“Liberal market economies such as the UK and US believe primarily in supply-side policies in which laissez-faire venture capital markets and technology-push research funding, drive innovation,” says Dr Hiram Samel of the Saїd Business School. “This over-stimulates short-term innovation - so we get thousands of app builders - but does less for the long-term, more complex innovation that yields national competitive advantage and local employment and growth.”
Samel’s comments arise from a recently-published study of the growth patterns of start-up companies in the US. Lessons drawn from this work indicates new policies are needed to ensure that manufacturing keeps pace with innovation.
“Our research in the US has shown how a start-up culture leads companies with novel technology to move overseas at the crucial manufacturing and scaling stage, taking with them important knowledge, skills, and capabilities,” Samel says. Start-ups are great, but there should also be policies to encourage longer-cycle innovation and scale-up.
Samel and his co-author, Elisabeth B. Reynolds, executive director of the MIT Industrial Performance Center, studied 150 start-up companies that licensed MIT technology between 1997 and 2008. They looked at growth patterns and, particularly, at the crucial move from the research and development phase to manufacturing, when it is common for companies to move overseas.
According to Samel’s research, when firms head overseas to scale their products, the US loses the knowledge, skills, and capabilities that come with this next stage, and this diminishes its ability to innovate in the future.
Short time frames
Although the availability of financing in the US is conducive to start-ups, most investors, particularly venture capitalists, want to exit their investments within seven years or so. This does not fit with the longer time-frames involved in scaling novel technologies, such as advanced materials, life sciences, energy and semiconductors.
Being part of innovation ecosystems, such as Silicon Valley or Boston, gave firms access to specialised resources and experienced suppliers, which enabled companies to get their ideas into early-stage production.
However, companies faced financial constraints as they tried to scale. Only 6 per cent raised funds through IPOs, with most finding the capital they needed from corporate investors, including multinational companies and foreign governments. As a result of these new relationships with investors, companies often started their scaling up operations in the new partner’s country or production centre.
“Our research took place in the US, but many of its lessons are applicable to other countries with a similar attitude to research and innovation,” believes Samel. “When young firms head overseas to scale-up, they often take their tacit knowledge - the knowledge that has taken years to develop - with them.
The originating country loses not only that knowledge, but also the chance to learn the skills and capabilities that come with the scaling stage. In the past, young companies scaled domestically and these capabilities stayed within the local industrial ecosystem, playing crucial roles in succeeding generations of innovation.
“When firms scale new technology overseas they leave little trace of capabilities for future innovators, decreasing local investment, jobs, new businesses and ultimately economic growth. The nature of future innovation may be uncertain but we do know that it is built upon a foundation of continually evolving industrial capabilities,” says Samel.
Once the centre of gravity for industries shifts to the manufacturing countries, so does the best talent and the most innovative technologies. The US and other similar economies need to do more to make themselves compelling locations for scaling innovative, production-oriented companies, Samel concludes.
Dr Hiram Samel is an Associate Professor of International Business at Saїd Business School, Oxford. His current research examines how entrepreneurial firms compete in global technology markets by leveraging government innovation and production policies.
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