flexibly so capital can flow to communities that desperately need it. Expand this program to include a loan guarantee program to enhance private investment in large-scale economic development projects; and a tax credit to encourage financial institutions to setup “Individual Development Accounts” for low-income people.

Information Ownership:
Treat information and knowledge as a renewable resource under the concept of sustainable development. In that regard, avoid over-control of this resource so that at a minimum, no company should be able to prevent others from using non-proprietary or classified information. Assure the replenishment of the public domain pool by placing reasonable time limits on intellectual property protections.

International Aid and Development:
Focus our international development agenda on bringing all nations into the information economy – thereby increasing both economic prosperity and international security. Specifically, increase the level of funding and participation in the efforts of the Digital Opportunities Task (DOT) Force, established at previous G-8 summits.

Please note that the authors’ affiliations are given for identification purposes only. The views expressed are those of the individual contributors, not necessarily their organization. Contributors do not necessarily endorse, or have a position on, ideas presented in other sections.

Telecommunications Infrastructure
Karen Kornbluh, Markle Fellow, New America Foundation

The economic boom of the 1990’s was fueled, in part, by large companies integrating data networks – and the newly commercialized Internet – into their business processes. Businesses were able to improve productivity by streamlining administrative, purchasing, inventory control and design processes. Productivity growth shot up during this period from the anemic 1.4 percent annual average growth rate before 1995 to 3 percent for the period 1995 to 2000.

But smaller businesses lack access to the same technology that allowed their larger brethren to streamline and help the economy to grow. Only 10 percent of smaller companies have access to broadband – or high-speed, high-capacity data networks. Following passage of the Telecommunications Act of 1996, $90 billion of fiber-optic cable was laid across the country.

However, 97 percent of that fiber-optic backbone remains dark; unused because so few end-users have access to it. Upgrading or replacing the existing connections that run through communities to individual homes and businesses – the “last mile” of the network – has proven expensive and difficult.

Overcoming this problem is no less important than was ensuring that critical infrastructures such as railroads, electricity, telephones, and highways were built and made accessible to all. We must begin with a clearly articulated national goal of universal broadband access similar to our previous goals of universal electrification and phone service. Reaching that goal will require a number of specific actions.

First, we must make sure that the proper incentives are in place. The Telecommunications Act requires companies who own the existing telephone network to share access to their wires with broadband companies. This law must be enforced rather than undermined. An open network has been the best guarantor of innovation and investment in the telecommunications sector in the past and certainly will be in the future. If sharing access cannot be enforced, means for separating the natural monopoly portion of the network from the more naturally competitive ones should be explored. This might include separating the physical infrastructure from the services provided on top of it in two separate divisions or companies.

Second, Congress and the Administration must free up more of the radio spectrum for “third generation” broadband mobile wireless and experiments with existing unlicensed spectrum. Wireless solutions can be far less expensive than installing new wires and can increase competition, innovation and investment in the broadband market. This will require recovering unused spectrum now held by a variety of incumbents, including television broadcasters and military users.

Finally, even with greater competition, it may be that broadband is too expensive for certain low-income users or rural communities. To make sure they are not left behind, subsidies may be needed.

Internet Access and Community Demand1

A vibrant grass roots movement has taken hold in a number of American cities, as citizen activists are working to bring Internet access to segments of the community that have not been exposed to the information revolution. Some of those carrying out these initiatives collaborate with city governments; others form partnerships with the private sector. All of them experience high demand; activists running community technology centers are uniformly struck by the volume of additional foot traffic that comes about once word spreads about the availability of the Internet in the neighborhood.

The community technology movement means that there is an existing capacity to help close the gap in many low-income neighborhoods. But these initiatives need assistance from government and the private sector. The likely benefits extend beyond closing Internet access gaps. By tapping into and aggregating latent demand, supporters of community technology initiatives can open up new markets for companies that serve the Internet economy, from infrastructure providers to companies that supply the hardware that accesses the Internet. Research on community technology programs in cities suggests the following for policymakers:

Encourage public funding. The coffers of local governments have played an important role; several places (Austin, TX; Cleveland, OH) use cable franchise fees for community technology programs. But as demand in the community for publicly available Internet access and training expands, more government help is needed to meet it. Federal funding, in the form of grants from the Technology Opportunities Program (TOP) of the U.S. Department of Commerce, has been crucial to getting many projects off the ground. It is appropriate to maintain or expand federal, state, or local programs that provide funds for community technology.
Encourage public-private partnerships. In several cities, coalitions have been formed to bring advocates of low-income people into contact with people from the technology sector for community development. The existence of them should not, however, be seen as ends in themselves. The partners in these coalitions have differing outlooks and goals. Business leaders may see community-computing programs as a quick way to increase the supply of skilled workers. Community activists may see the partnerships as part of a long-term strategy to foster civic engagement among forgotten members of the community. Recognizing these differences early is key to making “bridging” partnerships work.
Encourage catalysts. The bottom-up nature of most of the Internet initiatives has come about because committed individuals in the community have served as catalysts. Just because these people have taken the initiative does not mean that they and their initiatives do not need nurturing. Financial support is the most obvious, and probably most useful, form of encouragement, but publicity is another. The media could do a community service by focusing on how community groups are using the Internet for social purposes.
1.Based on material from John Horrigan, PEW Internet and American Life Project.

