[House Hearing, 112 Congress] [From the U.S. Government Publishing Office] LARGE AND SMALL BUSINESSES: HOW PARTNERSHIPS CAN PROMOTE JOB GROWTH ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS SECOND SESSION __________ HEARING HELD MARCH 28, 2012 __________ [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 112-061 Available via the GPO Website: www.fdsys.gov _____ U.S. GOVERNMENT PRINTING OFFICE 76-468 WASHINGTON : 2012 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON SMALL BUSINESS SAM GRAVES, Missouri, Chairman ROSCOE BARTLETT, Maryland STEVE CHABOT, Ohio STEVE KING, Iowa MIKE COFFMAN, Colorado MICK MULVANEY, South Carolina SCOTT TIPTON, Colorado CHUCK FLEISCHMANN, Tennessee JEFF LANDRY, Louisiana JAIME HERRERA BEUTLER, Washington ALLEN WEST, Florida RENEE ELLMERS, North Carolina JOE WALSH, Illinois LOU BARLETTA, Pennsylvania RICHARD HANNA, New York NYDIA VELAZQUEZ, New York, Ranking Member KURT SCHRADER, Oregon MARK CRITZ, Pennsylvania JASON ALTMIRE, Pennsylvania YVETTE CLARKE, New York JUDY CHU, California DAVID CICILLINE, Rhode Island CEDRIC RICHMOND, Louisiana GARY PETERS, Michigan BILL OWENS, New York BILL KEATING, Massachusetts Lori Salley, Staff Director Paul Sass, Deputy Staff Director Barry Pineles, General Counsel Michael Day, Minority Staff Director C O N T E N T S ---------- OPENING STATEMENTS Page Hon. Sam Graves.................................................. 1 Hon. Nydia Velazquez............................................ 1 WITNESSES Matthew Slaughter, Ph.D., Associate Dean for the MBA Program, Signal Companies Professor of Management, Tuck School of Business, Dartmouth College, Hanover, NH....................... 3 William C. McDowell, Ph.D., Assistant Professor, Department of Management, College of Business, East Carolina University, Greenville, NC................................................. 5 Robert E. Bruck, Corporate Vice President, Intel Corporation, Santa Clara, CA................................................ 7 Paul Blackborow, Chief Executive Officer, Energetiq Technology, Inc., Woburn, MA............................................... 9 APPENDIX Prepared Statements: Matthew Slaughter, Ph.D., Associate Dean for the MBA Program, Signal Companies Professor of Management, Tuck School of Business, Dartmouth College, Hanover, NH................... 19 William C. McDowell, Ph.D., Assistant Professor, Department of Management, College of Business, East Carolina University, Greenville, NC................................. 26 Robert E. Bruck, Corporate Vice President, Intel Corporation, Santa Clara, CA............................................ 30 Paul Blackborow, Chief Executive Officer, Energetiq Technology, Inc., Woburn, MA............................... 44 Questions for the Record: Rep. Owens Questions for the Record.......................... 49 Answers for the Record: Answers to Rep. Owens for the Record......................... 50 Additional Materials for the Record: Glaxo Smith Kline Statements for the Record.................. 51 LARGE AND SMALL BUSINESSES: HOW PARTNERSHIPS CAN PROMOTE JOB GROWTH ---------- WEDNESDAY, MARCH 28, 2012 House of Representatives, Committee on Small Business, Washington, DC. The Committee met, pursuant to call, at 1 p.m., in room 2360, Rayburn House Office Building. Hon. Sam Graves (chairman of the Committee) presiding. Present: Representatives Graves, Mulvaney, West, Owens, Schilling, Velazquez, Schrader. Chairman Graves. Good afternoon, everyone. We will call this hearing to order. And I want to thank all of you for joining us today as we examine the practice of large and small business partnering to create added-value jobs and economic growth. For many years, businesses have entered into agreements with other companies to supply a part for a larger product or provide a good and service. Increasingly, large companies create alliances with small firms to access their innovative ideas. These partnerships allow the larger companies to expand their current market or product offerings, enter into new markets, or simply gain a competitive advantage in a challenging economy. Small companies also benefit from these alliances by tapping into larger distribution networks, financing opportunities, and mentoring programs that larger businesses cannot supply. It should be noted that both large and small businesses can be very dependent on each other. A study produced for the Business Round Table by Dr. Matthew Slaughter, one of our panelists today, noticed that each type of company is deeply embedded in the overall U.S. economy with extensive connections to each other. Last week, the Committee held a hearing on the state of entrepreneurship. Heath Hall, co-founder of Pork Barrel BBQ here in Washington, D.C., testified that large businesses, such as Harris Teeter, Costco, and Safeway, took chances on stocking their unknown BBQ sauce and rubs, helping it to be stocked today in 3,000 stores in 40 states. This is an excellent example of the interdependence of small and large firms. And again, I want to thank all of our witnesses for being here today. And before I yield to the ranking member I want to note that it is her birthday today and I hope everybody will join me in wishing her a happy birthday. Ms. Velazquez. Thank you. Thank you, Mr. Chairman. That is very kind. And good afternoon to all the witnesses. America's nearly 30 million small businesses are central to the economy, representing 99.7 percent of all employers and pay nearly 50 percent of total private payroll. It is clear that as small businesses go, so goes the country. For many, this success is at least in part due to the symbiotic relationship that is enjoyed with their larger counterparts. During today's hearing we will examine this and seek to better understand the effect firm size has on the competitive landscape. Together, large and small businesses form a collaborative ecosystem that enables our economy to thrive. Small firms make up the vast supplier network that multinational companies rely on for goods and services. In fact, these corporations buy an estimated 1.52 trillion annually from small firms which is about 12.3 percent of their total sales. Perhaps nowhere is this interdependence more evident than in the federal procurement marketplace. Total subcontracting dollars now eclipse $200 billion with small businesses receiving more than one-third of these dollars. Over the last 15 years, several initiatives have supported this, including mentor prodigy programs. As a result, large companies are able to develop their supplier base, while small businesses obtain key experience that will enable them to grow stronger in the future. While there are real benefits to this cooperation, the truth is that large companies often enjoy many advantages that small businesses do not. This is due to the many structural benefits that come with having greater market power, including more influence over pricing and advantages in the capital and labor markets. Larger companies are often able to control the relationship with small firms, leaving small suppliers to provide accommodations. This absence of negotiating influence makes it more expensive for small companies to purchase the goods and services they need to remain competitive. Beyond their lack of equal bargaining power, small businesses face other obstacles in their quest for success. Even as the economy recovers, insufficient access to capital remains the number one challenge. Since peaking at $712 billion in the second quarter of 2008, small business lending