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Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
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Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
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Page 9
Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
×
Page 10
Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
×
Page 11
Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
×
Page 12
Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
×
Page 13
Suggested Citation:"2. INTRODUCTION." National Academy of Engineering. 1995. Risk and Innovation: The Role and Importance of Small, High-Tech Companies in the U.S. Economy. Washington, DC: The National Academies Press. doi: 10.17226/5024.
×
Page 14

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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

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~.

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

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~.

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~.

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

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.

Next: 3. THE ROLES OF TECHNOLOGICAL START-UPS AND SMALL INNOVATIVE COMPANIES IN THE U.S. ECONOMY »
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Smaller, technically-oriented companies often assume types of risk (and an amount of risk) that is not often tolerated by large companies. In the United States both consumers and companies depend on smaller, high-tech companies to explore the commercial application of technology in potential, emerging, and small markets. This book, through comparison of six industries in which small companies play a critical role, explores the principal economic function of small, high-tech companies—to probe, explore, and sometimes develop the frontiers of the U.S. economy in search of unrecognized or otherwise ignored opportunities for economic growth and development.

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