DRAFT
[ME204X] Degree Project in Entrepreneurship and Innovation Management, Second Level
Student: Daniel Rozen, [email protected] Supervisor: Professor Staffan Laestadius
T h e R o y a l I n s t i t u t e o f T e c h n o l o g y ( K T H ) | S t o c k h o l m , S w e d e n
May
2011
How can a hostile environment empower the
Index
Index...2
Figures...4
Affirmation...5
1. Abstract ...6
1.1 Keywords ...6
2. Problem description ...7
2.1 Background ...7
2.2 Problem ...7
2.3 Research question supporting a qualitative study (expected results)...8
2.4 Delimitation of the study...9
3. Methodology...10
4. Literature review ...12
4.1 Clusters and networks...12
4.1.1 Clusters...12
4.1.2 Factors that can empower the creation of clusters...13
4.1.3 Networks ...14
4.1.4 Knowledge transfer...16
4.2 Path dependence ...16
4.3 Economies of threat...17
5. Case Study ...19
5.1 Motivation for selecting this case study ...19
5.2 Historical review...20
5.2.2 Creation of the defense industry...21
5.2.3 Government spin-‐off effect...23
5.3 Structure of the cluster ...25
5.3.1. Location...25
5.3.2. Transition to a cluster...27
5.3.3 Industry composition...27
5.3.4 OECD statistics ...29
5.4 Interview...30
6. Discussion ...31
6.1 Origin of the cluster...31
6.2 The transition process...31
6.3 Immigration and foreign aid...32
6.4 Final remarks ...33
7. Conclusions...35
8. Recommendations for future studies...36
9. References...37
10. Appendix ...41
Appendix 1: OECD charts...41
1.1 Gross domestic expenditure in R&D ...41
1.1 Patents per million of inhabitants in 2007...41
1.2 Public expenditure on law, order and defense ...42
1.3 Share of ICT in value added...42
Appendix 2: Interview ...43
Figures
Figure 1: Venture capital investments per Capita in the OECD nations...8
Figure 2: Amount in billions of dollars of VC raised by Israel...23
Figure 3: U.S. Aid to the Israel government during the last 60 years...25
Figure 4: Location of the Israel hi-‐tech cluster ...26
Figure 5: ICT companies in Silicon Wadi ...28
Affirmation
I declare that I have completed the present Master Thesis by myself and without the use of any aids other than those listed. All passages that were taken either directly or indirectly from published and non-‐published sources have been marked as such. The Thesis has never been submitted to a different examination authority in the same or similar form.
Stockholm, May 2011 Daniel Rozen
This Master Thesis contains a total of 45 pages with 8883 words, starting to count from the beginning of the chapter “Abstract” until the end of the chapter “Conclusion”.
1. Abstract
The intention of this paper is to analyze the impact of a threat environment in the creation of a hi-‐tech cluster through the development of an independent defense industry. In order to conclude the implications of a military industry in the development of a hi-‐tech cluster, it was studied the case of the evolution of Israel’s defense industry into a diverse hi – tech industry (Silicon Wadi).
This work emerges from a personal concern in order to understand if there are some benefits or positive side effects in developing an indigenous military industry. Coming from a country in the developing process that has no military forces (Costa Rica) and at the same time has been struggling to create a hi-‐tech cluster, I wanted to learn what are the implications in the hi-‐tech sector for lacking an indigenous defense industry and a threat environment.
As it will be presented in this study, the major implication of having an independent defense industry is that it creates a path dependency in the military sector and if it’s handled correctly through the cooperation between academia, military forces and business sectors it will be possible to create transitions of this technologies into civilian applications, diversifying the entrance of resources and creating an entrepreneur environment.
1.1 Keywords
Hi-‐tech cluster, military industry, Silicon Wadi, Israel, path dependency and economies of threat.
2. Problem description
2.1 Background
It has been argued in previous studies (Moore and Davis, 2004; de Fontenay and Carmel, 2002, Saxenian 1994) that the effect of military spending in national R&D for developing new technologies for modern warfare has been an indirect factor that empowers the creation of hi-‐tech clusters.
In order to maintain the superiority in the battlefield or in some cases the survival of a country, big portions of the GDP are invested in developing, buying new weapons or technologies to achieve this objective. In some countries, it is more common to invest in developing new weapons and technologies rather than buying them from abroad. This complex decision may affect the development of the nation.