has declined by $113 billion. Conversely, large businesses have actually seen an expansion in lending since the middle of 2010. It is clear that small businesses have been disproportionately affected by credit tightening, while large firms have emerged relatively unscathed. Tax policy is another area creating disparity between small and large businesses as corporations often have dedicated tax teams for this purpose. Small firms, on the other hand, spend more time and money simply preparing tax returns. According to a report issued by the SBA Office of Advocacy, the cost of tax compliance is 67 percent higher in small firms than in large firms. Finally, it is also important to note that large companies are illegally taking federal contracting opportunities away from their smaller counterparts. In several cases, large businesses have used a small business front to win contracts through small business set asides. Such abuses not only impair the integrity of the procurement system overall, but divert money away from true small companies. All of these issues, from tax treatment to access to capital to government contracts are critical to the relationship between large and small businesses. While there is little doubt that these companies can and do work in a collaborative manner, the reality is that it is often due to the costly concessions made by small businesses. During today's hearing we will explore this complex relationship and the many benefits and challenges that come with it. Ensuring that small businesses can continue to flourish without the seemingly inescapable exploitation that comes with it is critical. Doing so will not only result in a more robust small business sector, but a brighter economic recovery for the nation. Thank you, Mr. Chairman. And I yield back. STATEMENTS OF MATTHEW SLAUGHTER, PH.D., ASSOCIATE DEAN FOR THE MBA PROGRAM, SIGNAL COMPANIES PROFESSOR OF MANAGEMENT, TUCK SCHOOL OF BUSINESS, DARTMOUTH COLLEGE; WILLIAM C. McDOWELL, PH.D., ASSISTANT PROFESSOR, DEPARTMENT OF MANAGEMENT, COLLEGE OF BUSINESS, EAST CAROLINA UNIVERSITY; ROBERT E. BRUCK, CORPORATE VICE PRESIDENT, INTEL CORPORATION; PAUL BLACKBOROW, CHIEF EXECUTIVE OFFICER, ENERGETIQ TECHNOLOGY, INC. Chairman Graves. Our first witness today is Professor Matthew Slaughter, who is the associate dean for the MBA program and the Signal Companies Professor of Management at Tuck School of Business at Dartmouth College. In 2010, Professor Slaughter authored a key study for the Business Round Table on small and large businesses working together, and we look forward to hearing more about your study today. And welcome, Professor. STATEMENT OF MATTHEW SLAUGHTER Mr. Slaughter. Committee Chairman Graves, Ranking Member Velazquez, and fellow members, thank you very much for inviting me to testify. The topic of today's hearing is extremely important. Although the news for American workers has improved somewhat in recent months, America's labor market remains quite damaged. Today America has 110.7 million private sector payroll jobs. The first time the U.S. economy reached that number was in March of 2000. America has created no new private sector jobs in 12 years, during which time its civilian labor force has expanded by about 15 million people. In my remarks I will stress that to address this jobs challenge one of the most effective ways to support job growth in small businesses is to support job growth in big businesses. This is because of extensive connections between large and small businesses, especially through the supply change, selling to each other the goods and services used as inputs in product. Small and big businesses have long helped strengthen the U.S. economy and each other. Let me here emphasize the rule of multinational companies which, like Intel, tend to be among America's biggest. Both the U.S. parents of U.S.-based multinationals and also the U.S. subsidiaries of foreign-based multinationals enhance the American economy by the capital investment, exports, research and development, and good paying jobs. Though far less than one percent of all American businesses, multinationals in 2009 accounted for in the U.S. private sector 24 percent of jobs, 41 percent of investment, 71 percent of goods exports, and a remarkable 84 percent of research and development. Neither small business nor large business operates in a vacuum; rather, each is deeply connected to the other in product markets, capital markets, and labor markets. One important connection is time. Small businesses of today can grow to become the big businesses of tomorrow. Many of America's largest and most successful companies started small. Indeed, as the quintessential person pursuing a dream from a garage or a dorm room. And many of those small start-ups were born and thrived because of having a big business as a major, if not the only customer. Another important connection is the supply chain partnership. Companies selling to others the goods and services used as inputs in production. To make their own goods and services, large companies buy many important inputs from small companies and vice versa. Input suppliers and their customers strengthen each other, not just by generating sales but through many other channels, such as sharing information and performance standards. Of particular note here are small companies selling inputs to U.S.-based multinational companies. In 2008, the U.S. parent operations of U.S.-based multinationals purchased over $6 trillion in inputs, of which almost 89 percent was bought from other companies in the United States, not from companies abroad. But of these trillions of dollars in domestic input purchases by U.S. multinationals, how much is bought from small businesses in America? Surprisingly, this question cannot be answered by any data collected by the various statistical agencies of the U.S. government. Given the statistical gap, in 2010, I worked with the Business Roundtable, an association of chief executive officers of leading U.S. companies to conduct an original survey of its members to learn about the role of small businesses and their supplier base. Taking these survey results as representative of all U.S. multinationals, I found that the U.S. parent operations of the typical U.S. multinational buys goods and services from over 6,000 American small businesses, buys a total of over $3 billion in inputs from these small business suppliers, and relies on these small business suppliers for over 24 percent of its total input purchases. Extrapolating from these surveys, I further calculated that U.S. multinationals collectively purchase about $1.5 trillion in inputs from U.S. small businesses, which is about 12 percent of the total sales of these small businesses. The bottom-line of this survey is that the supply chain partnership between U.S. small and big business is deep and essential to each other's economic success. Let me close by offering three policy implications of the supply chain partnership. One important implication is that government efforts targeted at just small businesses or just big business affect all firms, not just firms of a particular size. Think of exporting. Because of the supply chain partnership, there are lots of small U.S. businesses engaged in the global economy by supplying large U.S. exporters, even if these small businesses themselves do no exporting on their own. A second important policy implication is that the supply chain partnership between large and small businesses will almost surely become more important in the