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].
