Table of Contents
2 DEFINITION NEW TECHNOLOGY BASED FIRMS
3 CHARACTERISTICS NEW TECHNOLOGY BASED FIRMS
3.3 GROWTH AND EMPLOYMENT
3.4 EXTERNAL FACTORS
4 SMALL FIRMS - BIG FIRMS
4.1 WHY COLLABORATE?
5 PUTTING THEORY IN PRACTISE: THE MOBILE PHONE SECTOR
5.1 MOBILE PHONE TECHNOLOGY
5.2 EXCURSION: CHINA - THE WORLD’S LARGEST MOBILE PHONE MARKET
5.3 NOKIA AND SMALL COMPANIES
5.4 INNOVATION OF THE SMALL PLAYER - PICOCHIP
5.5 CONCLUSION MOBILE PHONE SECTOR
6 COUNTRY INVOLVEMENT IN INNOVATION
8 APPENDIX I
In the last twenty years, many researchers and even governments have undertaken studies concerning small, innovative firms operating in new technology sectors. Different researchers have concluded different things from different studies, and different opinions prevail in many areas.
Even a brief look into the area of New Technology-Based Firms (NTBFs) shows that extensive literature exists on a wide range of topics, both on a more general scale, but also on rather specialised sub-areas of NTBFs. While it is certainly desirable to explore any one of these specialised areas in more depth, the focus of this paper is to give a brief but comprehensive overview of the area of NTBFs about research in the last 20 to 25 years. The underlying notion of the paper is to question if large firms are better at innovation than small firms. An answer to this question in the light of the findings of this paper will be attempted in the conclusion in chapter seven.
Specifically, the purpose of this paper is to define and highlight briefly the main characteristics of NTBFs, and to point out the level of cooperation between small and large firms in the technology sector. It will then evaluate these in the light of the Mobile Phone sector. The influence of governments on small innovative companies will also be considered.
This paper will start out with a definition of NTBFs in chapter two. Chapter three will highlight the five main characteristics of a NTBF that will ultimately determine the success or failure of the company. Chapter four will then look at the interplay between small and large companies, and will consider how much these two parties cooperate or compete. In chapter five, the findings of the previous chapters will be Innovation in High-Technology Companies: The Small Firm’s Perspective with Reference to the Mobile Phone Sector examined in the light of the mobile phone industry, with reference made to the mobile phone market in China, and also to a small innovative UK company. In chapter six, four countries and their approaches to foster innovation among small companies will be highlighted. Finally, chapter seven will sum up the findings of this paper and offer a conclusion on the underlying question if large firms are better at innovation than small ones.
2 Definition New Technology Based Firms
The study of New Technology-Based Firms is, compared to other areas of research, a relatively new phenomenon. Arthur D. Little produced one of the first studies in the field in 1977, which generated interest among researchers and governments alike.
One of the first problems arising when talking about NTBFs is a clear and concise definition of the NTBF itself. Researchers offer different definitions of the term; from the literature reviewed, one can broadly divide these into two categories: A narrow definition of NTBF, and a broader definition. Arthur D. Little (1977) sees NTBFs essentially as ‘an independent owned business established for not more than 25 years and based on the exploitation of an invention which implies substantial technological risk’. While this appears to be a very narrow definition, a broader view is favoured by other authors such as Butchard (1987), who essentially sees NTBFs as industries in sectors ‘…with above-average R&D intensity and above-average proportion of scientists, professional engineers and technicians in the labour force’.
While the choice of definition largely depends on the purpose of the specific study undertaken, this paper favours the broader definition for the simple reason of including firms that might otherwise be excluded. This is particularly useful in our discussion about Chinese mobile phone companies in section five, where it is often difficult to establish the exact size and characteristics of some of the innovative companies.
3 Characteristics New Technology Based Firms
As Kay (1993) had previously established and Bommer and Jalajas confirmed in 2002 for the USA and Canada, the competitive advantage of small, innovative companies often depends on the company’s ability to mobilize their technical skills, knowledge and experience with regards to innovative products, processes and services. Baldwin et. al. (1994) adds to this that success based on performancemeasures such as growth, productivity and profitability often strongly depends on the importance the company places on innovation.
Storey and Tether (1998) researched the characteristics of NTBFs, and divided their findings into five main areas, namely
3. Growth and Employment;
4. External Factors; and
The next section will briefly discuss each of these areas in turn, and the most important arguments in each area will be highlighted.
Small, innovative firms are often seen as having great potential: A small innovation turns out to be economically feasible, the company grows rapidly, and evolves into a major blue chip within 25 years of its origin. While this could be observed in the case of American firms in the computing and software industry, these however often appear to be isolated cases.
The vast majority of small firms in the high technology sector are faced with greater risk than their non high-tech counterparts in other industries. It might be feasible to conclude that this translates into a high percentage of failure amongst technology start-ups. However, research in this area suggests - very broadly speaking - that NTBFs are actually no more likely to fail than other start-ups. Westhead and Storey (1994) report that innovative and high technology firms are sometimes actually more likely to succeed than non-technology firms. Tether (2000) attributes this to the fact that high-risk ventures are more likely to be started by more experienced and better-educated entrepreneurs than ‘normal’ start-ups.
Storey and Tether (1998) see one of the main reasons for the above findings in the overall characteristics of the founders of NTBFs. Studies in France and other European countries have shown that founders of such companies are more likely to be better educated than founders of other new companies, and significantly better educated than the general population at large. They tend to come from an academic background, and were often employed at academic institutions prior to starting their own company.
Secondly, while they tend to be no older than normal founders are, it was found that they are very rarely very young. While roughly 15% of other start-ups are started by people less than 25 years old, NTBFs are very unlikely to have founders of this age category. This correlates closely to the point made earlier about the level of education level of such founders; higher degrees simply translate into older age.
Thirdly, Lambert (1995) found that, at least in European countries, NTBFs founders with non-academic backgrounds tend to have been employed by larger rather than smaller companies, hinting at the increased commercial awareness of these individuals.
3.3 Growth and Employment
While researchers had expected that employment growth amongst highly innovative companies should be faster than in other sectors, the evidence as presented by Storey and Tether (1998) suggests that, in Europe, the ‘absolute growth in employment is modest’. The authors found that in no study conducted by the authors did the numbers of employees exceed twenty, even ten years after the company’s start-up.
Fontes and Coombs confirmed these findings in 2001, when they noted the ‘failure of most such firms to comply with the fast growth model’. As such, the authors go on to describe NTBFs not as motors of growth, but rather as a key player in technology distribution. Studies in the UK confirmed that ‘contrary to expectation, total employment in high technology firms declined over the 1987 to 1991 period’ (JonesEvans & Westhead 1996).
3.4 External Factors
While there are various external factors that ultimately contribute to the success or failure of NTBFs, access to capital is seen as particularly crucial (Storey & Tether 1998). These can occur in a variety of forms, either (bank) loans, credits, venture capital, or a combination of these.
Storey and Tether (1998) report that start-up founders of NTBFs often complain about the limited access they have to such external financing, and how this restricts their ability to innovate. The authors go on to explain this phenomenon through the often fundamentally different perception of the start-up by the entrepreneurs themselves and the bankers granting (or not as may be the case) access to funds. While the entrepreneurs tend to be rather optimistic about their own venture, bankers tend to take a more conservative stance in assessing the often high risks involved in financing such a high-tech company. Bankers also often lack a thorough understanding of the firm’s field of expertise, and a general lack of experience in dealing with high-technology firms, resulting in higher than expected estimates of potential risk. The above-mentioned lack of managerial expertise among NTBF founders - who were seen likely to be academics - further add to this aspect.