future. Large companies increasingly operate in large global networks in which final products are made in many stages that span many countries. As the global economy continues to grow in size and diversity, so too will the supply chain partnership between large and small businesses. And a final important policy implication is that to better support the partnerships between large and small businesses, U.S. government data need improving in various ways. Let me thank you again for your time and interest in my testimony and I look forward to answering any questions that you may have. Ms. Velazquez. Mr. Chairman, it is my pleasure to introduce our next witness, Dr. William McDowell. He is a Management Professor of Entrepreneurship and Family Business at East Carolina University. He received his Ph.D. from the University of North Texas in Management in 2006, and his research specializes in the area of small and medium-size enterprises and their relationship within larger organizations within the supply chain. Dr. McDowell is also vice president of the National Small Business Institute, an organization dedicated to field-based student consulting and outreach to small businesses. As a co-editor of the Institute Journal, Dr. McDowell has written scholarly research articles in the fields of small business management, entrepreneurship, and field-based learning. Welcome. STATEMENT OF WILLIAM C. McDOWELL Mr. McDowell. Good afternoon, Chairman Graves, Ranking Member Velazquez, and members of the Committee. Thank you for the opportunity to appear before you today to discuss this very important topic. The views and research that I will present today are my own and not necessarily those of East Carolina University or its Small Business Institute. Examining the potential benefits for large and small business collaboration is a very great thing but there are four key hurdles that small businesses face when trying to do business, especially with a large business. To be an effective partner, small businesses must be able to overcome these hurdles and obstacles in order to be effective. Access to capital compared to large businesses is the first area. Small business basically means fewer assets, which does translate into less capital and less money for operations for equipment and expansion. In addition, because of being a small business, oftentimes they have a smaller product and market scope which does translate to fewer revenue streams from which to be able to access capital. And of course in this rough economy that we have just come through, many of these small firms have completely depleted their cash and inventory levels creating much more difficulties. Thus, the difficulty in obtaining capital, especially for women, minority, and socially disadvantaged businesses can be a very serious issue when they are trying to work with larger businesses. In addition, small businesses, because of their size, are usually at the dependent stage when we look at the power dependency levels. Small businesses are often a niche supplier, sometimes supplying to only one business, and research shows that being a niche supplier actually works against these small businesses in retaining contracts with larger businesses and especially in retaining contracts with the federal government. These smaller businesses, because of their niche status, can be simply eliminated when the larger businesses find cheaper alternatives or other ways of reducing margins, and so in this case being a niche-market producer does create a problem for them. However, research does show that information quality, continued quality improvement programs, trust, communication, these all do aid the small business in being able to be effective in these supply chain relationships; however, most of these organizations, because of their size, do not take advantage of things such as continuous quality improvement programs. Flexibility, because of their size, can be a very key competitive advantage, but again, oftentimes they do not realize that that is their advantage and they do not go out and try to seek ways to emphasize that. Another disadvantage that they have is tax disadvantages. It is not necessarily the tax rate that is the problem but the difficulty in computing taxes for these small businesses. One major issue that has come up in a recent conference was that many small businesses do not have the experts on staff to find or take advantage of the tax credits that are available to them; therefore, they are missing out on those advantages. Large firms have large staff, large groups of individuals who are working to help them find these advantages and build on those, so that can be a problem. Recently, the National Federation of Independent Businesses indicated that the number one problem for small businesses is sales; however, this has come down to almost equal with taxes within the past few years. And right now the percentage point is only one percent between those two. But historically, taxes have been cited as the number one problem for small businesses over the last 25 years. And the final area is basically the access to qualified business experts for advice and direction. Large businesses have experts on staff to help maximize profits, reduce the cost, and streamline their processes, whereas, small businesses often do not have these resources on staff to be able to do these for them. Unfortunately, too many small businesses, and this is from experience, are not familiar with programs by the SBA from local SBDCs, which is literally to their detriment because these can be excellent programs for them to help. Thus, they begin to narrow their focus because of not being able to take an outsider's view of the situation. And this is often to their detriment. Really, the crisis of today that they are facing prevents them from positioning for tomorrow. A problem with this is that they can overestimate sales. Again, if we look at the NFIB's recent paper it shows that small businesses continually overestimate what their sales are going to be only to be disappointed when they have their actual sales numbers come in. Larger firms, they are amenable to stakeholders; therefore, they are able to have individuals to help them estimate those sales. So what are my recommendations? I think we need to continue to create a favorable lending environment for small businesses. We need to give better information for small firms to broaden their scope. We need to streamline the tax system so that all firms can take advantage of all the advantages that are available to them, but most importantly, we need to give small firms access to information and experts through the SBA, the SBDCs, SBCs, and even the organization I am familiar with, the SBI. I would like to thank you, Committee, for the opportunity to present my views of the current struggle of small business, and I welcome your questions. Chairman Graves. Thank you very much. Our next witness is Robert Bruck, who is Intel Corporation's corporate vice president and general manager of its Technology Manufacturing Engineering Division. Mr. Bruck is responsible for managing Intel's global capital expenditures, as well as government and industry relations related to technology and manufacturing. Intel, which is the world's leader in silicon innovation, was founded in 1968 to build semiconductor memory products. Intel introduced the world's first microprocessor in 1971. Welcome. Thanks for being here. STATEMENT OF ROBERT E. BRUCK Mr. Bruck. Chairman Graves, members of the Committee, I