New public infrastructures for small firm industrial modernization in the ...

I3NI'REPRENEURSHIP 91 REGIONAI, 1~1:\'EI,OPMENT, 7 (15)95), (j3-84

New public infrastructures for small firm industrial modernization in the USA PHILIP SHAPIRA, J . DAVID ROESSNER and RICHARD BARKE

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School o f Public Policy, Georgia Institute of Technology, Atlanta, C A 30332-0345, U S A There has been increasing concern in the United States about lagging industrial modernization, especially amongst the nation's small and midsized manufacturers with 500 or fewer employees. This has prompted a series of new technological infrastructure initiatives by federal ancl state governments, academic and industry organizations, and othcr groups. New legislation, policies and programmes have been established to promote industrial competitivcncss and modcrnization for small and midsized firms. After considering the dimensions of the industrial modernization problem, the papt:r examines US federal and state technological infrastructur;tl interventions aimed at promoting industrial modcrnization. These include industry a n d technology centres, industrial extension and technology deployment proyrammcs, industry consortia and networking, and support for convcrsion from defence to civilian tcchnologics and markets. The paper considers insights and best practices from the US cxpericnce with these programmes and discusses issues and policy questions that rcrriain to be acldressecl. Keywords: industrial modernization; USA; small and midsized manufacturers

1.

Introduction

In recent years, there has been a growing level of intcrest a n d activity in industrial modernization in the U S A . ' I n the context of broader debates about national competitiveness a n d regional development, there has been a concern that U S firms, o n average, have been slower thail their counterparts in other major industrial countries to adopt a n d fully use new m a n ~ i f a c t u r i n gtechnologies a n d techniques. "l'his problem of industrial modernization is believed to be most acute a m o n g small a n d midsized manufacturing enterprises (SMEs) with u n d e r 500 employees. These smaller firms frequently lack expertise, time, money o r support to upgrade their current manufacturing operations, introduce new technologies a n d methods, implement better quality control a n d improve workforce training. T o promote industrial modernization a m o n g smaller U S manufacturing firms, a series of technological infrastructural initiatives has been put into place by federal and state governments, academic a n d industry organizations, a n d other groups. These effbrts include: legislation a n d policit:~to promote industrial competitiveness and technology transfer; the establishment of a variety of regional industry a n d technology support centres; enhanced state a n d fecleral programmes for industrial extension a n d technology deployment; the promotion of industry consortia; the stimulation of industrial networking; a n d support for conversion from defence to civilian technologies a n d markets. Most of these initiatives a r c relatively new a n d mark a major change in American public industry a n d technology policies - especially at the federal level. D u r i n g the Reagan a n d Bush administrations (1980-92), the executive branch adopted a largely 'hands-off approach to applied industrial and technology policy. While governmcnt 0898-5626195 510.00 @ 1995 Taylor & Francis Ltd


support was allowed for basic or generic research ancl for military research and development, the policy of both administrations was to leave the commercialization and deployment of civilian technologies to the market. A number of applied technology programmes were started during this period, but these were gencrally championed by state governments or the U S Congress, rather than by the executive branch of the federal government (Atkinson 1991, Shapira 1990). However, 1993 marked a significant change in the national political environment for industrial ancl technology policy in thc USA, with the incoming Clinton administration being far niorc willing to embrace - and find support for - direct industrial policy- intcrvcntion and technolosy infrastructure development. In particular, there has been an expansion of federal funding and leadership in modernizing small firms and promoting a transition from dcfcncc to civilian production. This article discusses the problem of small firm industrial modernization in the US, and examines current public and public-private technological infrastructural interventions aimed at promoting industrial modernization. Then, fbcusing particularly on efforts aimed at modernizing small firms through industrial extension and technology deployment, the article considers insights ancl lessons from the US experience.

2.

