Ferrara’s 10 th Conference on Intangibles

1. Ferrara’s 10th Conference on Intangibles Baruch Lev New York University blev@stern.nyu.edu September 2014

2. Characteristics of Conference Research (72 studies) • Many studies on intellectual capital (intangibles) reporting by companies. • Many studies on integrated, sustainability, triple bottom line reporting. • Some studies on valuation of intangibles, mostly brands. • Some studies on intangibles in the public and not-for-profit sectors. • Some studies on intangibles at SMEs. • Others Most studies very interesting, high quality

3. Majority of Research on IC Disclosure • An old, 20−25 years research effort • There have been lots of IC disclosure initiatives (NYU, Denmark) but most • of them failed. • IC reports mainly limited to some European companies; no standardization; • very limited impact. • By and large, leading corporations resist any meaningful intangibles disclosure. • No incentives for managers, no real demand by investors. • Sustainable, environmental, social, integrated reporting, all pushed by various • organizations, but so far did not change the map (except in South Africa). Sorry for the grim report

4. Why the Failure? • Fortune magazing conference of the “100 smartest people.” • “Intangibles are inert, like bricks.” • Inert: to be in a state of doing little or nothing. • The only interest in intangibles per se, is when you try to sell them (patents, • brands, software). Otherwise, what’s interesting to managers and investors is: • how do the intangibles, with other resources, create value? • This points at a different research agenda. • This research agenda will be of great interest to managers, investors, and • policymakers. How do I know? From hundreds of conference calls.

5. A New Research Agenda Useful to Managers, Investors, and Policymakers • Focus on Strategic Resources, the drivers of long-termcompetitive advantage • (see Resource-Based Theory) • Strategic resources, mostly intangible (patents, brands) and some tangible • (oil & gas resources, Amazon’s warehouses) are assets which: • Create economic value • Rare • Difficult for competitors to imitate. • The research emphasis is on what interest managers, investors, and policymakers: • How best to create strategic resources • How to preserve and protect these resources • How to generate the most value from these resources.

6. Research: Creating Strategic Resources • Is developing patents/products internally (R&D) more or less efficient than • acquiring patents or development companies? • Is outsourcing IT more efficient than maintaining an IT department inhouse? • How effective are governments, or EU directives concerning minimum R&D? • Is the number of company’s patents predictive of its future sales growth or • share performance? (Many companies pay a bonus for patents granted.) • Are the subsidies given by regional governments to science-based companies • effective? • What is the relationship between marketing & advertising expenses and brand • values?

7. Research: Preserving Strategic Assets • “Communities of practice.” The success of companies’ efforts • to transform (codify) tacit to explicit knowledge. • The battle against “organizational amnesia.” • The effect of disruptive technologies on incumbent firms. • Examples: ebooks on book publishers, internet on local • newspapers, moocs (massive open online courses) • on universities. • The reinvention of bankrupt brands: Converse Allstar, Polaroid, • Fiat 500, or the Mini Minor. Why some brands are resurrected • while others are not.

8. Research: Creating Value with Strategic Assets • Exploiting “Big Data” (see OECD, 2013 Intangibles report). Big data − the new • factor of production (Brynjolfsson− 5-6% productivity increase). Create new • goods and services, optimize production and delivery, enhance research and • development. Netflix CEO: “80% of customer choices based on • “recommendation algorithms.” At this early stage − good case studies will be an • important contribution. • Design − the new resource. OECD classify KBC to: computer software, • computerized databases, R&D, creative property, brands, human capital, • organizational structure, and design. Most popular course in Stanford business • school. Design differentiates products (Apple, Sony). Contributes to the brand. • Great research opportunities. • Is Capitalized R&D an asset? Compare the valuation coefficient of expensed and • capitalized R&D.

9. Research: Creating Value with Strategic Assets – Cont’d. • Monetization of Intangibles • Licensing and sale of patents • Intangibles as loan collateral • Securitization of royalty streams (Bowie bonds) • Selling shares in patent pools (Deutsche Bank) Case Studies as well as large sample studies

10. Should I Do It? • This is obviously a more demanding research agenda. You • may have to access internal corporate records (big Data), • learn from managers’ surveys, or identify specific databases • (patent licensing). • But the rewards are much higher than those of conventional • research. • Improved publication prospects • Enhance your reputation (you’ll be cited) • Approached by companies and policymakers. • Like in finance: higher risk − higher return.