appreciate this opportunity to discuss with you the significant mutual benefits that result from collaborations between large and small businesses in our industry. Like nearly all large firms, Intel began as a very small entity. We were founded in 1968 by two scientists with only $2.5 million in venture capital to manufacture semiconductor memory products. Our growth began to accelerate in the early '80s when a large firm, IBM, adopted Intel's microprocessor for its personal computers. IBM helped provide additional investment and enabled Intel to expand our capital and R&D investments. Today, Intel is a Fortune 50 company with 100,000 employees and annual revenues in 2011 of $54 billion. In the last decade we spent $68 billion on our U.S. operations, research and development, and manufacturing capacity. A 2008 study found between 2001 and 2007, Intel contributed $758 billion to the U.S. GDP with $458 billion from direct operations and about $300 billion from companies that used our products. Intel has over 5,000 suppliers in the U.S. with more than 2,200 of them classified as small businesses. In 2011, Intel spent more than $3 billion on goods and services purchased from small businesses in sectors that range from the supply of chemicals and gases to construction services. All of these economic benefits are dependent upon the continuous development and innovation of semiconductor technology. I would like to make three points to illustrate how Intel partners with small businesses to meet competitive challenges in the global marketplace. First, small businesses play a critical role and benefit from basic university research as well as participating in Intel's own research and development programs. Due to the technical challenges involved in semiconductor product design, materials research, and development of advanced process technologies, upstream research must begin as much as 10 or more years before products enter the market. Semiconductor companies have a rich history of pooling their resources to form research consortia to address long-term technical challenges in a pretty competitive environment. These consortia, such as the Semiconductor Research Corporation are partially funded by various federal agencies, including NIST, DARPA, and NSF. Continued and expanded federal support for what Intel CEO emeritus Craig Barrett calls ``the greatest wealth creation machine in the world,'' the U.S. university research system, is critical to the U.S. maintaining our global lead in science and technology and gaining the related job creation benefits for both large and small businesses. Intel builds on the results of pretty competitive research with its own proprietary research in the technology development phase. Intel spends between 13 and 15 percent of annual revenue on research and development, which in 2011 alone exceeded $8.3 billion, making Intel the third largest company in the world for R&D expenditures. Small businesses play a critical role in the research and development stage through their willingness to collaborate at the frontier of technology development to help commercialize new technologies. For example, Energetic Technologies, whom you will hear from next, receives significant technical assistance from Intel to develop specific light sources necessary for EUV lithography, a critical technology enabler. Energetic also received research grants from NSF, which were used to explore the potential for commercializing laser-driven light source technology in the life sciences areas. That same technology is also used to detect defects in semiconductor chip fabrication. My second point is that large companies like Intel can assist small businesses through direct investment. Intel's venture arm, Intel Capital, invests in small businesses to fill technology and supply chain gaps. In 2011, Intel Capital invested over $500 million in more than 80 small businesses to cover a broad range of industry from consumer Internet to clean tech to health sciences. As an example, between 2005 and 2008, Intel Capital and Tallwood Ventures invested $15 million into small business crossing automation. In 2009, another of our suppliers, Assist Technologies, went into bankruptcy. Intel and Tallwood invested another $7 million for crossing to finance the purchase of certain assets from Assist, saving crucial U.S.-based capability. The result was a very successful new product and about 180 high-tech jobs in California were saved. The last point I would like to make is Intel helps small businesses with educational, training, and quality programs that help make them stronger businesses with increased potential for job creation. For example, the president of a woman-owned, 19-employee visual communications company recently noted the following: ``We have worked for Intel for more than 25 years. When the Intel supplier diversity and small business program took shape over a decade ago, we immediately experienced the value of its initiatives. Since then, we have significantly expanded our services and capabilities, made new business connections, and more importantly, have learned how to build a better company.'' Our written submission contains more detail on the three points I have made. Thank you. Chairman Graves. Thank you, Mr. Bruck. Our next witness is Paul Blackborow, who is the chief executive officer of Energetiq Technology, Inc. Founded in March of 2004, the company is a developer and manufacturer of advanced light sources that enable the manufacture of nanoscale structures. These light sources are used in application for life science instruments and leading edge semiconductor manufacturing. Thanks for being here. STATEMENT OF PAUL BLACKBOROW Mr. Blackborow. Chairman Graves and members of the Committee, I appreciate the opportunity to appear before you today to discuss various ways Energetiq technology, a small Massachusetts-based company and Intel, a large multinational corporation, collaborate. Our vibrant partnership has resulted in job creation and financial growth at Energetiq and technical solutions to pressing manufacturing challenges at Intel. Energetiq is a small, high-tech company based in Woburn, Massachusetts. We employ 20 people full-time, most of whom are engineers and scientists with advanced degrees. Energetiq specializes in developing advanced light sources for scientific and technical applications in the semiconductor, life sciences, and material science markets. Our staff focuses on research and development related to these technologies and to the assembly, testing, and marketing and sale of the products. The subassemblies of our products are manufactured by specialized companies primarily in Massachusetts and in New England. In 2002 [sic], we expected a majority of our manufactured products to be exported from the United States. Our core competence lies in plasma physics. We manufacture two product lines based on patented technologies that we developed. The Extreme Ultraviolet Light Source product line is an enabling light source technology for next generation lithographic processes in the semiconductor industry. EUV lithography will allow the manufacture of chips with extremely small dimensions. The Laser-Driven Light Source, or LDLS product line, is used for advanced measurement and inspection applications in the semiconductor chip fabrication and a diverse array of applications in the life sciences and material sciences. Our EUV and LDLS products are all part of Intel's supply chain. The EUV light source products are bought by many