High-Technology Entrepreneurship

Ray Oakey

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136323287
• Topic: Business
• Subtopic: Business General
• Index: Business

With the global economy in a precarious position, nurturing new entrepreneurial high-technology firms is likely to comprise a key component of any policy to encourage economic growth, both in developed and developing countries. Recent high-technology ventures – such as retailing in the music industry – have shown how entrepreneurs can radically change, or even replace, the structure of existing industries.

High-Technology Entrepreneurship introduces and analyzes all the major aspects of high-technology small-firm formation and growth. Locational and functional aspects of the process, as well as how contexts for development may vary between developed and developing economies are also discussed. Other key topics that are addressed include:

• how high technology firms originate in theory and practice
• entrepreneurship theory
• incubators, science parks and clustering
• entrepreneurial strategy and finance.

Students taking Master's-level courses in entrepreneurship, technology, innovation, academic enterprise and industrial development will find this an essential textbook for completing their studies.

1

Introduction

1.1 The rise of the high-technology small firm

Although the high-technology small firm (HTSF) has become a key part of the contemporary industrial scene throughout the developed world, the origins of this size and type of industrial enterprise are difficult to fix. However, it is clear that much of the stimulus for the emergence of this technologically sophisticated small firm must partly stem from the spontaneous development, in the United States, of the high-technology industrial clusters in Silicon Valley south of San Francisco in California, and around the Massachusetts Institute of Technology (MIT) on Route 128 in the suburbs of Boston. Worldwide interest in these developments occurred suddenly during the late 1970s and early 1980s and, although this was a frenetic period when the industrial growth potential of such focussed developments began to become clear, in both these cluster cases, growth had not been achieved overnight, but had been a gradual process over several decades.

The growth of these clusters was nurtured after the Second World War by the huge Keynesian-type public sector defence spending of the United States government in the 1950s and 1960s that funded the development of a series of progressively smaller semiconductor-based technical inven- tions, initially for military purposes. This was followed in the 1970s by extensive civil commercial applications of this technology based on the silicon chip (Saxenien 1985; Roberts 1991; Cardullo 1999). However, during the almost hysterical rush to replicate these high-technology clusters in Europe, the long development periods involved in the growth of such high-technology clusters were overlooked; and rather simplistically, many industrial planners throughout the developed and developing world assumed that, because they had become aware of these developments ‘overnight’, the clusters had suddenly emerged overnight, and, perhaps more seriously damaging for subsequent development planning, could be replicated virtually overnight. This was a misconception that has bedevilled HTSF development policy outside the United States since the 1980s, a topic discussed in greater detail below in this chapter, and in other parts of this book.

The extent to which both academics and politicians in Europe were unaware of high-technology industrial developments in the United States was brought into sharp focus by a television programme. In 1978, the BBC’s Horizon documentary series produced perhaps one of its most effective investigations, entitled ‘Now the chips are down’, in which the growing threat posed by the new silicon chip technology to many traditional industries was foreshadowed. This programme began a debate in the United Kingdom on how the growth achieved in the United States in Silicon Valley and elsewhere might be emulated by British industry. The discussion was heavily influenced by consideration of the role of entrepreneurial HTSFs in inventing, developing and finding markets for key new products (e.g. desktop computers, word processors), and of the venture capitalists who were funding such enterprises (Cooper 1970; Roberts 1991). This rise of interest in HTSFs was assisted by related work on small and medium-sized enterprises (SMEs) that was also emerging in the late 1970s. In particular, work by David Birch (1979) in the United States and by Fothergill and Gudgin (1979) and David Storey (1982) in the United Kingdom emphasized the role played by small firms, both in terms of the individual growth that could be achieved by fast-growing ‘winner’ small firms that individually grow large, and through the longer- term impressive growth that new and existing small firms can achieve in aggregate within local, regional and national economies. This enthusiasm for small firms in general, and HTSFs in particular, by politicians was partly caused by a realization that well-established large firms located in developed countries had become largely multinational in scope, and consequently operated beyond the control of national governments. However, in addition, Western developed economies were coming under increasing pressure from emerging industrial nations in South East Asia (especially Japan) in sectors such as motor vehicles, machine tools and consumer electronics (Oakey 1991). HTSFs were seen as particularly attractive vehicles for both aggregate and individual strong employment growth to replace these declining traditional manufacturing sectors, a view largely based on impressive but limited evidence of employment growth from United States high-technology clusters (Cooper 1970; Morse 1976).

