This paper investigates the tensions that exist in young and growing technology-based firms between (1) increasing technological opportunities for further growth and (2) the costs of developing these opportunities.
Data from 70 medium-sized, young technology-based firms were used to test two hypotheses concerning changes in the number of separate fields of technical knowledge during growth. Increasing the number of separate fields of technical knowledge increases the technological opportunities available to the firm, but increases the cost of developing and integrating knowledge from multiple fields.
The results indicate that tensions between technological opportunities and the costs of technological development in young technology-based firms are created due to both the advances in science and technology and the firms’ growth process itself.
The successful establishment and growth of new technology-based firms have been widely studied within the field of entrepreneurship research (e.g. Bollinger et al., 1983, Cooper, 1986, Roberts, 1991, Kazanjian and Drazin, 1990 and Oakey, 1995). Despite considerable interest in the growth of new technology-based firms, few researchers have investigated what may be the most specific nature of technology-based firms as compared to other business firms, namely their dependence on technical knowledge.
In a recent review, Autio (2000) observes that few models have been developed specifically for explaining the growth of new technology-based firms and argues that, if the growth of new technology-based firms is a phenomenon that warrants a separate study, more research should be aimed at investigating the link between technology and growth in these firms.
The research reported in this paper is an attempt to answer Autio’s call for more research on the interaction between technology and growth in new, or young, technology-based firms. The selected approach is inspired by the competence-based and evolutionary views of the firm put forward by Foss and Knudsen (1996) and Montgomery (1995), and by Penrose’s (1959) theory of growth of the firm. According to these views, firms are creative entities, the outcomes of ongoing processes of organizational design that provide a framework for creating and combining different kinds of productive knowledge. Understanding knowledge, organization of knowledge, and its subsequent changes therefore become the main explanatory challenge (Metcalfe, 2001) in explaining both firms’ competitiveness and their opportunities for further growth.
The purpose of this paper is to investigate the interaction between growth and the development of technical knowledge in young technology-based firms. More specifically, the paper investigates the tensions in young and growing technology-based firms between (1) increasing technological opportunities for further growth by increasing the number of separate fields of technical knowledge developed within the firm, and (2) the costs of developing and integrating knowledge from multiple fields.
Previous studies have identified tensions between technological diversification and increasing R&D costs in large technology-based firms (Granstrand and Sjölander, 1990 and Granstrand, 1998). Empirical evidence (Kodama, 1986, Oskarsson, 1993 and Patel and Pavitt, 1998) shows that large industrial firms are accumulating competencies in an increasing number of technological fields. This process is driven by progress and increased differentiation of scientific and technological activities. The increase in the number of technological fields increases both the R&D costs and the technological opportunities that can be utilized to cover these costs. The challenge of management is to balance the tension that exists between costs and opportunities in favour of growth and profits (Granstrand, 1998).
In this paper, it is argued that similar tensions exist in young and growing technology-based firms. But rather than being driven by growth or changes in science and technology, it is argued that these tensions are inherent in the growth process of young technology-based firms and are amplified through growth or changes in science and technology.
The paper is structured in the following way. First, a frame of reference is developed on how the growth process and the development of technical knowledge jointly influence changes in the number of technical knowledge fields. Two hypotheses are derived and tested to help us understand the role of the growth process in creating tensions between the costs of technological development and future opportunities for growth. Second, the method and sample used for testing the hypotheses are described. Third, the results of the statistical analysis are presented, followed by conclusions and discussion.
The purpose of this paper has been to investigate the interaction between the growth process and the development of technical knowledge in young technology-based firms. The focus has been on the tensions between increasing opportunities for further growth by increasing the separate fields of technical knowledge, and the associated costs of doing so.
Based on Penrose’s (1959) theory of the growth process and previous research on the development of technical knowledge in firms, it has been argued that both processes interact to create tensions between opportunities and costs. Two hypotheses were proposed. First, it was hypothesized that the number of separate fields of technical knowledge would increase during growth. Second, it was hypothesized that this increase would be negatively moderated by the degree of dependence on discovery-driven technologies. Empirically, the degree of interaction with science was used as a proxy for the degree to which firms depended on discovery-driven technologies.
Based on the empirical support for the hypothesis, the following conclusions can be drawn. First, technical opportunities in young and growing technology-based firms are likely to increase through the addition of separate fields of technical knowledge. Second, cognitive aspects of technical knowledge influence the degree of increase of separate knowledge fields during growth. The increase in the number of technological fields is likely to be lower in firms that depend on the development of discovery-driven technologies. These technologies are more uncertain in their business utility, take longer to develop, have higher costs of development, and have higher costs of integration with other technologies.
