Friday, February 27, 2009

Intellectual Property will be America's Main Source of Competitive Advantage in the 21st Century

by Ron Carson
Vice President of Marketing
Innovation Asset Group

As the new administration seeks ways to guide the U.S. out of recession, it would be well advised to pay attention to innovation and intellectual property. A press release I recently found on MarketWatch discusses the position of strength the U.S. has in the area of intellectual property and why the Obama administration must focus on strengthening IP ownership rights. There are some interesting ramifications for countries and companies competing in the global knowledge economy.

In the release, Mark Blaxill and Ralph Eckardt, two experts on innovation and intellectual property strategy (and authors of an upcoming book), argue that America's most valuable asset is its innovation and IP reserves, and that these will likely become the main source of U.S. competitive and economic strength in the 21st century. Importantly, the authors warn that these advantages are easily endangered by overzealous attempts to drive patent reform too far and misguided calls to weaken the rights of patent owners.

Backbone of Competitiveness
According to Blaxill and Eckardt, America's vast storehouse of IP reserves form the backbone of the country's global competitiveness. While business people and policymakers may undervalue and overlook these reserves, they are the fuel that powers the economy in good times and helps it bounce back from bad times. The story goes on to say:

  • The American IP sector, all by itself, provides one of the strongest surpluses in the country's balance of trade accounts: In 2007, America's IP exports (i.e., royalties and license fees) were $62 billion -- three times larger than Japan's IP exports, which came in second at $20 billion.
  • America's IP surplus in 2007 was eight times the size of Japan's and twice the size of the combined surplus of every other country in the world that reported an IP surplus.

Harsh Realities
With the U.S. in a position of relative strength in terms of intellectual property power, proper management at a national and corporate level should help the country come out of the recession faster and perhaps farther than other countries. A hopeful scenario, to be sure, but U.S. companies are now faced with weak quarterly earnings, declining revenues, lower stock values, forcing budget cuts –that sometimes come at the expense of protecting valuable IP assets.

Do More With Less
While companies have to function within economic realities, it is equally important for them to preserve and enhance their future competitive advantages. For obvious reasons, this blog has advocated the need for an integrated approach to business-IP strategy (and indirectly advocated the IP management software one might use to facilitate this integration), we also believe that firms can do both at the same time. (In fact, we’re recently published some studies that suggest an opportunity to achieve a positive ROI from IP management software in less than 12 months -- while at the same time, laying the IT foundation for longer-term strategic IP management.)

Start Doing It Now
While corporations in North America and Europe struggle with these competing demands, on the other side of the world, countries and companies continue to make significant investments in their innovation foundation. A recent article in the Oregonian entitled, “China chips away at our high-tech advantage” should help executives and politicians become aware of the growing competitive threat (in the purest, capitalist sense) from that country:
China's expansion into the world of innovation will test America's reputation and know-how. To peek inside China's largest free trade zone, Tianjin, is to glimpse the country's carefully calculated destiny: high-tech industries, cutting-edge research institutes and ambitions to become home to the world's most innovative companies. China no longer wants to be the world's factory for cheap products. Under pressure to create better-paying jobs and to clean up its environment, the nation is trying to snag blue chip companies by vowing to crack down on intellectual property theft and schooling a new class of managers.

THIS Is Strategic Alignment of Business and IP
China is well positioned for the future as well, as their IP ambitions are aligned and consistent at the national level and at the corporate level. At one level there are politicians such as Premier Wen Jiaboa, who stated in 2004: "The future of world competition will be for intellectual property rights." And on the corporate level there are executives such as Michael Jemal, president and CEO of Haier America, who recently stated that innovation and patents were his company’s "life blood." "Haier applies for two patents every single day, every day of the year. In fact, it's more than that."

For those of you who haven’t heard of Haier, I bet you will come to recognize the name in the near future. When it entered the U.S. market nine years ago, the company sold three products. Now it sells 3,000. You name it, Haier makes it, everything from little dorm refrigerators to air conditioners, washing machines to flat screen TVs. "Haier is the number one brand in China," Jemal said. "In Asia, we're in the top ten. The objective here in the U.S. is also to build a market share, to be in the top three in the U.S."

So What’s a New Administration to Do?
We’ve discussed what businesses can do better manage their IP in multiple entries to this blog (here for example). So for now, let’s stick with the issues on a national level. Going back to the press release on MarketWatch:

Blaxill and Eckardt argue that: "Today, the chief export of the U.S. economy is innovation. American inventors have built a strategic reserve of intellectual property rights that is every bit as strategic as our domestic energy reserves.” The U.S. national interest demands that we safeguard these strategic reserves, according to the authors:

  • "Unlike American multi-national companies, which can innovate anywhere in the world, the U.S. economy itself needs domestic innovation to thrive," they say. (In many cases, the interests of the U.S. economy and multi-national companies have actually separated.)
  • The incoming administration must defend both the volume and price of domestic American IP assets on the global market.
  • Aggressive development of innovation and IP assets will improve both the balance of trade and terms of trade for the U.S.

Policy Recommendations for Maintaining Innovation
According to Blaxill and Eckardt: "In practice, IP rights are the incentive that brings markets, talent and invention together to monetize our innovation and deliver benefits to the nation. For much of its history, the American economy has had a unique ability to put all these pieces together to create value from its innovations."

They argue that, "At this time of great national distress, we need to fall back once again on the spirit of American innovation, and as we have in the past, we must look to the foundation of American invention to pull ourselves through this latest crisis." They recommend a national "innovation policy" that includes:
  • Protecting the U.S. patent system and the renewable strategic reserves that it generates.
  • Sustaining America's terms of trade and defending the pricing of America's invisible assets through regulation and legislation.
  • Adapting the USPTO to the needs of the modern patent development process.
  • Building talent locally through quality science and engineering education.
  • Providing incentives for inventive talent to live and work in the U.S.
  • Making science and engineering financially rewarding careers.
  • Supporting returns on invisible asset investments.
Let's hope the gang in Washington is going to act along these lines.