Enterprise and Small Business Principles

The emergence of technical entrepreneurship

Technical entrepreneurship is not a new concept based on twenty-first century computer whiz kids. In the eighteenth and nineteenth century, British technical entrepreneurs such as James Watt and Alexander Graham Bell made significant scientific breakthroughs that built up vast industries and changed the lives of millions. Many of today’s ground­breaking innovations were not developed by large multinational corporations but were based on the ingenuity and invention of individual entrepreneurial scientists. Such ideas which changed the world included:

■ power steering (Francis Davis)

■ Kodachrome (L. Mannes/L. Godowsky)

■ zipper (W. Judson/G. Sundback)

■ Polaroid camera (Edwin Land)

■ ballpoint pen (Ladislao and George Biro)

■ Cellophane (Karl Schroeter)

■ air conditioning (Willis Carrier)

■ insulin (Frederick Banting)

■ FM radio (Edwin Armstrong).

During the past 30 years, with the dramatic growth of technology clusters, such as those in Silicon Valley, California and alongside Route 128 near Boston, technical entrepre­neurship has been most prominent in the US, with the emergence of entrepreneurs such as Bill Shockley with the transistor, Steve Wozniak and Steve Jobs developing the per­sonal computer at Apple, Bill Gates with his Microsoft empire and Jim Clark, who revolutionised the use of the Internet through Netscape.

The billions earned by such individuals within ‘sexy’ high-technology sectors have made all of them high-profile media celebrities and the resulting publicity has prob­ably encouraged more scientists to take the step from the laboratory into the market­place. However, one could also argue that perhaps too great an expectation has been placed on the development of high-technology industries. With the spectacular decline of the dot. com boom following a wave of large investments in Internet-based busi­nesses, financial institutions, government and policy makers are perhaps now more wary of pushing technological entrepreneurship than they were a few years ago, although it is noteworthy that the creation of a knowledge-based economy, driven forward by entrepreneurs and innovators, still forms the cornerstone of national and regional economic policies in many parts of the world.

13.5.1 The rise of the technology-based firm

With the decline in many traditional sectors such as coalmining, steel manufacturing and textiles, many nations have realised that industries characterised by rapid techno­logical advances can give competitive advantages in local, regional national and inter­national markets, which can result in increased industrial output, employment and prosperity. As a result, policy makers have indicated that the future competitiveness of industry, and success in accelerating growth and increasing employment, depend upon the capacity of firms to innovate in response to changing external conditions, includ­ing the continuing rapid pace of technological development.

Given this, it is of little surprise that firms working in ‘sunrise’, high-technology sectors such as electronics, software and biotechnology have been hailed as vehicles for the creation of new jobs, for regional economic regeneration, and for enhancing national rates of technological innovation and international competitiveness. Whilst it was previously thought that only large firms could take advantage of technological innovation within global markets, focus has now moved towards the development of small entrepreneurial ventures. There are a number for reasons for this:

■ Small firms are more innovative than their large firm counterparts, being less bound by convention and are more flexible due to their organic and network-based struc­ture, contrasting with the mechanistic and bureaucratic framework common in many large firms.

■ They make an important contribution to economic growth and vitality ‘by offering alternative career possibilities to those engineers and managers who do not function most effectively in larger organisations.

■ In many respects, they are better able to deal with the volatility inherent in numerous technology-based sectors, especially when fast-moving technology life-cycles reveal market niches suitable for exploitation by enterprising small firms.

■ As firms are forced to innovate and develop new products and services on a con­tinuous basis, and as competitors enter and overtake their market position, those working within such fields are forced to become acclimatised to a culture of instab­ility and change, risk taking and dynamic action, which is best suited to the man­agement and business style of technologically oriented, entrepreneurial small firms.

13.5.2 Characteristics of new-technology based sectors

The search for a definition of ‘high technology’ has occupied many writers and existing definitions are classified into those based upon purely subjective criteria, those draw­ing a distinction between product and process innovation and the final group using surrogate measures, such as the proportion of employees in R&D. Discussions regard­ing ‘high-technology’ industry and of sectors falling within the classification often imply that firms are similar; however, research on small firms in specific sectors suggests that theoretical and practical differences exist between ‘high-technology’ industries and that technology strongly influences the ability of founders to establish and grow firms (Oakey and Cooper, 1991; Oakey, 1995; Cooper, 1997a; Harrison et al., 2004). The use of the term across a heterogeneous group of industries can lead to the mistaken assumption that all founders have similar entrepreneurial opportunities and experience similar problems.