In the long term, it has been seen that countries that have the policy of investing in developing new weapons and technologies for their own use have been able to establish a powerful hi-‐tech cluster. This investment in military technologies is commonly accompanied by an investment in human capital (education) in order to have the necessary human resources to develop the new technologies. An educated population with the possibility of creating substantial R&D and with the necessary resources will probably be able to create a lot of Start-‐Ups.
An example of a country with this background is Israel. This country has been able to create the highest density of start-‐ups in the world: 3850 start-‐ups, one for every 1844 Israelis (Senor and Singer, 2009) while being threatened by a hostile environment.
2.2 Problem
With only sixty-‐three years since its creation, Israel attracts more venture capital than any other country in the world (see figure 1), created the necessary laws and institutions for empowering entrepreneurship among its citizens and in result created the second most important cluster for high-‐tech companies around the world according to de Fontenay and Carmel (2002, pp. 40).
Figure 1: Venture capital investments per Capita in the OECD nations
Source: Senor and Singer 2009, pp. 12
This story starts after the embargo created by the French government (main arms supplier of the Israeli army at that time) following the 1967 war. Israel had two possible ways to solve this problem, find another supplier of weapons or to start developing their own technologies and create a “technology independence” from other countries. At that time, Israel main source of wealth was agriculture and practically no R&D was made. Even though it was a high-‐risk decision, the government decided that independence was the right strategy for the country. According to the Stockholm International Peace Research Institute (SIPRI), Israel is the third country that produces and sells more weapons and other war technologies around the globe (Freeman, S., Ismail, O., Kelly, N. and Solmirano, C., 2010) and has also been able to attract close to $ 2 billion in venture capital for use in other types of companies, as much as flowed to the United Kingdom’s (61 million citizens), Germany and France combined (145 million citizens between Germany and France) (Senor and Singer, 2009).
The idea of this Thesis is to understand if there is a direct correlation between the development of a hi-‐tech cluster and the investment made by governments in R&D for creating weapons and other technologies related to the military.
2.3 Research question supporting a qualitative study (expected results)
2.4 Delimitation of the study
This paper will focus on the history and the current situation of Silicon Wadi in terms of how can a hostile environment created the necessary environment for the establishment of a hi-‐tech cluster and the actual structure of the cluster. This paper does not intend to focus on:
• Amount of weapons sold by the Israeli government or revenues generated by this
sector.
• Amount of exports generated by the companies located inside the cluster. • Types of technologies developed by the Israeli defense industry.
• Amount of jobs created by the cluster.
• Direct investments in R&D from the government to the defense industry.
• Political implications and effects created by the wars between Israel and its
neighbors.
3. Methodology
As Ghauri and Gr∅nhaug explain in their book “Research methods in business studies”
(2010, pp. 56-‐58), there are three kinds of research design strategies based on the problem structure, these are:
• Exploratory research: Research problem is badly understood. This is often the case
of medical research, where potential causes are examined in a laboratory experimental setting.
• Descriptive research: The problem is structured and well understood. The key
characteristics are structure, precise rules and procedures. An example of this problem structure is the method for measuring height made by doctors.
• Casual Research: Problems are structured as well, it differs from the last one
because the researcher is confronted with a “cause – effect“ problem. The main task for the researcher is to isolate the cause(s) and tell whether and to what extent the cause(s) result(s) in effect(s).
As described in the previous section, the main idea of this Thesis is to discuss the effect (creation and growth of hi-‐tech clusters) phenomena based on a cause (government investment in R&D for military purposes). For this reason, it will be followed a cause-‐ effect strategy.
The first step to find an answer for the Thesis is to investigate and present a theoretical background in which the Thesis will be supported. In this case, it will be divided in three sections, which are: Clusters and networks, economies of threat and path dependence. After completing the theoretical background, a qualitative research will be made to understand the relationship between the cause and the effect. According to Ghauri and Gr∅nhaug (2010, pp. 103-‐107), a qualitative method is best suited for an emphasis on
understanding a phenomenon that is made by interpretation and rational approach with an explorative orientation. It is primarily used when it is needed to uncover and understand a phenomenon. In the other hand, a quantitative method is best suited for an emphasis on testing and verification with a logical and critical approach.
online data sources). The reason for doing a case study is, according to Ghauri and Gr∅nhaug (2010, pp. 109-‐115) this is the best approach for answering questions like
“how” and “why”, when the researcher has limited control over the events and when the focus is a current phenomenon in a real life context because there are too many variables to be considered which makes experiment or survey methods inappropriate. This case study is the story of the creation and growth of the Silicon Wadi cluster, which is Israel’s hi-‐tech cluster.
