Chapter 7. Microelectronics in small/medium enterprises in the United Kingdom*

* Contributed by the ILO. This study is based largely on Jim Northcott and Petra Rogers: Microelectronics in industry: What’s happening in Britain?. Policy Studies Institute, London, 1982; and Jim Northcott, Petra Rogers and Anthony Zeilinger: Microelectronics in industry: Survey statistics, Policy Studies Institute, London, 1982.

IT IS INTERESTING to examine the spread of microelectronics within the manufacturing sector in the United Kingdom for two reasons First, since 1978 the government has made a concerted effort to promote the development and use of microelectronics. Second, a survey conducted by the Policy Studies Institute (PSI) in 1981 makes it possible to examine the rate of diffusion of microelectronics by size of firms engaged in manufacturing activities.¹ A brief description of government promotional policies is followed by an analysis of the PSI data by size of firms.

I. GOVERNMENT SUPPORT²

In 1978, the United Kingdom Government discovered that while about 50 per cent of manufacturing firms knew about microelectronics technology, only 5 per cent employed it. In response to this situation, largely through its Department of Industry, the government inaugurated a series of programmes designed to encourage the development and application of microelectronics. Policies centered on: (i) education and training; (ii) support of feasibility studies; and (iii) direct financial support for the development and application of new technology.

In July 1978, the Department of Industry allocated an initial US$72 million for a microprocessor applications project. Part of the resources were used to raise the level of awareness of microelectronics technology, through support for conferences/seminars, and the development of publicity materials. College and university training courses on computer use were also supported. The Manpower Services Commission of the Department of Employment co-operated with the Department of Industry in setting up technology centres that are intended to become self-supporting financially through the income generated from consultation and training on microcomputer use. These educational and training activities are supplemented by a five-year programme (started in March 1979) by the Department of Education which supports the purchase of microcomputers by schools.

The Department of Industry sponsors feasibility studies for firms which contemplate microelectronics applications. These studies are usually done by consultants registered with the department. By early 1981, 2,348 feasibility study applications had been submitted of which 1,627 were carried out. The completed studies led eventually to 345 development projects.³ This development phase is also supported with grants covering part of the costs involved.

In addition, the government has attempted to stimulate the development and production of electronic equipment, processes and components. The traditional research and development role of the Ministry of Defence has been enhanced. Also with another scheme of the Department of Industry (established in mid-1978), the Microelectronics Industry Support Programme, assistance is channelled to firms seeking to manufacture microelectronic components. Support is given to firms developing and/or applying equipment or new processes used in the microelectronics industry. Direct public financial support went into the founding in 1978 of INMOS, a company intended to become competitive in the manufacture of very large-scale integration chips. More recently, the British Technology Group has begun to assign priority to innovating firms in the microelectronics and information industry. The Department of Industry plans to spend US$140 million over four years (1982-86) to support the development and diffusion of information technology.

Although the rate of adoption of microelectronics technology has fallen short of what officials had hoped, its continuous penetration into the manufacturing sector has indeed occurred. Shortly after the Department of Industry initiatives in 1978 a survey indicated that 20 per cent of the manufacturing firms were using microelectronics for products, processes or both.⁴ This proportion had risen to approximately 40 per cent by 1979,⁵ and almost 50 per cent in early 1981.⁶

II. MICROELECTRONICS ADOPTION BY FIRM SIZE

In keeping with the theme of blending new technology with traditional economic activity, we turn now to an examination of how small and medium-sized manufacturing firms responded to microelectronics technology vis is their larger counterparts. The best available source for making the comparison is the PSI study mentioned above. During January to February 1981, telephone interviews were conducted with 1,200 manufacturing enterprises. The size of firms was established according to the number of employees with the smallest of the six size categories having from 20 to 49 employees and the largest category, 1,000 or more employees. The sample was constructed so that the number of firms from each industry included in the sample was representative of the actual proportions in the manufacturing sector. Questions asked ranged over the form and extent of the use of micro- electronics, the timing of adoption, effect on competitive position and production costs, sources of information, perceived advantages and disadvantages, costs and types of equipment, influence of skill shortages and training courses, and union attitudes. More than 200 reference tables were prepared from the data, over 40 of which contained a breakdown by size of firms.