IT Utilization by Non-profits and Community Groups
Ryan Turner, OMB Watch

Extending the information revolution is predicated not merely on providing affordable, equitable and utilizable access to technology and knowledge. It also involves the support, development and sustainability of mechanisms that are both appreciated and relevant in the lives of people who use them. Yet too often information, knowledge, expertise and technology are concentrated among developers or early adopters who have the financial means and people resources to access and use them.

Non-profits are responsible for addressing, coordinating and delivering services in response to an increasingly wide range of individual human needs. As such, they provide the means for collective social, civic and advocacy activity. The demands and responsibilities placed upon these organizations are increasing in an ever more uncertain economic and political landscape. Their value as fundamental institutions for advocacy must be acknowledged, with a focus on increasing the capacity of organizations to effectively acquire and apply information, knowledge management, communications and technology resources.

Non-profits are more than just conduits through which information resources are distributed to individuals. They are also more than simply access points for connecting individuals to useful knowledge and information. These organizations’ proximity to and experience with those they serve contributes to their valuable, yet often overlooked, roles as community facilitators. In that role, they serve in an important position of early adopters and arbiters of tools, resources, and practices most likely to succeed in addressing individual and community needs.

More resources (technological and otherwise) should be deployed to places where the need is greatest for innovation to address growing numbers of underserved populations in an effective and efficient manner, yet where demand is suppressed due to lack of awareness and understanding as to their availability or relevance. This means investing in non-profit capacity building specific to the internal operations of individual organizations. It also means broader nonprofit-driven development of knowledge management and coordination approaches to meet human needs. Directing resources in this area also helps to ensure that resources are deployed in a manner that is relevant to both organizations and the broader communities they serve.

This necessitates learning from similar efforts within the public and private sectors, whose track records as traditional early adopters and developers can help minimize the obstacles facing non-profits. Increased nonprofit involvement will also lead to more direct involvement by stakeholders in the issues around the support, growth, and sustainability of information mechanisms. This is an important part of moving end-users from consumers to owners of the knowledge that impacts their lives and opportunities. Such investments help to ensure that society’s innovation edge is kept perpetually sharp, while reducing the barriers to access and participation by all.

Achieving these ends requires the following actions:

Focus on helping community groups and non-profit organizations use technology in their day-to-day operations – not just on the role of these organizations in providing access to the technology.
Identify, assess and coordinate existing initiatives, at all levels and within and across all sectors, that direct funding, people and community-based and/or -focused knowledge assets towards key social and institutional deficiencies, in order to eliminate duplication and encourage replication.
Support innovation in technology and related means through non-traditional and/or non-commercial players, while fostering an environment of innovation which can target challenges specific to the sector.
Actively engage organizations and those served by their activities through both traditional and nontraditional means, including technologically, to address issues of reluctance and unfamiliarity, and to encourage interest and adoption of tools to facilitate public and social participation, especially where need is greatest.

Education
Bonnie Bracy, Christa McAuliffe Educator, National Education Association

As we extend the information revolution, education and the use of technology in education must be more than just an afterthought – as it still is for many people. The explosion of new technologies has changed the way we live – from the way we do business to the way we communicate with each other. Technological advancements are also affecting the way we teach and learn. But there is one group of workers who are not getting effective training who touch the future in educating the children of the nation. The teachers of America have little meaningful professional development. Students and teachers must learn new skills to live and work in this digital age.

In thinking about education, most people do not understand the impact that technology has on students in their daily lives. Technology in some schools is seen as an Internet connection or a “wired” solution. Today’s schools may have a wire that does not connect to anything. The ratio of computers-to-children is aggregated to make us think that students actually have hands-on technology in every school. That is not the case. Many schools and students are missing out on the richness of this learning experience.

Today, interactive, multimedia technology provides us with new ways to draw upon children’s natural impulses. These new media hold an abundance of materials including text, voice, music, graphics, photos, animation and video. But they provide more than abundance. Bringing all these media together means that we can vastly expand the range of learning experiences, opening up the social and natural worlds. Students can explore the relations among ideas and thus experience a more connected form of learning. Perhaps most importantly, these new media are interactive, and conducive to active, engaged learning. Students can choose what to see and do, and they have media to record and extend what they learn. Learning is thus driven by the individual needs and interests of the learner.

Some good things are happening. A quiet revolution is taking hold in many schools of education all over the country. Criticized for offering programs that are long on theory and short on practice, many schools have responded with new approaches to teacher education. Students in these programs develop subject matter expertise, practice teaching in real classrooms, connect with mentor teachers and learn the skills to teach with technology as media.

However, there remain problems with training, access, resources, the hardware and software and the understanding of how technology should be deployed in schools and learning communities. Studies of the process of educational change show that access to new information, procedures or tools alone rarely leads to change.

The National Academy of Engineering, in its report Technically Speaking: Why All Americans Need To Know More About Technology, addresses the question of fluency with technology. All teachers do not have these skills. Children have grown up digitally and may be masters of the technology, but the teachers who touch their future have been handicapped with lack of sufficient knowledge about the use of technology. Teachers who teach with limited reach cripple the future of the children they teach.

Missing in our education policy is a focus that encourages the integration of technology content into the learning landscapes of K-12, in the standards, curricula, instructional material, and student assessments in non-technology subject areas. For technology to work well for students and schools, we must build human infrastructure at the same pace we are installing computers, systems, and hardware.

