Creative Industries: Have intellect, will travel

FIRST some encouraging news for anyone worried about the quality of our education system. It is that Britain has the second largest surplus in trade in intellectual capital in the world - second to the US, which dominates the business. Now some less encouraging news. While the surplus seems secure, we do not seem to be gaining much ground; if anything, our imports of intellectual capital seem to have been growing faster than our exports.

As it becomes standard manufacturing practice to make products locally - to build Japanese cars for the European market in Britain, for example - so trade becomes more and more the shipping of ideas of how to make and market something, and the money to do so. Trade becomes trade in ideas rather than in goods.

Often this is difficult to identify. You can quantify the money coming into or out of a country in direct investment, or the money used to build the plants. But money spent on marketing, product development or on research is much harder to pin down. You cannot actually see what portion of the value of the product is embedded in research because it is incorporated into the total price for the product. However, there is one key aspect of this trade that is identified separately in the statistics: trade in royalties, licences and patents, which is the nearest thing we can get to trade in intellectual property.

Some numbers of the balance of trade for a selection of countries are set out in the chart. The latest figures are for 1996, collected in the new International Monetary Fund's Balance of Payments Statistics yearbook, and the 1994 figures are included for comparison. The most obvious feature is that US dominance increased over the two years. Why?

Well, you have to remember that "intellectual property" includes a lot of things that don't seem particularly intellectual, like the output of the entertainment industries. Part of the US dominance reflects patents and royalties on the output of academia, but the big puller is Hollywood.

Once you appreciate this, much of the rest falls into place. Sweden did well in 1994 - a good year for Swedish pop music exports; Norway was pushed into the black in the same year by the TV contract on the Winter Olympics. I have not managed to figure out why South Africa comes number three in the league table of net exporters or why Korea suddenly became such a large importer - there may be glitches in the figures. But the big picture of the US and (far behind) the UK being the two main net exporters and Germany and Japan by far the largest importers seems solid.

The next questions are surely these. What will happen to trade in intellectual capital over the next few years and how might we develop our own reasonably strong position in it?

On the first question, I think that overall trade in intellectual property is bound to grow very rapidly for four main reasons. The first concerns the entertainment industries. The move to digital will create an explosion in TV channels and hence in demand for entertainment products. I suspect that initially most of these will be more of the same: more Hollywood movies, more high-profile sport. But the rise in demand will eventually generate new types of supply, new types of product. In particular, I would expect a plethora of specialist channels to spring up and be delivered globally.

The second reason is the potential for growth in trade in education, particularly distance learning. Technologies here are racing forward and, paradoxically, situations like the East Asian economic crisis may increase demand for distance learning: it is much cheaper to use clever electronics to bring at least part of a syllabus to the students in East Asia (or wherever), rather than bring people to Britain or the US for the whole of their course.

Third, the need for a greater research or knowledge element in all products and services will continue to increase, for this is the only way in which high-wage countries can differentiate their products and services from those made in low-wage ones.

Finally, the development of the Internet has created a new means of worldwide distribution for any product or service which can be converted into bits and bytes. We do not know what those products will be, but in a way that does not matter - for we do not need to know what will sell. All we can do is watch market signals and respond forcefully to them.

So all three existing areas of the trade seem likely to continue growing: entertainment, education, and the embedded knowledge in products, typically measured by licences and patents. And there will be entirely new areas of trade, where an improving Internet will be the shipper.

What does this mean for Britain? The trouble here is that trade in intellectual property is a very segmented market: there are lots of completely different types of product, each of which requires a completely different approach on the part of government, academia, publishing and so on. There is no magic wand.

The diversity of the trade is caught in the variety of topics covered in this section of the newspaper, but even here there will be bits we haven't fully discussed. So forming policy is very difficult, except on an ad hoc basis. There are a lot of interesting ideas in this section, but policy perhaps should be more "let a thousand flowers bloom" than "this is the plan; let's go for it". We probably can do something to encourage more film-making here, but more by removing blockages than handing out taxpayers' money. We can certainly do something about teaching computer literacy, and we are probably not doing too badly on that score. But creating new areas of business has to be a bottom-up process. Nobody planned that Britain should specialise in computer games software: we just have the right mix of aggression, creativity and skills to do so.

The worry, surely, should be "push-back". Look again at that graph. A world so dominated by the US (with the UK as a sort of subcontractor to the US entertainment industry) will create increasing resentment. How long will Germany and Japan be content to import so much intellectual capital? To what extent will these large and independently minded countries try to restrict such imports? France has been seeking to do so with films.

There are two answers to these concerns. One is to say that everyone tends to resent importers taking over a market, but there isn't much anyone can do about it. The pressure for increased trade in intellectual property is so great, and the advances in technology that enable it to be delivered instantly around the world are occurring so rapidly, that the boom is bound to continue.

There is, however, a less sanguine response. This would be to say that the freeing of trade in goods is such an established process that it would be very hard to reverse it. But this sort of trade is much newer, and has not yet achieved sufficient critical mass to carry onwards. Besides, people expect to pay if they buy a car from abroad; they may feel differently about a program they can download over the Internet. One-third of the software used on the world's PCs is in effect stolen.