Perhaps the most striking relationship between microelectronics application and the size of enterprise in the United Kingdom manufacturing sector is the close positive correlation between the largeness of the firm and the acceptance of new technology. Table 7.1 brings this relationship out quite clearly. There is a perfect rank correlation for the six size categories and the proportion of firms either using or developing uses for microelectronics. A close association is seen for both product and process users and it is roughly preserved in all stages of development. Only a small proportion of the largest firms that are in the early stages of feasibility study appears considerably out of line with the general pattern.⁷ Other studies corroborate these findings. For example, a questionnaire survey carried out in June 1980 for Southeast England (including London) found that the firms with more than 200 employees used microelectronics much more than did the firms with 200 or fewer employees.⁸ Of subcontractors in Japan’s machine industry, 57 per cent of the firms employing 101 to 300 workers have introduced microelectronic equipment compared to 31 per cent for the firms employing 1-20 workers.⁹

III. CAUSES OF LOWER ADOPTION BY SMALL/MEDIUM FIRMS

Why are smaller firms less likely to apply microelectronics technology than larger ones? Perhaps the first explanation is the concept of economies of scale. Certainly, the costs of information search, acquisition of basic and ancillary hardware, purchase or development of software, and efforts to run the programme efficiently, must be recovered. Larger firms are more likely to have attained the minimum scope for application necessary to cover the costs. Undoubtedly however, the rapid trend towards smaller, better and cheaper microprocessors has reduced the importance of economies of scale in many microelectronics applications. Thus a priori one can say that economies of scale offer only a partial explanation at best.

It is likely that “economies of scope’’ represent a more important explanatory factor. When the overhead costs of microelectronic capability can be spread over several different types of products or processes the costs can be more easily recovered. Unless all firms in the manufacturing industry are homogeneous with respect to the number of products or processes, economies of scope can be a powerful incentive to adopt the new technology. It seems reasonable to assume that there is a rough association between largeness of firms and a greater variety of products and processes within the firms.

Economic environment also plays a part. Smaller enterprises are very vulnerable during periods of recession or stagnation in terms of both failure rates and difficulty in borrowing capital funds. Since the United Kingdom has been “resting between booms” for a considerable period of time the general climate must have had some impact on the ability of small firms to take advantage of new technologies. Indeed, the two smaller-size categories of firms in the PSI survey perceive the economic situation as a much more important disadvantage than technical considerations. While true also for the two larger-size categories of enterprises, Table 7.2 indicates that the smaller firms feel relatively more constrained by the economic situation.

Table 7.1 Microelectronics by stage of development and size of enterprises (percentages)

Employment size	Using or developing use	Users	Users for products	Users for processes	Planning use within 18 months	In early stages of feasibility study
20-49	17.5	11.5	3.5	8.0	2.0	3.5
50-99	25.5	21.0	5.5	16.0	1.0	3.5
100-199	42.5	29.0	8.5	24.5	5.5	8.0
200-499	50.5	34.0	7.0	32.0	7.5	8.0
500-999	67.0	45.5	6.5	48.0	9.5	9.5
>1,000	89.5	76.0	21.0	74.5	8.5	4.5
All firms	48.8	36.0	8.6	34.2	5.2	6.2

Source: Northcott, Rogers and Zeilinger, op.cit., Table 2.