The US government funds only about 8 percent of the educational budget. They give the guidelines but not always the models, examples and resources to fulfill the expectations and states are hard pressed to accomplish the tasks. First of all, Federal, regional and state agencies that help set educational policy should encourage, fund, and demonstrate the practices they wish the nation’s educators to accept. The funds should be explicitly earmarked for this use – but as explicit demonstration activities, not as general grants. Seymour Papert and the MIT staff talk about hard fun, hard demonstrations and ways to share and show what is possible. Such hard demonstration projects are needed for learning communities to be empowered and understand the technology needed to create empowerment. The education departments and agencies should specifically choose places in which they can create demonstration projects that reflect the many kinds of schools and the diverse people we serve. In that we will all be served.

Second, the use of technology should be a part of the standards that we are asking teachers to teach and test to. As long as technology is held outside of the curriculum base it will not be sufficiently integrated into teaching, and learning teachers’ needs, however many guidelines may be used. There are technology tools that will allow teachers to create and infuse these standards in their own planning. Empowered teachers using technology as a tool and using technology as media extend the reach of the learners.

While standards are important, teachers without technology resources are swimming in a set of data that they cannot manage. Teacher tools such as templates and metadata resources to help manage, plan and create learning landscapes should be developed through the Education Department and the Commerce Department’s National Institute of Standards and Technology (NIST).

Finally, knowledge networks should be developed to bridge the educational communities. Education needs to be more inclusive as the depth of content available has been increased. The job is to turn information into knowledge that is meaningful. Informal education is using technological literacy to improve learning outside of the formal K-12 or university settings. Learning places such as museums, newseums, science and agricultural centers, and television, radio, newspapers, magazines and other media comprise the informal education system which offers, to citizens of all ages and backgrounds, the opportunity to use, learn about, and be involved in a variety of learning experiences. We should build on those experiences by encouraging partnerships with parent and community groups, universities, and others who play a critical role in making schools true centers of learning in their communities.

Post Secondary Education and Training
Samuel Leiken, senior policy consultant to the Council for Adult and Experiential Learning (CAEL)

Three major trends are converging on our education and training systems.

The first is demographic changes that include:
an aging workforce – in 1978 the median age was 34.8 years, in 1998 it was 38.7 years;
a slowing of labor force growth – peaking in the 70s at 2.6% and declining in the 90s to 1.2%;
and, finally, the baby boom retirement which is costing the economy skilled workers at all levels.
According to Anthony Carnevale of the Educational Testing Service, if current trends continue, there will be a net deficit of about 12 million workers with at least some college by 2020.

Second is an increased demand for technologically skilled employees as technology spreads into all endeavors. This diffusion means that IT literacy will become as critical to employability as basic literacy is now. The ephemeral nature of technology skills will engender a growing demand for virtually all workers to regularly refresh their skills.
Last but not least is globalization, which allows business to utilize low-skilled, low-wage workers worldwide. As a result, the old road of unskilled jobs as steppingstones to upward mobility is closed. At the same time, competitiveness will be determined by the ability to produce high added value, which requires better-skilled workers.
The implications of these trends include workforce churning, whereby people will have many employers and multiple careers, and a growing contingent workforce. More and more people will be changing jobs and more and more will be on their own. The pending labor shortage will put low-skilled workers in higher demand, making their training more urgent. In addition, incumbent workers will be more important to the economy and will require continuous upgrading of skills.

At the same time, technology is making profound changes in the format, delivery, and credentialing of education and training itself. Post-secondary education is no longer a monopoly but an “education industry.” Technology has lowered the barriers to entry and offered economies of scale that has led to countless new providers, such as Cisco Systems Networking Academies.

What are the policies needed both to cope with the vast array of changes involved in the information revolution and to use it to create opportunities for those on the wrong side of the information divide?

The first order of business is to redefine the social contract – one that was built in the New Deal and is based on the workplace. The information revolution means that now individuals will be more responsible for their own career development. We need programs that help workers learn more about career opportunities in their industries and elsewhere and to make informed choices about their education and training. Lifelong Learning Accounts, a variation of IRAs, could allow employers and employees to contribute to portable, career development accounts to pay for these choices. Such a strategy could be coupled with innovative programs for self-managed, portable accounts for the contingent workforce in health care and retirement as well.

It is often noted that the digital revolution is a double-edged sword for the less educated. On the one hand, it creates new and better jobs. But on the other it raises the bar on the asset they least possess, high-demand skills. We need to sharpen the side of the sword that utilizes technology to serve those on the “downside of privilege.” The explosion of self-paced learning tools and access to on-line learning that is available now to the better-educated must be broadened to the unskilled. If government and foundations help with capital, it will be possible to develop better, faster, cheaper tools for this purpose. It has been noted elsewhere in this paper that by tapping into and aggregating latent demand communities around the country (libraries, community-based organizations, agencies, etc.) could be mobilized to recruit students – for example, there is enormous unmet demand for vocationally-oriented, intensive English as Second Language (ESL) nation-wide.

The skills shortage in the IT sector is an opportunity for the industry, government and education to develop partnerships to extend the information revolution to low-income communities. Government can support sectoral programs that unite industry and educational providers in developing curriculum, internships, training programs and career pathways. This strategy has worked in manufacturing and should be tried in the tech sector.

