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SPOTLIGHT
Europe looks enviously at US economic miracle
America's phenomenal success in generating strong technology-led growth without inflation is a wake-up call to European politicians. But don't hold your breath for them to replicate the miracle. Bedevilled by high unemployment and sluggish growth, the finance ministers of France and Germany agreed at the weekend to try to claw back the high-tech lead that is fuelling unprecedented gains in US productivity -- the ultimate building block of prosperity. The US expansion is now in a record-breaking eighth year yet wage inflation, defying economic theory, has slowed even as unemployment has fallen to the lowest level in three decades. The best guess, shared by Federal Reserve Chairman Alan Greenspan, is that accelerating productivity due to heavy investment in technology has temporarily broken the link between labour market conditions and wage gains, prolonging the business cycle beyond its usual sell-by date.
"What's most significant is how long the US growth cycle has lasted," said French Finance Minister Dominique-Strauss-Kahn, long an admirer of America's high-tech prowess. Strauss-Kahn and German Finance Minister Hans Eichel want to channel two billion euros ($2.15 billion) from the European Investment Bank to innovative firms in the hope of nurturing a new Microsoft. They will have their work cut out. More than an ocean separates America and Europe. Despite the competitive forces unleashed by globalisation and the new euro single currency, economists say Europe's rigid labour laws, red tape and stifling tax regimes would prevent it recreating America's flexible, entrepreneurial economy -- even if voters wanted it.
Euroland's clogged economic
arteries
Thomas Mayer of Goldman Sachs in Frankfurt says Europe
needs to twin defensive restructuring, whereby firms shut
unprofitable non-core operations, with the promotion of business
start-ups if it wants to catch up with America's higher rate of
return on capital and superior high-tech product range. "Our
problem in Euroland is that we make it difficult to successfully
proceed with defensive restructuring, because we do not allow
people who are laid off in the old industries to be re-employed
in the new non-traditional sectors. There are too many rigidities
for that to happen," Mayer said. "Secondly, we don't
make it easy for new business start-ups. So both these mechanisms
for transmitting the knock-on effects that come from
technological advances are somewhat clogged."
Steven Englander of investment bank Salomon Smith Barney in London said that to the extent that America's outperformance reflects improved technology, the gains should eventually spread around the world. That was what happened after World War Two. But if US productivity is racing ahead because of flexible labour and product markets, it is more likely to hold its lead until other countries implement corresponding reforms. "In this sense, smaller euro-area economies, such as Ireland and the Netherlands, that have made progress in establishing market flexibility could continue to outstrip some of their larger neighbours," Englander wrote in a research note. David Mackie of JP Morgan also cited the Netherlands as a positive example. As in Spain, reforms there have led to an improved trade-off between growth and inflation. As a result the unemployment rate in both countries has been able to fall further in the 1990s with less pressure on wages -- albeit not as impressively as in the United States, he noted.
Germany shows how not to do it
The picture in Germany, Europe's biggest economy, is far
less bright. Goldman's Mayer said two "mind-boggling"
pieces of legislation enacted by the Social Democrat-led
government elected last September showed how not to respond to
the challenges of rapid economic change. One law aims to root out
the abuse of rules that exempted jobs paying less than 630 marks
($346) a month from statutory social security payments. The law
might be aimed at unscrupulous employers, but Mayer said the
result is perverse. Employers say 800,000 part-time service jobs,
such as waiters, barmen, cleaners and tax-drivers, could be at
risk.
"People are losing their traditional employment. They need to find new ways of working and temporary jobs...and yet here we pass a law that is making life for these people as difficult as we possibly can," Mayer said. "So we're not only hindering adjustment, it's actually countering adjustment." The second law is targeted at the "seemingly self-employed". The aim again is to halt the avoidance of heavy welfare taxes, but by tying up self-employed contractors in bureaucracy the law deters risk-takers from setting up their own businesses. Because it leaves economic policy makers with fewer weapons in their arsenal, the advent of the euro has intensified debate on how the continental model of welfare capitalism can adapt to the quick-fire economic changes sweeping the globe.
Employment in the United States has risen 32 per cent since 1980, while it has not risen at all in the 11 countries that have adopted the euro. But the corollary is a harsh welfare regime and a degree of income inequality that European voters want no truck with. Reforms to Europe's welfare state might be advisable but they could run into strong resistance unless steps are taken to cushion the blow for the losers, said Fabrizio Zilibotti of the Institute for International Economic Studies in Stockholm. Substantial tax allowances for low earners, a policy Britain has adopted, would be one option, he suggested. "It's not necessarily the case that the European model is going to disappear. The point is that it might be extremely costly to sustain in terms of taxation," Zilibotti said.
