State of Innovation

Patents and Innovation Economics

The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation

 This post is the Introduction to my book, which should be available on Amazon.com in December of 2009.

This book started as a project based on my observations.  I deal with technology start-up entrepreneurs everyday as a patent attorney.  I noticed a difference between the sort of projects my clients were undertaking since the technology downturn of 2000-2001 and the 90s.  Clients, in the 90s, would come into my office with plans to build businesses that were disruptive or revolutionary.  The technologies underlying these companies held the potential to completely redefine a market.  Some of these of these ideas would increase the available bandwidth by 10x for minimal costs or allow data searches that were 10-100x faster than existing technologies.  It was extremely exciting talking with these entrepreneurs.  Their energy was infectious and the potential implications of their work was mesmerizing.  The technology downturn of 2000-2001 forced a reevaluation of these aggressive business plans.  I expected that after a couple years of the technology market taking a breath, I would again be working with companies trying to change the world. 

This expectation never came to fruition.  The start-up companies I came into contact with were all looking for narrow niche markets.  Instead of trying to change a whole area of a technology and go public, these companies were looking to develop incremental changes in technology and be bought out by an existing company.  I started wondering if other people in the technology business were seeing similar trends.  My informal surveys centered around the question of whether this decade (2000-2009) was as innovative as in the 90s.  While I would say that most of people I surveyed felt this decade was not as innovative as the 90s, there were people who disagreed. 

Some of the innovations that the dissenters pointed to were the iPod, the tremendous amount of money Intel was spending to build their next microprocessor plant, and the social media industry.  While these are certainly innovative, these innovations did not drive the whole economy like the Internet of the 90s.  The Internet in the 90s affected almost every business in the U.S.  For instance, it drove PC sales, retail, electronics, telecommunications, professional businesses, marketing, newspapers, etc.  It also redefined whole areas of life, with email, online shopping, online advertising, it was impossible to escape the effects of the Internet unless you crawled under a rock.  The personal computer revolution of the 80s had a similar, although somewhat less pronounced effect.  The iPod is cool, but it hardly effected the whole economy, in fact it did not even drive the electronics or software business.  The same can be said of Intel’s gigantic investment in a new microprocessor and social media sites. 

I began to wonder about the reasons for the differences in the 90s and this decade.  What were the causes and implications for these differences?  Since the main difference centered around the level of innovation, I began to explore some the structural factors that effect innovation.  It also caused me to explore in depth what the implications of innovation were for the U.S. economy.  My quest caused me to question whether my concern about innovation was egocentric or whether there were more fundamental reasons to be concerned about America’s level of innovation.  This book is the result of this inquiry. 

There is no attempt in this book to have determined or exposed every cause for the decline in our innovation.  I have only focused on those causes that are most critical.  For instance, I do not focus on the limited number of H-1B visas.  While I agree that we need to increase the number of H-1B visas, I do not think this by itself will change the U.S.’s level of innovation.  FASB’s elimination of the “pooling of interest” accounting for mergers definitely hurt the technology start-up community.  However, the impact was somewhat reduced by the new rules on accounting for goodwill.  While I think “pooling of interest” accounting for mergers should be allowed, again I am skeptical this by itself will significantly change the level of innovation. 

Each chapter in this book is intended to be self-standing.  Chapters 1-8 build on each other to make a larger point about innovation and its effect on our economy.  Chapter 8 ends with some recommendations to jump start the high technology start-up community and the U.S. economy.  Chapter 0 sets up a number of themes examined in this book.

Chapter 0 is about the musings of a mythical Fed Chairman in the late 90s.  He is concerned with the rapid rate that treasury securities are being paid off and how the Federal Reserve will control the money supply without treasury securities.  This leads to questions about the causes for the incredible economic growth of the 90s.  His musings take him on a journey covering the financial innovations that made the Industrial Revolution and Information Age possible.  He also explores the history of technology including the anti-technology attitudes of the 70s and the business model underlying the innovation of the 90s.

Chapter 1 compares and contrasts the U.S. economy in the 90s and this decade (2000-2009).  The chapter shows how far our economy has deteriorated using a variety of graphs and statistics.  The recession of the 2008-2009 is likely to be the worst recession since the recession of the early 80s and may surpass it. 

Chapter 2 demonstrates that U.S. innovation since 2000 has been anemic.  This is in sharp contrast to the innovation of the 90s, which made the U.S. the envy of the world.  From the decline in the number of Initial Public Offerings (IPOs) and the brain drain the U.S. is experiencing to the fact that in 2008 fewer patents were issued to Americans than foreign applicants by the U.S. Patent Office, U.S. innovation is declining.

Chapter 3 discusses the three broad theories of how to stimulate economic growth: 1) spending side economics, 2) supply side economics, and 3) innovation side economics.  This chapter explains that production precedes consumption and invention precedes production.  It establishes that real long term per capita growth is the result of innovation.

Chapter 4 demonstrates that the U.S. economy is built on innovation.  The first colony of the U.S. was only possible because of two new technologies.  The U.S. has been a leader in every major technology innovation since the constitutional convention.  The U.S. is wealthy because of its technological innovation, not because of its natural resources.

Chapter 5 provides a tour of the history of patent law, particularly the development of patent law in the U.S.  Particular emphasis is placed on the changes in the patent laws since 2000 and how these changes affect the incentives for inventors.  This chapter is longer than most of the other chapters because I found that attitudes towards patents track attitudes toward innovation, the free market and entrepreneurs.  Patents are the free market process of encouraging innovation.  There are many pundits pointing out that the U.S. in not innovating, but most of these pundits suggest updated versions of NASA to jump start innovation in the U.S.  The evidence is clear that a strong patent system does more to encourage innovation than any NASA like program at less than 1% of the cost.  A strong patent system mobilizes the private sector to focus on innovation in ways that dwarf any project undertaken by the government both in the quantity of innovation and resources devoted to innovation.  The Internet in the 90s ably demonstrates this.  While the Internet was based on a DOD project (ARPANET), it did not drive the economy of the whole world until private industry was mobilized to utilize the Internet.

Chapter 6 discusses the effect of Sarbanes Oxley on the technology start-up ecosystem.  The history of financial regulation in the U.S. is explored.  The effectiveness of financial regulation, including Sarbanes Oxley, is reviewed.  Suggestions on how securities regulations can be amended to encourage innovation are provided.

Chapter 7 reviews the history of the accounting rules associated with employee incentive stock options.  After 30 years of debating the accounting rules on stock options, FASB changed the manner in which companies account for stock options.  The logic behind this rule change is explored in the context of accounting’s role in society. 

Chapter 8 provides a summary showing that the economic growth of the 90s was the result of innovation.  The innovation was driven by high technology start-up companies built on intellectual capital, financial capital, and human capital.  Since 2000 the U.S. has changed the rules governing each of these pillars on which the innovation of the 90s was built.  Changing these laws and regulations would be inexpensive, politically uncontroversial, and reinvigorate America’s economy.

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September 24, 2009 - Posted by | -Economics, Innovation, Patents, Uncategorized | , , , , , , , , , , , , , , , , ,

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