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Britain is good at fostering start-up companies in high technology, but none of them grow to become an eBay, a Cisco or a Hewlett-Packard. Is this because of some flaw in British managers or British institutions, and can the government do anything about it?
These questions will be in the mind of Gordon Brown, the finance minister, when he opens an international conference - "Advancing Enterprise 2005" - in London on Friday. This is part of Mr Brown's campaign to inject American-style entrepreneurial dynamism into the British economy.
The problem - if it is a problem - is not new. In the 1970s, Arthur D. Little, a management consultancy, drew attention to the fact that few of the technology-based companies which had been founded since 1945 had matched the growth rates of their American counterparts. The only exception was Racal, which had started as a manufacturer of two-way radios for the military, then broadened its range through acquisitions and organic growth.
Other British electronics companies had grown slowly, partly because they were not represented in the most dynamic sectors, for instance, computers and semiconductors. This was not due to any lack of ambition on the part of entrepreneurs. Indeed, when opportunities opened up after the introduction of the personal computer in the mid 1970s, several British companies plunged into the market, and three - Acorn, Sinclair and Apricot - did well for some years. In the end, however, they were out-gunned by larger American rivals.
Later British entrepreneurs learnt an important lesson from these failures: to compete head-on against powerful American incumbents is almost always a mug's game. The sensible strategy was to develop a product or service that would be complementary to, rather than directly competitive with, what the Americans were offering.
This was what ARM, a spin-off from Acorn, did with great success. It designed a range of high-performance, low-power microprocessors for mobile phones and other handheld devices, and licensed its technology to the manufacturers: the plan was to promote the ARM chip as the "engine" for these applications and to establish such dominance that rivals would find it hard to break in.
Yet ARM, with fewer than 1,000 employees in the UK, is still a relatively small company. The US has fostered entrepreneurial businesses which have grown much bigger either by dominating a high-volume business, such as Intel, or by broadening to become diversified technology groups, such as Hewlett-Packard. In the UK, Racal went some way towards matching Hewlett-Packard's example, but it no longer exists as an independent company, having been sold in 2000 to Thales, the French defence electronics group.
What Racal did do was to give birth to a genuine British-owned "big gorilla", Vodafone, which was demerged from Racal in 1991. Vodafone used its strong UK position to launch an ambitious global strategy, and it now has a larger international footprint than any other mobile operator.
If Vodafone can do it, why not others? A common accusation is that British entrepreneurs lack the will or the ability to move up to a higher league. Faced with the hassle and personal risk involved in building a big company, they prefer to stay small, or to sell out.
It is true that many promising businesses sold out at an early stage, often before they had gone public. But this may reflect an active British market in the buying and selling of companies (and an openness to inward investment) rather than a lack of managerial drive.
While a few cashed-out entrepreneurs retire to their yachts, others start new ventures or become business angels. Stan Boland, for example, was managing director at Acorn before starting one of that company's many spin-offs, a chip-design business called Element 14. He sold Element 14 to Broadcom of the US in 1999 for $640m, then promptly set up another semiconductor company, Icera, focused on chipsets for 3G phones, which he intends to take public.
As for the quality of management, running a big international business demands special skills, and the founder-entrepreneur - a Clive Sinclair, perhaps, or an Alan Sugar - may not be well suited for the role. More commonly, founders give way to professional managers who take the company to the next stage - and these people do exist in the UK. Take the case of Glaxo (now GlaxoSmithKline), which, although not a start-up, was virtually a new entrant to the pharmaceutical industry after the second world war. Thanks to intelligent leadership and excellent science, it went from minnow to world leader in some 20 years.
If management weakness does not explain the scarcity of companies like Glaxo and Vodafone, could the government do more? In those two cases, government action was helpful in the early years - for Glaxo, in setting up a regulatory regime that encouraged investment in pharmaceutical research, and for Vodafone, in deregulating telecoms well ahead of other European countries. But their growth owed nothing to government intervention - it was good management and good luck.
More British-owned companies of the Glaxo and Vodafone type would be desirable - they act as role models for budding entrepreneurs, as trainers of management and as a source of spin-offs. But there is no magic bullet which the government can use to create them. US experience suggests that the government should focus on economic policies that encourage entrepreneurs.
The US still has the edge over the UK, but the gap is smaller than it was 20 years ago. Moreover, thanks in part to the policies of Mr Brown and his Conservative predecessors, the UK now has a cadre of experienced high-tech entrepreneurs. There is no institutional reason why some of them, over time, will not graduate into the senior league.
Geoffrey Owen is a senior fellow at the London School of Economic's Institute of Management. This article is based on a paper written for the Diebold Institute Entrepreneurship Project, available from firstname.lastname@example.org
HOW TO BREED BIG GORILLAS: THE CONTINENTAL EUROPEAN WAY
• Most European countries have fared little better than the UK in fostering “big gorillas”. This is particularly true in information technology, and the reasons are the same as in the British case - namely, the difficulty of catching up with powerful US rivals. Two companies have notably bucked the trend:
• SAP in Germany. Formed in 1972 by five programmers from IBM, SAP was the first mover in enterprise resource planning software. It was an engineering-based business and for several years its principal customers were large German manufacturing companies. By the time it moved into the US in the 1980s, it had perfected a software package which no American company could match.
• Nokia in Finland. Like SAP, it did not have a big US rival at the outset. Finland was one of several Nordic countries which banded together to form a cross-border mobile network, and that experience put Nokia in a strong position when the European market opened up. Luckily for Nokia, the US mobile industry was fragmented across several incompatible standards - this meant that no US company could achieve the economies of scale that would have enabled it to dominate the world market.