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The Cheshire cat's grin: innovation, regionaldevelopment and the Cambridge caseAnnaLee SaxenianPublished online: 20 Aug 2006.

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The Cheshire cat's grin: innovation, regional development and the cambridge case

AnnaLee Saxenian

Abstract

The prevailing approach to high-tech regions locates the determinants of growth in attributes of the regional environment. The case of Cambridge, England is used to illustrate the weaknesses of this approach and to highlight the importance of the broader political and economic context. In Britain, the institutional legacies of a century of industrial decline and a pattern of clientelistic relations between the state and the big electronics firms constrain the growth of innovative enterprises and the development of regions such as Cambridge. Future research should consider how political relationships at both national and the local levels affect innovation and regional development.

Policy analysts and planners around the world have created a flourishing cottage industry dedicated to analysing the growth of 'high-tech' regions. This outpouring of study has been motivated both by the impressive growth of a few technologically-advanced regions during the 1960s and 1970s and by the failure of existing theory to account for these islands of prosperity amidst the widespread decline of older industrial sectors.

We now have the results of close to a decade worth of regional case studies, analyses ofhigh-technology location patterns, and cross-national comparisons of 'technology-oriented complexes', 'innovation centres' and 'technopoli'. The regional planning, business, and public policy literatures have converged in a common analytical approach: one which locates the determinants of high-tech growth in attributes of the regional environment. This paper uses a 'critical' case to demonstrate the weaknesses ofthis approach, and to suggest that we still lack a satisfactory understanding of the dynamics of high-tech regions.

I The current consensus

The current analytical consensus is characterized by a search for attributes

Economy and Society Volume 18 Number 4 November 1989 @ Routledge 1989 0308-5 147/89/1804-0448 $3.0011

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common to all growing high-tech localities. Whether linked to such theoretical constructs as the product cycle, long waves, the incubator, the seed bed, or agglomeration economies (or to no theory at all) most contemporary studies start from an enumeration of the environmental attributes necessary for initiating the process of high-tech growth.

Although some are more circumspect than others in policy prescription, the lesson of this literature is that regions which combine their resources properly will be able, in the words of one Harvard Business Review article, 'to grow the next Silicon Valley' (Miller, 1985). As a result, studies of high-tech regions have become exercises in list-making. And since most of these studies are - either explicitly or implicitly -based on the Silicon Valley experience, the list has become highly predictable.'

Seven attributes of successful high-tech regions appear repeatedly in these studies. While analysts disagree on the relative importance of the factors, these are the most consistently identified as the secret to high-tech growth. (And since most readers are presumed to be familiar with this list, it will be only briefly reviewed here.) The 'high-tech growth recipe' includes:

(1) A research university, preferably of the highest calibre, which insures a science-base and a supply of scientists and engineers.

(2) An ample supply ofventure capital to fund new firms. (3) Public investment devoted to research and procurement of new

technologies. (4) A quality of life which will attract and retain footloose engineers and

scientists. (5) The absence oftrade unions. (6) An industrial park, euphemistically referred to as a science park, to

house start-up firms. (7) Adequate infrastructure (roads, airports, etc.) to insure efficient

transportation and communication linkages.

The underlying message - though rarely stated - is that once these prerequisites are assembled, innovation and growth will follow. Like a soufflt which exceeds the size of its initial ingredients, a region endowed with the proper mix of institutional and economic resources will be the lucky recipient of rapid high-tech growth.

It is not difficult to discern the economic assumptions motivating this recipe. The notion that ample supplies of venture capital, engineers, research funding and findings, and an appropriate environment - pbsent infrastruc- tural or social constraints (unions) - will produce innovative enterprises and regional development is a thinly veiled adaptation of the neoclassical economic model of free markets in which perfectly competitive firms and unimpeded, frictionless flows of capital, labour, technology and information automatically maximize economic efficiency and wealth creation. This conceptual framework has led market economists like George Gilder to glorify Silicon Valley as a model of the resilience of entrepreneurial capitalism

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and Prime Minister Thatcher to view Cambridge England as a breeding ground for Britain's 'enterprise culture'.

This case study demonstrates that such an approach - characterized by a radical separation of the market from its social and political environment - is deeply flawed. By focusing solely on the resource attributes of a locality, the high-tech recipe overlooks the complex relationships between politics and markets which shape economic outcomes. The vision of regional development in these studies thus tends to be ahistorical and undifferentiated. This approach has produced both misguided policy and a misinterpretation of the experiences of such high-tech regions as Silicon Valley and Cambridge, UK.

I1 The critical case: Cambridge, UK

The method of the 'critical case' allows for theoretical generalization based on a single intensive case study. A case is chosen to be as favourable as possible for confirmation of a thesis: this in turn allows for decisive confirmation of doubts about the thesis. If a thesis cannot hold up in the most likely situation - the critical case - then serious doubt must fall on the approach itself.'

Rather than relying on aggregate economic statistics or attempting a comprehensive survey of high-tech regions, the focus here is therefore on a single, carefully chosen region -one which is most likely to succeed according to the prevailing consensus on high-tech growth. The critical nature of the case means that if the dominant view is sound, there should be strong evidence of a regional growth process; if not, then there is ample reason to question the approach itself.

Cambridge, UK is a prime candidate for buoyant high-tech regional growth according to the above list of attributes. It is richly endowed with all of the elements identified in the dominant view:

Cambridge University is a world-class university, renowned for its technical excellence in physics, computers, and electronics. In many fields of science and technology it is on par with its American counterparts, Stanford and MIT. Trinity College alone holds more Nobel prizes than most nations (including France). The Cambridge Science Park was established by Trinity College -and unlike many industrial parks, it has boasted high occupancy levels since its formation in 1970. There is more venture capital in Britain than anywhere else in E ~ r o p e . ~ Cambridge itself is the home of several venture capital firms and there is no shortage of local finance for technology companies in the region. The Cambridge region offers a high prestigious address and a desirable living environment for professionals. It is within commuting distance of London, it enjoys easy access to both Heathrow and Gatwick airports and there are no trade unions to blemish its clean, white collar, high-tech image.

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Innovation-and regional development 45 1

The British government has provided extensive support for advanced technologies, particularly through defence procurement and research and development (R&D). Several Cambridge high-tech firms are long-standing beneficiaries of Ministry of Defence (MOD) contracts. In addition, millions of pounds were poured into the Cambridge region during the 1970s to support a government-funded Computer-Aided Design (CAD) Centre.

If the conventional wisdom were correct, it would be difficult to imagine a better set of conditions for a flourishing of innovation and high-tech growth. Not only is Cambridge well endowed with the prescribed attributes, but the often elusive process of new firm formation and entrepreneurship associated with high-tech growth regions is healthy.

Cambridge is the site of the largest concentration of high-technology firm start-ups in Britain - and perhaps in all of E ~ r o p e . ~ During the early 1980s, technology-based enterprises were being formed in the region at a rate of thirty per year, and by 1985 it was the home of over 400 high-tech companies. Cambridge gained national prominence in 1983 with the knighting of Clive Sinclair as a model entrepreneur, the rapid growth of Acorn Computers, and the Thatcher government's promotion of an 'enterprise economy'. Local activists dubbed the experience the 'Cambridge phenomenon' and began to draw parallels with America's high tech regions.

But upon closer examination, the promise of Cambridge and its scores of high-technology businesses disappears like the Cheshire cat's grin. Enter- prise in the region remain small and tend to be short-lived. In 1984, almost 30 per cent of the companies in Cambridge had fewer than six employees and 75 per cent had less than thirty. In the same year, close to half of the region's firms had sales of less than E350,000 (Segal Quince and Partners, 1985). And the most successful of the new Cambridge enterprises have failed to remain independent - typically selling out to foreign firms.