Table 7.2. Relative importance of economic situation and technical constraints by size of users (or those planning to use) of microelectronics (percentages)

Factor	Employment size
	20-49	50-99	100-199	200-499	500-999	> 1, 000	Total
Economic situation much more important	47	41	26	31	31	32	32
Economic situation rather more important	6	6	22	25	13	13	16
Both about equally important	30	20	24	20	20	22	22
Technical questions much more important	3	6	2	4	11	8	7
Technical questions rather more important	6	8	14	14	14	11	12
Don’t know/Not answered	9	18	12	6	11	12	11
Total	100	100	100	100	100	100	100

Source: Northcott, Rogers and Zeilinger, op.cit. Table 76.

In addition, the incidence of awareness of the Department of Industry policies for promoting microelectronics is associated with size. There is a definite tendency for decreasing incidence of awareness as one moves towards the smaller categories of enterprises. Table 7.3 shows the situation for the availability of US$4,800 consultant’s feasibility study while Table 7.4 gives the data on awareness of support of up to 25 per cent of development costs for a microelectronics project. Firms employing or planning the use of microelectronics showed more awareness than those firms which were not.

Table 7.3. Awareness of US$4,800 for consultant’s feasibility study: users and non-users by size* (percentages of the establishments in each size range)

Employment size	Users			Non-users
	Yes unprompted	Yes prompted	No	Yes unprompted	Yes prompted	No
20-49	17	17	66	2	13	83
50-99	22	20	59	1	15	77
100-199	18	25	55	9	15	76
200-499	29	28	44	15	20	66
500-999	37	34	29	20	21	58
>1000	37	27	35	19	19	62
Total	30	27	42	9	16	74

Source: Northcott, Rogers and Zeilinger, op.cit., Table 167.

* “Users” and “non-users” here include firms planning or not planning microelectronics applications respectively.

Multinational enterprises also influence the rate of diffusion of microelectronics by size of firm. These firms are more likely to adopt microelectronics than strictly United Kingdom firms: they are also more likely to be large than small. Table 7.5 brings this relationship out clearly. Although only 88 “overseas companies” were included in the sample of 1,200 firms, this factor does indeed help to explain the higher incidence of adoption associated with larger firm size.

One aspect of microelectronics technology which does not seem to disadvantage small/medium manufacturing firms in the United Kingdom is a shortage of skills. This is surprising because in Japan, shortage of skills is precisely the biggest complaint. Many smaller firms complain about the lack of operators and programmers for microelectronic equipment and the inexperience of this personnel. In these cases, the installed equipment cannot be properly utilised.¹⁰ Surprisingly, as Table 7.6 points out, larger United Kingdom firms suffer more from skill shortages.

A final point can be raised on which no direct evidence is provided by the PSI study. In an imperfect market for labour and capital funds, it can generally be presumed that wages will be lower and the cost of borrowed funds higher for smaller firms. This could result in some reduction in the number of smaller firms adopting microelectronics technology, a tendency based on rational economic calculation.

Table 7.4. Awareness of 25 per cent support for development: users and non-users by size*
(percentages of the establishments in each size range)

Employment size	Users			Non-users
	Yes un-prompted	Yes prompted	No	Yes un-prompted	Yes prompted	No
20-49	11	17	71	2	12	85
50-99	16	22	63	5	16	78
100-199	20	26	53	4	14	81
200-499	25	22	52	8	19	83
500-999	28	37	34	17	17	65
>1000	35	29	35	14	24	62
Total	26	28	45	6	15	78

Source: Northcott, Rogers and Zeilinger, op.cit., Table 171.

*”Users” and “non-users” here include firms planning or not planning microelectronics applications respectively.

Table 7.5 Use of microelectronics: all users by type of company and size - (percentages)

Size	United Kingdom independent	United Kingdom group	Overseas company	All
	Users	Users	Users	Base	Users
20-49	18	17	0	(200)	18
50-99	27	22	33	(200)	26
100-199	38	45	55	(200)	43
200-499	52	47	71	(200)	51
500-999	62	68	76	(200)	67
>1000	80	90	100	(200)	90
Total	38	54	76	(1200)	49

Source: Northcott, Rogers and Zeilinger, op.cit., Table 7.
* “Users” include firms planning to use microelectronics.

