Briefing Paper

GOING BITERNATIOMAL: THE DEVELOPMENT OF EXPORT-ORIENTATED INDIGENOUS FTBMS

James McCalman, Centre for Technical and Organisational Change University of Business School

This paper examines the development of which prevents this development occurring, indigenous electronics firms and argues and stresses the need for an increased that there is a need to develop growth level of awareness of opportunity both on onto international markets of a number of the part of organisations, such as the Scottish electronics concerns. The paper SDA, and within the electronics industry argues that the emphasis of companies itself. Middle managers in large foreign- which operate at internatonal trading owned companies in particular may have the levels should be supported by government potential and opportunity to develop agencies, such as the Scottish Development successful start-ups which, although Agency (SDA) by the encouragement of a intitially tied to larger firms, may be greater degree of indigenous spin-off able to break out of this dependency by which stems from the foreign base in manufacturing sophisticated products which Scottish electronics, is highly can be sold on international markets. technological in its product base, is Given the increasing level of R&D work export-oriented, and over time will being allocated to Scottish subsidiaries develop multinational characterlstcs in there should be no reason to suspect that its own right. the level of spin-off enterprises in ' glen' cannot at least follow those of '*. What restricts The emphasis of SDA policy in the these devlopments is a lack of enterprise electronics industry has hitherto been the in the Scottish economy coupled with poor attraction of inward investment, which it management team cohesion, and minimal has managed to achieve very successfully. external support. However, the presumed indirect benefits of a cohesive indigenous support sector which develops potential of its own has not developed as a result of the attraction of The indigenous electronics sector foreign electronics firms. 's level of local sourcing by foreign-owned firms has been falling during the 1970s and 1980s and there is no evidence that The problem faced by the indigenous sector any dramatic policy intitiatives aimed at in trying to develop onto international reversing this decline have been markets via increased levels of exports, forthcoming. Although there have been and eventually establishing Scottish efforts on the part of both the SDA and multinationals in the electronics foreign firms themselves to increase local industry, is that the product base of the content it still continues to decline. sector lies in two main product areas - Quite simply the policy goal of a industrial and commercial applications and "critical mass" of electronic firms has subcontract design and assembly work. not been attained in the sense that These areas account for 68per cent of the foreign presence, although substantial, has not generated increased local content Note: and spin-off enterprises. The funding from this research work was provided by the Scottish Economic Society through their small research grant scheme. This paper argues that it is a lack of The author would like to acknowledge their enterprise culture in the Scottish economy backing.

