Small and medium-size firms in high technology industries: The experience of biotechnology firms in the United States

Many nations and regions throughout the world are attempting to promote development of high-technology industries. Firms in hightechnology industries tend to be small and medium-sized, suggesting that industrial policy toward this sector might optimally be different from policies that would be directed toward firms in other industries and sectors. In industrialized economies high-technology industries are considered desirable because it is hoped that they will protect economies from challenges of international trade and employment migration. In addition, research suggests that high-technology industries tend to create positive externalities and support for one another. Conversely, a decline in one of these industries (e.g. biotech) is often associated with declines in others (e.g. computer chips and genetics). In developing economies the benefits of successful hi-tech industries are similar. In addition, development of these industries may attract relatively high-wage jobs from industrialized countries through outsourcing, and also may help retain the country’s brightest people and prevent human capital outflows – the ‘brain drain’. These justifications for promoting hi-tech industries explain why development policy toward hi-tech industries exists in countries that span a wide income range. Industrial policy directed at this sector is likely to be different, however, in the wealthiest and industrialized countries, from those in countries that are less affluent. These economic spillovers have two implications. The first is that these firms tend to locate near one another in multi-industrial clusters, as they attempt to take advantage of economies of agglomeration. The second is that growth in one hi-tech industry may stimulate growth in other hi-tech industries, and that successful growth in these industries has a synergistic effect, reflecting back upon all industries to increase innovation. Many of our observations pertain to high-technology industries in general, but we look especially at the experience of one particular industry, biotechnology. This chapter draws from analyses that we have done on the biotechnology industry in the United States. We will highlight areas in which the experience of biotech in the United States is likely to be generalizable to other industries and other countries, and also areas where this experience may not be so generalizable. This chapter will focus on three issues. (a) First, we discuss the comparative size of hi-tech firms. In doing so, we will attempt to better understand why it is that biotechnology and other hi-tech firms tend to be smaller than firms in other industries. A better understanding of the reasons for relatively small firm size will suggest more appropriate policies that might be undertaken in order to promote hi-tech industries. (b) Next, we discuss the clustering phenomenon of hi-tech firms. At first glance, it appears to some that hi-tech clusters are an anomaly, because many characteristics of hi-tech industries, including biotech, have been thought to be inconsistent with the explanations that have been offered for clustering behavior in older, more traditional industries. (c) We conclude with observations on industrial policy toward hightechnology industries and especially biotechnology. We will attempt to differentiate between industrial policies that are likely to be most effective in industrialized countries, and those that might be best adapted to less industrialized countries and regions. We will draw from our observations on firm size, the unique nature of the firms’ knowledge base, and the phenomenon of clustering to point out industrial policies that are best suited to this unique group of industries.