WHERE ARE THE BIG GORILLAS?
HIGH TECHNOLOGY ENTREPRENEURSHIP IN THE UK
AND THE ROLE OF PUBLIC POLICY
6 CONCLUSION
Entrepreneurial success in high-technology industries depends on a supportive domestic environment and on a supply of entrepreneurs and managers capable of exploiting technological and market opportunities. Over the last twenty years successive British governments have tried to make progress on both these fronts, in the hope of matching the entrepreneurial dynamism of the US. How much have they achieved?
The US benefits from four institutional advantages: a large and competitive domestic market; a highly developed financial system which ensures that entrepreneurs with sound projects have access to capital; large-scale government support for basic science; and a well-financed university sector responsive to the needs of industry.
On the first two of these, substantial progress has been made in the UK. The pro-market policies introduced by the Thatcher government in the 1980s included privatisation and de-regulation, which reduced the power of incumbents in such industries as telecommunications and widened opportunities for new entrants. Rules against anti-competitive practices were tightened, and this has been taken further by the current Labour government. The competition policy regime is now quite similar to that of the US.
The disadvantage of a relatively small home market has been partially offset by the removal of trade barriers within the European Union. Although Europe is not yet as integrated a market as the US, most of the distortions arising from government intervention have been removed, and the ability of firms to operate on a European scale is far greater than it was twenty years ago. There is still more to be done on public procurement, particularly in relation to small and medium-sized firms which are often at a disadvantage in competing for orders from government agencies; there are useful lessons to be learned from the US in this area.
On access to finance, a series of measures has increased the flow of funds into venture capital and early-stage finance, and entrepreneurial activity is no longer seriously impeded by lack of access to capital. If there has been a weakness in public policy, it may have been an excessive emphasis on support for start-up firms. As an American commentator on small firms policy has observed, providing generous amounts of capital to all comers is likely to lead to a misallocation of resources. “Meagre funding forces entrepreneurs to conduct low-cost experiments that help resolve market and technological uncertainties and prepare the ground for subsequent large-scale investment”.[116] There is no way of predicting in advance which experiment is going to succeed, but weaklings are more likely to be winnowed out if their access to finance is subjected to a market test.
The third American advantage is the scale of government support for scientific research. There is no way in which the UK can match the amounts of government money that flow into defence-related and health-rated research in the US. But within the constraints faced by a medium-sized country the British government has taken steps to strengthen the science base. In 2004 the government announced a new programme which would lift the government’s core spending on science from £4.2bn in 2004-5 to £5.4bn in 2007-8; the aim was to raise British spending on research and development from 1.8 per cent of GDP to 2.5 per cent in 2014. At the same time – and again following the US example – the government has sought to boost private sector spending on research and development through an R & D tax credit, first for small firms and later extended to all companies.
The impact of these policies on innovation and on entrepreneurial activity will only be felt in the long term, and they will need to be complemented by better funding of the universities – a much more problematic issue which the government has barely begun to tackle. The UK has several universities which rank at or near the top in the quality of their science, but their ability to maintain this elevated position will depend on finding a solution to the funding problem. While the government’s attempts to promote technology transfer are laudable, the overall health of the university sector is a far bigger issue – and one in which the UK lags badly behind the US.
With these reservations, entrepreneurship policy as it has evolved over the past two decades has worked well. Institutions and policies have been aligned more closely to the US model. The big gap, as the last two sections have shown, is the absence of American-style ‘big gorillas’ – firms like Amgen and Cisco, which grow very fast over a sustained period to become major international enterprises. Part of the explanation has to do with the character of the industries concerned, and the difficulty of catching up with American first-movers, but is there also some lack of dynamism or competence among British entrepreneurs?
A common accusation is that too many of them lack the will or the ability to make the transition into a higher league. Faced with the hassle and personal risk involved in building a big company, they prefer to stay small, or to sell out. It is true that a good many promising high-technology businesses have chosen to sell out at an early stage, often before they have gone public. But this may reflect an active British market in the buying and selling of companies (and an openness to inward investment) rather than a lack of ambition or energy. While a few cashed-out entrepreneurs retire to their yachts or their country mansions, others go off to start new ventures, or become business angels.
As for management competence, running a big business does demand special skills and motivation, and the founder-entrepreneur – a Clive Sinclair, perhaps, or an Alan Sugar – may not be well suited for the task. But this is not just a British phenomenon. Such men as Bill Hewlett and David Packard, who combine entrepreneurial and firm-building skills, are rare in any environment. More commonly, founders give way to professional managers – and the UK does have managers who are capable of running large, international companies in high-technology sectors. One example is Vodafone. Another is Glaxo (now GlaxoSmithKline), which, though not a start-up firm, was virtually a new entrant to the pharmaceutical industry after the war. Thanks to good management, excellent science and skilful marketing, it went from minnow to world leader within the space of some twenty years.
More British companies of the Vodafone or GlaxoSmithKline type would be desirable. However international such companies become, national ownership does make a difference, since the home base normally contains the core of their marketing, engineering and product development expertise. Given the improvements that have taken place in the UK environment, the continuing flow of new entrants in high-technology sectors, and the availability of experienced managers, it is reasonable to hope that some of them will become at least as big as ARM, and preferably bigger. But there is no magic bullet available to government which will produce British versions of an Intel or a Hewlett-Packard – and no obvious market failure which calls for government intervention. On the contrary, intervention is almost certain to make things worse. Admiration of the US model does not imply that British industry should be organised in the same way as its US counterpart; it was just such US envy that led to the disastrous ‘national champions’ policy of the 1960s and 1970s. The priority should be to continue the path that governments have been pursuing for the past twenty years – creating an environment that is conducive to the growth of entrepreneurial high-technology businesses and eliminating obstacles that stand in their way.
NOTES
[116] Amar V. Bhide The origin and evolution of new businesses Oxford 2000, pp.356-357.
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