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OCR for page 8
2
Introduction
It is widely understood that national economic growth anct
commercial technological advance are closely coupled. Techno-
logical advances as diverse as the airplane, the microprocessor,
and bioengineered pharmaceuticals have increased productivity
and restructured the economy in dramatic ways. While hindsight
makes it possible to see the enormous economic impact of techno-
logical advances, the drivers and mechanisms of such advances are
less clearly perceived. The mythology of invention and innovation
gives us many possible explanations the U.S. economy is driven
by individual inventors working in their basements, by research
universities, by large industrial research laboratories, by spin-offs
from publicly funded defense-related research, and by small high-
tech companies. This study examines the last of these commonly
discussed causative factors by considering the role of small high-
tech companies, including high-tech start-ups, in the clevelopment
of industries and the economy. The first step in understanding the
role of such companies is to characterize, at least briefly, where
small companies fit in the U.S. economy.
The corporate organization of U.S. economic activity is com-
plex and highly varied. At the top end of the size spectrum, the
combined 1994 annual sales of the 10 largest U.S. industrial compa-
nies was approximately $700 billion, or an average of $70 billion
8
OCR for page 9
INTRODUCTION
9
per company. All those companies are publicly traded. There are
approximately 8,000 publicly traded companies in the United
Statesi and about 12,000 companies with annual revenues over $50
million. These two sets of companies overlap but not entirely. in
addition there are about 60,000 companies with annual revenues
between $50 and $10 million, almost 500,000 businesses with an-
nual revenues less than $10 million but over $! million, and ap-
proximately 17 million tax-filing businesses with annual revenues
of less than $! million.2
It is difficult to get a comprehensive perspective on such busi-
ness complexity. if the Wall Street Journal dedicated one column-
inch about 60 words to every U.S. company with annual rev-
enues over $10 million, the issue would run about 600 pages. Small
or rapidly growing high-tech companies, however, get quite a bit
of attention both in the media and in policy circles. The media
focus on dramatic stories of success, savvy, folly, and failure. Tn-
vestors, would-be entrepreneurs, and business managers read and
learn something about what worked and did not work for certain
companies. Policymakers, and their economic advisers, focus on
the contribution of high-tech companies to the creation of jobs and
to national technological prowess. This report focuses on the role
of such business organizations in the growth and development of
particular industries and of the economy as a whole.
THE STUDY APPROACH
The study leading to this report was conducted between mid-
1993 and early-1995. The purposes of the study were
· to draw some general conclusions about the role of small
companies in the development of industries and the economy;
· to characterize the industry-specific economic conditions
which determine the opportunities for small high-tech companies;
and
~Nasdaq Backgrounder: The NASDAQ Stock Market (Washington, D.C.:
NASDAQ, 1995~.
2R. Crawford and W. Sihler, The Troubled Money Business (New York: Harper
Business, 1991~.
OCR for page 10
10
RISK AND INNOVATION
· to examine how the intent and implementation of govern-
ment policy either limits or increases the ability of small high-tech
companies to contribute to the development of industries and the
economy.
The findings and conclusions of the study are based, in part, on
committee member's experiences (see committee list, p. iii). To
broaden the base of consideration beyond the experience of the
study committee, the study also examined six industries in which
small high-tech companies play a significant role:
Advanced displays and visual systems. Advanced displays include
several competing flat pane! display technologies and also projec-
tion systems and video presentation equipment used in advancecl
electronics systems, such as full-color notebook computers or air-
craft display systems.
Implantable and surgical medical devices. Tmplantable and surgical
devices are designed for implantation in the human body, such as
shoulder prostheses and left ventricular assist devices, or for ma-
nipulating human organs and tissues, especially devices used to
perform minimally invasive therapy. These devices include angio-
plasty catheters, endoscopes, and a variety of accessory device tech-
nologies, inclucting lasers and miniaturized forceps.
Software. Software is ubiquitous. For the purposes of this study,
software products can be somewhat artificially divided into (a)
prepackaged software, for example, database or word processing
applications and (b) customized "enterprise" software and services,
including systems integration to help clients address specific re-
quirements.
Environmental testing services.
Environmental testing laboratories
perform assessments for industry and government agencies regard-
ing the nature and extent of environmental contamination in wa-
ter, soil, air, and waste products.
Network services and access devices.
~· .
Rapid growth in the nation's
genera-purpose communications assets (phone lines, satellites, cel-
lular systems) has combined with growth of distributed computer
OCR for page 11
INTRODUCTION
11
processing and the refinement of input devices (readers, sensors,
etc.) to create a host of new "network" services.
Outdoor sporting goodis. Outdoor sporting goods, as defined for this
study, include such items as technical outerwear, climbing ropes
and gear, kayaks and canoes, in-line skates, special-purpose hand
tools, hand-held global positioning devices, and "mountain" bi-
cycles.
In addition to staff research, the study committee organized
and held six sector-specific workshops, drawing heavily on small-
business entrepreneurs from the industry. Brief industry studies,
basest in part on these workshops and focused on the role of small
companies, are published separately.3 No study that relies on a
small committee and a small sample of industries can be exhaus-
tive; the roles of small high-tech companies in an industry and the
characteristics of successful small companies in an industry vary to
a degree that few generalizations apply. Within the scope of the
present study, the purpose of comparing and contrasting these
industries was to identify and understand the different roles that
small high-tech companies play in selected industries and the
economy as a whole, and to extract lessons for small high-tech
company success and, by implication, for government policy.
DEFINITIONS AND POLICY QUESTIONS
Three final introductory notes are useful to define what this
report means by "high-tech" and by "small," and to discuss briefly
the nature of the public policy challenges addressed in this study.
