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Research
Launching into I-Space
Wharton researchers have developed a simulation model of the structure of knowledge in information space or "I-Space." One use of this Sim-ISpace model it to explore how intellectual property policies affect the generation of new knowledge, and its cost to society, under different rates of knowledge diffusion and knowledge obsolescence.
Knowledge assets — building blocks for the modern information economy — resist traditional analysis based on material goods. You can't see, touch, taste or smell them. As soon as they're created, they begin to change, to evolve. And — perhaps most vexing for modern companies — their value may be increased more by sharing than by hoarding them.
They also defy the traditional approaches to property-rights for their owners. A farmer can easily fence off a plot of land to prevent others from expropriating its productive potential. Protecting knowledge assets such as musical compositions or chemical formulae has always been tougher. And in a networked world, where a song can be copied and broadcast with a few keystrokes, it has become even harder.
For several years Prof. Ian MacMillan, director of the Sol C. Snider Entrepreneurial Research Center and a Wharton professor of management, Max Boisot, a research fellow at the Sol C. Snider Entrepreneurial Research Center and Kyeong Seok Han, a professor of management information systems at Soongsil University in South Korea and a Snider Center visiting scholar, to build a computer-based simulation to understand the creation and protection of knowledge assets.
Why does this matter? As the co-authors point out in a paper explaining their simulation, "The modern economy is a knowledge-based economy, and its key resource is knowledge." Think about it this way: Microsoft, ultimately, is built on little more than knowledge. Sure, it has a bunch of computers and a campus outside of Seattle, but its knowledge, not its campus, is what makes it one of the world's most valuable companies. A better understanding of the formation of knowledge assets and how to protect them could lead to more Microsofts.
To appreciate MacMillan, Boisot and Han's thinking, it helps to know a bit more about knowledge assets themselves. As the name implies, they are stocks of know-how as opposed to stocks of physical goods such as, say, coal or internal-combustion engines. Unlike physical assets, they can last indefinitely. As Boisot point out in one of his books, farming methods in some parts of the world have remained largely unchanged for millennia. Or to extend the Microsoft example, the software maker may constantly tweak its products, but its core knowledge of computer operating systems endures.
Those two examples — local farming methods and software — also point to the structural boundaries of knowledge assets. At one extreme, like farming methods, they can be handed down informally from generation to generation by word of mouth and apprenticeship. At the other, like software, they can be written down and codified, which makes them easier to share. But that ease of sharing also makes them harder to protect.
Knowledge is also shared through abstraction — that is, by the reducing its particularities by combining similar categories. Consider farming again. In the wine-growing regions of France, farmers can distinguish vineyard from vineyard and even hillside from hillside. Each has oddities that affect the handling of its vines and grapes and, ultimately, the taste of a bottle of wine that they produce. These grape growers have particular, local knowledge, but that knowledge is valuable nonetheless — if you doubt that, check out the price of a fine Bordeaux.
At the same time,
abstract statements about farming can be gleaned
from their practices — for example, control of weeds and application
of fertilizers — that
are useful in other forms of farming and other places. Principles of
weeding and fertilizing are equally important for corn farming in the
American South — even
if the fermented product of these harvests, bourbon whiskey, isn't
quite as subtle on the palate.
The progression of degrees of codification and abstraction lead through
the six steps in the "social-learning cycle" through
which knowledge evolves, MacMilllan and his co-authors point out.
The cycle includes scanning, problem-solving,
abstracting, diffusion, absorption and impacting. The Researchers
have termed the realm in which knowledge grows and changes the Information
Space or I-Space.
The co-authors' simulation examines the protection of intellectual
property in the I-Space.
In theory, an owner
wants to protect a piece of property because
it's valuable.
And traditionally, the way to derive economic value from an asset
was to combine utility with scarcity. Take oil. Its utility is obvious
to anyone who owns a
car. The countries in OPEC try to ensure its scarcity by limiting
production. When they succeed, the scarcity increases as does the
price, and the OPEC nations
benefit. With physical assets such as oil, you protect their value
by fencing them off.
Knowledge assets don't work that way. As their utility increases,
they become more widely used and shared. Consider a popular song. The
more enjoyment
it gives people — in this case, its utility — the more
your hear it on radio, on television shows and, today, via Mp3
file-sharing. In addition — and
this is key — other musicians start to record cover versions
of the song. Yet for record companies to continue to have incentives
to produce music, that
sharing has to be regulated. That's where intellectual-property
regime comes in.
Ideally, however, intellectual-property rules should do more than simply ensure that a record company gets its nickel every time a song is played. They should also encourage as much innovation as possible. That's the balance that has to be struck in creating appropriate intellectual-property rules for knowledge assets, MacMillan and his co-authors point out.
"Make [the rules] too weak, and spillovers will deprive knowledge creators of a fair reward for their efforts; knowledge goods will then be undersupplied," they write. "On the other hand, make them too strong, and you end up with monopolistic regimes, and, quite possibly, once more with an undersupply of knowledge goods."
The rules also should take into account the effect of obsolescence and diffusion, which both erode the value of knowledge assets. In the simulation, obsolescence is a proxy for the rate of technological change, while diffusion represents the speed with which an assets use spreads.
"The rate of obsolescence of a firm's knowledge base can be affected by depreciation schedules, the investment incentives available to other firms to create either substitute or complementary knowledge, positive and negative incentives to make use of underutilized knowledge assets — such as tax breaks or compulsory licensing, official standards-setting, regulatory constraints on interaction with other agents, etc," the authors write. "Diffusion decay, on the other hand, can be affected by property-rights legislation, ease of patenting, copyright, trade secrets, legal-enforcement practices, the regulation of media behavior, of education, demand etc."
All of these insights are folded into the I-Space simulation, which the co-authors use to articulate several hypotheses about how knowledge assets diffuse and how they're best protected under different speeds of obsolescence and diffusion.
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Sol C. Snider Entrepreneurial Research Center