-BUSINEss-+ -REVIEW- Bureau of B~siness Research • College and Graduate School of Business • The University of Texas at Austin WhyAre SmallHigh­Technology Finns in ) TexasNot /Competing? by Elsie L. Echeverri­Carroll, Ph.D. Head, Economic Development Program Bureau ofBusiness Research University ofTexas at Austin Inside: Texas in the Information Age ................ 3 DECEMBER 1997 H igh-technology firms compete globally by bringing products to market quickly and efficiently. In a recent sample ofhigh-technology companies in Texas, 84 percent reported the introduction ofa new process or product during 1994­96. However, only 33 percent introduced new products and processes faster than their competitors. A key question for policymakers then is: why are most small high-technology firms in Texas not com­peting in this dimension? During 1996-97, the Bureau ofBusiness Research (BBR) and IC2 Institute at the University ofTexas at Austin addressed this question in a study of 1,772 Texas high-technology firms. The overall survey response ofthe study was 22 percent (374 firms), and most of these were small firms: 83 percent have fewer than 100 employees and 95 percent have fewer than 500 employees. More striking is the fact that 49 percent employ fewer than 20 people. The BBR-IC2 sample was divided into two groups of firms, low tech and high tech. Scientists and engineers represent less than 6 percent ofthe number of employees at low-tech firms. These firms mainly assemble products that are re­searched and developed at headquarters located elsewhere. The second group, high-tech firms, employs a larger percent­age of scientists and engineers and focuses on new product development. Long-term, positive economic development in a region depends on developing or attracting firms from the second group. To design policies that help develop or attract these innova­tive high-tech firms, policymakers must understand the factors that affect innova­tions and increase competitiveness. Industrial Organizationsand Innovations Firms organize their dealings with suppliers and customers based on either arm slength or network relationships. Arm's length relationships, usually associ­ated with "traditional" American firms, are textbook economic relationships: short­term, with little exchange of information between firms. Companies come to the market to buy from the lowest bidder. In contrast, network relationships are based on long-term linkages between firms, a great deal of information exchange, joint problem solving, and governance by trust. Arm's length relationships offer com­petitive advantages in the innovative capacity offirms with large stable markets characterized by long product cycles. Networking relationships, on the other hand, produce competitive advantages in the innovative capacity of firms in con­stantly changing markets characterized by short product cycles. Most high-technol­ogy firms fit the latter description: they must implement new processes and introduce new products quickly, continu­ously adjusting task coordination in the process. Clearly, networks can help accelerate innovations in high-technology firms that compete by rapidly introducing differentiating, high-value-added products. Most high-tech firms in Texas overlook an important strategy in developing new products faster than competitors: estab­lishing networking relationships with suppliers. For high-tech firms, partnerships with both suppliers and customers are key elements in introducing products faster to the market. For instance, by involving suppliers early in product innovation, firms avoid the waste characterized by mismatches in the fitting ofparts within a new product. Moreover, when supplier engineers and customer engineers have substantial experience working together they develop relation-specific know-how and are less likely to misread blueprints or misinterpret information. TheTexas Sample To measure the relationship between speed ofinnovations and networking relationships, we divided our sample of high-technology firms (those with more than 6 percent ofengineers and scientists) into two groups: firms innovating faster than their industry group and firms innovating at a slower pace. The impor­tance the first group attaches to long-term, flexible contracts and frequent (daily or weekly) information exchange with their main customers is evidence that network­ing relationships with customers are important in their product and process innovations. As was frequently mentioned in interviews with executives in high­technology firms in Austin, Houston, Dallas, Fort Worth, and San Antonio, these companies do not want to produce more new product than their customers need. So the firms work closely with their main customers to guarantee a market for their products. A Competitive Strategy Certainly, firms gain competitive advantages in innovation from maintain­ing strong networking relationships with customers. The BBR-IC2 study results indicate, however, that most high-tech firms in Texas overlook another important strategy: establishing networking relation­ships with suppliers. This is surprising given the abundance of examples ofthe positive effects of close