US Competitiveness Report Shows Struggle With Balance Of IP And Access

A new report from the United States Department of Commerce on competitiveness and innovation details the US need to boost innovation in order to compete globally and grow the economy. But while it stresses the need for strong intellectual property rights enforcement to create high-priced monopolies as an incentive for innovation, it also acknowledges that access to inexpensive technology and ideas is key to innovation and entrepreneurship. Furthermore, it shows that the rise in IP rights in recent years has been accompanied by a drop in innovation.

The report on the Competitiveness and Innovative Capacity of the United States, available here, was sent to Congress this month as mandated by the America COMPETES Reauthorization Act of 2010. The new report explores “federal support of research, educating our workforce, digital infrastructure for the 21st century, revitalizing manufacturing, and other important topics,” including intellectual property rights.

According to the report, there are two main approaches to measuring innovation.

The first is the “proxy method”, where rather than measuring innovation directly, “patents or spending on R&D are tracked as a proxy for the level or rate of change of innovation,” it said. But these they are “necessarily imperfect” measures, it said, offering the example that “many innovations are not patented, and innovative activity occurs even in industries that conduct little formal R&D.”

The second approach identified by the report is based on economic accounting where “economic growth is explained by factors that are measurable, such as the labor force and its quality.” Part of economic growth cannot be explained by measurable factors, it said, and is referred to as “technological change,” “innovation,” or in economic jargon, “multifactor productivity” or “total factor productivity.” Under this second approach, an estimated one‐third to a half of economic growth in the United States can be attributed to “innovation.”

The report supports a pro-business World Economic Forum definition of competitiveness and creating an enabling environment for innovation that includes protection of intellectual property rights. It appears to focus mainly on patents, though implies all types of IPRs.

University Slowdown

The report showed that the portion of basic research funded by the federal government has fallen significantly. In 1980, it provided 70 percent, most of which went to universities and university‐based federal research centres. Since then, “the federal government’s share of basic research funding given to all entities has fallen to 57 percent and its share of funding of basic research at universities has fallen to about 60 percent, largely due to increased funding from the private sector,” it said.

Meanwhile, commercialisation of technologies by US universities has slowed since 2000, even as universities have piled up patents. In 1980, Congress passed the Bayh‐Dole Act, giving ownership of intellectual property to the universities and institutions that create it, even if they used federal funding for the research.

“This was meant to provide a strong incentive for universities to offer useful technology to industry, who would then quickly transform it into products,” the report said. “By the late 1980s, university patenting, licensing of technology to industry, and the proliferation of university‐linked startup companies all began to accelerate, reaching especially high growth rates in the late 1990s.”

“However,” it added, “the pace of these activities slowed starting in 2000, a slowdown that persisted after the brief recession of the early 2000s.”

Irreconcilable Differences?

The report stressed the importance putting resources toward science, technology and math education, and of broadband and availability of technologies, and electricity.

It is in the discussion of the need for an open internet and technology access that the seeming inconsistency with a heavy-handed approach to IP creation and enforcement begins to arise. The report drives home the importance of a “sound” information and communications policy – including reversing the US lag in high-speed broadband access – and called for an open internet, “one that protects consumers and innovators.”

“Innovators need to be able to compete on their merits and not face anticompetitive barriers. Internet privacy is also crucial, and cybersecurity concerns need to be addressed,” it said. “President Obama has pledged to preserve the free and open nature of the Internet to encourage innovation, protect consumer choice, and defend free speech.” It detailed initiatives of the administration to advance these goals, including an international declaration to “reaffirm the importance of Internet policy principles that have enabled the open Internet to flourish with innovation and human connections beyond our wildest expectations.”

The seeming inconsistency in approaches further appears with the details of the pro-consumer and entrepreneur “open innovation” and entrepreneurial “startup” strategies.

These references are rife with pro-access and barrier-lowering measures – such as free software and lower-cost access to patented technologies – that are essentially alternatives to the strong IP rights philosophy it elsewhere espouses.

The Commerce Department readily acknowledges that the rise in recent decades of intellectual property rights corresponds with a decline in small business startups, though it does not draw the direct link between them.

The following is quoted from the report:

“Open Innovation Strategy. Data is a critical component in information technology and the Administration’s open innovation strategy is meant to increase access to data to help spur innovation.

This strategy incorporates four major components:

Improve Access to Government Data. On his first full day in office, President Obama signed a memorandum on transparency and open government. Part of this initiative was the launch of data.gov, a platform that provides public access to high value, machine readable datasets, now numbering in excess of 390,000.

Encourage Market Transparency. A transparent “marketplace” will lower barriers to entry and unleash the creativity of entrepreneurs to compete in the development of new consumer‐oriented products and services. The Obama Administration is working with the health, energy, and education sectors (among others) to simplify access to high value data by, for example, encouraging the creation of standards.

Cultivate Innovation Communities. Bringing together communities of innovators will help spur innovation. To support these communities, the Administration has partnered with organizations to inspire participation in innovative activities through the use of challenges and prizes.

Create Capacity for Innovation. To manage these policy tools, the Administration has actively recruited a group of technology and innovation leaders with direct reporting relationships to the Cabinet Secretaries. In turn, these leaders are recruiting three to five person ‘innovation teams’ to tackle an identified problem with rapid results.”

Separately, the report declares that, “The rate of new business startups has been declining over the past two‐and‐a‐half decades, meaning fewer would‐be entrepreneurs are rising to the challenge of turning new ideas into new businesses.”