1.1.1 Positive aspects of HTSF development

However, from the outset, thinking on the attributes of HTSFs was based on a mixture of myths and realities, as previously noted by other authors (Massey et al. 1992). One problem with assessing the growth potential of entrepreneurially led HTSFs was a difficulty shared with assessing the impact of entrepreneurship in general, in that spectacular and rare successes that are, in fact, exceptions, often become accepted as ‘the rule’ by media journalists and politicians. Probably the best example of this phenomenon was that of Steve Jobs and Steve Wozniak – founders of Apple Computers. While it remains possible for new entrepreneurs to begin a garage-based business in a high-technology sector and grow it into a world-class com- pany, substantial evidence on the extent to which new HTSFs fail, sell out, or are acquired by large multinational firms indicates that, in general, the Apple Computers ‘story’ is atypical (Oakey 1993). Nonetheless, despite over-optimism in the early days of the HTSF boom in the late 1970s and early 1980s regarding the potential for spectacular entrepreneurial growth of the ‘Apple’ type, it remains clear that, both individually and in aggregate, HTSFs – especially when located in successful clusters – have the potential to grow relatively fast and create substantial employment. Moreover, the jobs created by these firms, whether blue- or white-collar, tend to be skilled, relatively highly paid, and long lasting.

There is also substantial evidence to indicate that HTSFs are highly efficient when it comes to industrial invention and innovation. This ‘small- firm’ environment, in which there is little spatial or organizational distance between key actors in the invention or innovation process, ensures that specialist teams can work together as a close-knit group to bring new products to the customer. In particular, the links between research and development (R&D), production and marketing in HTSFs are often very close and productive (Rothwell and Zegveld 1982; Oakey 1991). The proof of this assertion lies in the fact that many large firms set up HTSF subsidiaries, or take equity stakes in existing HTSFs, in order to benefit from this highly productive and efficient environment, which, importantly, is largely free from the constraints upon R&D workers in large firms, where organizational and physical distances are often large and bureaucracy is obstructive. However, as will be detailed in a number of chapters below, although R&D in HTSFs may be efficient, this does not mean that it is inevitably successful. Research and development in HTSFs remain extremely risky in that success in the development of ‘leading-edge’ technologies can never be guaranteed, while development costs may be high and of long duration. Thus, put simply, although HTSFs might be the best place to perform leading-edge R&D in many areas of high-technology, such activity remains risky and, as Chapter 7 on HTSF finance will reveal, is difficult to resource, especially in new HTSFs.

Nonetheless, by the early 1980s, it was clear that successful HTSFs in the United States tended to be clustered when occurring spontaneously as a result of local agglomeration economies (e.g. skilled labour availability, capital, a rich supply of input materials at competitive prices and local tacit knowledge advantages) (Oakey 1984a, 1985a). This initial local advantage was buttressed by ‘spin-off’ activity in which early established cluster firms ‘incubated’ (often involuntarily) further new businesses into their local environment (Mason1979; Rothwell and Zegveld 1982). The success of this phenomenon was then seized upon by government economic planners in other countries as an ideal basis for artificially replicating such developments in order to generate or regenerate regional or sub-regional economies, based on high-technology production. However, the rush to replicate what had been achieved in locations such as Silicon Valley led to a number of misconceptions concerning the rate at which successful high-technology cluster replication could occur, and what was the main causal mechanism of such growth. For example, an early mistake was the assumption, especially in the United Kingdom, that the presence of Stanford University and MIT, respectively located in the centres of the Silicon Valley and Route 128 high-technology agglomerations, were major catalysts for the growth of these clusters.

While there was some beneficial impact on the relevant clusters through entrepreneurial ‘spin-off’ from these universities (Roberts 1991; Cardullo 1999), the idea, common among European planners of the early 1980s, that universities would act as information hubs of technical expertise that new HTSFs could draw upon when located in science parks or incubators on or near university campuses was proved by empirical investigation to be largely a myth (Oakey 1985b; Westhead and Cowling 1995). Even in the United States, it was noted that links between HTSFs in Silicon Valley and Stanford University were rare (Oakey 1984a), and usually of low technical importance when they occurred. The science park movement in Europe in general, and the United Kingdom in particular, was largely built on a false premise promoted by science park developers (e.g. Trinity College, Cambridge 1983) that firms locating themselves on science parks and incubators, based on university campuses, would develop useful technical links with their local university (see Section 3.5 for a full discussion of science parks and incubators). Nonetheless, although the university-based drive towards HTSF promotion had a number of flaws, and diverted attention away from a much-needed, more comprehensive, government-based development policy for HTSFs, it at least raised the profile of HTSF development in the 1980s and 1990s, and acknowledged the reality that new high-technology industrial production was essential to the prosperity of many Western developed and South East Asian developing economies beyond the year 2000.

