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Intangible intellectual property and data -- the most important assets of the new economy


For this issue, the Center has an exclusive interview with Professor Dan Ciuriak on the subject of the metasverse. He is a Resident Fellow at the C. Howe Institute and a Distinguished Fellow at the Asia Pacific Foundation of Canada. His research interests focus on international trade and investment. His recent research includes Economic Security and the Changing Global Economy and Quantifying Trade Secret Theft: Policy Implications.

The development of the meta-universe will bring prosperity to related industries. However, technological competition cannot be avoided at the same time. What kind of cooperation policies should countries implement to avoid the negative effects of spillover competition? How do less technologically developed countries bridge the data divide? So the center interviewed Professor Dan Ciuriak to get his thoughts on the metasverse.

Dan Ciuriak:Intangible intellectual property and data -- the most important assets of the new economy


We can only imagine at this stage what the metaverse will actually be and how significant it will be (Ravenscraft 2021). The same goes for a blockchain-based Web3 that aims to disintermediate firms that have established themselves as trusted intermediaries (Voshmgir 2020). Considerable investments are being made by firms in virtual and augmented reality technologies and decentralized financing (DeFi) and payments systems that underpin the immersive digital worlds now being created, such as Baidu’s Xirang (Catterall, 2021) and Meta/Facebook’s Horizon World (Rodriguez, 2021), in which people will be able to interact socially and commercially through avatars, including creating, buying and selling digital assets (Triolo, Allison and Tompkins, 2021). Speculations as to where this is leading are still mostly in the realm of science fiction (ranging from dystopias like The Matrix and optimistic versions like Black Mirror’s San Junipero) – and possibly leading to modern versions of the tulip bubble (e.g., re non-fungible tokens, see Reyburn 2021). Yet we know that we live in an age of accelerated technological change that cumulates to profound transformation and it is important to think through what this means for economies.

To provide some perspective, the first mention of the concept of the “cloud” was in 1996; today, a quarter of a century later, the cloud is part of the backbone infrastructure of the digital economy, enabling business models such as “platform as a service” (PaaS), “software as a service” (SaaS) and “infrastructure as a service” (IaaS) that provide small firms affordable access to computing power and technology that would otherwise be prohibitively expensive. (To this list, we could add “governance as a service” or GaaS, if we think about Estonia’s model of e-business registry.[1])

But it took several innovations in the late 2000s to establish the technological basis for this vision to be realized (Ciuriak 2021):

· deep learning based on stacked neural nets (2006)

· the introduction of the iPhone which launched the mobile age (2007)

· the application of graphics processing units (GPUs) to run stacked neural nets (2009).

These innovations generated the big data and machine learning capability that underpinned the emergence by 2010 of a new type of economy – the data-driven economy, which features superstar firms that operate at the global level, whose value is comprised almost entirely of intangible assets – intellectual property and data – and that provide the platforms that serve as the new digital backbone infrastructure.

These innovations also powered the rapid development of artificial intelligence (AI), which is now poised to usher in a new economic age of “machine knowledge capital”, a new form of productive capital that will compete with and complement the human knowledge capital that is the foundation of the knowledge-based economy. This promises to be profoundly consequential.

One consequence is that it lifts the constraint on economic growth of services-intensive economies imposed by the so-called “Baumol Effect” (Baumol, 1967; Baumol et al., 1985). This effect arises because services depend on human capital which does not easily scale; accordingly, the transition from the industrial age to a post-industrial age came with slowing growth. Machine knowledge capital, however, scales enormously as it features effectively zero marginal costs to replicate.

A second consequence is that it effectively industrializes learning. In 2021, we saw the first patents issued to AI systems (in South Africa, Naidoo 2021; and in Australia, Currey and Owen 2021). Just as the industrialization of R&D through the spread of computer-aided design and manufacturing enabled by the introduction of the IBM personal computer in 1981 led to a steep rise in the pace of patenting, we can anticipate a further acceleration in the pace of innovation.

What does this mean for economies that trail in technology and are on the wrong side of the digital divide? To get at this, we need to understand how economies develop.

Economic development is a story about technology and firms. And because technology resides in firms, it is actually primarily a story about firms. As economies grow, they diversify enormously in terms of technical capabilities and products. This means they also feature a Cambrian-like explosion in the number and types of firms. Conversely, economic under-development – including the so-called middle income trap – is associated with a lack of firms (Hsieh and Olken 2014).

By the same token, an age of accelerated innovation thus features a proliferation of new firms. One indicator that we are in such an age is the number of unicorns – private firms valued at US$1 billion. The term unicorn was applied to these firms because they were rare. A recent count identified 943 such firms with an estimated market value of over US$3 trillion (CB Insights 2021).