Market entry by new technology-based firms depends upon barriers that may vary through time and between sectors (Oakey, 1995). Technological progress creates busi­ness opportunities for new, small, research-intensive companies offering products, services or a combination of activities. Competition is generally less severe in ‘new’ sectors and more commercial opportunities exist for small firms; as sectors become more mature larger firms tend to dominate and the remaining small firms are likely to occupy narrow niches, unattractive to larger firms. Collaboration between small and large firms often occurs as the activities of small specialist product and service firms complement those of large organisations, allowing large companies to focus on their core business (Cooper, 2001a)). An important factor in the growth and development of technology-based firms is the sectoral variation in the length of product life-cycle (Markusen, 1985; Malecki, 1981, 1991). In the electronics industry, for example, it is possible to take an idea from the drawing board to the market-place in a matter of months; by contrast, product-based firms in sectors such as biotechnology experience long lead-times. The result is that some businesses are established on the basis of con­tract research, which is a low-cost method of start-up, on which future product devel­opment is built using revenue from service activities (Oakey et al., 1990).

Related to the question of timescales and development - and life-cycles is the issue of finance as the requirement for long-term funding is generally greatest where develop­ment cycles are the longest. For example, the capital required for the translation of an electronics idea into a viable product is likely to be significantly less than that required by a biotechnology firm to finance six years of laboratory/development work, two years of testing and clinical trials before revenue is forthcoming (Oakey and Cooper, 1991). The dilemma for firms working in fields where the outcome of R&D is uncer­tain is that while potential long-term financial gains may be very high, so are the risks. The requirement for up-front finance often prevents a firm from being established or sinks the firm whose ability to spend exceeds its ability to generate income. Wider issues of finance and the firm are discussed in Chapters 18 and 19.

13.5.3 The emergence of technology-based start-ups

The culmination of entrepreneurial activity is the appearance of a new firm and there are two principal routes by which new enterprises are established within a region. Spinning off, resulting from the outward movement of personnel from a firm in which they have worked, either as the owner or as an employee, is a particularly important method of new firm formation in areas of existing concentrations of high-technology industrial activity. The second method is the inward movement of individual and/or corporate capital into a region, often attracted by the quality of the local economic infrastructure or availability of incentives.

There is debate over whether entrepreneurs are born or made; whatever the case, some organisations appear to provide a greater stimulus to employees to be entre­preneurial and generate more spin-offs. Spin-off rates can vary dramatically between organisations; the spin-off rate from small firms is up to ten times greater than that of large organisations. Spin-off rates from business units within larger organisations tend to be greater than those where the activities of the organisation are not compartment­alised. Creating a culture supportive of enterprising behaviour within large organisa­tions can bring performance improvements, which increase the feeling of achievement in staff and encourage individuals or groups to consider exploiting their capabilities through entrepreneurship. The decision to establish a business in the ‘outside world’ can, in turn, improve the prestige and social and professional standing of individuals. For this reason the culture both within the source organisation and in the local area is important in influencing the likelihood of entrepreneurial action.

Cooper (1973) identifies two types of organisation, generating above and below average numbers of new starts, which he categorises by their technical entrepreneur ‘birth rates’. Low birth-rate firms produce below average numbers of entrepreneurs while high birth-rate organisations contribute more than their ‘fair share’ to the econ­omy. Low birth-rate organisations employ large numbers of employees, are organised by function, recruit average technical people, are relatively well managed and are located in areas of little entrepreneurship. By contrast, high birth-rate organisations have small numbers of employees, are product-decentralised, recruit very capable ambitious people, are afflicted by periodic crises and are located in areas of high entrepreneurship, where the presence of role models stimulates prospective entrepreneurs to found enterprises. This model implies that the structure and strategic orientation of existing organisations within a region strongly influence the likelihood of new enterprise creation by indigen­ous entrepreneurs. Locations such as Silicon Valley have seen significant levels of new technology-based firm formation through local spin-offs, while regions populated by ‘low birth-rate’ organisations do not exhibit high natural levels of spin-offs, nor are they likely to do so without proactive intervention.