Dimensions of the modernization problem in the US

Over the last decade, U S manufacturing has encountcrcd significant problcrns of international competitiveness and performancc, leading to pressures for restructuring and change (US Congress, Ofice of lechnology Assessment 1990a). Between 1979 and 1992, US manufacturing productivity growth - averaging 2.4% annually - increased at only two-thirds of the rate in Japan, the yearly mcrchandise trade cleficir expanded to US896 billion, and total manufacturingcmployment dcclincd by three million jobs.2 T h e poor performancc of U S manufacturing has not only been associated with declining employment, but also with an important shift in the structure of the industrial base. While many large manufacturers have rationalized or closed, the nurnber of smaller manufacturing units has increased. US manufacturing establishments with fewer thari 250 employees rose by 19%, from 303 470 in 1980 to 359910 in 1990, while very large (1000 + employees) establishments fcll by alrnost one-quarter, frorn 2 440 to 1 880 over the same pcriod." This shift towards smaller manufacturing units has also bccn observed in other industrial economies (Segcnberger et al. 1990) although debate has arisen about its importance and explanation. O n e interpretation suggests that the standardized, largescale, mass production systems of thc post-\,Vorld kliilr I1 cra (sometimcs typified as 'Fordism') are now being edged out by more specialized ancl flexible forms of manufacturing. In this new phase, competitive advantage is accruing not to the old industrial giants, but to networks of small, inno\;ativc, flexible and specialized production units (Piore and Sabel 1984, Scott 1988a). These systems of flexible specialization arc often associated with geograpllical concer~tr.ation and highly collaborative linkages amongst firms and with business support infrastructures. California's Silicon Valley has been submitted as an example of the leading cclgc of this new production systcm although other locations in the U S (as well as in \\Jestern Europe and Japan) have also bccn highlighted (Saxenian 1994, Scott 1998b, Storper 1993). However, another explanation attributes the shift towards sniallcr units not to any intrinsic new advantage to small and midsized firms but to thc changing strategies of


large corporations. Here, the argument is that large firms - responding to global competition - are concentrating on core business elements, using 'lean' production techniques. Other operations such as parts production, subassen~bly,transportation or maintenance are subcontractt:d out to smaller, and less costly, suppliers (Harrison 1994, Young et al. 1993). T h e result - the downsizing of big production units and a growing number of smaller ones - still leaves unscathcd the dominancc of larger parent corporations. Significantly, whichever explanation turns out to be more accuratc (and it may bc that both processes are occurring simultaneously), the challenges for U S SMEs are daunting. If the balance of industrial advantage is shifting towards small-scale flexible production, U S SMEs will need to strengthen their technological capabilities, management and workforce skills, and business relationships. O n the other hand, if' large corporations remain dominant and aggressively pursue lean production methods, US SMEs will face still greater pressures to reduce unit costs, pay greater attention to quality and on-time delivery, take more responsibility for design and subassembly ancl improve other aspects of manufacturing performance - or lose business to foreign compctitors. Many US manufacturers may adapt to these pressures by bidding down wages and working conditions. Indeed, such strategies are already observable in Los Angeles, Ncw York and other parts of the country where there has been a proliferation of small firm, low-wage employment in sectors like apparel, electronics and metalworking (Sassen 1989, Teitz and Shapira 1989). A more dcsirablc approach, in terms of strengthening the industrial base as well as maintaining living standards, would be for SMEs to upgrade their abilities to make high-quality yet cost-effective products. This will involve improvements in technology, skills, and relationships. However, while there are many excellent and technologically sophisticated small and midsized industrial firms in the US, a far greater number of these small firn~slag in modernizing their manufacturing methods and approaches. A series of studies has s h o w that smaller U S plants have a markedly lower propcnsity to usc new manufacturing process technologies when compared with larger units (Industrial Technology Institute 1987, Kelley and Brooks 1988, US Bureau of the Ccnsus 1989, 1993). Importantly, US small and midsized manufacturers not only lag larger US units in adopting ncw manufacturing technology, but also lag the technology adoption rates of small and midsized firms in Japan ancl Germany (Rosenleld 1992a). Moreover, the gap in ncw technology use between large and small units is wider in the US than in Japan (Shapira 1992). SMEs also trail in using 'soft' people-based technologies and techniques such as statistical process control, ,just-in-time manufacturing, cell-focused mani~facturing, greater attention to mariufacturability in design, or simple softwarc tools (Industrial Technology Institute 1987, Shapira and Geiger 1990). Additionally, smaller hrrns rarely provide formal training or skills upgrading for their workcrs and tend not to participate in public training programmes, which, in turn, are often not focused towards small firm needs (National Coalition for Advanced Manufacturing 1993, U S Congress, Ofice of Technology Assessment 1990b). With many small American firms slow to enhance technologies, operating methods and worker skills, not only is value-added per employee much lower in small U S plants when compared with large ones, but the gap has widened over the last two decades (Luria 1989). Several of the U S findings about the take-up of new technologies and techniques by small firms have been parall(:led in research on industrial moclernization in Ihrope and Canada (see, for example, Alderman and Davies 1990, Alderman and Fisctier 1992, Britton 1991, Davelaar and Nijkamp 1989, Hitchens el al. 1992, O'Fat-rell and Oakley


