The digital economy: data centers deserve some of the spotlight, too

When we talk about the digital economy we tend to focus on the newest and most innovative products and services coming to market. The digital economy is huge and growing rapidly, but everyone knows that. What’s less well known is the innovation and growth in infrastructure to support the digital economy, specifically, large data centers.

Large data centers are standalone facilities filled with servers and IT equipment that support the massive amounts of data and data communication capabilities that we rely on every day (in contrast, small data centers are basically server rooms in an office setting). In order for the digital economy to grow, the storage capabilities in data centers must keep up. Here are three things to know about the industry:

  1. Companies are making significant investments in data centers, and data capacity is growing rapidly. In total, $171 billion is spent on data centers worldwide. Capacity is expected to grow almost five times from 2015 to 2020.
  2. Data centers attract more data centers. Take a look at Ohio. A local news report recently announced Facebook will invest $750 million to build a data center outside Columbus; Google has spent over $1 billion on its data centers in the same region last year; and the tech company Cologix plans to invest $130 million, also in Columbus. That is nearly $2 billion total. The jobs to construct and maintain these data center are local jobs, which means the investment in this area will continue for years to come (read more on that here).  
  3. Data centers are leading innovation in energy efficiency and environmental sustainability. Power is the primary ongoing expense of a data center. Companies, like Apple, are investing in renewable energy, like solar and wind, and inventing environmentally sustainable systems, such as cooling techniques that reduce water usage. These investments advance and inform innovation in sustainability across industries and communities. 

Expect to see continued innovation and investment in data centers throughout the U.S. as states and regions follow Ohio in opening its doors to capitalize on the investments in technology, infrastructure and economic growth.

Increase Economic Growth through IP & Innovation

Last week’s Bureau of Economic Analysis (BEA) report on GDP had some good news; the advance second quarter GDP estimates reflected overall growth, with improvements in consumer spending, and an increase in exports. However, business investment, as a component of GDP, is lagging. This is where policymakers need to focus. Business investment, which includes R&D expenditures, is key to economic growth.

Washington needs to ensure protection of intellectual property in order to capitalize on investment potential and increase innovation. Innovation boosts GDP in several ways: it increases investment through R&D expenditures which impacts consumption by creating new and improved goods and services (or more efficient processes for production) and increases export opportunities by providing these new products and services globally.

National Science Foundation found that 64% of companies who invested in R&D produced ‘new or significantly improved’ products or processes; that number fell to only 12% for companies with no R&D (NSF). Moreover, we know that innovative companies value IP protections because companies who invest in R&D protect their investment through the patent system. NSF estimates that 93% of patents issued, and 92% of a patent applications filed, belong to companies who fund R&D efforts (NSF).

The value companies receive from protecting their investments is evident in their continued use of patent system. Therefore, maximizing innovation requires strong, and smart protection of IP rights. Policy makers need to support policies that maximize these protections, while deterring system abuse, in order to increase innovation and ensure economic growth.

Open Data Will Solve the Regulatory Riddle

Governments are the original big data entities. Our governments have long gathered data and compiled statistics on individuals and populations. The value proposition of a government’s use of data is the ability to transform information into an outcome that benefits the public good. Making good public policy stems from the ability to collect and analyze data and information, then execute changes based on those observations. Much of the promise for future generations will emerge from the trend of open data, which has taken place across the globe. 

The most exciting transformations on this front in the U.S. are happening on the state and local level. The Sunlight Foundation’s Open Data Policy initiative has logged the efforts of 36 government bodies on the state, county, and city level that have passed open data legislation. A few states and cities have been the leaders in data-driven initiatives and program administration. Maryland set the bar for states with its StateStat program launched in 2007 by Governor Martin O’Malley and its open data program. New York City has refined and enhanced a comprehensive city-management program built on data and analytics for key performance indicators across the city. Above all, open data is leading the way for more effective and efficient government. 

Cities can use open data to improve performance on local regulation. Our recent report—Enterprising Cities: Regulatory Climate Index 2014—measures the regulatory environments for small businesses across 10 U.S. cities in 5 areas of doing business. Our project documents the advances and improvements on the local level that these cities have taken. City governments in Chicago, New York City, and Boston have made proactive changes to make data more available. These changes have led to improvements in the issuance of permits and licenses for entrepreneurs and small businesses. 

Our research just scratches the surface to the true potential of open data in transforming public administration. State and municipal governments now have the technology and data to improve the ability of businesses to receive licenses, accelerate the zoning and permitting process for construction firms, and expedite city inspections for restaurants and buildings. These transformations can reduce or eliminate unnecessary waiting time and cut administrative fees. The tools are available. It's just a matter of putting them to work to improve the regulatory environment on the state and local level.