Finally, the Workforce Investment Act of 1998 defines literacy as “an individual’s ability to read, write, speak in English, compute and solve problems at levels of proficiency necessary to function on the job, in the family of the individual and in society.” In the 21st Century, this definition of literacy, with an emphasis on computer literacy, should be the basis for funding of all literacy projects, public, private and non-profit.

Economic Development

A key element to extending the information revolution is identification, development and utilization of information assets. Information and knowledge is the new fuel of the economy. Information is both a major input in the production process and a product in and of itself. Companies rely on information assets in all parts of their business, including the tacit knowledge of its workforce, the social capital of the companies and their locations and intellectual property such as patents and copyrights. Thus, in this information economy, economic development means harnessing the information and knowledge assets of a community to help local businesses succeed in the new environment.

Part of that information-based and knowledge-based economic development is the utilization of IT to enhance existing local businesses. As Mark Troppe’s piece describes, IT can be a powerful tool for increasing business productivity. Tools like the Internet can be important sales and marketing channels. More importantly, IT can help small businesses develop and utilize their internal information assets – and tap into external information assets.
But the process of local economic development is and should be much more. Every community has or can develop some knowledge and skills that are useful in the information age. In the information economy, every worker is an information worker. The tacit knowledge of the area’s workforce and social capital are some of the most important assets found in any location.

Local knowledge and information assets can be drivers of that economic development activity by:

capturing and using that knowledge as an information product, in and of itself;
using local knowledge to identify new entrepreneurial opportunities; and
developing the local knowledge and social capital base to facilitate innovation.
Three sets of actions will help communities better utilize their local information assets:

We need more research on how to identify and cultivate information assets. Our understanding of how to identify, develop and utilize local information assets is still incomplete and needs to be greatly expanded.
We need increased capacity building to help local organizations identify and tap into local information assets. Actions to increase capacity building include:
an increase in the size and number of EDA planning grants so that local organizations will have the resources to carry out the needed analyses;
creation of a new EDA program similar to the TOPS program for communities to identify and develop information assets; and,
an increase in the funding and analytical support by state governments and regional planning organizations to local governments in this type of planning activities.
EDA should develop a best practices data base to help communities share their experiences specifically in the development of information assets.

Entrepreneurship
Erik Pages, National Commission on Entrepreneurship

Full participation in the information revolution means full participation in the benefits of such a revolution—not only as consumers of new IT breakthroughs, but as owners and shareholders of the firms that pioneer and utilize these new technologies. This full participation requires an expanded commitment to supporting entrepreneurship.

This support for entrepreneurship can take many forms, but it must be based on several core concepts:

Encouraging and supporting those who already own and operate new ventures and existing small businesses;
Encouraging and training aspiring entrepreneurs, i.e., those who are currently dreaming of “taking the leap;”
Educating youth on entrepreneurship as a viable and rewarding career option.
Creating a vibrant climate in which entrepreneurial companies can start and thrive offers many benefits. Fast-growing entrepreneurial firms create the majority of net new jobs in the U.S. economy. But, beyond the bottom line, other benefits result. These new firms help increase participation in the economy, especially by groups previously left out. New immigrants and minority populations are among the most entrepreneurial parts of American society. Finally, entrepreneurs help build civil society by giving back via philanthropy and assuming civic leadership positions.

How to get there? While entrepreneurship is a largely a regional or local phenomenon, Federal actions can help encourage this activity. Three priority areas deserve attention:

Capital Access: Expand the pool of capital available for new and growing firms, especially those seeking funding in the range of $250,000 to $2 million, an area where chronic capital gaps exist. Quick implementation of New Markets Venture Capital, as discussed in Stockton Williams’ paper, would be a useful step.
Human Capital: Many fast-growing firms are based on new scientific and technological advances, and building these firms is impossible without relevant expertise. Yet, women and minority groups continue to be under-represented in America’s scientific and technology community. Efforts to expand this pool via training, scholarships and the like should be continued.
Technical Support: Programs that provide technical assistance to entrepreneurs, such as the Small Business Administration’s PRIME initiative, are woefully underfunded. In addition, new efforts, such as expanding technical assistance for rural entrepreneurs (as envisioned in the 2001 Senate version of the farm bill), should be enacted.
These Federal-level efforts must be supplemented by a commitment at the regional and local level to support economic development initiatives that encourage home-grown entrepreneurs. Existing programs like incubators, entrepreneurial networks and seed capital programs should be continued and expanded.

IT Infusion in Small Manufacturing Firms
Mark Troppe, National Center on Education and the Economy

Continued economic growth depends on extending the information revolution through the diffusion and application of knowledge across the American economy. This is particularly true for the small manufacturing sector, where the opportunities for productivity growth are tremendous. We must increase our efforts to help existing small manufacturers better utilize information technology for at least two reasons. This will enhance communication and supply chain efficiencies in support of the national security/homeland security effort, ensuring that we can deliver the required hardware (e.g., sensors, irradiation detection devices, etc.) as needed. In addition, it will contribute to renewed economic growth on a broad scale.

The evidence is clear and compelling that effective use of Information Technology (IT) is an essential element of competing in a fast-paced, knowledge-based economy. IT “cross-cuts” all operational functions within an organization and acts as the fabric that knits together business processes. Therefore, IT is critical in implementing high-performance concepts such as lean manufacturing, mass customization, learning organizations, and real time analytical marketing. High performance manufacturers are able to blend their business and information technology strategies to complement each other in ways that greatly improve overall business effectiveness. Studies show that firms that use the best practices and technology on the factory floor can have a 40 percent advantage over the average firms.