After presenting the case study, it will be conducted one unstructured interview (The respondent is given the liberty to discuss reactions, opinions and behaviors) in order to understand a specific phenomena, which is the relationship between the investment in R&D for military purposes and its repercussion on empowering the creation and growth of hi-‐tech clusters. This interview will be performed to a researcher in the Stockholm International Peace Research Institute (SIPRI).
4. Literature review
For the first part of the section it will be presented the theory of clusters in order to understand what are they and how they are created. This presentation of clusters will be followed by an introduction to networks for empowering innovation. This theory will help to understand how networks of innovation affect the creation of new technologies inside clusters.
The second section, economies of threat, will try to define how companies and nations face and respond to threats of the environment. Finally, it will be presented in the third section some theory in order to define “Path dependence” and how this concept can affect the selection of a technology.
4.1 Clusters and networks
4.1.1 Clusters
According to Michael Porter (2000, pp. 254), Clusters are geographic concentrations of interconnected companies, specialized suppliers and service providers, firms in related industries and associated institutions (e.g. universities, standard agencies and trade associations) in particular fields that compete but also cooperate that are linked by commonalities and complementarities.
There is not a “model” for establishing a cluster; they tend to vary in their purpose and extension. Practically all of the high-‐tech clusters are composed by end product or service companies, financial institutions that empower the companies allocated inside the cluster region and governmental institutions that provide training, education, information and financial aid.
innovative-‐based companies (local entrepreneurs will be able to develop new technologies more rapidly) and expand rapidly thanks to the leverage of local resources. As Michael Porter mentioned in his article “Location, Clusters and Company Strategy” (2000, pp. 259 -‐ 264), the three main advantages for working inside successful clusters are: increase of productivity, increase of innovation and stimulating new business that expands the cluster. He suggests that these advantages are achieved by the next factors:
• Static productivity: A cluster is a spatial organization that inherently enhances the
efficiency for assembling inputs.
• Access to information and knowledge: Thanks to the extensive work in R&D made
by companies inside clusters, there is a great amount of market, technical and other kinds of knowledge that is accumulated within the institutions that belong to the cluster. The more knowledge shared between companies, the more successful the cluster will be.
• Access to Institutions and public goods: Thanks to some governmental policies,
firms inside clusters may benefit from specialized infrastructure and advice from experts at a lower cost. Local technical universities that share or provide laboratories and knowledge in order to increase the relationships between the companies and the students mainly carry this task.
• Clusters and innovation: Firms that are inside a cluster are more able to perceive
buyer needs thanks to the proximity with the end buyer, which in most cases are companies inside the same cluster.
4.1.2 Factors that can empower the creation of clusters
Another similarity that the authors point out is that most of the hi-‐tech clusters were born thanks to the creation and exploitation of a new technology. For example, during the 1960 as a need for creating integrated circuits empowered the creation of Silicon Valley. Other authors, such as Scott Wallsten (2004, pp. 229 -‐ 231), argue that the creation of a hi-‐tech cluster is the result of two common policy approaches, which are:
• Creation of public venture capital (VC) funds: Direct government subsides for
small hi-‐tech firms and stimulate entrepreneurship
• Build a science park to lure hi-tech firms: Science parks are established to play
two roles. The first one is to play an incubator role (being a location for the birth and grow of new high-‐tech firms, facilitating the knowledge transfer between universities and companies and stimulating the creation of new products, services and products) and the second role is to be a catalyst for regional economic development.
These policies have to be accompanied by Universities that draw scientists and engineers to region in order to generate knowledge that local firms can use.
According to Asheim and Gertler (2004, pp. 292-‐294), the more knowledge intensive the economic activity, the more geographically clustered it tends to be. This is a consequence of the difficulty of transferring tacit knowledge. According to Harry Collins on his book “Tacit and explicit knowledge” (2010, pp. 1), tacit knowledge is the type of knowledge that cannot be made explicit. In other words, tacit knowledge is described as the “know-‐how” of doing things. It is a type of knowledge that it is difficult to communicate by words or symbols and it is usual transmitted by training or gained by personal experience. A simple example of tacit knowledge is learning how to ride a bike, which can only be done by personal experience.