relationships with suppliers for innovations. Japanese firms, for one, are known for effectively coordi­nating design and manufacturing with suppliers-a practice often credited with Japanese success in rapidly developing and introducing new products. Another example of the benefits of strong supplier networks can be found in Silicon Valley. In the 1980s, many com­puter firms in Silicon Valley began treating their suppliers as partners in a joint process ofdesigning, developing, and manufacturing innovative systems. These collaborations encouraged joint problem solving between system firms and their suppliers, and, as a result, Silicon Valley firms learned to respond collectively to fast-changing markets and technology. Programs such as the Texas Manufactur­ing Assistance Program (TMAC) help small firms establish networking relation­ships with customers. Such programs, however, are small and do not focus exclu­sively on high-tech firms. The need exists for a program devoted entirely to helping small high-tech firms in Texas increase their innovation capacity by developing networks with suppliers. Perhaps this pro­gram could be a coordinated effort, with TMAC, engineering and business schools at Texas universities, and large companies working together on behalfof smaller companies. The program could be funded by large companies, which would be the main beneficiaries ofmore competitive components, and the state. References J.P. Campbell, Comparative High-Technology Industry Growth, Bureau of Business Research, University ofTexas at Austin, 1986. J.P. Campbell and S. Goodman, High-Technology Employment in Texas-A Labor Market Analysis, Bureau ofBusiness Research, University ofTexas at Austin, 1985. A. Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Harvard University Press, Cambridge, 1994. J.P. Womack, D. Jones, and D. Roos, The Machine that Changed the World, Rawson Associates, New York, 1990.+ Texas in the lnfonnation ( • by Dr. Sharon Strover Associate Professor Radio-Television-Film and Director Texas Telecommunications Policy Institute and Kyle Nicholas Assistant Instructor Radio-Television-Film University of Texas at Austin ) W ith the Texas telecommunications deregulation bill in 1995 (PURA 95) and the passage of the 1996 Telecommuni­cations Act, more telecommunications­based firms are poised to offer services in Texas. The Internet, an important compo­nent of the growth in this sector, may be especially significant to a state like Texas with numerous high-tech businesses as well as large rural expanses. To understand how people in the state are currently using telecommunications and computers and to explore their attitudes toward deregulation and electronic privacy issues, a series of questions were placed by the Texa'S Telecommunications Policy Institute on the Texas Poll (a collaborative effort between Scripps-Howard and the Univer­sity ofTexas at Austin), which surveys a random sample of 1,000 Texans on a quarterly basis. When asked the possible benefits of deregulation, many people throughout the state envisioned improved and expanded telecommunications services, but they also expect to pay more for the upgrades. Additionally, while Dallas, Houston, and Austin are known as the Texas high-tech trio, our study indicates that computer and telecommunication use varies significantly among these three cities. In some catego­ries, one or more ofthe cities trail the statewide average. Across the state, many respondents reported concerns about how personal records are being used in an era of database buying and selling. Survey results suggest that a great deal more work must be done to guarantee privacy in the elec­tronic environment. ComputerUse Our survey found that Austin has a higher percentage ofcomputer users and Internet surfers than other Texas cities surveyed. Nearly seven out often Austinites (68 percent) use computers, compared to about 58 percent of Dallas and Houston residents. Nearly 70 percent ofall capital area residents with home computers have Internet connections, while only about half of Dallas and 43 percent ofHouston home computer users are hooked to the global communications network. In comparison, about 43 percent ofTexans outside the three major cities have Internet access. Texans on the whole use computers frequently: more than 60 percent are at their computers at least five days a week, either at work or in the home. That number increases in the metropolitan areas, especially Dallas where nearly seven out of every ten computer users reach for the mouse and keyboard every workday. In fact, metroplex residents divide their . computer time fairly evenly between home and work. Austin computer users, however, are more likely to click away at home (76.5 percent) than at work (67.6 percent). And both Austin (37.5 percent) and Dallas (40 percent) residents are more likely than their Houston counterparts (31.1 percent) to do some work at home using computers. Houston parallels the statewide figures for computer use in schools ( 18.5 percent compared to 20 percent statewide) and in libraries (5.3 percent compared to 3.3 percent statewide), suggesting the impor­ tance of these more publicly available