While high-tech industry does not create as many jobs as older industrial sectors, employment figures in Cambridge hardly suggest rapid regional growth. Local high-tech firms employed approximately 16,500 workers in 1986, and the majority of these jobs existed in the late 1960s prior to the onset of the 'high-tech boom'. At most, 6,000 jobs have been created by the hundreds of new firms started during the past decade (Keeble, 1987). The preponderance of industrial employment in Cambridge thus remains in a small number of large, older firms.

This paper examines the Cambridge case in detail. It begins with a description of the development of local high-technology industry.' This account provides ample grounds for rejecting the notion that a particular configuration of regional attributes will insure high-tech growth and inno- vation. The paper then looks to British history and politics to account for the Cambridge experience. It argues that markets and national institutions seriously constrain the possibilities for new technology-based firm growth in

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the region." concluding section draws lessons for policy and theory and suggests directions for future research.

Material for this study was gathered during six months of research in London and Cambridge, UK between October 1986 and March 1987. The primary source is a series of fifty open-ended, qualitative interviews with London and Cambridge-based entrepreneurs, venture capitalists, industrialists, bankers, accountants, and trade association and government representatives. The records of Parliamentary hearings, publications of quasi-governmental agencies and the business press also provided exten- sive primary documentation.

I11 The Cambridge Story

Cambridge University's origins can be traced to the thirteenth century, but industrial development in the region is recent.' The region's first science- based companies grew out of the needs of the University's laboratories for specialized equipment. Cambridge Scientific Instrument Company (now Cambridge Instruments) and WG Pye and Co. were both founded in the late nineteenth century to design and produce customized laboratory equipment and scientific instruments. In the early twentieth century Marshalls Engi- neering also started in Cambridge.

The two World Wars brought new business to local firms -making Pye and Marshalls UK leaders in radio production and aircraft engineering and servicing, respectively. The military continued to represent an important source of business for these two companies during the Cold War years and even today they remain major defence contractor^.^ War also stimulated leading edge scientific research at Cambridge University.'

Cambridge Consultants Ltd (CCL) - now one of Britain's leading R&D contractors in physical sciences - was founded in 1960 by a group of Cambridge University graduates. This consulting firm has been the source of over twenty start-up firms in the area. The fate of CCL also foreshadowed that of many Cambridge companies: in 1971 it ran into financial difficulties and was bought by the US consulting firm, Arthur D. Little. Today 50 per cent of CCL's business is from the Ministry of Defence.

The immediate origins of the 'Cambridge Phenomenon' date to the mid-sixties and the Labour government's commitment to 'reforge Britain in the white heat of the scientific revolution'. Harold Wilson's programmes brought millions of pounds of funding to scientists and engineers at Cambridge University labs. The region also benefited from the decision to locate a national, government funded CAD facility in Cambridge and from the support which the Mott report (a university-sponsored study) gave to encouraging growth of existing and new science-based industry in the region. The CAD Centre began operations in 1969 and it was followed by the 1970 decision to establish the Cambridge Science Park.

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Innovation and regional development 453

New technology-based firm formation in Cambridge has come in three waves. The first began in the late sixties with a handful of spin-offs from University labs. This included such firms as Applied Research of Cambridge (ARC), a CAD company which specializes in architectural and building graphics; Laser Scan, which makes hardware that 'reads' film with a laser; and Cambridge Scanning (CamScan), a producer of high-quality customized scanning electron microscopes.

The fate of these three firms is representative of the firms interviewed in Cambridge: ARC lingered for a decade on the edge of bankruptcy and finally was bought by its American distributor; Laser Scan survived only by building up a big business with the Ministry of Defence, ultimately it too was taken over by its distributor. And although CamScan remains independent, it has failed to expand during the past decade.

A second wave of start-ups began in the late 1970s. Some of Cambridge's most successful and well known companies date from this era. Acorn Computers and Sinclair Computers - started by graduates of the Computer Lab - are the best known survivors of a microcomputer boom which produced ten such companies in Cambridge alone. The destabilizing effects of the privatization of the CAD Centre also led a handful of its star engineers to strike out on their own. Cambridge Interactive Systems (CIS) - one of the region's most successful start-ups - and Shape Data are the best known of a wave of CAD firms started during the 1970s.

The third and largest wave of start-ups in Cambridge has been during the early 1980s. This deserves to be called the 'Thatcher boom' as it has been primarily a response to the increased availability of venture capital in Britain since 1979. While an abundance of venture finance provided seed money, the successful firms of the preceding decade served as role models for aspiring entrepreneurs. Over thirty enterprises were started per year between 1980 and 1986. As a result, while there were only about forty technology-based firms in Cambridge in 1978, by 1983 there were almost 250, and by 1985 there were over 400.

The overwhelming majority of the firms started during this period remain very small - most have fewer than thirty employees, and many less than ten - and the majority have annual sales of under fi50,OOO. These firms are typically started by Cambridge University graduates or faculty who have little, if any, industrial experience. They are engaged primarily in electronics, instrumentation, computer hardware and software, and scientific consulting or R&D.IO A handful of biotechnology firms have also started during the 1980s. The overwhelming majority of the firms started during this period remain very small - most have under thirty employees, while many employ less than ten; and the majority have annual sales of under E350,OOO.

A recent influx of business service activities is changing the character of the Cambridge economy. Venture capital funds, branches of big accounting firms, management consultants, lawyers, and advertising agencies have all located in the region. Established (often foreign) high-tech companies -

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including Schlumberger, Xerox, Data General, Logica, Marconi, and IBM - have all located small R&D labs in the area.

There has also been a significant increase in take-over activity. The region's leading CAD companies - CIS, ARC, and Shape Data - all were acquired by their American distributors (Computervision, McDonnell Douglas, and Evans and Sutherland, respectively) in the early 1980s. And in 1985, Olivetti rescued Acorn Computers from collapse and Amstrad took over the failing Sinclair Research.

It is therefore not surprising that many local entrepreneurs now predict the end of the Cambridge 'boom' and that others refer to it as the Cambridge 'hype'. Cambridge is, of course, a prestige address and it offers a desirable environment and life-style for engineers: it will no doubt survive as a location for R&D operations of international corporations and as the home for scientific consulting and professional service activities. However recent trends point to a softening in the growth rate for indigenous high-tech start-ups. Only a handful of the firms formed in the past two decades now have more than fifty employees or annual sales of over El0 million, and none of this scale appear to be on the horizon."

IV Cambridge and the British context

The visitor to Britain today cannot help but notice the unprecedented emergence of new firms in Cambridge and in southeast England more generally." This activity has been accompanied by a striking change in attitude toward enterpreneurship and industry."The purpose here is not to deny this change of climate - simply to suggest that such ideological change is not sufficient to produce widespread economic transformation, and to describe some of the institutional limits to this process.

Few would question the scientific brilliance of Cambridge entrepreneurs or the technical sophistication of their products. Many were trained in university labs which are at the leading edge of microelectronics, computer, software, and artificial intelligence research. Yet they have failed to create commercially viable firms or to construct a regional environment which facilitates the development of successful technology-based enterprise. Growth, either of individual enterprises or of the region as a whole, has thus proven elusive, despite the high rate of new firm formation.

This problem is not unique to Cambridge. Small high technology firms in the UK have only a slim chance of growing into middle-sized firms. A study of 73 publicly held UK-based electronics companies with annual sales under El00 million in 1970 found that only four had grown to E300 million sales by 1986. Over one-third (28) of the original group had been taken over, another third (20) were no longer publicly traded, and the majority of the remaining firms (13) had annual sales of under E50 million (Modiano and NiChionna 1986). Significantly, none of the successes were located in Cambridge.

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Innovation and regional development 455

Such evidence suggests that the failure of Cambridge companies is not explained by attributes of the region or by the personal characteristics of their founders: their difficulties are rooted in the larger context in which these enterprises operate." The following sections describe how two related factors -the structure of markets and current political alignments - currently deprive small British firms of external resources and input, thus undermining their ability to compete effectively in world markets for high-technology products."

