The Role of New Technical Enterprises
In The U.S. Economy

I. The Contribution of New Technical Enterprise

Many factors domestic and world-wide-influence the U.S. economy and employment. These factors include the increasing cost of imported energy, the declining supply of domestic natural resources, and the competition from imported goods manufactured with low cost labor or with increasing productivity. For all these reasons and for others, the U.S. must rely more heavily on the manufacture of high technology products-both for domestic consumption and for export-in order to maintain a high level of employment and a favorable balance of payments. Technology plays a crucial role in the maintenance of a sound domestic economy; its application is essential for the enhancement of productivity, creation of new jobs, and our ability to compete in the world marketplace. Against this background, it is important to review the current environment for technological innovation in the United States.

Many foreign countries recognize the importance of maintaining a healthy climate for technical innovation and have taken positive steps, particularly in the support of new product development, to encourage the innovative process. Our country unfortunately has no effective spokesman for either the entrepreneur or new enterprise generation. Congress has historically shown an increasing lack of understanding of the innovative process, the need for incentives for the entrepreneur and the venture capitalist, and the role of new technical enterprises in the U.S. economy.

While mechanisms for more effective applications of science, technology, and innovative management represent a general requirement of both large and small companies, the new technical enterprise has made a unique contribution to the American economy. The environment for a new generation of technical enterprises necessary to yield a future Texas Instruments, Xerox, or Polaroid appears to have deteriorated significantly in recent years.

In 1967 the Technical Advisory Board of the U.S. Department of Commerce studied and reported on technical innovation. (1) One

(1) Technological Innovation: Its Environment and Management, U.S. Department of Commerce (Washington, D.C., Government Printing Office, 1967).

important fact came to light, namely that the rate of sales growth and job creation occurs more rapidly in the innovative high technology companies than it does in the more mature organizations. The data for those relatively new innovative companies shown in the 1967 report have been revised to cover the period 1945-1974 and appear below. For comparative purposes, data for the same period for selected mature companies from a variety of industries are also shown. (See Table I.)

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(2) Moody's Industrial Manual, Moody's Investors Service, Inc., New York, New York. See Appendix A for more detailed data.

The above data cover the 29 year period from 1945 through 1974. Over the short 5 year period 1969 through 1974, young, high technology companies have shown a far more spectacular growth rate. (See Table II.)

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(2) Moody's Industrial Manual, Moody's Investors Service, Inc., New York, New York. See Appendix A for more detailed data.

During the five-year period 1969-1974, the average annual percentage growth rates of the companies in each of these three groups

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It is worth noting here that, during this five-year period, the six mature companies with combined sales of $36 billion in 1974 experienced a net gain of only 25,000 jobs, whereas the five young, high technology companies with combined sales of $857 million had a net increase in employment of almost 35,000 jobs. The five innovative companies with combined sales of $21 billion during the same period created 106,000 new jobs. (See Appendix A for more detailed data.)

It would appear that our more mature large corporations tend to reduce employment via such mechanisms as improved productivity. The technically-based new enterprise has the ability to create new job opportunities and products which are competitive in the world markets. It is suggested that the concept of innovation within the large corporation is viewed mainly in terms of cost reduction and increased productivity in an effort to remain competitive. In the small,

technically-based new enterprise, innovation is a way of life and is responsible for the creation of new products, processes and job opportunities.

No claim is made that the data presented above result from a rigorous statistical study of U.S. businesses. The claim is made that these data indicate trends in the business community, point to the role of new innovative companies in the development and commercialization of new technology, and suggest the importance of continuing utilization of new technology to the creation of jobs.

The business environment which led to the growth of companies like IBM, 3M, Polaroid, Texas Instruments, and Xerox in the post World War II years, and which encouraged the establishment of Digital Equipment, National Semiconductor, and other high technology companies in the 1950's and 1960's was a favorable one. Entrepreneurs were plentiful and enthusiastic. They were encouraged by economic incentives and by the freedom of the system which allowed them to function and to be creative without the constraints inherent in large corporations. U.S. Government research and development funds were available to small companies, and more than a few entrepreneurs built successful businesses on DOD and NASA contracts that nurtured the "know-how" ultimately utilized not only for the sponsor's mission but also in high-technology commercial products. Capital was obtainable, either from established venture capital sources, individual investors or through the sale of securities to the public.

II. Adverse Changes in the Business Environment

In the late 1960's and early 1970's changes took place in the environment for the establishment of new high technology enterprises. They resulted in a reduction in the rate at which new companies were started and restricted the development of many of the small companies that were established during the period. These changes appear to fall in the following areas:

A. Government Funding of Research and Development. About five years ago, a growing disenchantment with science and technology began to develop in,this country as a result of ever increasing government spending for R&D without, many people believed, benefits that justified the expense. The level of government-financed R&D in

constant dollars (and as a percentage of GNP) began to decline. Other measures, particularly the adoption of the Mansfield Amendment, tended to restrict DOD funding of R&D to specific agency mission-oriented tasks and to eliminate support for new innovative technical ideas.

Both small companies and universities were directly affected by these changes. Not only were government R&D contracts no longer a mechanism for small companies to get started, but also governmentsponsored university research became so oriented that opportunities were greatly reduced for the fruits of such work to continue to lead to the establishment of new companies that commercialized new technologies. (The RANN-Research Applied to National NeedsProgram of the National Science Foundation may be an exception to this generalization.)

Another change related to government funding of R&D has been the reduction in acceptance of unsolicited and of sole source proposals in favor of competitive bidding for R&D procurement. Although not generally understood, the unsolicited proposal has played a unique role in the development of innovative technologies by providing relatively small amounts of money to bring a new concept or technology to the point where a product might emerge. Today, an unsolicited proposal may provide the basis for a request for additional proposals and competitive bidding. The practice of competitive bidding tends to favor the large corporation which has the ability to submit and resubmit detailed and costly proposals to fit the requirements of a particular situation.

Contract administration of government sponsored R&D also has become overwhelmingly burdensome and often, particularly in small companies, the monitoring and reporting requirements have grown completely out of proportion to the size of the task.

B. Financial Incentives. Simultaneous with the pressure on government agencies to reduce spending for R&D, the long established practice of granting stock options came under attack. Many felt, and not without some justification, that abuses of the stock option programs in large corporations were occurring. As a result, the rules governing the granting of qualified stock options and their taxation were tightened. Abuses in the large corporations were to some extent

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