The 1995 survey of MIT graduates who have founded their own companies offers some fascinating insights into these knowledge-based companies and what makes them successful. Product quality and reliability, customer service, and innovation (in that order) are the most important factors in their success--ahead of price. Although price is not unimportant (it is hard for a company to compete if its price is "out of the ballpark"), it is more important to have a cutting edge product with outstanding performance and good customer service than it is to offer the lowest possible price.
The survey listed a number of competitive factors and asked respondents to rank each of them on a scale of 0 to 5, with 5 representing the highest importance. The results are summarized in Chart 4 below, which shows the average response to each factor across all industries.
Appendix Table 8 provides more detail, breaking down answers by industry, region, and company size. In the aerospace industry (where government is the major client), price is the second most important factor (behind superior performance). In the aerospace industry--and only in this industry--price is more important than product quality and reliability, customer service, and innovation. Price is least important to finance and consulting firms. Time to market is particularly important in electronics and instruments, software, and aerospace and least important in management consulting and finance. Innovation, new technology, and time to market are particularly important to founders who graduated in the last 15 years. Government programs are important to success only for aerospace firms.
The two greatest obstacles to success in domestic markets are difficulty in obtaining funding and government regulations (Appendix Table 9). Somewhat surprisingly, there was relatively little variation by region in the ranking given to government regulation. This suggests that the kind of regulation bothering most firms is federal and not state (had state regulation been a problem, we'd presumably have seen regional differences in the response to this factor). To the extent that there is regional variation, Massachusetts firms actually rated government regulation as slightly less important than founders in other states. This response suggests that Massachusetts was never as difficult a place to do business as its critics claim--at least for the kind of high-tech companies started by MIT graduates. Or perhaps the survey reflects the efforts of the governor and the legislature in recent years to improve the business climate.
Government regulation matters most to aerospace, biotech, and energy firms--reflecting, no doubt, the role of the government in defense procurement, drug approval, and utility regulation, as shown in Chart 5.
Environmental regulation is undoubtedly a factor in the relatively high score given by chemical and other manufacturing firms. Government regulation made the least difference to software and publishing companies. Government regulation made much less difference to company founders who graduated in the last 15 years than to their older counterparts.
While intellectual property rights violations were not normally a major factor in domestic markets, they did matter to chemical, publishing, and software companies.
Government research funding has played a powerful, if indirect, role in the formation of the kind of high- tech companies described here. Hundreds of millions of dollars of defense research into semi-conductors and electronics, much of it in New England, laid the foundation for the modern computer industry.
MIT has $370 million of on-campus sponsored research, $271 million of which is from federal agencies. There's another $338 million of research at Lincoln Labs, which MIT runs for the Air Force (Ken Olsen worked on computer research there before starting Digital Equipment Corporation). The on-campus research accounts for about 30 percent of the Institute's budget. Because of these research funds, the faculty is much larger than would otherwise be the case. A large portion of research money--over $70 million--goes to hire graduate students as research assistants. Some 2,100 graduate students (40% of all MIT grad students) currently receive research support averaging $35,000 (including tuition as well as living expenses). The flow of federal dollars, then, brings thousands of the brightest young scientists in the U.S. to Boston, involves them in cutting edge research projects, and helps pay for their graduate education. As we've seen, many stay in the area and start companies.
There is a lot to be learned about high tech companies from where they choose to locate--and the reasons for their choices. Of course, most firms are initially located where the founders are living at the time. But when company leaders make a conscious choice about location or expansion, the most important factors are quality of life, proximity to markets, and access to skilled professionals--ahead of low taxes and regulatory environment. This is illustrated in Chart 6.
To build reliable, high-quality, innovative products, these companies are highly dependent on a workforce of skilled professionals. They locate where such professionals like to live. In this sense, the quality of life response is really a second vote for access to skilled professionals. These findings offer a new perspective on the debate over taxes and the business climate. As one founder explained to us, personal taxes are part of the quality of life for skilled professionals; personal income taxes on managers and engineers out of line with other states could make it hard for businesses to expand. On the other hand, if taxes are lowered at the expense of quality education, cultural facilities, open space, and good transportation, this also lowers the quality of life and would make it harder to recruit skilled people.
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