The first focuses on the shape of British markets: the absence of domestic demand for technology products, the dearth of managerial and engineering skills, and the lack of 'technical infrastructure' (section IV A). These market characteristics are the products of close to a century of industrial decline, the narrowness of the British education system, and the cumulative loss of the nation's technological base.'Together they create substantial obstacles to the growth of new technology-based firms in the UK.

The paper then turns to contemporary politics (section IV B). It describes how the one potential source of change in this environment - the state - has failed to ameliorate this situation. Despite a variety of programmes aimed at promoting innovation and technology industry, clientelistic relations between the state and Britain's largest electronics firms have reinforced the weak- nesses of new technology-based enterprises.

A. Structure of markets

1. Product markets

Britain's protracted decline as an industrial economy dates at least to the 1890s. There is a vast literature discussing the sources of this decline. Whatever the initial causes, a wide variety of factors became self-reinforcing during the twentieth century. By the end of the Second World War, most sectors of British manufacturing - from coal, steel, and shipbuilding to machine tools, aircraft, and radar - lagged seriously behind their European and American competitors (Barnett 1986).

Ongoing decline in the decades since the war has left the UK with an atrophied industrial base and declining standards of living. Manufacturing output has declined in both absolute and relative terms since 1972; in 1983 British manufacturing went into a balance of trade deficit for the first time since the Industrial Revolution (House of Lords, 1985). As the House of Lords Committee on Overseas Trade concluded: 'The demise of so many manufacturing firms reduces the size both of the home market for those that remain and of the base from which exports may be launched' (House of Lords 1985: 46).

The largest civilian markets for technology products are industrial and consumer goods sectors. In Britain, however, those sectors which rely heavily

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on electronics inputs, such as automotive, data processing, and instru. mentation are all in varying degrees of crisis. Even relatively healthy British enterprises have been slow to invest in technological change. As a result, the UK today is commonly estimated to represent less than 5 per cent of the world market for high-technology goods.

The other major source of demand for high-technology products is the military. Of the advanced industrial nations, Britain is second only to the US in its per capita level of defence spending, and expenditure on defence elec- tronics accounts for a rapidly growing percentage of MOD investment (Min- istry of Defence 1985a and 1985b).I7 Not surprisingly, the electronic capital equipment sector - including avionics, radar, advanced weaponry, and tele- communications equipment - is the only sector of the British electronics in- 1

dustry with a positive balance of trade (Electronics EDC 1982).Yet this largt market is not open to new technology-based enterprise. The preponderancc of defence spending - like the major government programmes for high-tech I

industry - has gone to large, well-established electronics firms (see sectior 1V.B).

In the absence of a home market, the entrepreneur with an idea for a new high-tech product has little choice but to look abroad. This disadvantages the new enterprise in three ways. First, high-tech firms must be in touch with theil customers, especially in the initial stages of product definition and design be- cause they often serve markets which they help to create. This demands over- ~ seas relationships which few engineers have or can make on their own." Second, even when a commercially viable product is developed, a successful ~ export strategy requires marketing skills and knowledge of foreign markets As with product development, marketing is a costly process which places a , high premium on international contacts of a sort which the Cambridge entre- preneur typically lacks. Finally, distribution is critical to selling technology- based consumer or producer goods in foreign markets. Lacking the resources, experience, or relationships to establish foreign distribution and service net- works, most successful Cambridge companies have chosen to link up with a national distributor. This strategy, however, risks loss of contact with cus- tomers and their changing needs. It is thus not surprising that many Cam- bridge firms have eventually been bought out by their overseas distributors. I

In short, the need to enter and succeed in foreign markets from the onset places unusual demands on new technology-based enterprises in Britain. I

Firms from other nations with small domestic markets face similar problems. However those which succeed typically benefit from access to a robust , national technical infrastructure and skill base and/or from supportive rela- tionships with large firms and the state.

2. Supply and input markets

(a) Sources of capital The typical new technology enterprise is started by a university scientist

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or an employee of an existing company with an idea for a new product. The first step in this process - obtaining financing for the new venture - has not been a constraint on new firm growth in Britain. Studies of the nation as a whole, and of the Cambridge region in particular, all reach the same conclusion: that the supply of capital is not a limiting factor on the start-up and development of small- and medium-sized technology-based companie~.'~ The availability of start-up finance does not, however, ensure a venture's success; in fact, it obscures the deeper limitations of the business environ- ment.

(b) Supply of managerial and engineering skills The most common complaint of Cambridge entrepreneurs in interviews is the shortage of top-quality international marketing expertise. A lack of marketing experience or overseas contacts is not exceptional to British entrepreneurs. Their counterparts in Silicon Valley seldom have experience in international marketing. They can, however, draw upon a large supply of experienced marketers from other American firms with international operations.

Such experience is hard to find in Britain. This derives in part from low status - one Cambridge-based consultant described the 'immense lack of respect for marketing in Britain' - and in part from the small number of British firms competing in foreign markets. It is especially rare to find engineers or scientists in marketing, precisely what a technology-based firm needs most.

Cambridge firms report similar problems in their attempts to find product engineering, manufacturing and general managerial e~pertise.~' Examples of high-technology firms with technically sophisticated products that are manufacturing failures are common in Britain. To take just two well known cases: Inmos, the semiconductor company, has first-rate design talent but has been hamstrung by limited production capabilities, while Acorn Computers devised microprocessor chips as elegant and powerful as anything in Silicon Valley, but failed to incorporate them into commercially viable systems.

These difficulties can be traced to the nature of the British education system - which has historically been both exclusive in coverage and narrow in scope. Britain never developed a comprehensive national training system, was very late to create technical universities, and continues to face a pressing scarcity of skilled technical and managerial per~onnel.~' Engineering was not introduced and accepted as a legitimate field of education until a half a century after the rest of Europe - and it has still failed to achieve the status or calibre of its foreign competitors. And several recent studies demonstrate that most British managers remain both under-educated and poorly trained relative to their international counterparts (NEDO, 1987).22

These shortages have been exacerbated by the reluctance of British engineers and managers to incur the risks of leaving an established company. As a result, start-ups have a very limited pool of expertise to draw upon. According to Matthew Bullock, the Director of Corporate Finance at Barclays Bank, 'not enough experienced and highly motivated managers

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emerge from established large firms to pass on their skills to the smaller fry (Marsh, 1987). Contrast this with Silicon Valley, where managerial turnover i? ubiquitous.

(c) Lack of a 'technical infrastructure' While the supply of skilled engineers and managers is primarily a responsi- bility of the education system, some of the most significant contributions tc~ industry grow out of the accumulation of first-hand production experience Information, skills, and understandings of technologies, of product desigr and engineering, and of production methods and organization are accumu lated within a nation's firms and research labs and passed on through journals conferences, and the flow of people. This 'technical infrastructure' is thc product of a gradual accumulation of know-how - the product of man! incremental insights and ongoing interchange. It is embodied both in a nation's engineers, researchers, and managers and in the network of firm. which produce manufacturing equipment, components and inputs as well as final product^.^'

Despite its world-class science base, Britain has failed to maintain a health! technical infrastructure. By World War 11, the nation was dependent on imports of advanced technology in virtually all fields, including machinc

Even in radar, the wartime pride of British inventors, actual production was dependent upon American supplies of valves and radio components. In 1943, for example, imports of electronic items from the US accounted for an estimated four-fifths of the value of British radar productior?~ (Barnett, 1986).

This situation has deteriorated since the war. Today many industrialistst feel that lost manufacturing capacity will never be regained, that, in the word5 of House of Lords Report on Overseas Trade, 'human capital - the skills in1 design, operation and marketing and the good-will and sales contacts - havc been lost, perhaps irrevocably'. Vickers plc, an established British manufac- turing company, describes the consequences:

Once a country, or company, has opted out of a particular industry it is virtually impossible ever to re-enter because of the substantial costs involved in capital re-equipment, re-establishing access to markets and catching up with changes in technology.