61 indigenous electronics firms. A third high and tended to be based in the product area, components (excluding affiliates themselves.x Growing R&D ) accounts for another 18 intensity at the level of the affiliate in per cent of Scottish firms. The SDA in Scotland offers the opportunity for new 1982 pointed out that few indigenous enterprise spin-offs. Young (1986) notes companies had experienced significant that, *the number of spin-offs, encouraged expansion and growth in employment spin-outs and associated companies related although a limited number might have to electronics has been growing quite growth potential. The reasons for this rapidly in Scotland over the last five to lack of growth were that the majority of seven years, even although their indegenous companies were in specialised employment record remains a source for low-volume product markets or offered continued disappointment*. local design/consultancy services and their growth prospects were therefore limited. Similarly, the output of indigenous firms tends to be aimed at the Scottish market and shows very little However, the emphasis in foreign-owned impetus to develop export potential. subsibiaries remains with productive Buxton (1986) argues that there may be a activities, and this distinguishes strong case for relating investment grants electronics in Scotland from that in south and allowances directly to the proportion east England. Sayer and Morgan (1984) of output exported to encourage changes in argue that, "The overseas sector remains the structure of production and poorly integrated with multiplier effects composition of output in favour of which afford little secondary employment exports. and, perhaps most important for long-term prospects, a significant indigenous sector has not developed. What is notable about indigenous firms (eg. ) is that to However, the SDA study (SDA, 1982) keep abreast of international leading-edge noted that there were a limited innovation, they feel obliged to expand number of companies which outside Britain (in the US in this case) appeared to have a sound technical soon after birth.% base and credible market niches capable of substantial exloitation. Similarly, new indigenous start-ups at the beginning of the 1980s were spreading themselves throughout the Firn and Roberts (1984) take a more major product growth areas in optimistic view of the development of electronics. Companies were being set up indigenous enterprises stressing the in data processing/systems-related, growth of firms, such as Rodime, Fortronic medical, industrial/oil-related, sub­ and Prestwick circuits and University contract/printed circuit boards and spin-off companies. They .identify software/design consultancy fields. What factors, such as increased venture capital was important about these start-ups was availability; the demonstrative effect of that they were drawn primarily from early successful entrepeneurs; changing Scotland's existing electronics industry, attitudes towards the private sector; and especially the foreign-owned sector. the increasing base of electronics engineers and managers in Scotland who have experienced the entrepeneurial spirit during periods of employment in foreign firms at their US locations. Their policy The foreign sector has progressed from a recommendations stress the need to branch plant image of the 1970s with encourage new science-based companies by increases in both the development of Scottish entrepeneurs and, "a change in products for the European market and the Scotland's corporate ethos towards more level and sophistication of R&D work. effective competition in international Haug, Hood and Young (1983) provide markets, based on an enhanced ability to evidence that the, * emergence and growth manufacture and market goods and services of R&D activity was seen to be largely profitably in an increasingly harsh induced by the need for response to market competitive environment.' There does signals ...(and)... seemed to provide a appear to be a growing awareness that the mechanism for facilitating technology indigenous sector has to develop export transfers from the parent multinationals, market potential if it is ever to progress and the proportion of commercial beyond the boundary of domestic supplier applications from the research results was status.

62 For those indigenous spin-off firms which elsewhere that the need to achieve export have developed there is an awareness that surpluses in the Scottish economy should many are poorly managed and under­ influence development and grant aid capitalised (Hood, 1986). The indication provided to new start-up business and is that not enough are launched under the there is some argument for positive direct surveillance of mature management discrimination in favour of firms with the teams with direct experience in larger portential of becoming international in companies while many are academic spin­ their own right (Buxton, 1986, p.12). offs with high technological skills and low managerial competence. Hood (1986) argues the case for specific, radical and controversial schemes to ensure that Young (1986, pages 25-28) also believes projects are better founded. This gives that there is a need for change when one an indication that to be able to survive examines the issues related to higher the earlier years of start-up, firms in technology products and the the high technology sector do not only internationalisation of Scottish firms. have to compete in terms of technology, His assessment of the positive impact of quality and price but also have to have achieving or maintaining indigenous high within them the right mix of managerial technology manufacture and the foreign and technical skills. Many new start-ups income this generates are tempered by the suffer because although they have the belief that in some cases Scottish right product, they lack the management companies are perceived as being too small team framework to sell that product to the at the moment. To stimulate overseas outside world. The industry could activity Young recommends three particular certainly do with fewer gifted engineers setting up in business on their own and strategies: more experienced teams which combine the necessary management skills needed for business success. i) Short-term: Encouragement of exports from Scotland;

As far as the growth of those indigenous firms which can be regarded as successful ii) Long-term: Joint ventures, is concerned, Young (1986) identifies an Licensing, Back-up foreign investment internationally orientated sub-group in sales and service sectors and in within the total population of indigenous the manufacture of spare parts; high tech firms in Scotland. An important factor involved in the push towards internationalisation on the part of Scottish electronics firms are the remarks iii) Alternatives: Merger and made relating to small UK market size and diversification of Scottish the need to penetrate the American market. electronics firms. Manufacturing facilities and an American listing are regarded as crucial for Scottish firms to break into the lucrative US government contract market. This His analysis of 21 indigenous hardware and appears to be the pathway to success for software companies with active overseas indigenous firms. There are several interests relates the major reasons for examples of indigenous electronics firms movement abroad as small UK market size in Scotland which have become and the need to penetrate the American international primarily because the market market, topics raised in the two case itself is international. The willingness studies below. Added to this, however, to service the local market for particular are future projections which are likely to electronic products restricts growth encourage the outward movement of Scottish opportunities. Indigenous firms become firms. These are related to low economic tied into the growth patterns of those growth in the UK economy and the continued foreign-owned firms in Scotland which they globalisation of markets. service. The attainment of a ' reasonable* level of profit as the vendor firm of a major American multinational appears to satisfy most Scottish companies. What it does not do however is provide the nation with the level of export potential which To the extent that some indigenous firms it currently requires. It has been noted have specific advantages at the moment one has to recognise the limited scale of