For Mayer at Goldman Sachs, the market forces at work are far too strong to be stopped: after all, he says, nobody is seriously considering rolling back free international trade or capital movements -- the transmission belts of change. So anybody who tries to halt them, as Germany's law makers seem to be doing, is doomed eventually to fail, Mayer argues. "They'll be able to hold the fort for a while but then they will be swept away and relegated to history," he said. "All these efforts that they are making to stop the clock or even turn it back will just create more adjustment costs and make it more difficult for us to catch up."
By Alan Wheatley
INTELLECTUAL PROPERTY
Managing all-important intangibles of the information age
Hold that thought. Better yet, let us manage it for you. The "Big Five" accounting firms are offering their corporate clients a new service based on an old concept -- managing those all-important intangibles of the information age that fall under the heading of intellectual property. Leveraging intellectual property such as patents, trademarks, copyrights and trade secrets to create a new source of revenue has become the latest rage of the information age. "People are really coming to understand that there is more value hidden in their intellectual assets than in their bricks and mortar assets," said Robert Gruetzmacher, director of IP and licensing for DuPont Co.'s Corporate Technology Transfer group.
The intellectual assets along with other intangibles like organisational effectiveness can be worth more than the book value of the firm. "Wringing more money out of intellectual assets has been going on for some time -- there was a book on it in 1936. But in the last 10 years, adequately valuing intangibles like intellectual property has taken on a heightened level of importance," he added. The process for managing intellectual property, or IP, typically begins with an inventory of a company's so-called IP portfolio, KPMG LLP partner Roger Carlile said. The next step is to assess the value of the portfolio and then develop a strategy for making better use of the assets.
"Companies today are spending a majority of their time managing a minority of their assets, the tangibles like buildings, raw materials and equipment," Carlile said. "Everybody we talk to has begun to realise they need to do something different. But with the pressure for bottom-line results, it is difficult to persuade CFO's and CEO's to spend the money on installing processes for managing intellectual property companywide unless they can see the value," he said.
KPMG's answer has been to send in a team of economists, financial and legal experts, and engineering specialists to show companies how to commercialise their intellectual property to generate new revenues. "For example, instead of just spending money to protect patents, a company can make money by licensing or selling non- core property to another user, abandoning unused patents, or donating them to a university for a tax deduction," he said.
Pivotal to the management of intellectual property is how the value of intangible assets is measured, a subject of ongoing debate. That debate raises a second concern when some consultants propose that the value of intangible assets be incorporated in a company's balance sheet even though the methodology for obtaining those values is still evolving. "There are arguments both for and against including intangibles in financial statements. Many think tanks in the US and in Europe as well, are looking at the relevancy of reporting intangibles on balance sheets and other financial statements," DuPont's Gruetzmacher said. Last month, Business Finance magazine quoted Nasdaq chairman and retired Microsoft CFO Michael Brown as saying he was not a proponent of balance sheets bloated by intangible assets.
"You should be very aggressive about your intellectual property, but I wouldn't try to put it in my financial reporting model," he told the the periodical. Price WaterhouseCoopers LLP Partner Gordon Petrash agreed, suggesting the solution for now is to have separate but parallel accounts for real and intellectual property. "Don't mix them yet, but sometime in the future. We've been valuing machines and real property for hundreds of years and we have a comfort level doing that. We only have a couple decades under our belt with intangibles, but we're doing it. And the more we do it, the more comfortable and the better we'll get." Petrash, who left Dow Chemical last year to run Price's trademarked asset management practice, Holistic IAM, said there is a significant market for the service.
"Almost all companies do some intellectual asset management; almost none do it well. It's one of the few stones left unturned in corporate business opportunities," he said. For those who think IP management is a tough concept to sell to investors, Petrash points to Microsoft's stock. "They have been able to get investors to value the performance of their intangible assets on future shareholder value. That's evident by their price to earnings ratio which is 40 to one. Somebody's banking on their future." Gruetzmacher agreed but cautioned that the chip industry and telecommunications, and to some extent bio-agriculture and pharmaceuticals, may be special cases.
"Chipmakers are making enormous amounts of money. I believe IBM makes about a billion dollars a year licensing technology," he said. The reason, Gruetzmacher said, is that players in those special markets need to "ramp" existing technology into new products, so they must take licenses on seminal inventions to avoid infringing the patents. In 1997, IBM filed 1,742 new US patent applications, more than any other company. Canon K K JP was second with 1,381. "Cash is still king," Gruetzmacher said.
"In the real world, a company's (investment) is going to have to have a higher probability of return sooner rather than later. And the sooner the better." Carlile thinks the tide has already turned. "The key driver to success many years ago was capturing raw materials, plants equipment and other hard assets and owning them efficiently. That's now a base level requirement. The real value is in intangibles." -- Rita Farrell