Table 7.6 Difficulties as a result of skill shortages: product and process users by size*
(percentages)

Employment size	Product users	Process users	All users
20-49	10	17	15
50-99	27	0	6
100-199	42	10	19
200-499	43	14	20
500-999	34	26	23
>1000	43	37	30
Total	38	22	26

Source: Northcott, Rogers and Zeilinger, op.cit., Table VII.
* “Users” include firms planning to use microelectronics.

IV. CONCLUSIONS

Small and medium-sized enterprises perform several important economic functions. Generally, for equal amounts of capital investment they demand a larger amount of labour. A competitive “fringe” of smaller firms can help curb excessive oligopolistic behaviour of “big business”. They can often respond more quickly to local economic conditions. Frequently, a more satisfactory employer-employee relationship is maintained. Small and medium enterprises also provide an excellent vehicle for expanding and training the corps of entrepreneurs. Therefore, there is every reason for considering these firms, occupying the smaller end of the spectrum, as valuable socio-economic assets. It is desirable to take measures to keep them competitive, innovative and economically viable.

Smaller firms are less likely to adopt microelectronics technology. This can be partly explained by rational economic considerations such as economies of scale, economies of scope, and imperfect markets for factors of production. But it also stems from more difficult economic conditions. During sluggish or declining economic periods, smaller enterprises suffer inordinately in their ability to raise capital for innovation. Given the beneficial functions performed by small and medium-sized manufacturing firms, one wonders whether the low levels of investment in them also result in an optimal allocation of resources for the economy as a whole.

If availability of capital funds represents a severe problem to smaller firms, so too does the lack of available supply of managerial and entrepreneurial time and talent for seeking out and identifying existing opportunities. Special awareness programmes aimed at and tailored for small and medium enterprises deserve serious consideration.

NOTES AND REFERENCES

1. See Jim Northcott and Petra Rogers: Microelectronics in industry: What’s happening in Britain? (London, Policy Studies Institute, 1982) and Jim Northcott, Petra Rogers and Anthony Zeilinger: Microelectronics in industry: Survey statistics, Policy Studies Institute, London, 1982.

2. Unless otherwise noted, the material on government policy is taken from Ernst Braun, Kurt Hoffman and Ian Miles, Microelectronics and government policies: The case of a developed country, UNIDO/ECLA Expert Group Meeting on Implications of Microelectronics for the ECLA Region, Mexico City, Mexico, June 7 to 11, 1982, ID/WG.372/2, May 3, 1982.

3. See John Bessant: “The diffusion of microelectronics”, in Staffan Jacobsson and Jon Sigurdson (eds.): Technological trends and challenges in electronics; dominance of the industrialised world and responses in the Third World, Research Policy Institute, University of Lund, 1983. Bessant points out that the rate of applications has not been sufficient to use up the original money allocated for this purpose.

4. A Department of Industry survey conducted by PA Consultants, 1978. Cited by Bessant, op.cit.

5. Report commissioned by the Department of Industry, carried out by Market Opinion and Research International, 1979, cited by Bessant, op.cit.

6. Northcott and Rogers, op.cit. Actually, the 48.5 per cent “using” firms includes firms in the development of feasibility stage. See table 2.

7. This low percentage is probably explained by the high proportion of these large firms already using microelectronics (76.0) or activating shorter-term development plans (8.5).

8. See Tom Bourner, Howard Davies, Val Lintner, A. Woods and M. Woods: “The Diffusion of Microelectronic Technology in South-East England”, in Derek L. Bosworth (ed.), The employment consequences of technological change, Macmillan Press, London, 1983.

9. English provisional translation, outline of the second interim report, The impact of microelectronics on employment, National Institute of Employment and Vocational Research, Tokyo, Japan, 1982.

10. Speaking of small users of numerically controlled machines, The impact of microelectronics on employment, ibid.