Indeed, perhaps the most potent reason why, after intermittent periods of neglect, HTSFs return to the top of the government industrial development agendas of developed industrial nations, is their relevance to the long-term national industrial health. For example, in the United Kingdom, after the initial burst of enthusiasm for HTSFs in the early 1980s noted above, there was a gradual decline in interest in the late 1980s and early 1990s, followed by a resurrection of HTSF interest around the time of the 1997 general election, reflected in a number of public sector and private sector reports of how HTSFs might best be promoted (House of Lords 1997; Confederation of British Industry 1997; Bank of England 2001). It is generally agreed that HTSFs have long-term strategic import- ance because, in a range of key strategic future industries (e.g. electronics; biotechnology; software; the internet), new HTSFs are a major means by which a future industrial ‘foothold’ can be established (Office of Tech- nology Assessment 1984). Indeed, for all developed national economies, manufacturing should continue to form a crucial part of national earnings for the foreseeable future (as the recent over-reliance on financial services has reminded us), since it remains the case that it is in the HTSF-inspired ‘start of cycle’ industries that developed high-wage economies have the best chance of maintaining competitiveness, high profit margins, and high- salaried jobs. For this reason alone, HTSFs will remain of key importance. However, as noted above, to this assertion must be added the also incontrovertible fact that the long-term planning required to put HTSFs at the heart of any economic policy for a developed industrial nation has not been a consistent concern of national governments. A major and intractable problem is that, to be effective, industrial planning horizons should be extended over 20- to 30-year periods, when in fact, politicians are forced by their electoral systems to take a ‘short-termist’ attitude based on the average of five years they can be sure that they will be in office, after which a different party in power might change the direction of policy. This will be a theme that is returned to at many points subsequently in this book and especially in Chapter 8, which is concerned with ‘short termism’ regarding HTSF funding.

1.1.2 Negative aspects of HTSF development

It must be acknowledged, as will be discussed in detail in Chapter 7 on finance, that recently, HTSFs have not proven to be very attractive investment vehicles for external providers of capital in general, and venture capital firms in particular (Murray and Lott 1995; Bank of England 2001; Oakey 2003a, 2007a). Put simply, new HTSFs are no different to any other small firms during formation in the sense that they go through all the same stages that most new medium- or low-technology firms experience. However, the major difference for HTSFs is that virtually all these stages are more protracted and more precarious than for their lower-technology counterparts. At formation, many HTSFs do not have a product to sell, and spend a considerable amount of time either on perfecting a new technological ‘idea’, often ‘spun out’ from a university in an unproven conceptual state, or in circumstances where the new technology must be developed ‘from scratch’. This inevitably means that such firms are what is termed ‘front-end loaded’ in that they require external financial support for a number of years prior to the launch of the initial new product that they are developing, and the hoped-for arrival of subsequent income from product sales. Moreover, this period of ‘front-end’ development is often so protracted that it sometimes exceeds the R&D development period predicted in an HTSF’s business plan when applying for external venture capital funding support (Oakey 1995) and, in the biotechnology sector, can easily last at least ten years. Clearly, in such circumstances, a three-year bank loan would be inappropriate, since it would need to be repaid in the middle of the development period, when such a firm would have accumulated debt and have no means of repayment.

For these reasons, it is frequently the case that venture capital is the best source of investment for HTSFs. Not only can capital be advanced in exchange for equity over longer periods than three years, the purchasing of equity by the venture capital investor (or investors) ensures that a degree of longer-term commitment is assured, because the venture capitalist will be reluctant to see such a firm collapse, since a return on an investment depends on obtaining a successful ‘out’ for the venture capitalist when the equity held by them is sold. However, while venture capital investment, overall, might be the best form of funding for HTSFs, there are two major problems that inhibit such funding. First, a significant proportion of HTSF founders are reluctant to surrender equity in the firm that they have founded, often in a desire to be independent after previously working for large firms (Oakey 2003a). Second, since the late 1980s, many venture capital firms have progressively seen HTSF investments as too risky, and have tended to shift their investment portfolios away from high-technology sectors to lower-technology activities in general, and management buy- outs, buy-ins and expansions of existing firms in particular (Murray and Lott 1995). These existing entities are seen as less risky because they have track records of performance which can be extrapolated into the future, as compared with a new HTSF with no record of performance and only a business plan that predicts sales volumes that are pure speculation (see Chapter 7 for a full discussion of this problem).