There are two possible interpretations of these conclusions. The first is to take them at face value. Technological opportunities for growth increase during growth due to the interaction between the growth process and the development of technical knowledge. How challenging it is to manage this interaction in terms of higher costs of development and integration depends on the cognitive properties of the technical knowledge, being most challenging for firms that have a high degree of science–technology interaction. Surviving firms depending on a high degree of science–technology interaction that have obtained reinforced growth have responded to these challenges by developing fewer fields of technical knowledge than other firms. The implication for managers is therefore to be aware of the higher uncertainty, higher costs of development and higher costs of integration that are related to closer interaction with science when making decisions about technological diversification, or differentiation within existing areas of specialization. While adding new fields of technical knowledge and ‘splitting up’ existing ones increase opportunities for growth, firms may not be able to manage the associated increases in costs that are needed to exploit these opportunities.
The second interpretation, which does not exclude the first one, is more daring and far-reaching. Due to the specific differences between discovery-driven technologies and design-driven technologies, it is possible to make inferences about the different roles that the process of growth and the development of technical knowledge play for the creation and resolution of the tensions between opportunities and costs. These differences polarize the influences of the two processes in such a way that the increase in the number of separate fields of technical knowledge is likely to be smaller for discovery-driven technologies according to the logic of the growth process, while it is likely to be larger according to the logic of technological development. That it turns out to be smaller suggests that the logic of the growth process takes precedence over the logic of technological development.
There are two main implications of the conclusion about the precedence of the logic of the growth process over the logic of technological development. First, it implies that tensions between technological opportunities and the costs of technological development in young technology-based firms are created not only through the progress of science and technology, as suggested by, for example, Granstrand (1998), but also through the growth process itself. This may not be very surprising, considering that it can be seen as a variation of the basic Penrosian (1959) theme, but the theme has received little attention in recent research on the growth of firms.
Second, it implies that in young and growing technology-based firms, it is more important to manage according to the logic of the growth process than the logic of technological development. While this seems obvious at first sight, there are hidden implications in the statement. To manage according to the logic of technological development is to manage according to the logic of technological competition (Pavitt and Steinmueller, 2002). Thus, it amounts to saying that during growth it is more important to manage according to the logic of growth rather than the logic of technological competition.
But saying that it is more important to manage according to the logic of the growth process than the logic of technological development is not the same as saying that it is unimportant to manage according to the logic of technological competition. It only means that it is not sufficient to manage according to the logic of technological competition in order to attain growth. The logic of the growth process constrains how technological competition can be managed, increasing the challenge for management. This implies that young technology-based firms may have to be selective regarding the technological fields they choose to add, in order to satisfy the requirements of growth and competition. Being forced to do so may increase the probability of failure, as these firms are not able to build a portfolio of technical knowledge in a number of fields in order to be better prepared for future competition.
It could be argued that the study does not provide sufficient evidence to draw general conclusions about the role of the growth process in creating and resolving tensions between opportunities and costs. That is, the results on the role of the growth process are peculiar to firms with a high degree of interaction with science. It is true that these general conclusions are based on the assumption that the growth process displays the same logic independent of the cognitive properties of the technical knowledge that the firms depend on. This assumes that characteristics which are displayed under one condition, e.g. for discovery-driven firms, can be understood as expressions of the general characteristics of the growth process. While this may not seem an unreasonable assumption, further research is needed on the interaction between the processes of growth and development of technical development.
Penrose’s (1959) investigation has been very influential for the study of competitive advantage in firms. These studies have nevertheless not given much attention to the main Penrosian theme of the tensions inherent in the growth process (Rugman and Verbeke, 2002). The present study points to some opportunities for reconnection with the current research on competitive advantage in order to better understand the interaction between technology and growth in young technology-based firms, as well as the relationship between managing according to the logic of growth and managing according to the logic of technological competition.
In this study, the processes of growth and development of technical knowledge have not been observed directly. Further studies should seek to observe the interaction between these processes more directly, through either retrospective case studies or longitudinal studies in real time. While longitudinal studies are preferred due to better quality of data, they are expensive and time-consuming to conduct when studying the growth process.
Better understanding of the interaction between growth and the development of technical knowledge might be facilitated by more precise conceptualisation of technical knowledge than was used in this study. Here, it was not possible to distinguish between increases in the number of fields due to diversification into new fields and differentiation within existing fields. In order to be able to do so, more attention must be given to how different fields are delineated and how this delineation evolves over time.