1992, 1993). These studies have generally Sound that smaller plants, particularly in peripheral regions, are less likely to use new manufacturing technologies, although other factors, such as plant age, customer and market relationships, and government incentives, also have an effect. However, it is also apparent that there are considerable variations within and between countries in the way small firms adopt and use new technologies, leading to the argument that the critical determinant is not so much size but the broader 'technological system' of institutional relationships and market and nonmarket linkages (Carlsson and Jacobsson 1994, Sabel et al. 1987). As we will see, U S policy-makers are now bccoming more attuned to this point, recognizing that these systemic influences on industrial modernization arc, at least in part, amenable to policy action.

3.

Understanding the modernization problem

How can we understand the 'causes' or underlying rationale for the modcrnization problems of small firms in thc United States? Therc arc, of course, numerous specific reasons which interact with one another, and there are many varying perspectives as to which particular causes are most important. However, considered most broadly, the reasons for lagging small firm modernization can uscfully be clescribcd in terms of the following four-step f ' r a m e w ~ r k . ~ (I) Firm-level. Small and midsized manufacturers face a series of enterprise-level barriers to modernization (National Research Council 1993, Shapira et al. 1992). These include the lack of technical expertise and access to information to make informed decisions on equipment purchases. Knowleclgc can be limited about appropriate solutions for modcrnization, whether about hardware, software, management methods, worker training or management training. Managers arc uncertain about information sources: where to go, who can help, whorn to trust (Dcrtouzas et al. 1989). Some managers have insufficient information about their own manufacturing processes. Issues of finance and cash flow to underwrite upgrading are also serious (Kosenfeld 1992a, Shapira and Geiger 1990). These barriers are compounded by problems of time and the pressurcs of dealing with immediate situations. In a small firm, rnanagcment time and energy often focuses on clay-to-day crises: meeting payroll, dealing with personnel issues, equipment breakdowns and other short-tcrm problems. l'here is littlc time for proproblems. In some active, strategic thinking, only reaction to relatively u~~preclictable cases, managers may be fearful of change or concernccl about shortcomings of workforce skills to implement improved technologies. Managers are often content with aged equipment and methods because these have enabled thcir firins to survive in the U S market; they see that thcir U S competitors operate similarly, and there is little concern for the firm's survival beyond the present generation. (2) Business infrastructure. The business infrastructure, involving the organization of industry, inter-firm relationships and associations has important elt'ects on industrial modernization. Included here are the nature and intensity of'industry co~npetitionand cooperation, the closeness of links with customers, suppliers, vendors and subcontractors, and the role of trade organizations and other industry and regional associations. T h e short-tern~character of supplier-customer links and the weakncss of small-firm technology-focused networks puts U S srnall and midsizecl firms at a disadvantage in pursuing modernization when compared with the environment for small es 1990, and midsized firms in Japan, Germany, Italy anti other European c o ~ ~ n t r i(Best