companies which in turn sell EUV lithography tools and materials to Intel for its manufacturing plants. Energetiq's LDLS technology and products are used by Intel to detect defects on silicon wafers as they pass through the chip manufacturing process. We have licensed one of Intel's largest capital equipment suppliers to incorporate the LDLS technology into its inspection and measurement tools. Prior to the establishment of Energetiq, our founding team worked in high-level marketing and technical roles at a large supplier of process control products to Intel and to other semiconductor companies. In those roles we learned of Intel's technology road maps along with the EUV technical challenges that needed to be met by the supplier community. We were impressed with Intel's vision for EUV lithography, and even more by Intel's well publicized financial support of that vision through research funding and equity investments in its supplier companies. Intel made it clear that existing sources of EUV lights were lacking in performance. We were planning to start a new enterprise and Intel's public commitment to EUV lithography guided in large part the choice of our first product. Intel's lithography team leaders agreed to fund some research at Energetiq to better prove the technology we developed. In addition, they introduced us to Intel's venture capital arm and provided two rounds of financing and valuable coaching on the investment process. Financing from our investors, including Intel, allowed the further development of the EUV source technology and the development and introduction of the LDLS technology. Intel Capital has held an observer seat on our board of directors since 2006. This person has provided significant advice and resources to Energetiq, including assistance on resolving a complex legal and intellectual property issue. Our Intel Capital investment manager provides business development suggestions to Energetiq, and each year we are invited to attend the Intel Capital CEOs Summit. That event brings together the CEOs of the Intel Capital portfolio companies with senior executives from large public companies from around the world. We have been able to make many useful connections at that summit. On the technical side, the senior lithography staff at Intel have monitored our technical progress on our two technologies and guided us toward certain business opportunities. We have been able to showcase our technologies to Intel's engineers and scientists at events held at Intel's development operations in Portland, Oregon. We regularly attend Intel Supplier Days where we can continue to learn the technical needs and challenges of Intel's manufacturing operations. As a result of the technical and investment relationship in a small company, two technologies critical to the manufacture of Intel's present generation and future-generation semiconductor chips have been developed and commercialized. These particular technologies were not developed by Intel's large capital equipment suppliers, whose focus on making supremely reliable and productive chip manufacturing equipment has, perhaps, made them less capable to aggressively pursue new technology. Small companies like us can rapidly develop such technologies if we have a technical problem clearly defined. In summary, Intel provided the inspiration for the first product for Energetiq followed by R&D funding and equity financing. Our relationship with Intel provides us significant credibility to our customers, suppliers, and our investors. We have continued to receive valuable technical and commercial guidance and support from Intel, and Intel's adoption of our EUV and LDLS technologies has helped drive our revenues from product sales. Our biggest customer is a large U.S. semiconductor capital equipment company, a major supplier to Intel, which represented about a quarter of our sales in 2011. Thank you very much. Chairman Graves. We will now start with our questions. We will start with Mr. West from Florida. Mr. West. Thank you, Mr. Chairman. Also, ranking member thank you. And thanks for the panel for being here. First question I would like to go to Dr. Slaughter and Dr. McDowell. As I was listening to you speak and read your testimony I was writing down what seems to be some negative factors that you listed which are driving our small firms to go into partnerships with larger firms, such as capital access, sales, taxes, favorable lending environments, streamline tax code, access to business experts on staff, and access to research assistance. So if I could get your insights, where are the places where legislators such as ourselves have added to these negative factors and how can we alleviate some of these negative factors as we move forward? Mr. Slaughter. That is a great question, Congressman West. Mr. West. Thank you. Mr. Slaughter. So a couple thoughts come to mind. One is clearly on the tax code. I mean, I think folks on both sides of the aisle here in Washington and in the business community acknowledge America has one of the most complex, high-burden effectively tax codes around the world. It is a challenge for the Intels, but as Dr. McDowell and others know from their scholarship and others, the order of magnitude and the degree of the complexity for the small business community is massive. So it is not just for C corporations. I think one of the things to keep in mind then with tax reform is a lot of these small businesses, especially when they start, they are S corporations, they are partnerships, they have got a lot of different legal entities where a lot of taxable events flow through on the personal side. So one is mindset. When you are thinking about business tax reform, corporate tax is important but it has to be linked up with a lot of individual tax issues. And then again, the broad issues that a lot of economists from all parts of the political spectrum will acknowledge, broadening the base, reducing the complexity, lowering the rates. That is one. I think the other thing, I am not sure what the policy implication is but I will just point out on the issue of capital access, clearly in the wake of the world financial crisis there is an issue about how the banking system is working. Some people will look at large corporations in America and they wonder to complain about the large amount of near-cash assets that large corporations have on their balance sheets. But as we just heard in the testimony, a great advantage of that actually is as our financial system struggles to heal, paradoxically it can be the business sector that provides a lot of the key financing needs for small businesses. Mr. McDowell. I would agree that when we look at the tax issues over the past 25 years, that has been the number one issue. So I think just the complexity of it, all the new taxes, the green credits, different things like that, they only add to the burden of the small business in comparison. I mean, it is a burden to the large business as well but they have the resources to take care of those things. Small businesses do not have those resources. So that is one major issue that we have to look at. But also when we think about the legislation, what they have done to help or hurt with the access to capital, you know, recently there was just so much uncertainty out there. Banks make their money by lending money. I mean, that is how they want to make money. They want to do that. But yet with all the regulations and the changes that occurred there is just a lot of uncertainty. And some of the