access points. In contrast, figures for adults in Austin and Dallas using computers in schools and libraries are much lower, perhaps a reflection of their higher penetra­ tion rates for computers at home. Dallas and Austin residents connected to the Internet spend quite a bit of time there (table 1). Of those with Internet access, 37 percent ofDallas respondents and nearly 35 percent of those in Austin spend five or more hours per week online. About 13 percent in each city are online more than eleven hours per week. Houston, on the other hand, may still be more interested in outer space than cyberspace: only 7 .5 percent of those with Internet access spend five hours or more online each week­ probably the minimum time necessary to be productive-and only 2.5 percent use the Internet for more than eleven hours per week. In the three metropolitan areas and throughout Texas, home computers are most frequently used for school and work purposes. Overall, 34 percent ofTexans say the main use of their home computer is Ab0ut 76.5 percent reported being con­cemed or very con­cemed about the extensive use ofelec­tronic records contain­ing personal informa­ti on. job-related, and 27 percent report its use is school-related. Roughly 10 percent cited "entertainment" as the primary use for their home computers, except in Dallas where schoolwork and entertainment each attract about 1 7 percent ofusers, and another 19 .1 percent listed home finance uses. While Austinites report more school­ related and job-related computer use, they are less likely than the average Texan to exploit home finance capabilities (16. 7 percent compared to 19.8 percent state­ wide). In Houston, school and job-related functions occupy about equal percentage ofusers while entertainment (9.8 percent) and home finance (11 .5 percent) fall well below the average. Other Technologies Dallas, Houston, and Austin area resi­dents take advantage of sophisticated telecommunications infrastructure to keep in touch and manage their communications needs (table 2). As might be expected, the use ofvalue-added phone services such as caller ID, call waiting/forwarding, and voice mail in these three high-tech cities Table 1 Amount of Time Texans Spend on the Internet (percentages) Number of hours Dallas Houston Austin Rest of Texas 3 to4 10.0 20.0 17.4 10.3 5 to 10 24.3 5.0 21.7 13.7 11to20 1.4 2.5 8.7 6.0 More than 20 11.4 0 4.3 5.1 Table2 Types of Technologies Texans Use (percentages) Technology Dallas Houston Austin Rest of Texas Caller ID 37.5 40.0 44.7 32.8 Call wait/forward 58.8 65.8 70.8 48.8 Voice mail 27.9 19.4 20.8 13.1 Answering machin e 68.5 65.8 75.0 59.4 Pager 31.5 34.4 27.l 19.8 Cell phone 33.6 37.5 39.6 32.8 Multiple phone lines: Two lines 27.8 28.6 27.1 28.5 Three lines 5.0 7.5 10.4 6.6 Four or more 4.5 1.2 2.1 2.5 Total multiple lin es 37.3 37.3 39.6 37.6 Texas Business Review 4 December 1997 far exceeds that ofTexas as a whole. Even answering machines are more common in these areas, penetrating a whopping 75 µercent ofAustin homes and significantly 1igh percentages in Dallas (68.5 percent) and Houston (65.8 percent), compared to a 59.4 percent average statewide. Residents of these three metropolitan areas also report significantly higher pager and cell phone use than the rest of the state. More than 34 percent of Houston respon­dents report using pagers and about 3 8 percent use cell phones. At 40 percent, Austin cell phone use exceeds the state average of33 percent. Patterns ofmultiple phone line use appear similar across the state, although total multiline penetration is slightly higher in Austin. The addition of new phone lines appears to be closely related to the growing interest in Internet access from home, and certainly many telephone companies have identified this as a growth area. Deregulation and Privacy Roughly 80 percent ofthe respondents round the state confessed they knew little or nothing about recent deregulation moves. While an enthusiastic minority (16 percent on average) believes that deregula­ tion will produce many benefits, more (about 49 percent on average) foresee few advantages. Those in the Austin area seem more optimistic-22.8 percent believe they will benefit from deregulation quite a bit­ than the respondents in Dallas, only 16.2 percent ofwhom reported similar levels of enthusiasm. In response to specific ques­ tions about deregulation outcomes, how­ ever, people seem to agree that there will be more equipment in schools, new services, and more choices. Among Dallas respondents, 73.3 percent believe deregu­ lation will provide more choices, 79 .1 percent foresee better equipment for schools, and 81.5 percent predict new telecommunications services. Austin and Houston results follow a similar pattern. However, more telecommunications and dectronics networks are accompanied by privacy threats. About 76.5 percent of our sample reported being concerned or very concerned about the use of electronic records containing personal information. When asked what sorts of information should be publicly available in purchased databases, 74.4 percent said that their mailing address should not be available. Even more people, 84 percent, objected