American Entrepreneurship Is Declining

America’s entrepreneurial and small business dynamism—the process in which firms are created, fail, expand, and contract—is in decline. That’s the conclusion from a new report released by the Brookings Institution. Ian Hathaway and Bob Litan examine firm entry and exit rates in the United States from 1978 to 2011. The authors find that the firm entry rate (the share of firms that are one year old or younger) fell from nearly 15 percent in the late 1970s to around 8 percent in 2011. 

Source: Brookings Institution

Source: Brookings Institution

This trend is similar on the state and metropolitan level. 

Source: Brookings Institution

Source: Brookings Institution

Chris Ingraham at the Washington Post took the authors' data and mapped it across 50 states. The top 5 states with the small declines include New York, Illinois, Texas, New Jersey, and Missouri in the top 5. Wyoming, New Mexico, Vermont, Hawaii, and Alaska rank at the bottom for the steepest decline. 

Of course, this isn’t a good thing for the U.S. economy. Economies that allow creative destruction to run its course grow to be more productive and prosperous, while citizens enjoy new and better products, better jobs, and increased standard of living. Resources flow to innovating firms and industries, and away from less innovative firms and industries. While creative destruction is an essential facet of a market economy, the severe downturn of this trend is alarming. 

So why is America’s start-up engine experiencing this decline? Hathaway and Litan don’t really go into details and there isn’t really a straight answer. The authors observe that business consolidation is occurring in the U.S. economy and larger businesses are doing better relative to younger, smaller firms. The authors offer suggestions on what the policymakers can do to induce increased entrepreneurship rates including work visas for immigrant entrepreneurs and business accelerators at the state and local level. 

These are good ideas, but they only scratch the surface. Reforming the tax-code that’s more favorable to start-ups and entrepreneurs, easing burdensome local regulations, and allowing for greater public investments in innovation, infrastructure, and broadband are a few things we could do to recover from this decline. Fortunately, we’re seeing these policy changes on the local level. But it will take a lot more than a few dozen forward thinking cities to reverse this trend.

Sorry, China Is Not The World’s Largest Economy

Mainstream media has the American public aghast at a recent report from the World Bank claiming China is poised to take over the United States as the world’s largest economy. Of course, this is not exactly true. Measuring economic performance goes beyond simple measures of GDP, PPP, and per capita income—something that is obviously missing from the World Bank report. China still has a ways to go to give the United States serious contention as the world’s greatest economic power.

There are considerable issues with trying to use Purchasing Power Parity (PPP) to compare the sizes of world economies. The concept of PPP is useful for domestic policymakers to evaluate the relative prices of non-tradable goods and services within their country. But, it’s not exactly a true barometer of economic prosperity. For example, as the Wall Street Journal points out, China cannot buy missiles, ships, iPhones, German cars, or any other imported goods, at PPP exchange rates. When standard GDP exchange rates are used rather than PPP, China’s economy is only half of the size of the U.S. economy. When population is taken into account and factoring PPP measures of GDP, China’s economy is only ranked 99th in the world. Most of the Chinese population is still relatively poor.

Beyond these technical problems, the future of the Chinese economy is less bright when China’s major long-term economic weaknesses are taken into account. There are many essential factors China lacks that will prevent the country from experiencing the sustained, broadly-based economic growth that developed countries such as the U.S. experience. It is well-established among economists that institutions are the fundamental determinants of long-term economic growth.

The United States and other advanced economies have well-developed, transparent, and accountable political institutions that have implemented laws and policies which favor trade, innovation, and competitiveness. For that reason, developed economies are the most connected to the global economy. While Chinese policy leaders have attempted to foster innovation to spur domestic sources of economic growth, they lack these institutions, which allow Chinese citizens to become entrepreneurs. It is this top-down approach that will ultimately limit the innovativeness of the Chinese economy, and why the U.S. economy continues to be driven by bottom-up sources of innovation

Intellectual Property is Key Economic Factor in Free Trade Deal

When IP rights are protected, companies are more confident in trading with and investing in those countries, which also increases exports and economic growth at home.

President Obama’s trip to Asia this week to promote the Trans-Pacific Partnership (TPP) has significant ramifications for the future of the U.S. and global economy. Yet, the TPP negotiations between the United States and Japan leading up to his trip have stalled with little progress in sight. This setback reveals the difficulty of negotiating a free trade treaty between two countries, let alone twelve.

In the U.S., some free trade skeptics are unconvinced of the TPP’s economic merits, particularly the provisions strengthening the enforcement of intellectual property. However, it is clear that the key economic benefits from a TPP deal come from a strong legal framework that protects innovation and IP.

Our empirical analysis shows that two-thirds of the economic gains from concluding a TPP would come from IP-intensive industries. Harmonizing IP protections creates jobs, produces more exports, attracts more direct investments from other countries, and enables the transfer of technology across countries and industries, all of which helps to raise incomes and living standards across all participating countries.

