I just returned from a week in Korea and Japan, talking, primarily with government representatives, about the importance of intellectual property to innovation in the information technology industries.

Background information is linked, in the form of Japanese METI strategy documents on Intellectual Property Rights (IPR) issued in 2005 and 2006. For more background, also linked are comments on these filed by CompTIA in 2005 and 2006. (CompTIA set up these meetings; I tagged along.)

The gist of my pitch was:

INTELLECTUAL PROPERTY RIGHTS (IPR) AND INNOVATION IN THE INFORMATION TECHNOLOGY INDUSTRIES

Summary: Those who regard the destruction of IPR as the key to promoting interoperability and cooperation among firms have the situation exactly backward. To the contrary, the road to effective cooperation and interoperability is through IPR.

There was once a time when industrial organizations relied heavily on producing their own innovations. One thinks of Bell Labs and the AT&T telephone network, or of the automobile manufacturers.

Increasingly, enterprises are adopting a different model, one that relies on innovations from the outside. They recognize that they cannot rely solely on their own personnel to produce all the innovations that they need in order to run their core business, or all the innovations that they can profitably integrate with that core business. These enterprises must be able to draw on the creativity of other firms, individuals, and academic institutions.

Several considerations trigger this more catholic approach:

o The unpredictable nature of innovation and the recognition that in-house production cannot be consistently relied upon. Companies that invest billions in creating networks cannot rest comfortably if the whole investment will be put in jeopardy if the research department fails to come up with the next great idea.

o The poor fit between organization structures that foster innovation and the structures, incentives, hierarchies, and cultures of large industrial firms.

o The commonplace that "wherever you work, most of the smart people work somewhere else."

o The fact that ideas and creativity are a new form of capital, and that the creators must be treated as capital rather than as labor.

The genre includes enterprises as diverse as:

o Telecom companies that provide basic connectivity while relying on others for the content carried and for innovative ways of improving the carrying capacity and quality of the network;

o Creators of computer operating systems that rely upon outside developers to produce applications that enhance the value of the OS. Examples are Microsoft and Windows, or the support of Linux by IBM/Sun/HP/Red Hat et. al.

o eBay, with its auction network, around which many have built businesses.

o FedEx and UPS, which allow others to establish businesses in reliance upon guaranteed delivery.

o Dell, which is an assembler and marketer of components manufactured by others.

And, of course, because the platform companies exist and seek innovation, it is possible for innovators to develop business plans that depend on the existence of the platforms and that allow the innovators to focus on what they can do best, secure in the knowledge that development, integration, and marketing can be done elsewhere.

In a further twist, platform companies sometimes produce innovations that do not fit with the core business or expertise, and which they cannot exploit efficiently. They need to hand off either to other platform companies, which are better able to use a particular innovation, or to innovation companies, which are equipped to take the idea and build on it.

Both IBM and Microsoft, for example, are paying great attention to licensing inventions that they themselves cannot efficiently exploit.

These changes in the organization of innovation are enhancing attention to the interdependence of firms and to the need for interconnectedness. In particular, they are creating a growing demand for interoperability – the capability of information technology products and services produced by different firms to operate together seamlessly (to the consumer) to produce a result.

As touched upon above, the changes are also related to changes in how people think about “capital.” Capital is not just finance that can then be traded for fungible physical assets or labor. Capital also consists of ideas and creative capacity, and the people who possess these ideas are capitalists of a new kind. Institutional mechanisms that foster interaction among platform companies and innovators must recognize the capital contribution of the latter, and enable them to monetize it.

The system of Intellectual Property Rights is the primary institutional mechanism to enable the development of these important and fascinating changes in industrial organization.

Without IPR, the innovators have no way to deal with the platform companies, who could simply take any ideas revealed and implement them. And even if the platforms wanted to compensate the innovators, they would be unable to, because any competitor could copy the innovation without payment.

The platform companies know well that it is in their interest to have innovators protected by strong IPR, because without these people would not be willing to invest in innovative companies. It is a truism of game theory that the ability to bind oneself is a way of guaranteeing good faith and of inducing others to rely on one's promises.

The mechanisms for using IPR to meet the needs of all the parties, of both producers and users of innovation, are being worked out by the players, in the form of standard setting and licensing, including the use of RAND and RAND-Z terms. (See Reflections on Intellectual Property and Standards: The Immediate Issue: Should Standards be Own-Able? (Aug. 2005).)

As an interesting aside, many of the issues that arise in this context of guaranteeing the good faith of all parties are similar to the problems addressed by Japanese managers as they pioneered in lean production techniques that require very high levels of trust and cooperation among primary producers (platform companies) and suppliers. (For more discussion of this point, see Jail Break: Japanese Corporate Structure as an Antidote for Prisoner's Dilemma Problems (April 29, 1996)(Dft).)

posted by James DeLong @ 1:12 PM | International

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