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ram L~)Yt~(~)~ The Role and Importance of Small Hi~h-Tech Companies in the U.S. Economy Committee on Technology, Management, and Capital in Small High-Tech Companies National Academy of Engineering NATIONAL ACADEMY PRESS WASHINGTON, D.C. 1995

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NATIONAL ACADEMY PRESS 2101 Constitution Avenue, NW Washington, DC 20418 NOTICE: The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages edu- cation and research, and recognizes the superior achievements of engineers. Dr. Harold Liebowitz is president of the National Academy of Engineering. This publication has been reviewed by a group other than the authors accord- ing to procedures approved by a National Academy of Engineering report review process. Partial funding for this effort was provided by the Alfred P. Sloan Founda- tion. Library of Congress Catalogue Card Number 95-72005 International Standard Book Number 0-309-05376-5 Copyright 1995 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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COMMITTEE ON TECHNOLOGY, MANAGEMENT, AND CAPITAL IN SMALL HIGH-TECH COMPANIES Henry Kressel, Chairman, Managing Director, Warburg, Pincus & Company E1wyn Re BerIekamp, Professor of Mathematics, University of California, Berkeley H. Kent Bowen, Professor of Technology and Operations Management, Harvard University, Graduate School of Business Administration Ruth M. Davis, President and CEO, Pymatuning Group, Tnc. Joseph F. Engelberger, Chairman, Transitions Research Corporation Gerald D. Laubach, Retired President, Pfizer Inc. Robert A. Pritzker, President and CEO, The Marmon Group, Inc. Roland W. Schmitt, President Emeritus, Rensselaer Polytechnic Institute George L. Turin, Retired Vice President, Teknekron Corporation NAE Staff: Bruce Guile, Director, Program Office lanes Hunziker, Program Officer Simon Glynn, Research Associate Damian Saccocio, NAE Fellow Vivienne Chin, Administrative Assistant . . .

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Preface Small firms play a critical role in the U.S. economy. Between 1980 and 1990, U.S. employment in both manufacturing anc! ser- vices grew by 19 million jobs. Over the same period of time, em- ployment in Fortune 500 companies shrank by three million jobs. During the 1970s and 1980s, new technologies, deregulation, and the destabilizing effect of imports on markets created many new niches for growth-oriented company builders. Coupled with the drastic shrinkage in many big companies' market share due to increased competition, small business began to account for a larger portion of GNP and employment. In addition to small business' increasing share of GNP and employment, these firms are also among the country's most innovative. Small companies often have been ignored or mix-perceived during the last 15 years of debate about national competitiveness and economic globalization. Because of the critical role of small high-tech companies in the national economy the NAE, with the support of the Alfred P. Sloan Foundation, undertook the project leacTing to this report. The project had three major elements: a) Six industry-specific workshops were held to explore the range and nature of critical issues facing smaller, high-technology companies, including trends in organization, technology manage v

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Al PREFACE ment practices, humar~ resource policies, government assistance initiatives, and financing. The six workshops covered the follow- ing industries: advanced displays and visual systems, network ser- vices and access devices, software, environmental testing labs, out- door sporting goods, and medical devices. Each workshop was chaired by a member of the NAE study committee (see page iii). b) Staff research, commissioned papers and workshop partici- pant presentations served as the basis for a brief industry study for each of the industries examined. Those papers are published sepa- rately~ and adclress the competitive parameters of the industry, areas of agreement about best practice, areas of disagreement about best practice, and areas for further investigation. c) The study committee, working with NAE staff, prepared this report which compares and contrasts the six industries and pre- sents findings about the role of small, high-tech companies in the U.S. economy and the role of public policy in the performance of small, high-tech companies. On behalf of the Academy of Engineering T would like to thank the members of the study committee for their time and effort on behalf of this project. The NAE staff also deserve thanks for their work on this project, especially Bruce Guile, who clirected the project, lanes Hunziker, Simon Glynn, anct Vivienne Chin. Henry Kresse! Study Chairman 1National Academy of Engineering, Small Companies in Six Industries: Background Papersfor the NAE Risk and Innovation Study (Washington, DC: National Academy Press, forthcoming in 1996~.

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Contents 1 EXECUTIVE SUMMARY INTRODUCTION The Study Approach Definitions and Policy Questions The Structure of the Report 3 THE ROLES OF TECHNOLOGICAL START-UPS AND SMALL INNOVATIVE COMPANIES IN THE U.S. ECONOMY Comparing the Contributions of Small Technology-Oriented Companies Conclusions 1 8 9 1 1 14 15 18 37 4 OPPORTUNITIES FOR SMALL TECHNOLOGY ORIENTED COMPANIES 40 How the Market Determines Opportunities and Risks 40 The Large-Company Role 48 The Importance of Geography Summary and Conclusions 51 54 . . vat

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vIll HOW GOVERNMENTS CAN NURTURE SMALL COMPANIES AND TECHNOLOGICAL INNOVATORS Federal Policies: Small Business Assistance Federal Policies: Technology Initiatives Federal Programs that Support Small High-Tech i_ . Compares State anct Regional Assistance Programs The National Business Environment Unintended Effects of Government Policymaking Implications for Policy APPENDIX: WHAT WE KNOW ABOUT SMALL BUSINESS IN AMERICA Definitions The Job Creation Debate Innovation in Small Companies Other Areas of Comparison Between Large and Small Firms The Data on Small High-Tech Companies BIOGRAPHIES OF COMMITTEE MEMBERS CONTENTS 56 57 59 61 63 67 69 73 77 77 78 79 80 84 87

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