bankers that I work with in my regular work with small businesses, you know, they want to lend. They want to do things that will help them make money. But of course, the regulations are very difficult for them and for small businesses, of course, with the less access to capital or assets. I mean, to utilize as collateral, more guarantees, more things like that from the SBA can be very helpful and beneficial in those situations. Mr. West. Thank you. Mr. Bruck and Mr. Blackborow, you know, as I was listening it seems like this is like the second and third generations of a great thing about small firms partnering with bigger firms. You talked about Intel with IBM and now Energetiq with Intel. So if you could, just briefly talk about what you saw as the lessons learned, the best practices in that relationship that you all experienced over these couple machinations. Mr. Bruck. Well, I suppose I could begin with the alignment on very long-term programs, and I want to commend the Committee for looking at research and development in particular and the partnerships between large and small companies because unlike many short-term issues that work with intellection cycles, these issues may take many, many years. And if you look at NASA's investments in the '60s and they have reported many times to Congress on the spinoff of businesses from health care and telecommunications and energy that have come out of that program, these things have to survive multiple administrations and have bipartisan support. So when we see that, like we have seen in Congressman Velazquez's state with the Center for Nanoscale Science and Engineering, you can attract global companies. Some of the best companies in the world have come there now for the GE450C development and are matching the state funds that come in and they are working to try to get some federal matching as well. And the members that participate are committed to small and minority-owned businesses getting a big part of the participation there. So you can see this kind of synchronization and cooperation is really critical to yield long-term success. Mr. Blackborow. I would just echo the long-term aspect of it. I think one of the things that has helped us really with working with Intel is Intel's long-term vision. This differs actually from the vision of venture capitalists who are the main source of funding for people like us. Intel can take a much longer view partly because it is a corporation. And so the relationship we have, we can go through peaks and troughs and Intel will stick with us because they value the technology over the long term. So it is really long-term investment for us, patient investment which we perhaps we would not get from the venture capital community, and we will not get a look from the banking community. At this point in our company's development, sources of loan capital are simply not available at all and that is something, of course, that would be helpful to us as we want to grow. Mr. West. Thank you, Mr. Chairman. I yield back. Chairman Graves. Ranking Member Velazquez. Ms. Velazquez. Thank you, Mr. Chairman. Dr. McDowell, due to the recession, demand for both products and services dropped dramatically, and for the small business that weathered the storm and survived, how can they prove to lenders that they are creditworthy after a prolonged period of below average cash flow? Mr. McDowell. This is a major issue because, again, they depleted their cash and inventory levels and now we are trying to help them to work with larger businesses and that can be a major problem and hurdle for them to overcome. One thing that we can do is to help them to better plan for their future. Business planning is a very difficult thing and sometimes overlooked by small businesses. If we can have a greater business plan in place on the part of these small businesses then they will be able to better show where their revenue streams are going to come from, how they are going to help pass the cash that will enable them to be able to get credit. So that can be a very major plus and bonus for them. Ms. Velazquez. How can we help, you know, you mentioned that we have technical assistance through SBA, and in putting together a business plan or helping them prepare for the future in terms of having a business plan in place, how can--what can we do to get information that is available through SBA get to small businesses? Do you have any idea? Mr. McDowell. Well, I do believe this is a situation where really they need to be aware of what is available. And so therefore, the SBA and other organizations have not been doing a good job of marketing their own services to these small businesses. I think that the more education that we can give to small businesses and even to small business owners starting at the university level when they go through their training at a university if they are at a university or college, if we have more entrepreneurship programs such as, you know, interdisciplinary entrepreneurship programs or small business programs, so no matter what industry they are going into--arts, science, anything else--the more education they can have up front will help. But of course, at a later state we need to get them as much help as possible, and that is where I think universities can help if we will continue to push university systems and other aspects like that to help create an awareness of what is out there. Even things such as a lot of small businesses utilize social media as a marketing tool. You know, maybe the SBA and other resources need to look at where the small businesses are going for marketing to market their brands as well. Ms. Velazquez. Thank you. Dr. Slaughter, the report that you made reference to that you prepared was done in 2010. Right? Since then a lot of things have happened. We have an economy that is creating jobs and consumer spending is up. Given those indicators would you revisit your report and will it be different if you have those counter into your analysis those factors? Mr. Slaughter. I think two things come to mind. One is sort of at the company level of the surveys, in informal conversations with some of the companies that were involved in the survey in the first wave a couple of years ago, their sense is things have not changed very much. You know, I think that speaks to a couple things. One is the size of the companies that were involved in the survey. They were the Intels of the world and a lot of larger corporations. And again, on average when they have established over 6,000 small business supplier relationships, even amidst the financial crisis and the turmoil that created, a lot of those relationships still persist. And I think that some of the earlier testimony we heard speaks to that. The long-term nature of those relationships, both the large companies and the suppliers try to maintain those. The one thing the numbers would be different is thanks to some modest, though still fragile economic recovery, the overall magnitude that one would infer from the survey that we conducted of the amount of input to purchase it, for example, would hopefully be a bit larger today than it was two years ago. Ms. Velazquez. Okay. According to the Bureau of Labor statistics, large multinational companies have cut their workforces in the U.S. by 2.9 million since 2000, while increasing overseas employment by 2.4 million over the same time period. By contrast, small firms created and net 14.5 million jobs in the 15-year period from 1993 to 2008. Why do we see such a disparity in the contributions of large and small firms in creating jobs here in the U.S.? Mr. Slaughter. So the broader answer is much faster economic growth abroad. There is a lot of academic research by me and others that have shown when U.S.