They (Asheim and Gertler, 2004) propose that tacit knowledge is a key factor for empowering the innovative activity in a specific region. The transmission of tacit knowledge becomes a critical success factor for the development and growth of a high-‐ tech cluster because it has to be transferred in most cases by face-‐to-‐face interactions.
4.1.3 Networks
development of new products and services, especially in sectors with rapid technological progress, such as semiconductors, computers, biotechnology and pharmaceuticals. By creating ties between partners through multiple collaborations or expanding R&D and development, companies end up increasing the points of contact between them. When these relationships are broadened and the commitment between institutions increase, the more knowledge will be transferred.
Networks enable firms to cross boundaries to access different types of assets (both tangible and intangible). The existence of a level of trust within a network enables the firm to reduce many of the costs that are inherent in the research and creation processes. In addition, networks allow better access to research infrastructures and help the firm identify its boundaries, while classifying which assets should be integrated into the firm and which should be accessed through contractual agreements (Kaufmann and Schwartz, 2008).
In order to understand the importance of networks in the development of clusters, it is important to mention the study made by AnnaLee Saxenian (1994). She was able to conclude that the success and growth of a hi-‐tech cluster will depend on the type of networks and openness of the industrial system. While comparing the networks inside Silicon Valley (California) and The Route 128 region (Massachusetts), she was able to understand why the first one, Silicon Valley has become the biggest and most important hi-‐tech cluster in the world and the second one has decreased its size significantly since 1970.
The reasons for the success of Silicon Valley are mainly because the cluster has a regional network-‐based industrial system that promotes collective learning and has the necessary flexibility to adapt the producers of complex technologies to the needs of the customers. The social networks that are established in the region and open labor market have helped to encourage experimentation and entrepreneurship. Companies compete intensively and at the same time they are able to learn from each other about the changes in the market and technologies through informal horizontal networks of communication and collaborative practices.
customers are dominated by practices of secrecy and corporate loyalty. Information tends to flow vertically in order to ensure the centralization of the authority. These relationships are a consequence of the origin of the cluster, which are the military technologies developed for the United States army during the Second World War.
4.1.4 Knowledge transfer
The role of knowledge transfer is clearly central to the innovation process (Powell and Grodal, 2004). If firm A is good at producing specific component and firm B is capable of using that component to produce an engine, they collaborate in a joint production in which their capabilities reinforce one another. .
A second form of knowledge sharing occurs when existing information within a network is recombined in novel ways. Indeed, novelty is often the unanticipated result of reconfiguring existing knowledge, problems and solutions. As a consequence of such collisions or transpositions, firms can generate something they were unable to create on their own (Powell and Grodal, 2004).
The productive transfer of knowledge is also essential when two or more organizations are able to combine their different capabilities and create a product or a service that they would not be able to construct on their own. Because all the participants provide valuable inputs, there is a high commitment to knowledge generation (Powell and Grodal, 2004).
4.2 Path dependence
“A path-dependent sequence of economic changes is one of which important influences upon the eventual outcome can be exerted by temporally remote events, including happenings dominated by chance elements rather than systematic forces” (David, P., 1985, pp. 332).
As Brian Arthur (1990) explains it, some technologies can improve as they become more popular among users, creating an improvement cycle: As the use of the technology and the adoption process increases, the more it will give the necessary feedback to improve causing further adoption. In the case that there are two or more technologies that are competing to fulfill this improvement cycle will make the market unstable. One of these technologies will pull ahead for various reasons including luck and will pull out of n market the other technologies.
An example of this behavior was the adoption of the VCR technology rather than the Betamax technology. Although the Betamax technology was superior in quality, it didn’t allow the user to record from the television. Users turned out to buy more the VCR technology rather than the Betamax technology. Subsequently the second technology disappeared and the VCR dominated until the birth and adoption of the DVD.
In the long term, an economy that it is based on a path dependency will create a positive feedback effect; this means that it will create increasing returns through multiple point of equilibrium. Once an economy has selected a particular path, it may get locked in into the path avoiding possible advantages of others (Arthur, B., 1989).
4.3 Economies of threat
The Cambridge dictionary defines threat as “A suggestion that something unpleasant or violent will happen, especially if a particular action or order is not followed”. In this
section it will be presented two cases of economies based on threat: How does a company behaves under external and internal conditions of threat and how does a country reacts to threats on a hostile environment.