However, small companies have been slower to adopt new technologies than large companies. A recent National Association of Manufacturers (NAM) survey indicates that large firms (>500 employees) are much more engaged in utilizing information technologies and the Internet than smaller firms. The study also shows that, with respect to current usage, small companies are much farther behind larger firms in using the Internet for the purchase of, for example, maintenance, repair and operations products and for supply chain management. Thus, small companies lag in productivity gains and related benefits from what could be expected with greater IT investments. Greater incorporation of available technologies has implications for business strategies, organizational culture and skill requirements on the job (particularly in light of expected demographic changes as noted in Sam Leiken’s paper) as well.

We must focus our efforts on policies that help small companies close this gap and take full advantage of the productivity enhancing potential of the information revolution. Growing existing companies (see Erik Pages’ paper), especially small manufacturers, is an essential component of any strategy for renewed economic growth. The following steps would further that agenda:

Expand the mission and resources of the Commerce Department’s Manufacturing Extension Partnership (MEP) Program to help small manufacturers integrate information technology effectively into production process improvements and the entire enterprise. This will support a new phase of the information revolution by helping companies better utilize information and information technology in the transformation process.
Provide additional funding and flexibility for the Workforce Investment Act’s provisions that allow skills upgrading for workers on the job, so that states and localities can encourage and supplement firms’ private training investments in technology occupations and applications.
Ensure that H-1B training funds (authorized by the American Competitiveness and Workforce Improvement Act) are accessible for increasing the skills of employees in small firms who need to learn how to use the new technologies on the job.
Provide employer tax credits for skill enhancement in manufacturing and technology-dependent occupations, such as by expanding the investment tax credit to cover (in addition to capital investments) training in the use of advanced technologies.
Provide incentives for public agencies with complementary missions (e.g., Economic Development Administration, Small Business Administration, Small Business Development Centers) to collaborate in this effort.
Promote the role of intermediary organizations (e.g., industry associations, community-based organizations) that can help to raise the level of “common practice” in small firms regarding technology utilization and create effective working relationships among employers, technology vendors and other training providers.

Financing and Community Renewal
Stockton Williams, Enterprise Foundation

Bipartisan legislation enacted in 2000 to spur economic development in communities left behind during the economic boom of the 1990s will be especially important now that the nation is in recession. Low-income families and neighborhoods are always especially hard hit during economic downturns, and this one is no exception. Some of the heaviest job losses, for example, have come in the manufacturing and service sectors, where many low-income people found jobs when the economy was strong. Fortunately, the “Community Renewal Tax Relief Act of 2000” gave local communities and the private sector a host of new and expanded tools to generate jobs and investment in underserved and distressed areas that should help many mitigate the recession’s worst effects (The legislation’s major provisions include expansion of the federal Empowerment Zone program for stimulating business development in low-income areas and a similar set of incentives in a new “Renewal Community” initiative. It increases state capacity to allocate tax credit for affordable rental housing development and includes greater state and local authority to issue tax – exempt bonds for affordable housing and economic development. It also provides a new “New Markets Tax Credit” to induce private equity investment in financing entities serving low-income communities, and loan guarantees and matching grants for venture capital investments in small businesses in those areas through a new “New Markets Venture Capital” company program.)

Congress should assure that the federal agencies responsible for implementing and administering the provisions of that landmark legislation do so quickly and flexibly so capital can flow to communities that desperately need it. The government is off to a good start. The Small Business Administration has selected the first group of entities eligible for assistance under the New Markets Venture Capital company program. HUD has designated new Empowerment Zones and started the process for selecting Renewal Communities. And the Treasury Department has issued regulations for launching the New Markets Tax Credit. The benefits of these initiatives should soon be evident.

Congress and the administration also should apply the bipartisan spirit and principles that produced the Community Renewal Act to filling financing and savings gaps that still exist for low-income people and places. In particular, Congress should revisit two promising proposals it almost included in the Community Renewal Act: a loan guarantee program to enhance private investment in large-scale economic development projects; and a tax credit to encourage financial institutions to setup “Individual Development Accounts” for low-income people.
The loan guarantee proposal in its original form was called the “America’s Private Investment Company (APIC)” initiative. APIC was part of the Community Renewal bill the House passed 394-27 in the summer of 2000. Unfortunately, the initiative was dropped in negotiations with the Senate on the final legislation.

APIC would provide for-profit private investment funds with low-interest, government-backed debt to finance high-impact economic development projects in distressed areas, such as shopping centers, manufacturing facilities, industrial parks, back-office space and business incubators. The low-cost federal guarantee would enable firms to raise private capital for higher-risk activities in difficult markets. By attracting “first-in” private dollars, APIC would unleash tremendous investment activity in capital-starved communities. The program would protect taxpayers by requiring that all private capital be lost before any claims on the federal guarantee. Since the federal commitment is of “credit subsidy” and not actual appropriated funds, the APIC proposal would leverage huge investment at a minimal cost. A mere $37 million in APIC credit subsidy – a virtual rounding error in the scheme of the federal budget – would generate three-quarters of a billion dollars in private investment in low-income communities.