The principles that lie behind the cluster formation process are not new. The concepts of clustering and agglomeration are very similar, and agglomeration principles have their roots in the early works of academics writing on industrial location theory. The seminal work of Alfred Weber (1929) argued that industrial firms would migrate from a ‘least cost’ transport-cost location to urban areas if such sites offered economies associated with ‘labour advantages’ (Riley 1973). Interestingly, the enduring relevance of this early work is borne out by the fact that a major locational advantage of Silicon Valley, for example, has been observed to be access to a concentrated pool of high-quality blue- and white-collar workers (Oakey 1984a). Indeed, many of the staple industries in the United Kingdom emerging from the industrial revolution (e.g. watches and clock production in Clerkenwell in London; gun and jewellery production near the centre of Birmingham; and cotton textile production in Lancashire) (Wise 1949; Hall 1963; Martin 1966) were all strong examples of clustering, exhibiting many of the strengths of Silicon Valley (e.g. skilled labour; vertically disintegrated input and output local linkage patterns; and especially local entrepreneurship).

However, those practitioners concerned with the post-Second World War period of industrial development in the United Kingdom had tended to downplay such locationally constraining factors, and considered most industrial activities to be ‘footloose’ by proposing that the relocation from core areas of the country to peripheral development areas could be achieved without damage. Nonetheless, this approach often resulted in substantial harm to the relocated industries involved when they were moved to peripheral regions outside established clusters (e.g. the relocation of the United Kingdom motor vehicle industry from the South East of England and the West Midlands to peripheral areas; see Townroe 1971; Sant 1975; Smith 1979). Overall, there was a general feeling that locationally constrained production was a feature of Victorian industries which had ceased to exist or were in terminal decline. With the rise of interest in high- technology industry in general, and HTSFs in particular in the 1980s, it was a shock to many academics and planners to discover that this new type of highly technologically advanced production was heavily agglomerated in a very similar manner to the Victorian industries of the past (Oakey 1985b). The strong production efficiencies of a cluster, which outweigh other disadvantages of high local costs (e.g. staff wages, property prices), are now well established as a price worth paying to be ‘at the heart of things’ (Porter 1998). The challenge for politicians wishing to copy this type of highly profitable and forward-looking industry, clearly evident in the United States, then involved solving the problem of how successful replication of this phenomenon can be achieved in other national contexts (Oakey 2003a).

A number of major problems confronted government policy makers when they attempted to replicate, through planning, phenomena that originally were caused by spontaneous ‘natural’ economic forces. One major contextual difficulty confronting any form of replication was the problem of time lapse. It is obvious that any attempt to copy phenomena must be hampered by the fact that time will have elapsed between the original occurrence and the replication. While entrepreneurs obviously play a key role in the establishment of any new industry, there is also a strong part played by ‘windows of opportunity’. If Silicon Valley is used as an example, the key ‘window of opportunity’ was approximately between 1965 and 1975. By the time politicians and planners in other countries noticed the existence of Silicon Valley in the 1980s, the window of opportunity for this type of cluster based on semiconductor production and computers had begun to close. First, this was partly because the firms that had grown to dominate these sectors in the Silicon Valley cluster had reached such a large size that they tended to inhibit new HTSFs subsequently founded in Europe and elsewhere from entering this sector (e.g. Intel; Hewlett- Packard); and second, consistent with the maturing semiconductor industry, manufacturing output was becoming more mass production in nature, and was progressively moving ‘offshore’ to other parts of the United States and Southeast Asia. Moreover, by the early 1980s, much of the high-volume silicon chip production had been captured from the United States by large Japanese producers (Langlois et al. 1988). Put simply, the entrepreneurial HTSF phase of the semiconductor industry, and its related downstream sectors (e.g. computers) had ended.

As noted above, the problems associated with the false assumption by European planners seeking to replicate these concentrations that United States universities acted as ‘accretion nodes’ for the development of high- technology clusters have caused many difficulties. While there has been some limited success with the development of totally new clusters in Europe (e.g. Sophia Antopolis in ...

Table of contents

• Front Cover
• High-Technology Entrepreneurship
• Title
• Copyright
• Contents
• List of Figures
• 1 Introduction
• 2 The role of the technical entrepreneur
• 3 Clusters, incubators and science parks
• 4 Research and development
• 5 Selling high-technology small-firm products
• 6 Strategy
• 7 Finance
• 8 Conclusions
• Bibliography
• Index