INDUSTRIAL MODERNIZATION I N THE USA

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Dore 1987, Pyke el al. 1990). U S smaller firms operating in end-use markets do so in an atmosphere of great uncertainty, are generally squeezed for capital for investment, and are typically in a weak position to bargain with their customcrs and vendors. Smaller suppliers to larger manufacturers often do not have the independent capability to know whether they are making the right decisions and they lack supporting customer incentives and assistance. Although thc situation may be changing, most larger companies still focus on least-cost and have not adopted practices to improve their suppliers' productivity or technology (US Congress, Office of Technology Assessment 1990a, National Research Council 1993). A further issue is the weakness of private industry infrastructure to support and stimulate modernization among small manufacturers. Vendors of hardware and software are potential sources of information and assistance, but frequently do not serve small firms well. Vendors want to sell products, and thus may not provide ob.jective advice. Poor after-sales follow-up and training are also problems, particularly for small firms lacking their own internal training resources and technical expertise. Private consultants again can be helpful to small firms. However, major private consulting firms, whose clientele is mainly larger firms, often do not tailor their approach to reflect srnall firms needs. O n the other hand, small consulting operations can be too narrow in their expertise, and may misdiagnose problems or offer inadequate recommendations. Moreover, small firm managers can find it difficult to icientifi. well-qualified consultants and often feel that consultants are too expensive. Trade associations are another part of the industrial infrastructure that could potentially help firms to modernize. In contrast to industry organizations in Germany and several other advanced economies, most American trade associations do not proactively focus on helping their members promote collaborate innovation (Sabel el al. 1987). Conversely, many small firms do not actively participate in trade associations, nor do they expect their associations to offer technological assistance. Trade associations in the US tend to be reactive, responding to government actions or dealing with business regulation issues. This problem is compounded by the perception, if not the reality, that many smaller firms are reluctant to share technical, training or marketing infbrmation with other small firms in their industry or region, seeing them as competitors. This 'atomizes' small manufacturers, isolates them and weakens networks of information, experience and collaborative: problem-solving that could be mutually beneficial to all firms involved. (3)Social infrastructure. T h e social infrastructure for modernization in the US, including education and training systems, technology transfer programmes and other public services, is an area of concern. At the local and regional level, where the workings of this infrastructure are most relevant for small firms, many gaps and problems are evident. In particular, it has become apparent that regional variations in workforce training and skill not only affect whether firms introduce new technology or not, but also influencc the kinds of technology adopted and the manner in which it is used. Where workers are poorly trained, firms will tend to adopt centralized and more rigidly automated technologies; if workers are better trained, and if firms are well managed and organized, adopting firms will be able to select more flexible and decentralized technologies and draw on their workers' skills to improve further technology and pursue ~nnovation (d'Iribarne 1990, Jaikumar 1986, Martin 1990). While large lirms can establish their own training systems and recruit from national labour pools, small firms are more dependent on the local employment and training ~nfrastructure,including high schools, technical and community colleges, universities, skill centres, and retraining and


upgrading programmes. In the US, this infrastructure has drawn increasing criticism for producing neither well-rounded competent students nor well-trained technical specialists (US Congress, Office of Technology Assessment 1990b). In turn, small firms often employ workers who have less education and high turnover. Such firms generally do not provide formal training (in part, because thcy fear their trained workers will leave to obtain higher wages elsewhere) and tcncl not to participate in public training programmes, which are frequently not suitable for srnall firm needs, especially for upgrading existing employees. In a mutually reinforcing downward cycle, the weaknesses of public and private training means that smaller firms find it dificult to develop the skilled labour needed to adopt and cn'ectively dcploy flexible new manufacturing technologies. Other elements of the social infrastructure are problematic, too, from the perspective of industrial modernization. For example, universities typically stress research anti advanced technology missions, and reward their faculty for excellence in these areas. Technology deployment for small and midsized tirrns is generally not high on thc university institutional priority agenda. While a handful of universities have focused on the needs of smaller firms, universities most often seek alliaric:es'\vith larger firms able to absorb advanced technologies and who can provide reciproc;ll financial support. Equally, state and local economic development progr-ammes are felt to ofl'er little in the way of appropriate technological expertise and infr-equently focus on thc needs of existing srnall and midsized manufacturing enterprises: traditionally, most econon~icdevelopment ef'orts have concentrated on recruiting large firms, aicling newr start-up businesses or building physical infrastructure. Even where thcy exist, modernization and industrial extension prograrnmes have not, up to now, rcachecl most small and niidsized firms (US Congress, Office of Technology Asscssrnent 1990a). T h e problerns of an ineffective social infrastructure for mociernization not only put U S srnall and miclsizeci firrns at a disadvantage but, ironically, present a history that makes it even more clifficult to correct the problem. Many U S small firm managcrs now have low expectations about the public sector and are not motivated to push for improvements in the ser\:ices providccl. ( 4 ) Policies and uttitu[les. Finally, there is a climcnsion to the problcm involving policies and attitudes. American manuljcturers of all sizes have often ernphasizcd new product development over improvcn~entsin manufjcturirig procctlures (Dertouzas el ul. 1989, U S Congress, Office of Technology Asscssrnent 1990a). Federal R&D policies have reinforced this by focusing on basic and applied research rclatetl to promising new products, with scant attention paid to manufacturing processes and equipment. The needs of existing small and midsized manufacturing firms have generally been given little regard at the national level. T h e bulk of federal R&D spending to private companies goes to large firms with more than 25 000 employees (National Science Board 1993, p. 374). Less than 1 % of the federal R&D budget is allocatecl to tcchnology transfer and, of this: most is fbr the transfer of advanced technologies aritl prorlucts rather- than best practice process technology. With the arrival of the Clinton acltninistration in Washington, thert: is now much greater policy activity in promoting applied industrial and technology policies (Rranscomb 1993). However, it should bc noted that the increasetl fcticral intcrcst now seen in industrial modernization is only the latest in :I series of targets for policy (for example, R&D, technology transfer, now niodcrnizatioli). This constantly changing pcrception of the problem has macle it dithcult to dcvelop stal,lc prograrrirnes. Also having a broad but significant influence o n motlcrnizi~tionare nlilcro issucs such as thc cost and availability of capital, tas and trade politics, thc short-term nature of the stock