The IDA tax credit concept has been popular with both political parties for several years. While various versions have circulated, the basic premise is the same in most proposals. Financial institutions – from banks to nonprofit community development financial institutions – would receive tax credits for establishing, administering and providing matching contributions to an IDA for a low-income person. The IDA would enable the person to save to buy a home, start a business or send children to college. In addition, by enabling low-income people to build personal savings and accumulate assets, IDAs would help them gain greater access to the financial mainstream. Such increased access is a stabilizing force for families as well as communities. IDA tax credit legislation was part of some Senate drafts of the Community Renewal Act, but was dropped from the final bill late in the process.

The current federal budget picture precludes most new initiatives not related to military readiness and homeland security. But America’s ultimate strength depends on effective capital markets for communities and equal capital access for everyone in our society. Initiatives to raise private capital for economic development investment in distressed communities and help low-income people build wealth deserve the same strong bipartisan political support now that they have had in the past.

Information Ownership

As pointed out in the discussion on economic development, information assets are the new life blood of the economy. Information and knowledge are the raw materials that make the machine go. And just like any other important resource, control over that resource is of critical importance.

Legal control over information assets is defined by intellectual property rights – patents, copyright, trademarks, etc. Over the past few years, those rights have been greatly expanded. Some argue that this expansion has gone too far. As James Surowiecki points out in the January 21 issue of The New Yorker, if today’s copyright laws had been in effect a hundred years ago, the Federal government might have to pay the estate of Thomas Nash every time it uses the image of Uncle Sam. And Santa Claus, as well. Both were created by Mr. Nash.

More importantly, if today’s copyright laws had been in effect a hundred years ago Mr. Nash’s estate could conceivably prevent the U.S. government from using Uncle Sam on a government poster if it disagrees with the policy being presented. Or it could stop a rival Christmas card company from using the image of Santa Claus on its products.

The issue, as Professor Larry Lessig keeps pointing out, is not simply payment, but control. A company that owns a particular information asset can prevent any rival company from using it. The situation is similar to a farmer who might like to dam the stream running through his property to prevent his downstream rivals from irrigating their fields. If certain suppliers of information can control the flow of this key resource, they can choke off various forms of competition. This has been a consistent theme in economic history: cattlemen versus ranchers in the West, railroads versus Rockefeller oil pipelines. The list could go on forever.

The issue is one of anti-trust/competition policy as much as one of property rights. Over two hundred and twenty-five years ago, Adam Smith warned of the dangers of state-granted monopolies. Back then, Smith cautioned policy makers about monopoly rights to a major intangible asset of the day – trading rights of the East India Company. That warning is true for today’s intangible information assets.

Information is the ultimate renewable resource. As such, it should be treated in the same manner. Environmentalists and businesses have come together to develop the concept of “sustainable development.” We should adapt some of the same basic principles to information resources.

One principle is to avoid the over-control of this resource. It should be available for the benefit of all. At a minimum, no company should be able to prevent others from using information. It is appropriate that others pay for the development of that information. But information should be available on a user-neutral basis. Any make or model of car or truck can use a road, even a toll road, if its owners pay the fee. Similarly, anyone should be able to gain access to certain information, even if they must pay a fee. And just as cars are barred from private roads for security purposes, disclosure of information that is considered proprietary or classified can be protected. But roads should be not closed to traffic without a strong reason; information should not be locked up in the intangible version of gated communities.

Second, the requirement of continued replenishment of the public domain pool is an important part of sustainability. “Public domain” is the legal term for that body of information that is free for use by all. When a copyright expires, the information is then considered to be in the public domain.

Continued innovation and economic progress is contingent upon general access to the building blocks for new information and knowledge. Those building blocks are found in the public domain. There should be reasonable time limits placed on intellectual property protections in order to continue a flow into the public domain.
Striking the proper balance between the private utilization of information and the renewal of the public pool of knowledge and information will require careful calibration. The current intellectual property law seems to be tilting out of balance. Unless that balance is restored, we may end up with a system that in the name of promoting economic growth actually undermines our prosperity.

International Aid and Development

America’s security and economic prosperity is enhanced and strengthened by economic prosperity and security around the world. Terrorist organizations find aid and comfort in inequality and poverty. One of the ways to strike at terrorism is to strike at its breeding ground. This principle was embodied in President Bush’s State of the Union address when he said “we have a great opportunity during this time of war to lead the world toward values that will bring lasting peace. All fathers and mothers, in all societies, want their children to be educated and live free from poverty and violence.”

At last year’s G-8 summit in Genoa in July, the United States joined with other nations in a program to reduce poverty through two programs: debt-relief and an expansion of information technology. The Digital Opportunity Task Force (DOT Force) is working with countries to develop national “eStrategies” and promote conductivity.
However, poverty is not a technology-deployment issue. Nor is it an issue of charity. It is an issue of wealth and asset creation. Technology can help, but it is at best a tool and at worst a barrier. Debt-forgiveness is an important step, but only if it leads to future asset creation.

As noted in the earlier section on economic development, information assets are important keys to local economic development. The same is just as true in international economic development. While there are crying infrastructure needs in less developed nations, infrastructure is not the end all and be all of economic development, either at home or abroad. The G-8’s DOT Force declaration of last July recognizes the importance of enhanced human capacity development through education and training and of fostering enterprise and entrepreneurship. Yet, since September 11, attention to the activities of the DOT Force seem to be a low priority for the United States.