-based multinationals expand abroad, that expansion in hiring and capital investment tends to support more hiring and more capital investment in America. So there is sometimes a presumption that more abroad means less in America, but when that growth abroad, as it has been with the tremendous growth in the BRIC and beyond countries is driven by really fast economic growth, a lot of that tends to be down to America. Ms. Velazquez. So you do not agree that the data for suggests that the outsourcing of jobs contributed to a higher unemployment in America? Mr. Slaughter. The outsourcing played some role but the prevailing scholarship to date shows that it is a very modest role. And if I may, the numbers that you cited, the more revised numbers from the BEA show U.S. employment declines that are not quite as large in the U.S. paired operations of U.S. multinationals. And it was entirely concentrated in a handful of manufacturing industries. Services, for example, in the U.S. over the 2000s, U.S. parent employment growth was several hundred thousand in conjunction with fast employment growth in services companies abroad. Ms. Velazquez. Thank you. Mr. Blackborow, when small businesses are awarded contracts through the small business contracting programs, they are allowed to subcontract a certain percentage of their work. However, there have been numerous reports that have detailed the abuses with these limitations on subcontracting. In your experience, what part of the contacting process makes it susceptible to contracting abuse? Mr. Blackborow. Honestly, I could not say. We have been the recipient of SBIR grants and we have been very happy with that. The comment I would make with regard to SBIR grants is not with regard to any elicit practices; simply that it takes too long to get between phases in the SBIR programs. So if you have a phase one program, getting to phase two where there is more money is often a big gap. And so shortening the timeline for SBIR programs for small companies like us would make the program much more supportive of our business goals. We have done very little subcontracting and only to universities, and I do not believe they are corrupt. Ms. Velazquez. We are not implying that. Mr. Blackborow. Okay. Ms. Velazquez. Mr. Bruck, the semiconductor industry is among the most capital-intensive in the world. By the way, we have asked GAO to do investigations. Those reports have been released right here and it shows that a lot of large companies that do not qualify and violate the eligibility requirement to apply for contracts that are awarded to small businesses have been awarded to large businesses and that is my question. What is that about? The semiconductor industry is among the most capital- intensive in the world, both with research and manufacturing costs running well into the hundreds of millions of dollars. If these costs continue to escalate, how will small and medium- sized companies manage to secure adequate investment to allow them to innovate and keep pace with large companies like Intel? Mr. Bruck. Yes. It is a challenge and it is one of the reasons that we have developed such a closely integrated relationship with our small business partners. And this extends not only to our direct supplier but to the suppliers of our suppliers of our suppliers. We find that, you know, many of the issues around innovation or quality breakthrough or cost breakthrough happen many levels down in the supply chain, and that is where the big opportunity is for small businesses. And I think as the testimony here has shown, those companies are more agile in many ways and can move to invest first before markets are mature. The other point I would like to make is with that investment, it does help us keep high paying jobs here in the U.S. The more capital intensive our industry, the more the labor cost, which is a relative cost to the total product, diminishes, which is why we have 75 percent of our revenue is exported to the rest of the world. Sixty percent of our jobs are here in the U.S. and they all average well over $100,000 at all sites. Ms. Velazquez. Thank you. The R&D tax credit is of great importance to the technology and manufacturing industries. It provides businesses of all sizes the ability to invest and innovate research. How in your view could this credit be simplified to make it more business friendly, and why should it be made permanent? Mr. Bruck. Yes. A great point. And I think our view is making it permanent would be wise and helpful for U.S. job creation. In terms of its usefulness, I think expanding on the discussions we are having today to understand how R&D investment creates a broader impact in the U.S. job market and in U.S. GDP growth would be helpful I think to the overall narrative of why the R&D tax credits should be made permanent. Ms. Velazquez. Thank you. Thank you, Mr. Chairman. Chairman Graves. Mr. Schilling. Mr. Schilling. Thank you, Mr. Chairman. And welcome, fellows. One of the things that--I own a small business in Moline, Illinois. It is just a small S corporation. One of the things that right now we are really hurting because, of course, the disposable cash with the high gas prices, of course, which we are trying to get under control, but one of the questions I have is do you believe that more regulation and higher taxes will help hold American companies here or will that be an incentive for them to move outside the United States? Mr. Bruck. To me? Mr. Schilling. Yes. Mr. Bruck. Okay. Well, obviously it is a disincentive for investment here. Our view, and let me contrast between large and small companies because on both the tax issue and the regulatory issue, but we have a global economic competition that is going on. The main thing that we would look at as a large company is a level playing field. So I think trying to look for ways that, as I mentioned, 75 percent of our revenues is exported into other markets. So our competition is coming largely from Taiwan or Korea or Japan or places like that that may have more favorable tax treatment. But it is even more important for the small business. And if you look at the amount of money they can reinvest into research and development, reinvest into hiring and expanding operations, that really will have a very long-term return on investment. And so providing that assistance is critical. The regulatory question, if you look at something like Sarbanes-Oxley, I certainly understand why we need to protect investors especially with companies as large as Intel. But as a percentage of overall revenue, the administrative cost for small business to comply with Sarbanes-Oxley is a crippling cost and again, takes away from investment and innovation and job creation. So looking at the regulatory framework and maybe contrasting the difference for large versus small businesses would be helpful. Mr. Schilling. Very good. Mr. McDowell, this is kind of tied into the same thing. In your written testimony you say that lack of awareness of available tax credits rather than high tax rates may be the problem for small firms. According to the NFIB, high tax rates are a problem because they siphon capital that entrepreneurs need to invest back into their companies to create jobs. And I can relate to this firsthand because right now our taxes in