63 these. For the remainder of the sector currently exist and may increase in the there may be some hope that through near future. collaborative ventures and close liaison with the foreign sector present in the Scottish economy indigenous enterprises Two Case Studies of Indigenous Success will survive and prosper. There appear to be two development models open to Scottish firms, both of which depend on the It is against the background of growing continued and expanding role presence of foreign-owned R&D activity and the the foreign sector. The model (figure 1) potential this has for a larger number of indicates the importance of the MNE spin-off companies, the need to develop subsidiary to the successful development export potential, the ability of firms to of indigenous enterprise. In terms of compete in an international sense, and the spin-off companies and "piggy-back" presence of an internationally-orientated exporters the central key rests with an sub-group of indigenous electronics firms, expanded foreign sector which achieves which led to the analyses of two paticular higher levels of autonomy, and which gains R&D capability and world or European Scottish companies - Prestwick Circuits product market charters (defined as and Flexible Technology. These case subsibiary repsonsibility for all aspects studies attempted to determine the of R&D, manufacturing and international development of the companies towards marketing). international markets, their relationships with the foreign sector, and their views concerning the devlopment of electronics in Scotland. It is not the intention to FIGURE 1 detail the studies here, but they do provide a number of general conclusions SabaMiarj World which are relevant to the analysis of the protfaet charter future prospects of indigenous firms in X the electronics industry in Scotland. oxport-orientod increased R&D. indigenous highly skilled enterprise* management *fe Although the data are qualitative and what high quality component is true for two firms in the industry may demand not be generally applicable across the \ broad sub-divisions within electronics, generation of the case studies are valuable in providing more spin-off 1 milestones of achievement from which companies increased others may learn. They are also important performance in pinpointing the fragile relationships of local supplier which exist between the foreign-owned sector and indigenous enterprises. This is particularly true in two areas. First, the level of 'presumed" autonomy which subsidiaries in Scotland have is called There would appear to be a logical into question. Second, the treatment of stepping process in the model from the the spin-off entrepeneur by his previous establishment of R&D facilities in employer does not follow the "Silicon Scotland with associated technology valley" model. Leaving the larger transfer from the parent to the subsidiary organisation to go it alone seems to be an through the need for higher quality anathema to the senior management of supplier and higher grade management and foreign-owned subsidiaries where one would professionals at the subsidiary plant, to suggest that there are net benefits to be the creation of more spin-off enterprises had by the subsidiary in encouraging spin­ and export-orientated suppliers. Although offs. this model is simplistic and open to criticism that it does not reflect corporate centralisation there is evidence Although it is difficult to generalise (Buchanan, 1987; Young, 1986) that several from two case studies of indigenous Scottish based MNEs are moving in this electronics devlopment, the studies do direction and this should give hope for emphasise several important points about the future. What is needed therefore is a the nature of the industry in Scotland, change in what the SDA (1986) describes as the impact of foreign presence, and the the "cultural and management weaknesses'' general climate for entrepeneurship in in the indigenous sector to be able to Scotland. The main conclusions which can take advantage of opportunities which be derived from this study were:

64 1. The development of entrepeneurship in products at an international level were the Scottish economy needs a major likely to be those with the major injection of effort on the part of levels of success. A two-tier government, industry and universities. indigenous sector exists with firms who serve international markets by exports, or become multinational in their own Given the availability of start-up right being the major examples of finance a major policy intitiative from indigenous success. industry, supported by government and academic institutions is needed to encourage more new enterprises in Electronics firms in Scotland are faced electronics, and other industrial with the alternatives of suplying major sectors. One of the major ideas which foreign-owned subsidiaries based in the managing director of Prestwick had, Scotland and maintaining these in his role as vice-chariman of the linkages, or expanding beyond these Scottish CBI, was to have the chairmen confines to operate on international of major companies embrace a new markets. To do so requires that they enterprise intitiative encouraging are either product innovators in the middle managers to set up in business mould of companies, such as Flexible for themselves. Technology, or they compete on cost and quality criteria, or do both. 2. To succeed, the new enterprise culture needs directly to attack the two major negative enterprise cultures which One possibility is that firms which currently exist in the Scottish currently have close relationships with econoBy. foreign firms use these relationships to build up their own quality, cost and product innovative potential and take There are marked differences in the these onto wider markets. The crucial encouragement given to new start-ups in step is breaking out of the restrictive the United States and Scotland. These boundaries imposed by buyer/vendor differences are strongly apparent in relations to become more independent the treatment of failure by potential and therefore able to concentrate on financial backers, and the attitudes import substitution or export of organisations towards employees who orientation. At present, the best hope leave to set up in business for appears to be from a series of new themselves. start-ups coming from within larger electronic companies, with their specific backing, and aimed at These negative cultures stem from two substituting for imports with eventual areas. First, the desire on the part development of export potential. of larger organisations to maintain their middle management elites for succession purposes without recognising For example, Flexible Technology's main the possible advantages of supporting markets for high quality flexible spin-off companies. Second, the circuits were military, computer and intrinsic culture that favours security communications manufacturers. The of employment at the expense of risk growth markets for these products were and the unpopular connotations in the United States and the company associated with setting up in business had always intended being export for oneself when the result ends in orientated. failure. In setting up the two firms, the 3. The successful ezaaples of indigenous founders were aware of the failings of electronics firms are more likely to be those firms already in existence. product innovative, export These failings reflected the lack of firms in particular markets and the orientated/import substituting concerns x which eventual ly becoae international benefits of being first to the market in their own right. place*, an inability to serve the market demands with high quality products which were priced Those indigenous firms that recognised competitively, and the growing demand the market potential of providing from larger firms for flexible circuits

65 and standard pcbs which encouraged the Scottish Economy, University start-ups. Press.

4. Product and management experience were Haug, P, Hood N, and Young S, 1983, * R&D crucial factors for success. Intensity in the Affiliates of US-Owned Electronics Companies Manufacturing in The management teams which set up the Scotland, REgional Studies, Vol 17, 6, companies had a broad range of PP 33-392 technical and management skills to ensure the success of the venture. The future establishment of spin-off or new Hood N, 1986 "Future of the indigenous enterprise in Scotland Multinational in Scotland*, Working should view this as a pre-requisite for paper for the conference on Scotland and success. the Multinationals, IRM and Strathclyde International Business Unit, Glasgow These conclusions lead one to suggest that in its current format the indigenous McCalman, J, 1987 'What's wrong with sector of the electronics industry is not Scottish Firms? Local sourcing in geared towards exports. Policies which Electronics", Fraser of Allander encourage the birth of new start-ups Institute, Quarterly Economic particularly from within the foreign Commentary, University of Strathclyde, sector, should therefore stress the need February. for export-orientation. The existence and attracton of foreign enterprises and the growth of a strong domestic supplier base McCalman, J, 1987 "Going International : are unquestionably important to the The development of export-orientated Scottish economy. However, there is also a indigenous electronics firms*, Glasgow need to penetrate international markets. Business Schol Working Paper Series, The pay-offs will be substantial and November. several indigenous high-tech firms appear to be pointing the way. What is required is an initiative which encourages firms to Roberts, T, 1980 "Getting new ventures develop foreign markets and compete at off the ground", Management Review, June international levels. 1980.

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