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Harnessing Technology for Growth ROBERT MALPAS Perhaps both Europe and the United States are suffering a lime from the "grass is greener" syndrome. From the European per- spective, what is happening in America is an enviable arulfaloulous success story. Ten million jobs have beer created in 5 years in the United Statesin Europe, none. The Una ted States had phenomenal growth in 1984 ant] has a strong verdure capital market. Some 600,000 companies are created each year in the United States, about a third of them in high technology. Yet Americans, too, are looking overfences, because there is indeed a problem. How do you maintain the tremendous momentum and dynamism generated these last few years to continue to create Jobs arm to generate wealth? My particular interest in the interaction between technology and economic grown is Mat I by to do what H. W. Coover talks about in this volume (chapter on "Programmed Innovation Strategy for Successes. My respon- sibilities at British Petroleum include trying to do all those Wings that Coover discusses, devising and implementing bow evolutionary and revolutionary methods to achieve them. My interest stems also from He fact that ~ am on a British government committee and the Engineering Council, both of which have the difficult but vitally important task of setting out to reverse Bntain's industrial decline. We are Dying to counter the erroneous view that Britain is in a postindustrial era, and that our future is to become almost wholly a service society. Until about a year ago the government, heavily committed to the perfection of market forces, was taking a line that gave the impression to some that industry did not matter to Britain. My discussion is set against a background that is best summarized by the advertisement shown In Figure 1 which was devised by the Engineenng Council to shock the nation. It has done so. You don't have to know much about Hat quaint and very English game cricket to appreciate that what is happening to each of these players is bad. You do have to know that last 105

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HARNESSING TECHNOLOGY FOR GROW 107 year we were beaten by just about every nation that plays this bizarre game. Given that we taught them, "It's not cricket!" that they should beat us, which you know means that we think it is unfair! The caption under each player spells out that for industry after industry others are beating us at our own game. We taught them? damn it! So it's not fair! But then, similar complaints seem to be emanating from the United States, concerning your country, and this indeed is a surprise. Perhaps ~ am an incurable optimist, but I am confident that we will succeed in my company in harnessing technology for growth to a significantly greater extent than has been the case over the last decade. Similarly, I hold out great hope for Britain despite the national background that I have painted, and despite a Europe where such words as "Eurosclerosis" and "Europessi- mism" have entered the vocabulary and are fashionable. Daniel I. Okimoto (in this volume), in what is a superb analysis contrasting the situation in the United States and Japan, raises We question: "Is this a two-horse race between the United States and Japan, with Europe straining not to fall too far behind?" Perhaps we in Europe, and you in the United States, are suffering a little from '`the grass is greener" syndrome, for what we in Europe see happening in the United States is an enviable and fabulous success story. You have created 10 million jobs in 5 years Europe has created none. You had phenomenal growth in 1984. You have a strong venture capital market, which is largely responsible for creating your position in biotechnology, ahead of the rest of We world. You have great mobility in your work force and are not encumbered by such ant~dynamic forces as rent control acts and old- fashioned institutions. You have been creating 600,000 new companies each year, about a third of them in high technology. You have a very rich society with plenty of aunties and uncles ready to finance fledgling start-up companies either directly or indirectly. You are reviving so-called mature industries by the application of high technology both to the design of the product and to the manufacturing process. Chrysler is a case in point. You have huge defense and space budgets and far better mechanisms than we in Purope to harness the technology these develop for broader commercial use. Figure 2 shows defense spending as a percentage of gross domestic product (GDP) for selected countries and Figure 3 shows the same in absolute num- bers. Compare the United States with Europe, remembenn~, that Europe Is still very fragmented and that we have relatively poor mechanisms to harness this effort outside defense. As part of the "grass is greener" syndrome, we in Europe say that obviously the U.S. effort in defense and space is a major reason why you do better, but then we look at Japan, which does not have a similar driving force for technological innovation. So we look around for other reasons and, without decrying the brilliant job the Japanese have done and are doing, we point to their highly protected market. We in Europe are significantly more open and less protectedeven more so than the United

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08 ill Cal ROBERT MALPAS 6 4 2 o U.S. U.K. France I Netherlands NonNay Belgium =' I Germany Denmark Italy Spain Japan at, U.S. EU ROPE JAPAN FIGURE 2 Defense expenditures in selected countries as percentage of gross domestic product (GDP), 198~1984 average. States. Far be it from me to argue in favor of protectionism, but are we in Europe perhaps too liberal? I think not, and I think that both these reasons reflect a high element of "looking for excuses." The United States is so attractive to investors that one new investment fund recently was reported to have raised 200 million. They proudly an- nounced that it was all to be invested in high technology in California! So there is no shortage of money in Britain for investment. The North Sea will call for 60 billion over the next 10 years, much more than the last 10. No one has any doubt that it will be found and easily. And we have no shortage of ideas in Britain. We have had, and still have, a great capacity for invention. So in the government committee ACARD (Advisory Council for Applied Research and Development), we are addressing the question of why the available money does not meet the abundance of new ideas. It is a difficult and complex question to answer, but in a few words, I would say, "Because there are too many apparently less risky options." You seem to have solved the problem in the United Statesbut then, perhaps the grass is Preener! ~ \ You have conferences that set out to develop a proper dialogue between economists and technologists, recognizing that dialogue and mutual under- standing are prerequisites of continued success. We are having difficulty in

