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Small enterprises serve as incubators of U.S. innovation. The National Science Foundation estimates that 98% of "radical" product developments spring from the research labs of small firms. "Why did the large employers allow the entrepreneurs to escape?" asks Frederic Scherer, an economics professor at Swarthmore College. "There is one story after another where superior ideas were rejected by the larger companies and disgruntled staff went out to found their own enterprises."
Perhaps one reason the 1980s fostered entrepreneurship is that during the decade Big Business tended to grow even bigger as companies merged and improved already dominant positions. In industries as diverse as banking, airlines and brewing, the major companies increased their market share. That in turn presented the opportunity for upstarts to begin filling the niches too small to be noticed by the behemoths.
In the debate over entrepreneurship, everyone agrees that the U.S. needs a balance of large companies and small ones. But critics of the entrepreneurial era believe Government policies and America's business culture have provided too many incentives for innovators to strike out on their own, especially in manufacturing and high-tech industries, ranging from steel to supercomputers. Says William Weisz, vice chairman of Motorola (1987 revenues: $6.7 billion): "Entrepreneurs create a lot of energy, but big businesses are the only ones that are going to maintain an industrial base for this country."
While upstart ventures may run circles around stodgy companies when it comes to rolling out fresh products, they often cannot protect their new markets against giant foreign conglomerates that can knock off their merchandise and mass-produce it at a much lower cost. American companies invented many of the basic technologies behind such products as videocassette recorders and robotics, but Japanese firms have captured the lion's share of the sales in those fields.
Nowhere is this process more sharply defined than in the $32.5 billion global semiconductor industry. Since 1980, more than 200 new U.S. semiconductor companies have been formed as the development of microchip technology has surged forward. Yet the U.S. share of world semiconductor production has slipped from 57.2% to 39.4% during this period, while Japanese companies have expanded their market share from 27.4% to 48%.
Once dominant mainly in manufacturing, Japan's giant electronics companies are sharpening their edge in product development as well. Reason: manufacturing profits have bankrolled research and development. Japan now leads the U.S. in twelve of 25 strategic chip technologies, has pulled abreast in eight others, and is catching up in the remaining five.