We know that the size distribution of firms follows a power law – which means below this threshold are many, many more highly-valuable start-ups. From the perspective of equitable development, the question is: how many of these are in the developing world? The current answer is “too few”, but the breakthrough potential is there. Recently the Israeli research centre StartupBlink’s annual Global Startup Ecosystem Index ranked Lagos 122nd out of 1,000 cities worldwide in terms of providing an environment conducive to digital start-ups, while the World Economic Forum listed seven African start-ups in its 2021 cohort of 100 Technology Pioneers (Velluet 2021).

Cyberspace is inherently global in nature. Developing economies can plug into cyberspace as consumers – obtaining free services from the Internet – and as producers (which means through firms). In principle, the new digital platforms and the IaaS/SaaS/PaaS/GaaS infrastructure relieve the constraints on firm creation posed by inadequate economic infrastructure and governance in developing countries and the thinness of local firm ecosystems.

The key insight for developing countries is not whether they are “competitive” with advanced countries – whatever that might mean – but whether they can provide the launching pad for start-ups to enter the global ecosystem of firms that each new economic age spawns. An expanding ecosystem accommodates new firms rather than driving them out of existence – a thriving ecosystem is all about diversity. That’s the message.

The path to the metaverse will be long and winding with technological innovations as yet unknown that will structure its course and open up new niches in the evolving ecosystem – developing countries need not be excluded.

As a final observation, China’s rise has been described in many ways. In my view, the critical phase was its entry into the knowledge-based economy and the data-driven economy simultaneously around 2010 – and with regard to the data-driven economy, contemporaneously with the United States (Ciuriak, 2021). Today, China has the largest number of Global 500 firms (143) and second-largest number of unicorns (170). My advice to policymakers is to count firms rather than focussing on aggregate measures of output such as gross domestic product that do not capture the value of the most important assets of our age – the intangibles of IP and data and the firms that hold them.



References

Baumol, William J. 1967. “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis,” The American Economic Review 57(3), June: 415–426.

Baumol, William J., Sue Anne Batey Blackman, and Edward N. Wolff. 1985. “Unbalanced Growth Revisited: Asymptotic Stagnancy and New Evidence,” The American Economic Review 75(4), September: 806-817.

Catterall, Peter. 2021. “A Glimpse Inside Xirang, Baidu’s Immersive Digital World,” Pandaily, 21 December 21. https://pandaily.com/a-glimpse-inside-xirang-baidus-immersive-digital-world/

CB Insights. 2021. “Global Unicorn Club: Private Companies Valued at $1B+,” Spreadsheet, 22 November. https://www.cbinsights.com/research-unicorn-companies

Ciuriak, Dan. 2021. “Economic Doctrine is in Flux: What are the Implications for Canada’s Regional and Multilateral Trade Engagement?” Notes for remarks at the Queen’s Institute on Trade Policy 2021, Addressing Global Trade Challenges through Canada-United States Cooperation, 15 November 2021. https://papers.ssrn.com/abstract=3965977

Currey, Rebecca and Jane Owen. 2021. “In the Courts: Australian Court finds AI systems can be ‘inventors’,” WIPO Magazine, September. https://www.wipo.int/wipo_magazine/en/2021/03/article_0006.html

Hsieh, Chang-Tai and Benjamin A. Olken. 2014. “The Missing ‘Missing Middle’,” Journal of Economic Perspectives 28(3), Summer 89-108.

Naidoo, Meshandren. 2021. “In a world first, South Africa grants patent to an artificial intelligence system, The Conversation, 5 August. https://theconversation.com/in-a-world-first-south-africa-grants-patent-to-an-artificial-intelligence-system-165623

Ravenscraft, Eric. 2021. “What Is the Metaverse, Exactly?” Wired, 25 November. https://www.wired.com/story/what-is-the-metaverse/

Reyburn, Scott. 2021. “Art’s NFT Question: Next Frontier in Trading, or a New Form of Tulip?” The New York Times, 30 March. https://www.nytimes.com/2021/03/30/arts/design/nft-bubble.html

Rodriguez, Salvador. 2021. “Facebook takes a step toward building the metaverse, opens virtual world app to everyone in U.S.,” CNBC, 9 December. https://www.cnbc.com/2021/12/09/facebook-opens-horizon-worlds-vr-metaverse-app-.html

Triolo, Paul, Kevin Allison and Sienna Tompkins. 2021. “The geopolitics of the metaverse,” Eurasia Group, December. https://www.eurasiagroup.net/live-post/the-geopolitics-of-the-metaverse

Velluet, Quentin. 2021. “Seven African start-ups shaking up the global tech ecosystem,” The Africa Report, 2 July. https://www.theafricareport.com/104738/seven-african-start-ups-shaking-up-the-global-tech-ecosystem/

Voshmgir, Shermin. 2020. Token Economy: How the Web3 reinvents the Internet (Second Edition). Token Kitchen.




Interviewer: Li Xuan

Interview date: Dec. 23, 2021

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