to their medical information being accessible in electronic databases that could be bought and sold. Roughly half ofthose people with e-mail find it acceptable that their e-mail address be publicly available. The extent to which people feel their private information is safe and being used responsibly by the commercial sector may have significant influence on the develop­ment oflnternet commerce. We asked people about their confidence in banks, employers, credit card companies, and businesses selling over the Internet with respect to handling ofpersonal data. Credit card companies and the wave ofnew Internet businesses do not receive strong confidence ratings from Texans: 59 percent were either not very confident or not at all confident that personal, confidential information was being handled properly by credit card companies; the figure was 61.4 percent for Internet companies. Somewhat in contrast, 27 .8 percent ofrespondents expressed low confidence in employers' use ofdata and 31 .9 percent felt similarly about banks' use ofpersonal data. In an absolute sense, these ratings are still somewhat surprising and suggest some general insecurity about how these essen­tial institutions conduct their record keeping and sharing. Deregulation among telecommunica­ tions service providers is moving quickly now, particularly at the state policy level. At the same time, Texans heavily use the services telecommunications industries bring to us. Our data suggest that inequities in computer access and use should be investigated further so that the best social and economic outcomes can be obtained. The prospects for electronic commerce seem very bright in this state, where Internet use is relatively high, but people's privacy concerns must be heeded by businesses.+ Credit card companies and the wave ofnew Internet businesses do not receive strong confi­dence ratings from Texans. Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, University ofTexas at Austin. Subscriptions are available free upon request. Views expressed in this newsletter are those ofthe authors and do not necessarily reflect the position ofthe Bureau ofBusiness Research. Research and service activities ofthe Bureau ofBusiness Research focus on the ways Texas industries can become nationally and globally competitive. The Bureau is policy oriented and dedicated to public service. The Bureau is located on the sixth floor ofthe College of Business Administration building. Editor: Lois Glenn Shrout lhroulOmall............. Assistant Editor: Sally Furgeson llllllyNhnall............. Sales Office: (512) 471-5179 (512) 471-1063 fax danhardyOmal............. General: bbrOuts.cc.utaw ..... wWw.· htflrlwww........~, • Office ofTechnology Licensing and Intellectual Property • • The Office ofTechnology Licensing and Intellectual Property (OTL) facilitates • • the transfer of technology developed at the University ofTexas at Austin to the • • private sector for commercialization and public benefit. Currently, more than 70 • • : technologies are available for licensing through OTL. Among those are the two • below, from the semiconductor and electronics category. • High Resolution Deposition and Etching in Polymer Films. The invention provides a new method for producing microfine conducting features by using a scanning electrochemical microscope (SECM) to electrochemically deposit various conducting substances on the surfaces ofconductive objects. Applications: • Electrodeposition of materials with high resolution of less than one micron; • Process or repair of integrated produce mask used in X-ray of electron beam photolithography; • • Fabrication of microsensors; • Bypass wavelength resolution limitation of the photolithography. • Wafer-Scale Optical Bus. This novel approach uses an omni-directional solid state laser to transmit in all directions along the wafer. This produces an optical bus such that all receivers on the wafer can receive the transmission, thereby providing a means for reducing the electronic bottleneck that plagues data transmission via optical fiber. Applications: • Integrated optoelectronic circuits (IOEC); • IOEC detectqr chips in, e.g., amplifiers, equalizers, pulse reshapers, photodetec­tors. OLIVE G FORBE S 2 0961 PUBLIC AFFAIRS LIBRARY W W W UNIV OF TX AT AU STIN W -W SRH 3.243 S544 2 CAMPUS BUREAU OF BUSINESS RESEARCH P.O. Box 7459 Austin, Texas 78713-7459 Change Service Requested Announcements Copies ofJapanese Style Net­works and Innovations in High Technology Firms in Texas are available from the Bureau at $20.00 each. Research directed by Dr. Elsie Echeverri-Carroll and funded by the IC2 Institute and the Bureau focuses on the ways company networks contribute to innovative behavior. Also available for $20.00 each are the four volumes resulting from the study ofmarket opportunities for recycling in the state's manufacturing industries. Directed by Dr. Mina M. Dioun and funded by the Texas Natural Resource Conservation Commission, the research explores the potential for a sustainable recy­cling market in Texas. Correction: an article in the Octobe· Texas Business Review referred to Compaq as a Dallas-based company. It is, in fact, a Houston company.+