13.5.4 The environment for technology-based firms

Planners and agencies wishing to attract firms to their areas or encourage indigenous entrepreneurship need to understand what influences the founder of technology-based firms to select a location in the first place. In the mid-1980s, Galbraith (1985) com­mented that high-tech firms operate on the basis of factors different from those for other types of manufacturing, the one common element being the importance of a complex local infrastructure including universities, government research labs and mature com­panies, implying that the influence of materials and transport, so important in Weber’s (1929) traditional location model, are less relevant in the context of new technology- based sectors. Porter (1998) defines clusters as ‘geographic concentrations of inter­connected companies, specialised suppliers, service providers, firms in related industries, and associated institutions (e. g. universities, standards agencies, and trade associations) in particular fields that compete but also cooperate’. In the context of technology firms the presence of institutions such as universities or research establishments plays a multi-dimensional role in encouraging and supporting new enterprise development (Keeble and Wilkinson, 2000). Institutions act as sources of entrepreneurs and of ideas on which firms are based and support innovation through the provision of specialist technical help to companies (Lindholm Dahlstrand, 1999). While technical links may be maintained over long distances, links are most readily maintained within a local area; enthusiasm for the university science park is predicated on the belief that inter­action will necessarily occur between firms on the park and academics in the univer­sity. There is debate between those who believe that universities and science parks play a role in stimulating industrial development (Monck et al., 1988) and those who ques­tion the precise nature of the relationship between universities, science parks and the growth of agglomerations of technology-based firms (Oakey, 1985). While the level of interaction may vary, research-intensive organisations are viewed as an important part of the innovation infrastructure, improving the network to support and encourage new enterprise development and growth. A regional infrastructure rich in universities, research-active firms and other key actors in the innovation process provides an ‘innovative milieu’ within which to establish new ventures (Camagni, 1991). Such areas are characterised by high rates of learning and knowledge diffusion between organisations within the clusters (Castells and Hall, 1994; Keeble and Wilkinson, 2000). Researchers and policy makers are increasingly interested in the rich variety, in terms of both breadth and depth, of organisations (institutional thickness) in such areas (Amin and Thrift, 1995; Keeble and Wilkinson, 2000).

The tendency for firms to select similar locations results in the development of agglomerations or clusters of related firms and organisations, such as those in Silicon Valley and in the Silicon Glen of Scotland (Bell, 1991; Cooper, 1996). A location within an agglomeration frequently attracts higher costs, for example through high land, premises and wage rates, but yields benefits through ease of access to local customers, suppliers and financiers (Saxenian, 1996). In spite of this, a minority of firms establish themselves in relatively remote locations where the entrepreneur enjoys the quality of life and a pleasant working and living environment. Roberts (1991a) concludes that the supportive environment (including the presence of the Massachusetts Institute of Technology (MIT)) not only contributes to the high incidence of spin-off entrepre­neurs in the Boston area but also influences the degree of success of those ventures (BankBoston, 1997). Close proximity to a rich array of firms (including actual and prospective customers and suppliers), research institutions (such as universities and public sector R&D organisations) and resource providers, including venture capitalists and business angels, does not necessarily mean that cluster benefits will accrue. The contrasting fortunes of firms in Silicon Valley and those along Boston’s Route 128 (Saxenian, 1996) illustrate the important fact that firms need to be culturally and institu­tionally as well as geographically proximate (Porter, 1998), otherwise effective inter­action will not happen.

The growth of industrial complexes leads to the development of specialist support infrastructure such as accountants, lawyers and financiers whose input can be vital, particularly in the pre-start and early days of the firm. A location providing ready access to those with the right skills/knowledge base should facilitate the establishment of the new business. Financial advisers with knowledge of technological sectors are not ubiquitous and locations with a strong presence of high-technology firms establish a reputation for the quality of local specialist support (Cooper, 1996). Universities are increasingly playing an important role in fostering the emergence of new firms through the provision of physical incubator infrastructure and business support. The availabil­ity of incubator space at preferential rates can provide new start-ups with appropriate and low-cost space in which to begin operations, often with mentoring or other busi­ness support from specialists. Initiatives such as the TOPS programme at the University of Twente in the Netherlands have been successful in supporting the development of new ventures through start-up into mature businesses.

The challenge for policy makers is that there is no easy recipe to develop a tech­nology cluster, as a growing body of research suggests that all clusters do not follow a common path of development and do not operate in similar ways (Saxenian, 1996; Swann and Prevezer, 1996; Garnsey, 1998; Hendry and Brown, 2001): ‘clusters come in many forms, each of which has a unique development trajectory, principles of organisation and specific problems’ (Mytelka and Farinelli, 2000: 11).