We need to re-invigorate the DOT Force – both as a tool for international poverty reduction and as an anti-terrorism strategy. Greater attention must especially be given to those areas of utilization discussed in the other sections of this report: community access, the role of non-governmental organizations (NGOs), education, training, utilization of information assets for economic development, entrepreneurship, small business and financing. U.S. foreign aid efforts should incorporate these areas as funding priorities and expand their focus to include the range of activities outlined in this paper. Government officials, from the President on down, should also give greater emphasis on participation in and support for the activities of the DOT Force working groups.

Conclusion

This is a time of transformation and change. Such times require special efforts to ensure that everyone shares in the opportunities ahead.

The information revolution is entering a new phase. Up until now, activity has focused on the dot-coms and their supporting telecommunications and computer industries. But, information is becoming the main input into the production process. In this new phase, the creation and utilization of information and knowledge is the key element of economic prosperity. But prosperity and security in this networked age are only possible if everyone participates.

This paper lays out some of the policies and programs that will spur the revolution forward. Without the efforts of all of us – government, the private sector and civic and social organizations – the information revolution will stop short, leaving many behind. With concerted actions, we can make sure the information revolution is spread to all citizens and all sectors.

For further reading:

Karen Kornbluh, “Disconnect,” The Washington Monthly, October 1, 2001, and “The Broadband Economy,” New York Times, December 10, 2001.

John Horrigan, Cities Online: Urban Development and the Internet, The PEW Internet and American Life Project, Washington, DC, 2001, http://www.pewinternet.org.

Technically Speaking: Why All Americans Need To Know More About Technology, Committee on Technological Literacy, National Academy of Engineering and National Research Council, Washington, DC, 2002, http://www.nap.edu/books/0309082625/html.

Kenan Patrick Jarboe, Inclusion in the Information Age: Re-framing the Debate, Athena Alliance, Washington, DC, October 2001, http://www.athenaalliance.org.

Kenan Patrick Jarboe, Knowledge Management as an Economic Development Strategy, Reviews of Economic Development Literature and Practice: No. 7, Economic Development Administration, Washington, DC, April 2001, http://www.athenaalliance.org.

Lawrence Lessig, The Future of Ideas, Random House, New York, 2001.

“Building Entrepreneurial Networks,” National Commission on Entrepreneurship Policy Report, December 2001, http://www.ncoe.org.

“Five Myths about Entrepreneurs,” NCOE Policy Report, March 2001, http://www.ncoe.org.

“Building Companies, Building Communities: Entrepreneurs and the New Economy,” National Commission on Entrepreneurship White Paper, July 2000, http://www.ncoe.org.

Working in the 21st Century, US Department of Labor, Washington, DC 20001.

“After Doha: What The WTO Is Not Talking About”

Athena Alliance working paper, by Kenan Patrick Jarboe

Click to view as PDF

The World Trade Organization (WTO) will shortly convene its 4th Ministerial Conference in Doha, Qatar. The goal is to launch a new round of multilateral trade negotiations. It remains to be seen whether the Doha meeting succeeds. The betting is that the participants cannot afford a failure such as happened in Seattle two years ago.

Slightly less than a decade ago, I played a small part in the implementation of the Uruguay Round and the birth of the WTO. As a Senate trade policy staffer, I had fly-on-the-wall view of the pushing and shoving. At the time, I could not help but think that I was witnessing the last major trade round. I may be proven wrong. But, regardless of whether a new round is launched and successfully completed, it will be outdated before it begins. As we engage in the first war of the 21st century, we may be entering into the last trade negotiations of the 20th Century.

This is not to say that the negotiations are unimportant. There are numerous areas, ranging from agricultural subsidies to the dispute settlement process, that need to be addressed. These are, however, the loose ends of trade in the Industrial Age – not the emerging issues of the Information Era.

Trade negotiations have long since gone beyond tariffs and quotas. They have even gone beyond issues of trade-distorting practices such as subsides and non-tariff barriers. As trade and international commerce have expanding and evolved, negotiations are more and more focused on issues of harmonization of commercial rules and regulations. The WTO system is now in the position of resolving disputes between internal regulatory systems. Thus, we have seen the rise of a number of issues such as investment, competition policy, labor standards and environmental protection. All of these issues are on the table, more or less, at Doha.

Not on the table is a comprehensive look at policies toward information and other intangibles. We are moving to a knowledge economy. Knowledge is both an increasingly important input into the production process and an end-use commodity in and of itself. As the role of information increases in both our economic and social systems, issues of control of information will become increasingly central to our policy and political debates. Parts of the issue are included in the WTO agenda, such as: Trade-Related Aspects of Intellectual Property Rights (TRIPS); the work program on electronic commerce; trade and investment; and the proposal for a new discussion on technology transfer. Missing from the discussions is the recognition of the interconnection between these areas.

Government policy and activities with respect to knowledge and information covers a number of areas: intellectual property rights (IPR); privacy policies; regulation of content and freedom of speech; data protection and security; access to government information and freedom of information; “right-to-know” policies. The intellectual foundations for these policies come from a number of different traditions, which often conflict with one another. Cutting across all of these various information management regimes is the fundamental tension between proprietary rights and public rights – that is, between the aspects of knowledge, information and data as a private commodity and that of knowledge, information and data as a public good.

This tension is often most viable in the area of intellectual property rights where the competing needs of scientific and technological research for sufficient proprietary rights to create incentives for action and the need for information exchange as the building blocks for that action. For centuries, patent laws and the practices and customs of scientific inquiry have sought to strike a balance between these two competing goals.