Some studies, like the one performed by Bergman and Wigblad (1999) demonstrate that when a company announces that is about to shut down their operations in a certain plant or the management intends to reduce the investments in developing one of its plants in comparison to others; the result will be that productivity will increase. The authors conclude that this outcome is due to the absence of management interest in keeping the traditional patterns of control, and as a consequence, enforced the empowerment of innovation between the workers and helped them to reorganize the plant in order to achieve better results.
decision of closing the plant. This result contradicts the expected outcome of management, in which it is common to expect a reduction in the productivity of the plant.
On a national level, when a country feels threatened by a hostile environment the outcome is to increase support for belligerent policy options, oppose international involvement and to increase the willingness to take risks, among other consequences. Huddy, Feldman, Capelos and Provost (2002, pp. 486 -‐ 489) got to these conclusions after analyzing mainly the consequences of the terrorist attacks in September 11, 2001 in New York. They were able to accumulate the necessary evidence in order to conclude that the perceived risk of a potential terrorist attack will influence the assessment of the national economy and the future economic well being of the individuals.
Other studies, like the one performed by Arian (1989, pp. 606) state that citizens in nations that are in constant threat of war are willing to invest in weapons rather than investing time and efforts in peace talks in order to prevent an attack from the enemy and they are also willing to take any measure needed in order to reduce the risk of personal harm. The author comes to this conclusion after analyzing Israel’s situation along the country’s history.
5. Case Study
This section intends to present a historical research and current situation in Silicon Wadi, Israel’s hi-‐tech cluster. This case study will give the necessary input in order to conclude the influence on military spending in R&D in empowering the creation of hi-‐ tech clusters.
5.1 Motivation for selecting this case study
As pointed out on the problem and research question section, Israel faced the challenge to develop the defense industry in order to survive in the 1960’s. This change of paradigm fostered in the long term the creation of Silicon Wadi. The creation process of this cluster will be exposed in the historical research section.
Other clusters, like Silicon Valley, where sustained and “nurtured” in the first stages by military spending, but they carried on to create other technologies. As Moore and Davies (2004, pp. 7-‐ 39) explain in their article “Learning the Silicon Valley Way“: Some observers have argued that Defense Department spending “bought” Silicon Valley through support and development of semiconductors, however, in our perspective, the impact exerted by defense R&D was quite small. Contrary to what may have been thought or alleged, the space program in the 1960’s had a negligible impact on the semiconductor industry.
Another case, which was also created thanks to the military spending of the United States is Route 128 in Massachusetts. In recent years, this cluster has been loosing its size and importance due to the difficulty they have had to transform military technologies into civilian applications (Saxenian, 1994).
It can be seen that there is not a direct intervention by the defense industry in order to foster the creation of the hi-‐tech cluster.
As presented in this section, no other cluster presents the unique form of fostering made by the military in order to develop new technologies and converting some of these technologies to civilian use as it is made in Israel, making this the perfect case study for this Thesis.
5.2 Historical review
The story of Silicon Wadi starts with the simple need for survival in adverse conditions. Israel has limited natural resources and territory, with only 21,642 Km2 (Practically the
same area as the State of New Jersey in the United States) has a population of 7,1 million people. The country has a high and dry temperature in the Southern and Eastern desert areas, causing that only 15.45% of its land is available to cultivate. (The World Factbook, 2011)
5.2.1 Colonization of the country
Along with its problems of agriculture, diseases and water, Israel has been fighting with its neighbors for the survival of the country. Just after declaring its independence in May 1948, Israel was engaged by all of its neighbors in order to destroy the newborn state. After two years of intense battles and with an army that consisted mainly of settlers from the Kibbutzim, Israel was able to succeed in the war. This war turned to be the start of a series of wars that were meant to destroy the Jewish State.
5.2.2 Creation of the defense industry
After the Independence war, Israel fought two wars that enforced the confidence of its military forces. During the Sinai War (1956), Israel along with France and the U.K. conquered the Suez Canal from Egypt after its nationalization by Egypt’s president Gamel Abdel Nasser. Israel was able to add more strategic territory to the nation (The Gaza strip and the Tiran Straits), but France and the U.K. were not able to maintain the Canal after the United Nations forced the return of the Chanel to Egypt. Creating unstable Pease in the region (Kunz, D., 1991).
After eleven years of a tense calm, Israel engaged its neighbors (Egypt, Jordan and Syria) in a surprise attack in order to prevent a massive attack towards the nation. The Six Day War (1967) helped the country to demonstrate the strengths of the army by conquering territories from other countries and diminishing the power of their armies. In terms of security and territory, this was a successful war for Israel, but it meant to lose one of its closest allies, France. The French Government, which was the main supplier of weapons to Israel, decided to create an embargo on arms supply to the country (Vekstein and Mehrez, 1997).
