U.S. exchanges. It was not a typical high-growth, sub-$100 million technology company led by creative entrepreneurs and technologists and funded by U.S. venture capitalists. Yet, these smaller companies have been subjected to the same regulations created for the large firms, and the costs of compliance are disproportionately more burdensome.51

Young technology companies lack the critical mass required to deploy the administrative staff, processes, and controls mandated by SOX in order to pursue an IPO in the United States. Their lifeblood is technology innovation. They often cannot afford to reallocate a large percentage of their resources away from research and development toward general and administrative costs in order to become compliant and seek a U.S. IPO. Therefore, when crafting corporate-governance legislation and regulations, it is important that policy makers take into consideration unintended consequences on smaller companies.


The large industrial research laboratories have traditionally been a significant institutional category in the U.S. IT R&D ecosystem.52 However, by the late 1980s the firms supporting major laboratories, such as AT&T Bell Laboratories, IBM, and Xerox Palo Alto Research Center, came under intensifying pressure to shift their research portfolios toward more applied research and development work. Some other firms, most notably Cisco, have pursued a corporate strategy of “research by acquisition,” rather than establishing and maintaining a central research infrastructure (see Box 4.2).53


CRA International, “Sarbanes-Oxley Section 404 Costs and Implementation Issues: Spring 2006 Survey Updates,” Washington, D.C., April 17, 2006. The CRA survey was sponsored by four large accounting firms. Self-reported costs for compliance with SOX Section 404 were as follows: smaller companies with market capitalizations of between $75 million and $700 million estimated that implementation costs (including audit fees) amounted to about $1.2 million the first year and $860,000 the second year. For larger companies with market capitalizations over $700 million, the first- and second-year costs were estimated to be about $8.5 million and $4.8 million, respectively. For the smaller companies, SOX Section 404 compliance costs were estimated to be about half of all audit fees the first year and about the same as non-404 audit costs the first year—in other words, SOX Section 404 compliance basically doubled the audit fees.


R. Rosenbloom and W. Spencer, eds., Engines of Innovation, Harvard Business School Press, Boston, Mass., 1996.


These changes are part of a more general trend toward what is sometimes called open innovation, whereby ideas flow both from and into corporations: in order to prosper in the face of new markets and competitors, incumbents must transform themselves from “closed” innovation models (with heavy corporate investment in internal R&D) that are no longer sustainable to more open models, without centralized control and where ideas transfer

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