The tension manifests itself in all area of information management. For example, who owns the data about my DNA? What information is my personal property that I may sell, disclose or withhold according to my choice? Likewise, what is the larger community’s rights? What information is of such importance to the community as a whole that its disclosure should be mandated (e.g. details of toxic waste sites), should be allowed to be sold (e.g. micro-weather data), or should be withheld/censored (e.g. child pornography)? The issue centers on what information is and should be private, what information is and should be proprietary and what information is and should be public.

In the U.S., we are beginning a discussion of these broader issues under the rubric of an “information commons.” Yet, these are issues that by their very nature are global. The WTO may or may not be the best venue for discussion. However, the decisions that get made during the next round on issues such as TRIPS and electronic commerce will affect the entire information commons approach. We should at least be cognizant of that outcome, as it will have a major impact on shaping the environment in which business will operate in the future.

Crafting a Stimulus Package for the Information Age

Athena Alliance working paper, by Kenan Patrick Jarboe

Click to view as PDF

In the wake of the terrorist attacks, attention of economic policy makers has turned to way to prevent the shock from further damaging an already weak economy. Talks are underway to craft a stimulus package. Many items are under discussion. Treasury Secretary O’Neill has been quoted as saying nothing has been excluded from consideration. If everything is on the table, I have a few suggestions – ones which afford us a grand opportunity to lay the foundations for a sustained economic boom.

The economic slow-down began with the bursting of the tech-stock bubble and the dramatic reduction in information technology investments. With the attacks of September 11, that retrenchment mentality has spread to other sectors. As the economy slows, we are in danger of forgetting those left behind by the previous good times. This is not a call for a new set of programs, policies or subsidies – but an alert to keep the opportunities flowing.

Macroeconomic policy – either fiscal or monetary – is not the sole answer. In addition to economic polices to maintain workers’ purchasing power and protect the most vulnerable, actions to spur business investment are needed. This should include ways of reviving the IT sector; the current IT innovation cycle still has a long way to run.

But, the information revolution is entering a new phase. Up until now, activity has focused on the dot-coms and their supporting telecom and computer industries. In the future, real sustainable economic growth in the future will come from expanding the information revolution to all parts of our society. Metcalfe’s Law states that the value of a network increases exponentially in relation to the number of users. The same is true for markets and economic activity. By leaving some behind, we impoverish not only those individuals; we also impoverish ourselves.

In part, our task is one of technology deployment. The technology infrastructure (including POTS – plain old telephone service) must be extended to those on the wrong side of the digital divide. We must be careful to craft a policy that concentrates on the underbuilt areas of the network, not to add additional capacity to those parts that are already overbuilt.

Investment in the telecommunications infrastructure is not enough. We must also eliminate the barriers to access that are keeping millions out of the digital economy. Access to computers and broadband is only useful if people have the skills, resources and opportunities to use those technologies. As many have noted, education is key – but not the only key. Community Technology Centers, libraries and schools all provide both access to the technology and the training and other resources to help individuals participate in the information age. However, these centers often face a continuing fight for survival. We need to bolster and expand programs, such as those at the Commerce and Education Departments, which support these activities.

Most importantly, we must focus on creating model of sustainability for these activities. A grant here and there from the government and foundations is not enough. The bottom line is not just access to information technology, but the utilization of that technology by organizations and individuals to better people’s lives. We must work to weave information technology into the operations of community groups in a way that will both help individuals use the technology and will make those groups more efficient and effective in their core mission.

Closing the digital technology divide, however, is not enough. The driving force behind our economy is the creation and utilization of information and knowledge – not just new technology. Ultimately, it’s the Information Economy – not the Internet Economy. In the Information Economy, productive capability is no longer completely dependent on capital and equipment; information and knowledge assets are increasingly important. Social capital and intellectual capital are as important as financial capital. Success comes from harnessing the information and knowledge assets of a community and from helping local businesses use technology and develop their own information assets.

Harnessing those assets to jump start economic growth will involve both start-ups and the expansion of existing businesses. Entrepreneurship remains one of the driving forces of our economy, despite the dot-com crash. Support of entrepreneurship, especially locally-based programs to developed social capital and to incubate and mentor new entrepreneurs, are critical to maintain economic growth.

We must also increase our efforts to help existing businesses better utilize information and information technology. This new phase of the information revolution will be marked by the transformation of small- and medium-size businesses. The mission and resources of the Commerce Department’s Manufacturing Extension Partnership should be expanded so that it can help all businesses enter the Information Economy.

Financing the transformation is another concern. In this downturn we need special efforts to reach out to those areas left behind. The New Markets Initiative in last year’s budget deal is a case in point. These provisions provide for, among other things, expanded empowerment zones, new tax credits for investments in low-income communities and ways of spurring capital formation for these investments. This program is an example of a true bipartisan effort, which the Bush Administration and Congress would do well to emulate and build upon.

The Information Revolution is alive and well – and entering a deepening phase. In this new phase, information and information technology will transform our economy. But, the process is not automatic. It will require new policies and programs to spur the revolution forward. Without the efforts of all of us – government, the private sector and civic and social organizations – the information revolution will stop short, leaving many behind. As we take steps to revive the economy today, let us also take steps to create the economy of tomorrow. With concerted actions, we can make sure the information revolution is spread to all citizens and all sectors. And that is the surest way to continue economic growth.