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HARNESSING TECHNOLOGY FOR GROWTH 109 this respect in the United Kingdom. A recent lecture in London brought together financiers, economists, scientists, and industrialists, the aim being to promote dialogue. We failed. The financiers clammed up defensively. The grass seems unquestionably greener over here, yet you are looking over other fences because there is indeed a problem. How do you maintain the tremendous momentum and dynamism generated these past few years to continue to create jobs as you have done and to generate wealth? You have identified a gap described neatly by Harvey Brooks (in this volume), who said that historically In the United States there has always been a gap between the private ente~pnse system and government policy, particularly in the de- velopment of long-lead-time innovation. The grass certainly does seem green- er in Japan in this respect, but harbor no envy for Europe. And of course everyone is concerned with the gap between invention and commercialization, the process called innovation. On the grand scale, in- novation does fall foul of He gap between private enterprise, which is properly preoccupied with the bottom line, and government policy, which should be capable of longer-ten, patient money, except that politicians need to be elected too frequently. There is indeed a problem in financing what I will call "big D." Research (R) and development ("little d") get one to the stage of, say, a prototype and a small-scale manufacturing process. "Big D" involves taking the fruits of R & d to full-scale production and marketing. Innovation is not complete 7 6 ~ 4 A US 1 o U.S. Netherlands I France Belgium I I Magi imark Italy Europe Spain ~ Japan U.S. EUROPE JAPAN 140 100 40 o FIGURE 3 Defense expenditures in selected countries as percentage of gross domestic product (GDP), 198~1984 average; and in U.S. dollars in 1980.

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110 ROBERT MAL]PAS at the prototype stage. Moreover, the marketing element of "big D" and its huge costs are as important as the science and technology. We have all learned that if R costs 1 unit, "little d" costs 10 units, and "big D" costs 100. Herein lies the financing problem, particularly if it takes a ion:, time, which, other than in the field of electronics, is usually the case. It takes heavy front-end money, with a long and risky payback- patient money. If it fails, there is usually a large and visible monument to failure to remind one of the folly. Hence people, whose promotion in a company is based on 3 to 5 years of achievement, are scared of it. Research, on the other hand, is relatively inexpensive. Anywhere from $1 million to $20 million buys considerable effort, and you can stop it without much visibility. Big D, however, involves major investment. Harnessing technology for growth, however difficult, is essential for suc- cess, of a company and a nation, particularly in a sustained period of low growth. No doubt the world is in such a period now. The 1950s and 1960s were a high-growth era in which prosperity could be achieved by a me-too approach High growth provided ready-made markets to conquer. A low- growth era requires that products, and processes to make them, have "edge. " Both product and process edge flow from technology. This realization is increasingly pervading He boardrooms of all corpora- tions, and this is happening in Britain. For the United States, H. W. Coover described how his company has increased its research effort and has devised new mechanisms to turn it into commercial success. This realization of He need for edge to be provided by technology will be the main force that will bring together the money needed to innovate both on a small and on a grand scale. In closing, I raise several important issues regarding, the commercialization of technology. I suggest eight issues for study. 1. What Is the Role of Government? A number of contributors to this volume discuss the role of government in technology development. Robert Swanson, for example, devotes most of his chapter to it, as does Ed Zschau, who makes several brilliant comments. We must, however, try to be specific about what is needed, particularly in the light of the very large proportion of GDP that is government expenditure, as shown for selected countries in Figure 4. Look at Europe, for instance. Private ente~pnse is not quite bridging the financing gap required for expensive, long-lead-time projects, and all governments are Lying to reduce expenditure. Swanson has reportedly raised the $56 million he needs; how- ever, he might yet need $300 million or $400 million properly to commer- cialize his inventions. It is doubtful that venture capital will fill this "big D" need, and indeed we should not expect it to do so. So is he looking to government for help? Perhaps this is where large companies with cash moun- tains that have resulted from tidying up their operations should step in.