Startup America is a January 2011 White House initiative to accelerate high‐growth entrepreneurship nation-wide. The report lists the details like this:

“First, the Obama Administration’s Startup America initiative is an ongoing series of policy actions to improve the environment for high‐growth entrepreneurship in five key areas:

(1) Increasing access to capital for high‐growth companies (including zero capital gains tax on qualified small business investments and streamlined rules for private funds that invest in lower income communities);

(2) Creating mentorship and educational opportunities for entrepreneurs (including new opportunities for clean energy entrepreneurs, military veterans, and undergraduate engineers);

(3) Reducing barriers that can limit the growth of entrepreneurs through the solicitation of recommendations regarding the modification or elimination of regulations;

(4) Accelerating innovation from lab to market for federally‐funded R&D (including lower cost access to government‐patented energy technology, and new funding for regional proof‐of‐concept centers and regionally interconnected networks of researchers, managers and capital across the business, education and government sectors); and

(5) Driving a nationwide effort by the Administration to engage potential new opportunities in industries like healthcare, clean energy, and learning technologies.

Second, the Startup America Partnership has been launched, which consists of alliances of entrepreneurs, corporations, universities, foundations, and other leaders whose goal is to encourage innovative, high‐growth U.S. startups. The Startup America Partnership has created a national online network where high‐growth entrepreneurs can establish free membership profiles and unlock resources from dozens of companies—from free software to free business filing to steeply discounted computer hardware. The total value of these resources is over $730 million and climbing.”

The Elusive “Well-Functioning” IPR System

The administration concludes the report with a full section on the goal of a “well-functioning” IP system, which seems to swing back to the one dimensional perspective that IP rights are simply a means for businesses to protect their property, neglecting to mention the public interest bargain in which the consumer and innovation sides are affected by that exclusive protection.

“A well‐functioning intellectual property rights (IPR) system is crucial for encouraging innovation and creating jobs,” it said. “‘Absent effective legal protections for innovators, other businesses can immediately exploit an innovator’s idea, undermining the incentive to invent in the first place. Public policy solves this problem through intellectual property rights – allowing limited, short‐run grants of exclusive rights to catalyze inventive activity.’

With the objective of “safeguarding” those intellectual property rights, it said, it notes the administration’s white paper of March 2011 with 20 recommendations for legislative changes (IPW, US Policy, 15 March 2011).

The report goes on to say: “In the United States, intellectual property (IP) significantly influences innovation and economic growth. Industries that are the most intensive users of IP protections directly support millions of jobs across all sectors of the economy. Unfortunately, the U.S. patent system has not always functioned in a manner conducive to encouraging innovation.”

It sees the solution as easing the way for even more patents to be processed faster, and then finding ways to lower legal costs for would-be entrepreneurs deterred by high costs.

“In particular, it is crucial that the United States improve its IP system by reducing both review times as well as the cost of litigation related to patents,” it said. “Fortunately, significant progress has been made in reforming the patent system in the United States. With the passage of the America Invents Act in September 2011, the United States Patent and Trademark Office (USPTO) will be able to offer, under a prioritized examination process, a new fast track for reviewing patents with a guaranteed 12‐month approval timetable for certain patents.”

“Additional resources are provided in the Act, allowing USPTO to continue reducing the backlog of patent applications and the time it takes to review them,” it adds. “USPTO will offer entrepreneurs new ways to make litigation regarding patent validity less burdensome and at costs significantly less expensive than going to court.”

The report shows the administration’s view of international IP rights as primarily focussed on protection and enforcement. “IP protection abroad is also crucial for U.S. firms,” it said. “Infringement of IPR in markets abroad causes significant financial losses for rights holders and legitimate businesses around the world and undermines key U.S. comparative advantages in innovation and creativity to the detriment of American businesses and workers.”

The report highlights the administration’s Joint Strategic Plan on Intellectual Property Enforcement, issued in June 2010 by the White House Intellectual Property Enforcement Coordinator, which it said lays out a comprehensive strategy for the US government to strengthen enforcement of intellectual property rights, domestically and abroad.

“Initiatives on the international front include the U.S. government aggressively pursuing meaningful improvements in the protection and enforcement of U.S. intellectual property with our trading partners,” the report said. “This includes direct bilateral engagement to increase enforcement, participation in regional and multilateral fora, and the negotiation of new IPRs related instruments, such as the Anti‐Counterfeiting Trade Agreement, and, where appropriate, enforcing our rights using the dispute settlement procedures of the World Trade Organization.”

Furthermore, it is working to prevent other governments from taking undue steps to build their own industrial bases. “The U.S. government is also alert to emerging concerns regarding innovation and industrial policies in some of our trading partners that may disadvantage U.S. IP rights holders,” it said. “Such policies include measures that condition government benefits on the local development or ownership of IPR, or that condition market access or other benefits on the transfer of technology, IPR or other proprietary information from foreign companies to domestic entities. They may also include measures to restrict the ability of U.S. rights holders to freely negotiate the terms and conditions of the use of their IPR or impediments to enforce contractual arrangements.”

The IP rights section of the report concludes with almost an afterthought about the intensive values-based discussions surrounding the ongoing IP rights build-up. “The Obama Administration is committed to an intellectual property rights system that recognizes that IP rights are fully consistent with – and indeed enable – other core values such as the norms of legitimate competition, free speech, fair process, and the privacy of users,” it said. “The Administration is also committed to addressing international health and public safety challenges. For example, the USPTO has issued a request for information to develop strategies to incentivize humanitarian technologies through the intellectual property system.”

In sum, it remains to be seen whether the administration has managed to splice together the disparate threads of IP enforcement and access. In its own words, it leaves the door open, by concluding:

“The private sector is the engine of innovation in the United States and it is crucial that both established firms and entrepreneurs in the private sector have the best possible environment in which to innovate. To this end, areas that should be the focus of attention in the United States in the years ahead include reforming the corporate tax system, and ensuring that the intellectual property system continues to function in a way that encourages growth.”