As UK volumes have declined, and product design expertise has moved abroad, the supporting infrastructure has suffered. Many suppliers have gone out of business and UK manufacturers have increasingly to source components abroad, particularly those with a high technology content. (House of Lords 1985,238-111, p. 427)

Britain's technology-based enterprises thus rely increasingly on foreign1 firms for inputs and equipment. The managing director of ACT (Computers)~ plc - producer of Apricot personal computers - testified to the House 01' Lords that the firm imports vast quantities of technologically sophisticatecl~

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Innovation and regional development 459

components and sub-assemblies from Japan and the US because of 'the dearth of suitable suppliers within the United Kingdom'. In 1984 imported component costs amounted to 40 per cent of ACT'S total sales (House of Lords 1985,238-11, pp. 516-19).

Like shortages of engineering and managerial manpower, the deficiencies of the technical infrastructure cripple British firms as they enter world markets: especially as their competitors have access to a trained, experienced workforce and networks of technically advanced suppliers. Yet inherited limitations of both product and input markets are not the sole constraints on small high-tech firm growth in Britain. Post-war policy and politics further constrain the resources available to new technology-based enterprises.

B. Post- war politics

The Thatcher government has placed its faith in the revival of the British economy on the vision of creating a thriving private enterprise economy. Commitment to this vision is evident in new policies to encourage the process of small-firm formation and innovation and in the acclaim accorded to such entrepreneurs as Clive Sinclair. And -the administration's rhetorical aversion to intentention in industry notwithstanding - it is evident in the growing portion of the Department of Trade and Industry budget devoted to the promotion of microelectronics and other advanced technologies (Riddell 1985).

This appears to be precisely what is needed by regions like Cambridge: explicit state commitment to both small-firm growth and high-technology industry. Yet despite this ideological and programmatic support, the overall impact of state policy has been to further undermine the possibilities for small high-tech enterprises in Britain.

Clientelist relations between the state and Britain's large electronics companies insure that the lion's share of government spending devoted to advanced technology remains within a small circle of firms. This deprives small companies of public resources and of access to the already limited supplies of skilled labour. This exclusive relationship with the state also reinforces the insularity of the big firms -hence undermining the potential for mutually beneficial technology transfer or cross-fertilization between big technology companies and innovative new enterprises.

1. The state and the big firms

At the end ofworld War 11, technological expertise in such advanced products as radar and radio was concentrated not in British industry but in government research establishments and universities. While the balance shifted toward industry in the post-war period, government procurement and sponsorship of research and development remains a significant determinant of the structure

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and performance of high technology sectors in the UK. The Ministry of Defence is the biggest single customer of the UK electronics industry, and through R&D funding it is a major, and possibly the largest, source of te~hnology.'~

While massive military commitments have a long history in Britain, the dominance of large firms in the electronics industry was consolidated in the 1960s. The creation of 'national champions' was at the centre of the Labour Government's efforts to bring advanced technology and new processes into British industry. In 1966, the Industrial Reconstruction Corporation (IRC) was established to facilitate mergers among British companies in order to achieve the scale needed to compete in world markets.

The merger of the three leading British electrical engineering firms, Associated Electrical Industries (AEI), English Electric (EE), and General Electric Company (GEC) in the late 1960s was one such effort to create a British firm which would be large by international standards. The resulting firm, GEC, became the largest manufacturing employer in the nation. It also became the largest single beneficiary of government spending in electronics.'"

(a) The cosy boys Not only did state policy create large firms, but it has also insured their survival. The evolution of Britain's semiconductor industry exemplifies the history of relations between the state and these large firms. During the 1950s and 1960s, the Ministry of Defence was the major source of R&D funding for the industry (exceeding even the industry's own R&D spending). The department responsible for military sponsorship of industrial R&D in electronic components, the CVD," thus occupied a central role in determin- ing the semiconductor industry's R&D activities, direction, and organization.

By the 1970s, CVD dominance of R&D was such that relations between the CVD and the industry have been described as 'sycophantic' (Dickson 1983). Over 80 per cent of all microelectronics industry support in the UK went to five firms - Ferranti, GEC, STWITT, Philips, and Plessey. Ferranti alone received half of the total (Scibberas 1978). The MOD was, in turn, the primary market for these firms, typically accounting for at least one-third of total sales (Guy 1986).28 Close associations between these firms, the CVD and government research establishments gave rise to the so-called 'CVD Club' - an exclusive group of favoured clients. Personal relations between CVD staff, scientists at government research establishments, and the firms, as well as the accumulation of shared expertise in particular projects insured the conti- nuation of this pattern. The difficulty of entry into this select group has been acknowledged both by those within the 'club' and by outsiders (Dickson 1983).

The orientation of the CVD toward military applications resulted in the neglect of commercial applications by industry. When the CVD provided only limited support for integrated circuit research during the 1960s, UK companies failed to fill the gap themselves. Thus despite initial technological

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paritywith the US, the over-reliance of the British firms on CVD funding and direction was a major determinant of their subsequent failure in commercial semiconductor markets.

Such 'cosy' relations between state agencies and the large firms characterize virtually all of the advanced technology sectors in the UK. A House of Lords Report on Engineering Research and Development thus describes 'the creation of a circle of large firms who have prospered through MOD contracts and have become almost totally dependent on them' and goes on to argue that * these firms 'form a closed community, which continues to receive the main contracts' (House ofLords 1983: 83). One scholar describes relations between electronics manufacturers and the MOD as: 'mutual dependence extending to the point of symbiosis. . . . It is inconceivable that major items of research and development, or production itself, could take place without negotiation, agreement and effective subsidy' (Bonnett 1985).

Relations between the large electronics firms and British Telecom (BT) parallel those with MOD.'' In fact, the same small circle of large technology firms dominates the production of telecommunications equipment. Evidence of the predominance of these big firms is overwhelming: two firms, GEC and Plessey, account for 25 to 30 per cent of the annual UK output of electronic capital equipment." In 1985, these two firms supplied 80 per cent of the UK market for electronic components and approximately 50 per cent of the telecommunications equipment market. They were also the leading manufacturers of defence electronics - together receiving 23 per cent of total MOD equipment contracts (Monopolies and Mergers Commission 1986).

Beyond these two giants a small circle oflarge firms collectively dominate the defence and telecommunications sectors. Over 60 per cent of all defence contracts go to ten large companies (Policy Review Staff 1984). Each of five firms in defence electronics - GEC, Plessey, Ferranti, Thorn EM1 and Racal- received over El00 million in MOD contracts in 1984 (Ministry of Defence 1985: 68). And defence in turn represented a major portion of firm sales: in 1986 it accounted for an estimated 31 per cent of GEC sales, 38 per cent for Plessey, 37 per cent for Racal, 60 per cent for Ferranti, and 9 per cent for Thorn EM1 (Parker et al. 1986).

Even in civilian electronics sectors, this clientelistic pattern has prevailed. Preferential procurement by the public sector insured ICL a market for over one-third of its mainframe computer output during the 1960s and 1970s (Hills 1984). Thus it is not surprising that a National Economic Development Office (1982) study attributes the decline ofthe UK electronics industry to firms which are 'particularly dependent on state markets' - markets which have been characterized by both continuity and high returns. As one entrepreneur put it 'If you make radios and you are Ferranti, you won't go out of business.'