With regard to the definition of "high-tech," this study relies
more on an assessment of industry dynamics than on measures of
technical expenditures or assets employed. Traditionally, high-
tech companies are defined as those companies (a) that spend a
relatively high proportion of annual revenue on R&D or (b) that
employ a relatively high proportion of scientists arid engineers in
3National Academy of Engineering, Small Companies in Six Industries: Back-
ground Papers for the NAE Risk and Innovation Study (Washington, D.C.: National
Academy Press, forthcoming in 1996~.
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12
RISK AND INNOVATION
their total workforce.4 By these criteria a three-person, R&D-ori-
erlted start-up in the garage of a university engineering professor,
with no sales and no manufacturing, is a mode! high-tech com-
pany. Although these firms are important they represent a narrow
segment of companies this report considers. For the purposes of
this investigation, therefore, a high-tech company is one in which
technical innovation or specialized technical competence is re-
garded as one of a limited number of key elements of competi-
tive success.
This definition expands the universe of high-tech companies to
include those that do no formal R&D, but compete on the basis of
applications of technology. For example, in the high-end of out-
door sporting apparel or bicycle manufacture, there is fierce com-
petition over certain technically determined product characteris-
tics. The materials advances may be driven by R&D in large,
integrated manufacturers of textiles, metals, or composites, but the
small companies who design, manufacture, test, and market the
products in a technologically dynamic marketplace often with no
R&D budget and relatively few technical professionals are treated
by this study as high-tech companies.
On the matter of company size, although there are quantitative
measures such as annual revenues or number of employees for
characterizing small companies, these numbers are ultimately not
very satisfying. For example, using typical definitions of small as
set by the Small Business Administration (under 500 employees-
see the Appendix for discussion of defir~itions) and used In the
majority of empirical analyses, a 450-employee, publicly traded,
$70 million medical device company that is dominant in its market
is consiclered small. For the purposes of this investigation, small
is determined relative to industry sector norms. In general, small
companies in an industry have many established, or plausible
potential, competitors that are the same size (employees or rev-
enues) or larger.
4For example, Science and Engineering Indicators, the annual databook produced
by the U.S. National Science Board, draws data from a variety of sources, most of
which rely on a ratio of R&D expenditures (however defined) to shipments to
determine which companies or products are high-tech. National Science Board,
Science & Engineering Indicators (Washington, D.C.: National Science Board
1993~.
OCR for page 13
INTRODUCTION
13
With regard to policy issues, while the study committee re-
viewed the full range of government programs aimed at small and
high-tech businesses, no attempt was made to evaluate specific
programs. The focus of this investigation has been the condi-
tions under which small high-tech companies thrive. The ap-
proach to the policy arguments included here has been in asking
the question, How do government policies affect the likelihood
of small high-tech company formation and survival?
The committee elected to focus on general policy practices and
effects rather than specific programs, recognizing that government
programs affecting small high-tech businesses are varied and con-
stantly evolving. The following significant events have occurred
since the start of this study:
· A major Department of Defense program to provide support
for the advanced display industry has been initiated.
· The rapid ramp up of technology-oriented programs with
implications for small businesses-especially the Advanced Tech-
nology Program (ATP) in the National Institute of Standards and
Technology, and the Technology Reinvestment Program (TRP) in
the Department of Defense-followed shortly by strong moves to-
ward rapid reduction in these programs under the Congress elected
in the fall of 1994.
· Apparently real and significant threats to current levels of
Department of Defense (DOD)-sponsored academic research fund-
ing as the end of the Cold War brings a re-evaluation of DOD
research and development priorities.
· The issuance of a draft Federal Accounting Standards Board
(FASB) rule on the ways in which stock options are carried on a
company's books, followed by the withdrawal of the rule as a re-
sult of a firestorm of criticism from the entrepreneurial, high-tech
community.
· The announcement of new legislation, brought forward as
part of the Republican "Contract with America" to limit product
liability and, significantly for small high-tech companies, to limit
the exposure of companies to stock fraud suits on the basis of sub-
stantial fluctuations in stock price.
· The presentation of seriously received federal budget pro-
posals from the House and the Senate that include, among other
actions, cuts in the Small Business Administration as well as in
OCR for page 14
14
RISK AND INNOVATION
programs of the National Institute of Standards and Technology
such as ATE (already noted) and those for the support of manufac-
turing extension services.
in short, the policy environment for small high-tech companies
continues to change rapidly. This study's contribution to policy is
to advance understanding of the principles that should distinguish
good policy and programs from bad rather than attempting an
evaluation of current or currently proposed programs and policies.
. , . ~
THE STRUCTURE OF THE REPORT
This report is divided into three major sections. The next chap-
ter-The Roles of Technological Start-Ups and Small Innovative
Companies in the U.S. Economy focuses on the six sectors de-
scribed above. For each sector, the chapter identifies the explicit
and implicit expectations of small companies in the development
of the sector and of technologies employed in the industry. These
analyses are then followed by the committee's assessment of the
principal economic role of small companies, as well as a distillation
of the divergent set of issues that appear to affect the role of small
technically oriented companies. The chapter on Opportunities for
Small Technology-Oriented Companies examines the ways in
which certain characteristics of industries, regions, and technolo-
gies affect the attractiveness of business opportunities for small
technologically innovative companies. The primary contribution
of this chapter is the identification and description of those market
and technological characteristics that create a large number of op-
portunities for small high-tech companies. The final chapter pro-
vides an overview of current government policies, and the effects
of these policies on the opportunities for small technology-inten-
sive companies.
Representative terms from entire chapter:
hightech companies