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INI)USTRIAL MODEKNIZA'I'ION I N '['HE USA


market (which cuts the time horizons of business decision-making), poor national educational performance, anrl uncertain attitudes towards manufacturing in gcneral in the US. Industrial modernization is thus a complex problem, involving tcchnolo~y, information, management, training and financing, and raising questions of structures, private and public-private relationships, attitudcs, policies and practices. It is a problcm with multiple dimensions. Addressing the problem at the 'micro' level of the firm and its managers and workers is critical; but the problem also involvcs 'macro' economic, technological and social policies, as well as 'meso' issucs of business relationships and practices, institutional linkages and inter-firm networks, and public-privatc cooperation.

4. Infrastructural policy initiatives in the US for industrial modernization

Over the past decade, there has been an expansion of public and public-private technological infrastructural initiatives and programmes to help small firms with industrial modernization and technology deployment in thc USA. However, until quite recently, most of these industrial modernization activities were initiated at the subnational level, by state governments, universities, collcges and othcr local and non-profit organizations. During this period (covering much of the 1980s) the federal government provided only limited ant1 rather uncoordinated support fbr statc and local modernization efforts, preferring to focus the bulk of federal technology and R&D resources towards basic research and defence ob-jectives. However, a shift in thc federal government's stance towards industrial modernization began with the passage of the 1988 Trade and Competitiveness Act. This Act recognized that there was a problem of industrial competitiveness in the USA and gave an explicit mandate to a civilian agency, the National Institute of Standards and Technology (NIST) within the US Dcpartn~ent of Commerce, to promote milnufacturing technology ~ l c ~ l o ~ r n eNew n t . ~manufacturing technology and state extension programmes were establishccl within NIST, marking a first round (1988-92) of increased federal support and guidance to statc modernization programmes. A second and far deeper phase of federal activity began in 1993 with the incoming Clinton administration. During his election campaign and after taking office, President Clinton pledged to establish a national system of 170 manufacturing centres to help small and medium-sized manufacturers adopt ncw technolop, production techniques and business practices (Clinton and Gore 1992, 1993). The administration is now overseeing a dramatic growth of federal manufacturing technology assistance, supported largely by funding from its defence conversion initiative (known as thc Technology Reinvestment Project, or TKP). T h e following scctions revic\v thc development and status of state and fedcral rnodernization activitics.

4.1

State industrial modernization

programmes

In America's decentralized governmental kamework, states have frequently led the federal government in promoting ncw developmental and public infrastructural policies (Eisinger 1988, Osborne 1988). This has been the casc for industrial modernization where several states have run programmes for many years. For cxarnplc, in the US South, programmes were begun by North Carolina in 1955 and Georgia in 1960. Thcsc


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