(b) Technology policy Traditional industrial policies for electronics are negligible when compared to defence and telecom procurement. Despite a five-fold increase in Department

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of Trade and Industry (DTI) support for innovation, science and technology between 1978 and 1984, the sums of money remain very small. In 1983/84, for example, total DTI spending on such programmes - including the Support for Innovation scheme, the Alvey programme and various pro- grammes to promote robotics, computer aided design manufacture, flexible manufacturing systems, microelectronics, and fibre optics - amounted to only E206.4 million, or one-tenth of the E2,100 million"' spent for defence electronics and ordnance (House of Lords 1985; Guy 1986).32

There is also increasing evidence that the new schemes to promote innovation and technology industry continue to benefit the established companies. A recent review of the Thatcher administration's showpiece programme for collaborative research in information technology - the Alvey Programme - concluded that although it has promoted new forms of collaboration, it has 'simply replicated and reinforced the existing patterns by concentrating projects in the large firm sector' (Guy 1986). The recipients of contracts are overwhelmingly the same 'old boys' - and small firms are excluded, particularly by the great expense of entry.33

As a result, leading edge technological know-how in Britain today resides increasingly in the military activities of large electronics firms and government research establishments. According to Sir Ieuan Maddock (1983): 'In the past several decades the level of this civil platform [industrial base] has been subsiding, leaving the defence 'peaks' standing even higher relative to the national engineering platform.'

In sum, two contradictory policies have been pursued in the UK electronics sector. On one hand, the state has encouraged the creation of a small number of 'national champions' through its support for mergers; on the other hand, it has provided de facto protection of these large firms through guaranteed defence and telecommunications markets. This pattern contrasts with that in Japan, for example, where the national market is protected but firms are forced to compete vigorously with each other, or that in Europe, where civilian national champions have been created but they are forced to compete in world markets.

2. Consequences for small firms, innovation, and regional development

These 'cosy' relations between the large electronics firms and the state have hindered the development of Britain's small technology-based firms in three ways. First, neither the state nor the large companies provide markets for new enterprises; second, the large firms and government research establishments employ a majority of the nation's leading scientists and engineers; and third, the insularity and inflexibility of the large firms reduces the possibilities for technology transfer or mutually beneficial interactions between small and large firms. In short, the orientation of the established electronics firms toward the state disadvantages new technology firms and further undermines the potential for development of a regional economy like Cambridge.

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(a) Markets Massive defence expenditures alone do not ensure business for small high-technology firms. According to the Policy Review Staff (1984) 70 per cent of UK defence contracts granted are single source or otherwise non-competitive. These 'cozy consumer-producer relationships for well established and favoured suppliers . . . (make) it difficult for competing companies to break into the market' (Parker et al. 1986).

The Defence Manufacturers Association (DMA) - which represents small- and medium-sized defence subcontractors - has testified to a House of Commons investigation about the bureaucratic and financial difficulties specialist firms encounter in gaining defence contracts in the UK (House of Commons 1982). Certainly the typical resource-constrained Cambridge firm faces similar - if not greater difficulties in competing for contract^.^'

This contrasts with the pattern in the US where early government programmes helped the civilian electronics industry achieve research and production superiority over its competitors" and where a strong anti-trust tradition underlies the Small Business Administration policies which insure that a percentage of government contracts are allocated to small firms (Ergas 1984).

(b) Labour supply Small British firms are not simply deprived of markets by their exclusion from government procurement and R&D expenditures; they are also disadvan- taged by the diversion of skilled manpower to defence production. Sir Robin Nicholson, Thatcher's chief science adviser until 1986, testified to the House of Lords that:

in some areas the Ministry of Defence is so dominant - for example, in electronics and in some of the computer areas - that there are not the people to do the research in the civil area or in the scientific area because so many are taken up by the MOD spend. (House of Lords 1986)

Similarly, Kaldor et al. (1986) note that the military sector attracts the cream of the technically skilled labour force since it provides work in exciting and prestigious fields. They suggest that 'the drain on skilled manpower, particularly in electronics, has been a major factor inhibiting the expansion of high-technology industries' and conclude that:

The absorption of a large proportion of the pool of skilled manpower by military R&D and production is arguably the most significant cost to the British industrial economy, especially since Britain is by common consent an under-skilled society in comparison with most other industrial societies.

Hence in two critical areas where state policy might assist innovative new enterprises - in the creation of markets and in the supply of skilled managers and engineers - public resources have kept the big firms alive at the expense of

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the civilian electronics sector, and particularly of small technology-based companies.

(c) Interactions between big and small firms One potential source of support for Britain's new technology-based enter- prises might be the large electronics companies themselves. Silicon Vallej start-up firms during the sixties, for example, benefited not only from support from government space and defence programmes but also from relations with established technology firms in the region."Today most successful computer and electronics companies in the US maintain extensive supplier relations with small firms. In addition to traditional supplier relationships, many, like Apple Computers, have venture capital funds to encourage innovative start- ups. Others, like Xerox, AT&T and IBM collaborate with small firms in tech- nology development and exchange project^..'^

Such relationships between small and big firms - especially facilitated by geographic proximity in places like Silicon Valley - are fruitful for all involved. For small firms they provide an important source of market information, as well as actual markets; for the larger company they provide both flexibility and access to a wide range of technological inputs.

Large electronics firms in the UK, by contrast, neither have nor appear to desire such interaction with small firms. In fact, managers in the big British companies repeatedly express their aversion to the small firms in interviews. In the words of one Cambridge-based consultant, 'the big firms are, at best, blind or patronizing to small firms'. Not surprisingly, corporate venturing is virtually non-existent in Britain - large firms generally disdain contact with small ones, except as acq~isitions.~'

The insularity and inflexibility of the large British electronics companies derives from their history of privileged relations with the state. Operating in protected markets influences management priorities as well as the organization of these firms. They are large multi-product corporations, organized both internally and jointly (through industry associations) to best insure the continuing flow of contracts, rather than to complete in world markets.

In a study of the potential for commercial exploitation of defence technology, Maddock (1983) found that British firms with a high dependence on defence contracts tended to be less entrepreneurial and innovative, and more risk-averse, than their counterparts in civilian industry, that they consistently failed to have extended contact with outside resources, and that a large culture gap existed between civil and defence-oriented companies.

Britain's large electronics companies, for example, make limited use of subcontractors. They are highly vertically integrated corporations which perform most activities internally: GEC is involved in everything from chip making to missile guidance systems to large scale electronic capital equipment. As Andy Hopper, a highly respected and experienced Cambridge entrepreneur noted: 'It's bullshit, the argument that the large firms

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subcontract to small companies. I don't know anyone who has gotten these contracts and I don't know anyone who knows anyone who has gotten one.'

Many analysts have thus concluded that the potential for technology transfer from the defence operations of British companies to civilian industry is limited, because information flow between the two is minimal (Maddock 1983; Kaldor et al. 1986; House of Lords 1983,1986). This disadvantages the small firm in particular. According to the Lords Report on Civil R&D (1986: 63):

access to defence research and the establishment concerned is too tightly confined to groups already known to the establishment teams. Small firms in particular seem poorly informed and think that spin-off would be greatly improved if MOD research was spread more generally to the smaller companies and research organizations.

This is apparent in Cambridge, where interviews with representatives of both small new firms and the older established companies confirm that they have nothing to do with each other. Managers at Cambridge Instruments, Pye, and Marshalls all report that they see little of value in the small firms which have sprung up around them in Cambridge over the past decade; Cambridge- based entrepreneurs likewise describe failed attempts to sell to the big firms, and speak with distaste of their inflexibility, technological backwardness, and cultural stuffiness. Not surprisingly, when Acorn experienced difficulties, it was Olivetti, not a British firm, which bailed them out.3y

While small British firms do not gain the advantages of relations with large firms - contracts, financial support, or access to technological breakthroughs - the big British firms also lose a valuable source of innovative input by remaining aloof. Many of these start-ups are highly sophisticated technologi- cally (hence their tendency to be bought out by foreign companies); recent research suggests that the contribution of small firms to innovation in the UK has increased over the past three decades (Rothwell 1985). Thus the lack of interaction between big and small firms deprives both from mutually beneficial cross fertilization, ultimately undermining the national industrial effort by hindering technological advance.