our city, in Moline, Illinois, continue to go up and then the business is constantly dropping. And one of the problems is we have some equipment that needs to be replaced and instead of being able to replace the equipment we cannot and we are having to let people go. So it is kind of a tough situation here. Basically, how do you respond to something like that, sir? Mr. McDowell. I am not saying that tax rates are not high for small business. I am saying that oftentimes, if we look at the trends over years, the taxes, you know, whether they have been up or down it always seems to be the number one problem for small business. I am not trying to deviate from that. But I am saying that what we are seeing today is that as more and more tax credits or different ways of even organizing your business are developed, too many small businesses are not taking advantage of the credits that are available to them. So I am not trying to imply that the taxes are not high and burdensome for businesses at all; it is just oftentimes there are too many things that are missed. And there are actually firms now that go out and specialize and go into small businesses such as yours and saying, look, we will do what we can to save your business and we will charge you a percentage of those tax savings as our fee. But again, the uncertainty for most businesses, whether or not it is going to be beneficial to them to explore different advantages or disadvantages can be difficult. Mr. Schilling. Okay. Very good. I appreciate that. I yield back my time, sir. Chairman Graves. Mr. Mulvaney. Mr. Mulvaney. Very briefly. Thank you, Mr. Chairman. Mr. Blackborow, you mentioned access to capital and you said you are participating in the SBIR program. Have you ever had occasion to try and get any other SBA financing, more traditional SBA lending, that type of thing? Mr. Blackborow. No, we have not. We have approached various banks from time to time to sense whether they would lend money to a company like us and they have not been very interested. Honestly, they do not feel that we are at a point in our growth that makes them feel comfortable enough. And thank goodness that we have people like Intel around. The biggest challenges we have are really not around financing, honestly. Or taxes at this point in our growth. Our biggest issue is access to good, talented people. And so the things that I would point out to the Committee, our focus on STEM education in this country needs to be really emphasized. We have trouble finding good, qualified scientists and engineers now that are born in this country or educated in this country. And when we advertise for a job we often get applicants from China, from Russia, from India, and many of them require visas which we cannot always get. And so I would say--and equally we have grad students at MIT down the street from us who when they get a Ph.D. have to go home when we just educated them in this country. This does not make any sense to me at all. So I would say the things that we need to do is to keep the talent here in this country and then it will fuel the creativity of companies like ours. Mr. Mulvaney. Thank you. I appreciate that comment. You mentioned also about the SBIR program and shortening the time between the phases. I am trying to keep the topic of conversation to the jurisdiction of this Committee. Is there anything else that the Small Business Committee, the Small Business Administration can do to help any of you gentlemen? I am trying to figure out what it is that we should be specifically focusing on in this room. Mr. Blackborow. Let me just answer as a small business to say that I believe I am not very aware of what the Small Business Administration does and I think that in itself is a challenge. We have not been reached out to. I probably could go find it if I dug into it but it has not been something that has been obvious to me that I should go chasing after because I am not sure what I would get when I would get there. Mr. Mulvaney. You would be surprised, by the way, at the number of times we hear that, which is frustrating, us serving on the Committee. And recognizing the time, I am curious. I seriously have a question that is just of interest to me, probably not to the rest of the Committee, how do you all handle intellectual property? How do you handle proprietary information? When you do these partnerships between these big businesses and these small businesses, are you relying heavily on legal documents or is there something else that allows you to function but still allows you to sort of trust each other not to steal each other's ideas? Mr. Bruck. Well, no, it is very carefully controlled. And again, one of the points I would like to make about investment in small businesses and technology fields is that we can create high value products in this country that we can export to the rest of the world, but you need that intellectual property protection to be able to do that. And so what we will tend to do in a relationship like we have with Energetiq is to find what we want is the process technology, the technology related to building chips. We are not in the equipment business per se and so they should expect to own the IP around the hardware. And we bring in what is all of our background IP so we are not mixing that up. And then there is a very careful chain of custody as we create new technology together. But that allows them to go off and build products and serve an equipment market and us to go off and serve the chip market. Mr. Blackborow. Yes, I would say it is quite sophisticated, the relationship we have both with Intel and our other large customer in this business. We have very good intellectual property lawyers on our side and theirs, and we carefully carve it out. We both want to own what we need and we do not want to jointly own things that we do not need because it gets cumbersome. So it is easier if we own our intellectual property, they own theirs, and we carefully spell it out in the contractual arrangements that we have between the companies. I would also say that Intel and the other companies are very respectful of our intellectual property and they need it, which is why they do not want to be seen to be taking it generally. Mr. Mulvaney. Gentleman, thank you very much. Thank you, Mr. Chairman. Ms. Velazquez. Mr. Chairman, I just would like to share with the panel that SBA not only offers a series of different economic development programs through technical assistance to helping put a business plan together to matching borrowers with lenders. But last year when large financial institutions were not lending to small businesses, the SBA stepped up and we injected--the federal government injected close to $30 billion into the economy. Where would this economy be today if it was not because of the role that we played in helping small businesses access affordable capital. So you have been lucky that you did not need their service, but a lot of businesses in this country, small businesses depend on the kind of services that the Small Business Administration provides. Thank you, Mr. Chairman. Chairman Graves. Thank you all very much for participating today. We appreciate it. I would ask unanimous consent that members have five legislative days to submit statements and supporting materials for the record. Without objection, so ordered. And we appreciate it again. Thank you. This hearing is adjourned. [Whereupon, at 2:01 p.m., the Committee was adjourned.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]