If U.S. Is So Inventive, Why Is It Scared?
There’s no good news without bad news in this economy. That’s the reason even well-informed people are perplexed--people such as Treasury Secretary James A. Baker III, who made a wisecrack last week about the stock and bond markets declining in the face of good news. “Because things are so good,” said Baker, the markets probably feared they would “get worse.”
But more than vague fear is involved. What’s going on is a growing debate about U.S. policy toward a changing world economy. Assumptions are being questioned, even about the economy’s heroes--the fast-growing entrepreneurial companies. We spawn lots of small companies, debaters concede, but does that give us the strength for industrial leadership?
The question is perplexing because the U.S. entrepreneurial environment is so vigorous that new companies can sell stock again, six months after the market crash. In April, 28 new companies went public, according to IDD Information Services, the highest total since before October.
The market is selective, says Raymond Godfrey of Needham & Co., a New York underwriter, but willing to pay handsomely for some prospects. As an example, Relational Technology, a new software company, was brought public Wednesday at $14 a share, more than double its tangible asset value, and 47 times last year’s earnings.
Too Many Growth Companies
Yet the market is not willing to pay high prices for many young companies that are doing well in a hot computer market--electronics companies like Applied Materials and Cypress Semiconductor, software firms like Ashton-Tate. Brokers complain that growth companies no longer get a premium.
Why don’t they? One reason might be too many growth companies. There are roughly 200 makers of IBM-like personal computers, for example, and 400 firms making word-processing software. And more are coming because advanced computers have made it easier to set up your own shop, and venture capital, or seed money, is plentiful.
Pension funds invested $4.9 billion in venture capital last year, up from $3.3 billion in 1986, according to the research firm Venture Economics. Those investors were willing to risk having only one big winner in 10 investments--but counting on an overall won-lost percentage to give them a 30% a year long-term return.
The system produces inventive results--70% of the world’s computer software is American. But there may be clouds even here.
For international competitors are eyeing software as a growth industry, too. And, as they did in semiconductors, those competitors will test whether U.S. companies have staying power--whether the U.S. system is better at starting companies than sticking with them. “I remember when we made 90% of the world’s semiconductors,” observes Regis McKenna, head of his own Silicon Valley marketing firm. Today the U.S. produces 40%.
The question--if America’s so inventive, why is its lead threatened in so many industries--is at the heart of the debate over economic policy. The debaters, in the Harvard Business Review, are author George Gilder, who says the United States shouldn’t worry about importing semiconductors from Japan because entrepreneurial inventiveness will keep it vibrant as the world changes from separate national economies to a unified global one.
Opposing Gilder, Charles H. Ferguson of MIT argues that industrial leadership counts and that nimble but capital-short companies are no match for large competitors who can outspend them two to one. He calls for U.S. business and government to cooperate in backing American big companies.
Those are not small-bore debaters. Gilder’s 1981 book, “Wealth and Poverty,” influenced Reagan Administration policies. Ferguson is among the MIT-Harvard thinkers who would influence the administration of Michael Dukakis.
The question is not who is right--both make valid points. Gilder speaks hopefully of an ideal world economy, while Ferguson speaks to our fears of losing world position. Fear generally beats hope as a motivator, so Ferguson’s position is likelier to influence future policy. Whether it should is a perplexing question, like today’s good news-bad news economy.