V Conclusions

The experience of Paul Johnson, now third-time entrepreneur, illustrates the environment for small high technology enterprises in Britain today. Johnson - who founded a Cambridge-based electronics company in 1980 which failed relatively quickly and then started a home computer company which succeeded briefly before collapsing in 1985 - has learned a lesson about doing business in Britain. His latest company, Array Consultants, is a research consulting firm which designs customized integrated circuits. Johnson has learned to avoid the business of product development, manufacturing, and

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sales - instead he sells an engineering design service. The chips he designs are then manufactured elsewhere, primarily in the US.*

An individual who starts a third firm after two failures is evidence of the new attitudes towards enterprise and industry in this historically anti-industrial nation. But faced with a decimated manufacturing base, corresponding shortages of engineering, manufacturing and marketing expertise, and minimal support from either the state or large technology firms, high-tech entrepreneurs have learned to avoid manufacturing in favour of design and consulting activities.

Localities cannot simply choose to 'grow the next Silicon Valley'. The Cambridge experience illustrates that there is no recipe - no set of local inputs which can be assembled piecemeal to ensure innovation and high-tech development. The development of an innovative region is not simply a matter of combining ingredients: it is dependent upon the broader political and economic environment.

While it is now fashionable to be skeptical of the indiscriminate construc- tion of science parks, we should also be wary of programmes which take other elements of the Silicon Valley experience out of context. 'Centres of excellence' which develop state-of-the-art technology, for example, provide great political visibility but are of little value in the absence of mechanisms to ensure the diffusion and commercialization of research findings.

High-tech entrepreneurs in Cambridge are constrained by the national environment in which they operate. There is no set of local policies which alone will overcome the limitations of British markets and politics. Nor will increased national funding of high-technology industry - the industrial policy advocated by both liberal and conservative observers - necessarily ensure increased competitiveness. Given current political relationships between established firms and the state, more centralized spending programmes are likely to simply reinforce the industrial status quo (as the Alvey case demonstrates).

The reconstruction ofthe skill and technology base in a nation like Britain is a long-term undertaking which requires political vision, will, and support. However the required programmes would more likely include broad education and training initiatives and decentralized programmes to spread resources and promote the diffusion of technology, networking and collabora- tion between firms rather than high visibility programmes which continue to concentrate resources."

There is, finally, a clear lesson from the British example for other nations like the US. The loss of a manufacturing base has long term consequences for a nation's economic well-being. Firms in Silicon Valley, no less than industries of the rust bowl, are learning the importance of manufacturing.

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Serious commitment to comprehensive education and training programmes and to the development, diffusion and preservation of technology is critical to survival as an advanced industrial nation.

B. Lessonsfor theoty

The lessons of the Cambridge experience for theorists of regional develop- ment are two-fold. First, it is fruitless to try to understand regional growth by looking solely at local resource attributes. The vision of entrepreneurial firms and competitive free markets for capital, labour and technology which motivates the high-tech recipe represents a serious distortion of the regional development process. A regional economy cannot be understood separate from its national political and historical context. The organization of the state, its relations with industry, and an inherited economic context shape firm behaviour and local development processes.

The second lesson from Cambridge is to recognize that both the experience and the symbol of Silicon Valley powerfully influence our assumptions and expectations. Hence we find ourselves seeking commonalities between Scotland and Grenoble, North Carolina and Route 128, trying either to make them fit Silicon Valley-based preconceptions or to change the recipe slightly so that they fit, rather than studying- and learning from - the diversity of these cases."

Analyses which seek convergence among high-tech regions also obscure our understanding of the reality of Silicon Valley. This region is unique, even within the American context, for its innovative and economic resilience. By focusing primarily on its external attributes we have failed to develop a more sophisticated understanding of the dynamics of this regions' development. This is not to suggest some of the attributes which scholars have identified are not important - only to argue that they need to be analysed as dynamic elements of a process of innovation and regional development which we understand poorly.

C. Directionsforfurther research

While this discussion has focused on the national environment, local institutions also powerfully shape the regional development process. We need a far more refined understanding of the dynamics of innovation in regions like Silicon Valley. This means more than simply recognizing the presence of particular regional attributes or firms, but also understanding how they are organized and how they interact with one another. Silicon Valley's firms are not the atomistic, perfectly competitive agents of economic theory. Politics and markets interact in subtle ways even at the regional level. These firms are

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embedded in networks of social and political relationships - relationships which play a critical role in integrating the regional economy.

Two examples from the Cambridge experience highlight this point. While Britain is endowed with a generous supply of venture capital - one attribute which most analysts agree is important to promoting high-tech growth - it is very different from the venture capital found in the US. The American venture capital industry grew from a base of successful high-tech entre- preneurs with first-hand experience in regions like Silicon Valley and Route 128, while in Britain venture capital is an artificial creation of state tax legislation.

According to Matthew Bullock, Director of Corporate Finance at Barclays Bank, the result is that many venture capital financiers are totally inexperi- enced with the problems of technology-based companies. In fact, Bullock claims that while there are 120 venture capitalists in the UK financing high-tech start-ups, only six truly know the businesses they invest in. Rather than serving as the centre of a network of industry contacts and intervening directly in the process of building healthy technology-based firms on the basis of years of first-hand experience (as in the Silicon Valley), they tend to maintain an arms-length relationship with young entrepreneurs. Most are in the business primarily for the tax advantages; they supply firms with money, not ideas, guidance, industry contacts or managerial resources.

Hence the simple existence of an attribute is deceptive. Institutions with the same name often function differently. Similar contrasts could be drawn between the effects of the British MOD and the American DoD on the early development of the semiconductor industries in the two nations. In the US, for example, defence procurement and support for R&D during the 1960s stimulated the entry of innovative new firms in several ways, primarily through direct purchases. As a result, a new generation of entrepreneurial companies came to dominate the semiconductor industry - technologically displacing the older electrical and electronics companies.'3 In the UK, by contrast, military policies enhanced the position of existing electronics producers. The effect of defence spending is not predetermined: it depends upon the distribution of defence dollars and the nature of the projects.''

Similar attributes also assume differing significance depending upon their context. Observers of Cambridge for example, often cite the social networks among local entrepreneurs as a source of the region's growing potential. However, tenants of the Cambridge Science Park complain repeatedly in interviews that there is no interaction - social or technical - among firms there. Efforts to create forums for information sharing and co-operation in the region over the past decade have produced disappointing results. And a recent study reports the limited extent of economic linkages between firms in Cambridge: close to three-quarters of local companies report either no or minor local input and output links (Segal, Quince and Partners 1985).

This absence of technical interchange, information sharing, or inter-firm linkages is critical. There is little to integrate the economic activity of local

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firms; the result is a disarticulated collection of small technology enterprises and service. While successes may emerge in Cambridge, it is difficult to view the region as a supportive environment for innovation and the growth of high-tech industry.

Compare this with Silicon Valley, where local institutions and relationships are central to the region's ability to grow and remain innovative. The interfirm mobility of personnel, extensive supplier relations, collaborative research and product development, well-developed venture capital networks and a multi- tude of forms for technical interchange and risk-sharing ensure that resources and technology diffuse rapidly to new enterprises in the region. It is these relationships between the individuals, firms and institutions in the region that matter -not their mere presence.

It may be more fruitful to compare innovative regions like Silicon Valley with other innovative regions -rather than with other high-tech regions, most of which are not innovative. Despite differences of product and history, there are institutional similarities between innovative regions like Emilia-Romagna in Italy or Baden-Wiirttemberg in Germany and Silicon Valley.4Vhe dynamism of these regions is rooted in the flexibility of their production organization, the relationships between firms, and the institutions which encourage innovation.

We clearly need a more rigorous conceptualization of the dynamics of industrial innovation and regional development - one which is informed by an understanding of local production and social organization as well as by an awareness of the broader ~olitical and economic environment in which it is located.