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HARNESSING TECHNOLOGY FOR GROWTH 70 60 50 40 30 20 10 o 111 Sweden Belgium France l 3 1 i 1 1 I 1 1 1 _ i Switzerland Malaysia U.S. Japan _ Singapore I Korea I I ndonesia ail 1 l _ w _ 1 _ 1~ _ Thailand EU ROPE U.S. EAST ASIA FIGURE 4 General government expenditures in selected counmes as percentage of gross domestic product (GDP), 1980-1984 average. Perhaps they would do better financing innovation on a grand scale than buying each other! 2. Financial Expectations How often do we hear, "They play it by different rules"? Who plays it by different rules? The Germans? The lap- anese? British electronic companies regularly refer to Germany, Japan, and France in these terms. What do we mean by it, that retu~n-on-capital ex- pectations are lower? Well, if they are, certainly the German and Japanese economies as a whole seem to be doing well; the end result is satisfactory. So what formula do Hey use? We must grapple win this apparent contra- diction and not just keep complaining that they play it by different rules. 3. More and Better Mechanisms We need more mechanisms like R&D partnerships, which have worked, and are working, well. The venture-capital movement has been of major significance in He United States, and we are delighted Hat it is in full swing in Britain. However, do not expect it to deal with really "big D" expenditure. The Unlisted Secunties Market (USM) was formed In Britain about 3 years ago and is flourishing, providing equity for start-up companies in their second stage of development. The USM market in Britain is now valued at $2.8 billion and is so flexible and effective that U.S. companies are using it to raise equity for investment in the United States! In Britain, finance has become too centralized in London. It is interesting

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112 ROBERT MAMAS to reflect that the rapid development of the railway system in England during the last century was financed wholly by provincial banks London did not want to know! No doubt the U.S. transportation infrastructure was similarly developed by decentralized financial support. In Britain, we need richer aunties and uncles. Mrs. Thatcher has done a great dead to revive the quest for personal weals by altering the tax system to reduce the amount government takes away from successful people. Europe in general still has too high a floor of unemployment benefit and too low a ceiling for success. Here again, it is this realization that personal wealth is an essential fuel for entrepreneurial drive, both for individuals and companies, Hat is causing attitudes to change 4. The Third Dimension Accounting standards have been built up al- most entirely on the concepts of revenue and capital, assets being physical, either products or factories. But increasingly technology is concerned with intellectual property and current accounting practices do not deal with it adequately. Coover (in this volume) touched on this, and in British Petroleum we are looking at the issue fundamentally. Research must have a value greater than zero, yet that is how we treat it. Each year it is written off. Quite apart from anything else, these days when people's performance is increasingly measured by monetary value, it is very Remotivating to researchers, and it is a real problem. S. DCF Is the Enemy of Strategy Discounted Cash Flow (DCF) tech- niques reduce long-term gain to insignificant value, however brilliant the prospects for the longer tee. We need better mechanisms and some are emerging. Professor Hank Jacoby of MIT spent a sabbatical year with British Petroleum and introduced the concept of 'generating options for the future." A first project may have a low DCF, but it will open up many options which would not exist if the first investment were not made, for example, a second or third plant, spin-off technology, new markets, a family of products, and so on. We should try to assess these many options, establish their risk value, and add that value to the first project, for they are a consequence of the first low-DCF investment. 6. Excellent Manufacturing Technology Swanson (in this volume) dis- cusses the prime importance of developing innovative, excellent process technology if biotechnology is to realize its full potential. Excellent manu- facturing technology is what the Japanese have developed for all Heir prod- ucts. Their attention to ~is, and to excellent product design, is the main reason for their preeminence today. We in Britain have tended to ignore it. We have a record of producing many firsts radar, television, jet engines, but we did not devote, for any of these, sufficient attention to how to produce products for world, not just home (which is relatively small in Britain), markets by low-cost manufac- nmng processes.

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HARNESSING TECHNOLOGY FOR GROWTH 113 In this respect, government intervention can be damaging because of the cost-plus mentality, and government specifications frequently apply only to the needs of the country. Thus, the government as a purchaser is a dangerously soft option that can prejudice world sales. 7. More Engineers Japan produces more engineers than Britain pro- duces total graduates. Engineering in Britain is, as you probably know, regarded as a fairly lowly activity. And a production engineer is near the bottom of the engineers' merit scale. Something of He same attitude is at work here in the United States. Yet we are now realizing that excellent design and manufacturing technology are required to turn invention into world- beating, low-cost products. I now refer to manufacturing technologists, implying that the activity is broader than being a production, mechanical, electncal, chemical, or any over kind of engineer. 8. The Role of Large Companies Coover has discussed the role of companies, and I have told you what I am trying to do. I have also suggested that companies with cash mountains developing should be a major source of financing for "big D." The problem is Cat many are apprehensive Cat the cash mountains will soon vanish if they do not choose Be projects well. In other words, it is risky, but then risk taking is the major element necessary to harness technology. Without it, we will be condemned to lower and lower grown.

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