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Where Intangibles Meet Innovation:
Report on New Publications
by Debra M. Amidon

As most knowledge professionals are well aware, considerable progress has been made toward identifying new Intellectual Capital measures as a foundation for successful innovation. We can argue the precise validity of the various formulas currently being explored, but the reality is that “being roughly right is better than being precisely wrong,” suggests Leif Edvinsson. In 1996, we examined the notion of Innovation Capital produced in a Skandia Report and most recently outlined the Power of Innovation Capital. We now know that several prominent magazines as featuring cover stories to that effect (e.g., Fortune, Forbes, CFO Magazine et al).

The Brookings Institute:

What may not be familiar to most, is the major economic study that has been underway at The Brookings Institute (Washington, D.C. USA) “Understanding Intangible Sources of Value.” Several ENTOVATION colleagues have been involved, and the pre-publication of the report, Unseen Wealth, authored by Project Directors, Margaret M. Blair and Steven M.H. Wallman, is now available for purchase. An annotated bibliography appears citing documents from Tax Policy, Human Capital, (labor, employment, training), SEC and Financial Reporting, Capital Markets, R&D Policy, Intellectual property, Strategic Organizations, Macroeconomic Implications, and Related Conferences, Symposia and Other Materials .

The 42 individuals who helped prepare this report believe the inability to clearly define and measure intangible assets is a serious potential problem for business managers, investors and the government. This report examines this problem and makes recommendations for businesses and the government that, the authors believe, will improve the quality and reliability of information about intangible sources of value in the economy.

New York University:

As part of the Study, Brookings commissioned a report to be written by Baruch Lev, professor of accounting at New York University's Stern School of Management. He has assembled in one place available data and other information documenting trends in investments in intangibles, and review existing practices regarding measuring, monitoring and reporting of these investments. The report will outlines what is known about how firms and other organizations make decisions involving investments in intangibles, and what economic theory says about the private and social costs and benefits of such investments. Finally, this document assesses the institutional environment (e.g. regulations, reporting requirements, tax rules, capital budgeting practices, professional accounting standards, and constraints imposed by lenders and other providers of capital) within which decisions are made about investing in intangibles and reporting on these investments. The publication is available free-of-cost at http://www.stern.nyu.edu/~blev .

The Report entitled Intangibles: Management, Measurement and Reporting, is an exhaustive review of the field, including insights on the economics of intangible investments, economic and political reasons for full disclosure, and a foundation for a comprehensive, coherent system to manage both internal and external intangibles. More importantly, for one of the first times, we see a lucid articulation of the economics of innovation, based not upon traditional technology development models. Lev outlines the (A) the Value Drivers as (1) Scalability and (2) Network effects; and the (B) Value Detractors include (1) Partial Excludability, (2) Inherent Risk, and (3) Non-Tradability. He suggests a value-chain scoreboard might include indicators within the following categories: Discovery/Learning, Implementation and Commercialization. [Note: We might offer our 3 C’s categorization of Knowledge Creation, Knowledge Conversion and Knowledge Commercialization as an alternative as it is more consistent with the Ten Dimensions of Innovation.]

Some illustrative excerpts follow:

“The prospects of abnormal profits or monopoly rents, protected for a certain period by patents or ‘first-mover advantages,’ have always provided strong advantages to innovate.”

"What is unique to the modern corporation is the urgency to innovate. Given the decreasing economies of scale (efficiency gains) from production, coupled with the ever-increasing competitive pressures, innovation has become a matter of corporate survival in recent decades.”

“Innovations are created primarily by investment in intangibles. The new products, services and processes that are generated by the innovation process (e.g., new drugs, ATM machines or Internet-based distribution channels) are the outcomes of investment in R&D, acquired technology, employee training, customer acquisition costs, etc.”

“Summarizing, intangibles are inherently difficult to trade, legal property rights are often hazy, contingent contracts are difficult to draw, and the cost structure of many intangibles (large sunk cost, negligible marginal costs) is not conducive to stable pricing. Accordingly, at the present, there are no active, organized markets in intangibles. This can soon change with the advent of Internet-based exchanges, but it will require specific enabling mechanisms, such as valuation and insurance schemes. Private trades in intangibles and alliances proliferate, but they do not provide information for the measurement and valuation of intangibles.”

“On average, investments in intangibles are clearly creating value, namely, yielding a return above the cost of capital; why else would business enterprises invest so heavily and consistently in R&D, employee training, brand creation and maintenance, organizational change, and other forms of intangible asset?”

“The key to achieving substantial improvement in the disclosure of information about intangibles is to construct a comprehensive and coherent information structure that focuses on the big picture – the value creation (innovation) process of the enterprise – and places intangible assets in the proper role within the structure.”

Also available from Baruch’s website is an Appendix for Accounting Rules and Regulations for Intangibles: U.S. and International Standards.  Intangible Assets are defined as “Non-monetary assets without physical substance held for the use in production or supply of goods or services, for rental to others, or for administrative purposes.” They should be identifiable; controlled by the enterprise as a result of past events, provide future economic benefits to the enterprise and is distinguishable from Good Will.

The categories for intangible asset to be disclosed include: Customer Acquisitions and Retention (e.g., customer relationship, customer support, subscribers, customer lists/databases, etc.), Innovations (e.g., blueprints, drawings, designs documentation, laboratory notebooks, etc.), Assets Not Specifically Recognized (e.g., book and publication libraries, music/master recordings, distribution networks, cooperative agreements, environmental rights, etc) and Specific Industry-Related Intangibles (e.g., airport landing rights, FCC broadcast licenses, drilling and mineral rights, interstate operating rights, etc).

Insight from India:

With the close of the Millennium, a conference was sponsored in New Dehli, India. ENTOVATION® Global Knowledge Map participant - Parthasarathi Banerjee (National Institute of Science, Technology, India) and Developmental Studies) and Frank-Jurgen Richter (ThyssenKrupp, Germany) have edited an anthology of papers soon to be published – Intangibles in Competition and C-operation: Euro-Asian Perspectives – based upon the conference presentations. Titles include: “Competition for Co-operation – How Exchange Enabling Assets Influence a Firm’s Success in International Co-operation,”  “Competition and Cooperation between the Japanese and British Management Models in the UK,”  “Making the Intangible Tangible,” and “Innovation Competence – Intangibles in the Cooperative Innovation Process” – to mention a few. More details will be later available, but if you cannot await publication announcement, please contact Parthasarathi Banerjee - psb_nist@yahoo.com.

An Intangibles Conference Not to be Missed:

This is advance notice of the 4th  Annual Conference sponsored by the Stern School of Management for May 17-18, 2001. As you can tell from the program announcement, expected lectures come from the finest academic research, the latest FASB innovations and the commentary provided by lead authorities in the field, such as Thomas Stewart and Larry Prusak. For a summary of the conference from last year, visit the I3 Update archives.

This conference – notably without peer – tackles the central issues concerning intangibles – measurement and valuation. Leaders of national level experiments (US and Denmark) will report progress in designing new corporate disclosure systems; and developers of users of non-conventional intangible measures will present clinical case studies. For further information, contact Autherine Allison [aallison@stern.nyu.edu].


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Last updated: 21 Jan 2001