Departrr~ent of City and Regional Planning, Unicersiy of California,

Berkeley, California

Acknowledgements

Special thanks to the Social Science Research Council, Wolfson College (Cambridge University) and Segal Quince and Partners for their support of the field work for this project. Thanks also to Carol Heim, Bennett Harrison, Gary Herrigel, Charles Sabel and Grahame Thompson who provided helpful comments on earlier drafts.

Notes

1 For a sampling of this literature from a variety of different disciplines see Sirbu (1976); Premus (1982); Dorfman (1983); Office of Technology Assessment (1984);

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Oakey (1984); Haug (1986); Markusen, Hall and Glasmeier (1986); Tatsuno (1986); and Rogers and Chen (forthcoming). 2 See Goldthorpe et al. (1969) for an extended discussion and application of this methodology. 3 Britain has, after America, the world's best developed venture capital industry. In 1986 alone British venture capital invested k426 million in over 700 companies; and between one-quarter and one-half of the funds invested during the 1980s have gone into electronics and computer-related companies. See 'Plodding into the sunrise', Economist, 23 November 1985 and 'UK venture capital: larger - less risky', Financiai Tinles, 6 June 1987. 4 Peter Marsh 'Cambridge - eggheads and chips', Financial Times, 4 July 1987, describes Cambridge as the fastest-growing centre in Europe for high-technologq business. 5 Because of the conceptual difficulties which plague researchers attempting to define the boundaries of 'high technology' this paper focuses on the electronics industry - which includes components, computers, software, and electronic capital goods. This choice is appropriate for Cambridge as the preponderance of new firm activity has been in this sector. 6 Scholars have recently begun to identify the matrix of institutional structures which have impeded economic development in the UK. For the best of the recent institutional analyses of the British economy see Elbaum and Lazonick (1986); Williams et al. (1983); and Hall (1986).

However a unique nexus of institutions confronts new technology-based firms. Some of the constraints on older industrial sectors, such as the nature of shop-floor control by unions or the organization of the financial system, are not relevant to nea high-technology companies, while other factors - particularly the role of the state - are critical to these firms. 7 See Segal, Quince and Partners (1985) and Marsh (1983) for more detail on the region's history and growth. 8 The defence sales of these firms alone dwarf the sales of the majority of Cambridge high-tech companies. In the 1960s Pye divided into two firms, Cambridge Electronics Industries and Phillips Electronic & Associated Industries. Each received between E.50 and k100 million in defence contracts during 1983-84. Marshalls Engineering received between #5 and E50 million during the same year. (Ministry of Defence 1985: 68.) 9 The accumulation of scientific excellence at Cambridge during the twentieth century is illustrated by the record of the physics laboratory - Cavendish Lab. Cavendish physicists were responsible for many major breakthroughs in atomic structure and crystal structure in the thirties; during the Second World War they were at the forefront in development of radar, telecommunications and electronics and since the war the lab has played a leading role in electron-optical analytical techniques, molecular biology, and radio astronomy. A similar record of excellence could be described for the math laboratory (now the Computer Lab) in the fields of computing, computer-aided design (CAD) and artificial intelligence. 10 The university origins of these entrepreneurs differentiates them from their counterparts in Silicon Valley, for example, who typically have industrial experience as well as university training. 11 Not all Silicon Valley firms grow as fast as Apple Computers or Sun Microsystems - each of which approached $500 million in annual sales within their first five years. However, growth rates for new firms in Silicon Valley are generally an order of magnitude larger than those in Cambridge. Even in the mid-sixties, the time period most comparable to Cambridge today, the fledgling Fairchild Semiconductor had $130 million in sales and 12,000 employees. 12 Small businesses have long represented a smaller part of the UK economy than in

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comparable countries; however the marked increase in start ups during the 1980s may have reversed the long term decline of the small firm sector. See Bums and Dewhurst (eds) (1986) and Rothwell(1985).

Some parts of the southeast report more robust high-tech growth rates than Cambridge. In 1984 there were 30,000 electronics jobs in the county of Berkshire - of which 8,1000 were created between 1981 and 1984 -and 44,000 in Hampshire. While there is new gro\vth along this h14 corridor, it should be kept in perspective: there has been aggregate job loss in the British electronics industry over the past decade. See Hall el NI. (1 987). 13 In describing this Lprofound change of climate' the Firlnrrciul Tirrles refers to a new breed of entrepreneurs and claims that: 'There is a new mood of optimism which cannot just be e.xpressed in terms of numbers. hlany managers feel better paid and better appreciated than at any time in their working lives' (1 April 1987). 14 In a stud! of small firms in north-east England, Storey (1982) found that the personal characteristics of entrepreneurs exert only the mildest influence on firm performance. 15 See Pa\& (1980) for an analysis of British industrial performance in technical innovation which shares many points of similarity with the present approach, but fails directly to address the issue of small firms and innovation. 16 These factors are, of course, interrelated and rooted in the nineteenth century. The shape of British markets and many economic difficulties can be attributed to the nation's role as the first to industrialize and to the legacy of an overseas empire. See Ha11 (1986) and Elbaum and Lazonick (1986). 17 In 1984, US and C'K defence expenditures were 6.9 per cent and 5.3 per cent of GDP respectively, as compared with 4.1 per cent for France, 3.3 per cent for West Germany, 2.9 per cent for Italy and under 1 per cent for Japan. Ministry of Defence (1985a) Figure 7.

Electronics expenditures of 1983/84 amounted to E1.5 billion, or 21.6 per cent, of total defence procurement of E7.1 billion. This represents real growth in defence electronics expenditures of 36 per cent since 1979/80. Ministry of Defence (1985b) Table 2.5. 18 Cambridge Interacthe Systems succeeded in the CAD-CAM marketplace because of consulting relationships which provided extensive early contacts Gth customers like Saab and GEC. CIS has pro\en to be the exception, not the rule, in Cambridge. 19 See Committee on Finance for Industry (1986). The same conclusion is reached for Cambridge firms by Segal Quince and Partners (1985).

Two major new government schemes stimulated the growth of the largest private venture capital industry in Europe: the Loan Guarantee Scheme (1981) which guarantees loans made by private banks to small firms, and the Business Expansion Scheme (1983) which allows investors to claim tax relief on equity investments in private companies. In addition an Unlisted Securities Market was established in 1980 for equity in small companies whose stock is not publicly traded. 20 There is, of course, no shortage of financial management skills in the UK. However this is no way compensates for the lack of product design, marketing, production and general management skills. 21 Virtually all explanations of Britain's decline cite the low degree of academic achievement and professional training of British engineers and managers relative to its competitors. For recent work on the subject, see essays by Austen Aibu and Nuala Sword-Isherwood in Pavitt (ed.) (1980) and those by Julia Wrigley and David C. Moaery in Elbaum and Lazonick (eds) (1986).

Most recently, Corelli Bamett -who refers to a system of 'education for industrial decline'- has documented how Britain failed to match education and training efforts at all levels being made competitors to supply the highly-skilled and motivated workforce

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and professional management essential for continued industrial success. See Barnett (1986). 22 For example, only one-fifth of all UK managers have degrees or professional qualifications of any sort, compared with 85 per cent in the US and Japan (where higher education is less academically specialized). Most British managers receive an average of only one day's formal training a year - far less than their foreign counterparts. As a result they are neither as technically qualified as managers nor as well grounded in basic business skills as budgeting and marketing as managers in West Germany, Japan and the US. See 'The Making of UK Managers', Financial Times, 29 April 1987. 23 See the discussion of technological interdependence in Rosenberg (1983). Cohen and Zysman (1987) refer to 'national technology networks' which link manufacturing sectors together and suggest that 'advantage in a national economy is embodied not simply in the capacities of specific firms but in the web of interconnections that establishes possibilities for all firms'. 24 According to Barnett (1986), the British wartime output of high tech products, from aircraft to radar, guns to instruments, would have been impossible without massive imports of US machine tools. 25 For procurement, Kaldor etal. (1986) calculate that defence production alone accounted for 32.7 per cent of total UK engineering value-added in 1983, up from 17.3 per cent a decade earlier. Morgan (1983) suggests that state expenditures (defence and telecommunications) account for at least 40 per cent of the UK electronics market.