The TPP would unite 12 Pacific Rim countries, which stretch from Canada to Chile and across the globe to Japan, Australia, and east to Vietnam. These dozen nations are home to more than 800 million people and have a combined gross domestic product of more than $27 trillion, or about 40 percent of the world’s economy. According to the U.S. Trade Representative’s office, a TPP agreement could add $223 billion to global income and boost U.S. exports by $124 billion by 2025. We estimate the immediate benefits from TPP will create more than 107,000 new jobs, generate $4.8 billion in wages, produce $47.5 billion in manufacturing sector sales, and add $15.4 billion to GDP in all 12 participating countries.

While free trade agreements have traditionally sought to reduce tariff barriers to trade between countries, these barriers have been mostly eliminated among TPP countries. However, nontariff barriers to trade are still a problem. The TPP focuses on the reduction of these nontariff barriers to trade, particularly weak or inconsistent IP protection, which is the most significant nontariff trade barrier in the 21st century global economy.

When IP rights are protected, companies are more confident in trading with and investing in those countries, which also increases exports and economic growth at home. Therefore, strong legal frameworks for protecting IP rights leads to higher economic growth and standards of living across the globe.

The TPP also creates considerable economic benefits to the U.S. We estimate that IP supports more than 55 million American jobs, creates $5.8 trillion in gross output, pays workers 30.5 percent higher wages, and drives more than two-thirds of U.S. exports to global markets. In a time of persistently low economic growth, a TPP that strengthens IP rights would also considerably bolster the U.S. economy and job market through increased innovation. Innovation is the fundamental source of economic growth, and the benefits of IP have been demonstrated in the U.S., other developed countries, and developing countries.

But IP is only as robust as the laws that protect the copyrights, patents, regulatory data, trademarks, and trade secrets that safeguard a business’ intangibles. The economic incentive to spend billions of dollars and as long as a decade funding costly experimental trials rapidly disappears if the originality and novelty of the product can be freely copied as soon as the innovative product is introduced to the market. Thus, the goal of treaties such as the TPP is to protect these investments in IP, giving innovators the confidence to bring their products and services to market in developing countries.

A TPP agreement that upholds the highest standards of IP protection in each country and more closely harmonizes its legal and regulatory framework creates more efficient markets unencumbered by the uncertainty that ideas will be protected one way in one country and a different way in another.

The stronger the protection of IP rights under the TPP, the greater the value of trade and investment in IP-intensive industries, the engines of economic growth, higher wages and more jobs across all TPP member economies. We cannot invest in our future and grow our economies without them.

Dr. Nam D. Pham is Managing Partner of ndp | analytics, an economic research firm and an adjunct professor at George Washington University in Washington, D.C. This piece first appeared on Ideas Laboratory

Tesla, Local Regulations, and the New Normal for Innovators

Tesla’s latest spat on its direct-sales model with the state of New Jersey is dumb, but it’s nothing new for the company or other rising start-ups. The case is another piece in a growing trend of local regulations stifling innovative companies. As the sharing economy has grown and technological innovation has made electric cars affordable and reliable, local governments and regulators have found ways to impede their ability to reach consumers. Some research has discounted the impact of local regulations on start-up companies and entrepreneurs, while others have highlighted significant regulatory burdens facing small businesses.

You cannot discount the real world examples of cases where state and local governments issued regulations that impair business operations of growing companies. There are Uber’s feuds with city governments and taxicab monopolists in Chicago, DC, Denver, Miami, Nashville, and San Francisco. Airbnb is facing its share of problems in New York City. California’s Bureau for Private Postsecondary Education is leading a crack down on ‘learn to code’ bootcamps. Let’s not forget the culinary innovators in local food truck scenes that are constantly hopping over regulatory hurdles.

In the case of Tesla, auto dealers are worried that this case will set a strong precedent for automakers circumventing dealers to directly sell to consumers. This despite the fact that buying a car is one of the least enjoyable consumer experiences. Tesla has faced similar issues in Arizona, North Carolina, Texas, and other states. In fact, Cornell University’s Journal of Law and Public Policy notes, “the franchise laws of at least 48 states ban or limit Tesla sales—get this—to prevent unfair competition. Franchise laws require automakers to sell their cars exclusively through dealership networks.” There will be plenty of more battles down the line. Overall, these restrictions will hurt Tesla’s long-term viability to offer an automobile that will be more affordable in the coming years due to economies of scale and product innovation.

The surprising nature of these regulatory battles is that the come at a time when state and local governments are devoting significant energy and resources to streamline regulations and promote technological advancements to aid the local permitting process. What’s even more startling is that nearly every major city is supporting entrepreneurial incubators and vying to attract important venture capital funding to foster vibrant start-up environments. Yet local governments are doing all they can to limit the ability of start-up companies to grow and provide citizens with access to new services. Isn’t that a pity?