In R&D the bias is even greater. Over 29 per cent of gross R&D expenditures in the UK are devoted to defence. (This proportion of military relative to civil R&D is higher than any of Britain's competitors, including the USA.) In particular, the state funds over 60 per cent of total electronics R&D. See Electronics EDC (1982) and Kaldor et al. (1986). 26 International Computers Ltd (ICL), Britain's sole mainframe computer manu- facturer, was another product of the merger enthusiasm of the sixties. Its formation in 1968 -the result of the merging of International Computers and Tabulators Ltd and English Electric Computers -was sponsored by the IRC and it received substantial public R&D funding during the sixties and seventies. Most scholars would agree that ICL's origins and survival have been totally dependent upon the state (Bonnett, 1985). 27 The CVD was founded before World War I1 as the Inter-Services Committee for the Coordination of Valve Developments. Although its title changed in 1972 to the Directorate - Components, Valves and Devices (still CVD) to reflect current areas of interest, its mandate continued to be one of supporting industrial electronics R&D for military objectives. 28 Currently over 50 per cent of Ferranti's sales are defence-related; and 70-80 per cent of the sales of GEC Electronic Systems and Components Group (its largest operating division) is defence-related. 29 In an analysis of UK policies for the electronics and information technology industries, Guy (1986) concludes that: 'the continuity and high returns characteristic of the "protected" markets nurtured by MOD and PO/BT (Post Office/British Telecom) policies have constimted security blankets for many UK firms in defence electronics and telecommunications - to a large extent the same population of firms.' 30 The definition of electronic capital equipment used here is wider than elsewhere in the paper. Following the Monopolies and Mergers Commission (1986) usage it includes electronic data processing, office equipment, equipment for control and instrumentation, medical and industrial equipment, communications and military equipment, telecommunications equipment and electronic components. 31 British terminology for large numbers can be confusing. A billion in Britain is a trillion in the US. Whereas a US billion is equal to one thousand million, a British

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billion is equal to one million million (a British trillion equal to one million billion, etc.). Thus #,I00 million does not equal D. 1 billion in Britain. 32 The increase in support for electronics and information technology during the 1980s coincided with an overall drop in DTI assistance to industry from W. 1 billion in 1981182 to about E1.5 billion in 1984185. This belies the claims of the Thatcher administration of non-intervention: the reorientation of funds towards innovation, science and technology clearly represents a form of industrial policy. (House of Lords 1985, HL238-11, pp. 688-95) 33 This should not be surprising, as the programme is jointly funded by the DTI, the MOD, the DES, and industry. Given the massive clout and resources of the MOD and BT relative to the DTI, it is no wonder that old political relationships persist. 34 Changes are underway in the 1980s: the Thatcher government has outraged the large firms by attempting to create more competitive environments in defence and telecommunications. Both the introduction of competitive tendering and fixed-price contracts in defence procurement and the privatization of British Telecom have upset the oligopolistic relations of the 1960s and 1970s - leaving the big firms without the guaranteed state markets which they had grown dependent upon.

It is too early to assess the long-term effects of these changes, but it is clear that they have little to offer small firms. Competitive tendering has raised the costs of competing for contracts by introducing an extensive application and evaluation process - a process which may ultimately upset the secure markets of the big companies, but one in which small firms cannot afford to participate. The beneficiaries of the new policy will most likely be foreign firms, as with the 1986 decision to award the contract for an airborne early-warning system to Boeing rather than GEC. 35 During the early sixties, military and space contracts removed the financial baniers to integrated circuit production for both Texas Instruments and Fairchild - which were, at the time, small enterprises - and played a crucial role in encouraging several start-up companies in the semiconductor industry. Government programmes thus allowed a whole new generation of firms to emerge and technologically surpass established electronics firms like Raytheon, Sylvania, Westinghouse and RCA. 36 According to industry veteran Lester Hogan, IBM was the single largest customer of every semiconductor company in Silicon Valley during the 1960s. The major defence contractor Lockheed also deliberately spread development contracts to small firms in the region. 37 Even Raytheon Co. -comparable in its extent of defence dependence to Ferranti in the UK - established Raytheon Ventures in 1985 to make venture investments for the company. In its first two years Raytheon Ventures has invested $25 million in small companies. The Boston Globe, 1 July 1987. 38 In the 1960s and 1970s, GEC maintained profitability by acquiring ailing companies in safe markets and turning them around with efficient management. One analyst who compares this 'negative defensive sort of management' to a 'management ready to venture into emerging markets', concludes that 'it is hard to calculate the damage done by GEC swallowing up British high-tech pioneers as part of huge mergers and then letting them either sink without trace or pushing them into narrow defence markets'. John McCrone 'A heavyweight hogs the market' Computing Magazine, 26 September 1985. 39 The founders of Qudos, a semiconductor company in Cambridge which specializes in leading edge application specific integrated circuits report on their efforts to sell to large British firms: 'We tried every bloody GEC, Ferranti and Plessey plant that there is. We crawled on our hands and knees and still got nothing - not a bloody sausage'. Their claim that Qudos electron-beam technology is superior to anything in the big firms is supported by Olivetti's subsequent decision to invest in a minority stake in the firm and by their successes in markets outside of Britain. 40 Peter Marsh 'Pick yourself up . . .'Financial Times, 18 July 1987.

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41 For possible models, see the debates over the Greater London Council's local industrial policy strategy in Local Economy, the journal of the London Economic Policy Unit (LEPU, South Bank Polytechnic, London) and Rothwell's (1984) discussion of innovation-oriented public procurement. 42 Take, for example, the case of Scotland. In his analysis of Silicon Glen, Haug (1986) devotes a section to listing the 'same specialized resources available to high technology firms in Silicon Valley, Boston's Route 128, Silicon Fen, and the M4 Comdor' and concludes that 'similarities between Silicon Glen and Silicon Valley are readily apparent'. While acknowledging that its genesis was different from the other regions, he implies that a convergence is underway as local entrepreneurship and innovative activity increase in Silicon Glen.

In fact, current evidence is totally to the contrary. A recent Financial Times article concluded that 'the presence of major electronics manufacturers has largely failed to stimulate the growth of a strong indigenous industry, either in the form of component suppliers or as spin-off enterprises', noting that only 12 per cent of the electronics industry's inputs are sourced locally and it has produced little new employment since 1979. See James Buxton 'A hard time for the spirit of enterprise' Financial Times, 10 June 1987. 43 In addition to providing a substantial market for semiconductor innovations and directing contracts to new as well as existing firms, the US DoD followed a strategy of 'second sourcing' - requiring at least two independent sources for a component before it was approved for military use. This encouraged rapid technological diffusion: firms often shared patent rights, drawings, photomasks and manufacturing know-how. Defence spending also greatly enhanced the mobility of highly skilled manpower and entrepreneurs in the electronics field (Webbink, 1977; Utterbach and Murray, 1977). 44 Stowsky (1986), for example, contrasts the differing impact of military policies on the development of US semiconductor and machine tool industries. In the case of machine tools, unlike that of semiconductors, Stowsky claims 'the Pentagon has clearly inhibited the development of beneficial spinoffs and has contributed to the evolution of a military dependent and uncompetitive industry structure'.

See also Jones's (1985) discussion of how state policies have differentially shaped the configuration of the aerospace industries in the US and Britain. 45 See Piore and Sabel (1984), Scott and Storper (1987), Herrigel (1989) and Storper (1989).

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