This tipping point accelerated the path of development of the Israeli defense Industry. The Israeli government advanced a highly risk-‐averse defense technology policy, the policy of independence. One of the main objectives of this policy was to achieve an independent local capacity for defense and R&D and production so as to reduce significantly Israel’s dependence on foreign suppliers of weapons and ammunitions (Vekstein and Mehrez, 1997).
• In the first stage (1967 – 1975), Israel accumulated high level of inventories of
materials and parts in order to reduce the risk of a war in the region. These inventories also helped the country to create reverse engineering, learning from others on how to create weapons.
• The second stage was the implementation of the policy of independence, which
started after the Six Day War. This stage pushed defense firms to accumulate large stocks of technical knowledge in order to gain and maintain an independent R&D and production in a wide range of defense technologies.
These strategies lead to the strengthening of the three biggest firms of defense created by the government in the early stages of the creation of the State: Israeli Aircraft Industries (IAI), Taas Israel Industries (TAAS) and the Armaments Development Authority (Rafael). These firms created a transformation from becoming production companies in an agricultural country into knowledge intensive firms (Vekstein and Mehrez, 1997).
As a result of increasing expenditures on developing specialized labor, the costs of military hardware in Israel increased rapidly, pushing defense firms to pursue economies of scale aggressively. This economies of scale where achieved by promoting exports, since the domestic market was really small (Vekstein and Mehrez, 1997).
Two other strategies where taken in order to maintain and increase the defense industry in the country:
• Develop turnovers between military technologies to civil technologies in order to
diversify the entry of resources: During the late 1960’s the defense industry began to create some spin-‐offs into civilian technologies. This was the case of the Arava airplane, which was intended for military and civilian uses. The customers were found mainly in third world countries, especially in Central and South America (Taylor, J., 1984).
• Push the defense industry to seek access to external sources of funding and state of
5.2.3 Government spin-‐off effect
The government spin – off effect in the last forty years (Creation of companies based on research made by R&D inside the military industry) was caused mainly by five reasons (Senor and Singer, 2009):
• The BIRD and Yozma programs: These government programs were destined to
empower start-‐up companies, not only with capital funds but also with management guidance. The BIRD program (Binational Industrial Research and Development) was a joint foundation established between the United States and Israeli government. The program started in 1978 with an initial budget of $ 110 million, giving joint venture companies between the two countries capital from $500,000 to $1,000,000. The program served as a matchmaking service between an Israeli Technology and an American company that could distribute the products. To date, the program has invested over $250,000 million in 780 projects, resulting in $8 billion in direct and indirect sales (BIRD, 2011). In the other hand, the Yozma (Initiative in Hebrew) program focused on helping young companies by injecting founds and also management skills into the company. This is an entirely program founded by the Israeli government since 1992 with $200 million, today they are managing funds of $ 3 billion (Gemini, 2011). There are also offers from the Israeli government for financial incentives for firms from abroad to locate their activities in Israel, through tax reductions and funding of R&D costs (de Fontenay and Carmel, 2002). To see the amount of VC funds raised by the country in resent years, please look at the Figure 2.
Figure 2: Amount in billions of dollars of VC raised by Israel
• Unit 8200 of the Israeli army: This unit is the technology Intel unit of the army.
This Unit also serves as a network for positioning alumni into high position jobs inside Israeli companies. Some companies, like instant message’s ICQ and CheckPoint (Company specialized in determining online money transactions) were created by members from this Unit. The purpose of this Unit is to develop the necessary technologies in order to collect signal intelligence and code decryption. The technologies developed inside the unit are allowed to turn into civilian purposes with no retribution to the Israeli government (Forbes, 2007). There has been a wide range of commercial civilian applications with military technologies origins, such as voice logging, wireless, paging and vehicle positioning, faster network software, Internet telephony software and streaming techniques. (de Fontenay and Carmel, 2002)
• Value improvisation: Due to the absence of the necessary amount of soldiers in the
Israeli army, the pyramid turns to be really narrow at the top, meaning that there are fewer senior officers to issue commands. Fewer senior officials represent more individual initiative at lower ranks. In an army that survives from obligatory conscriptions of high-‐school graduates, becoming a lieutenant at the age of twenty is very common. This turns out to be a great school for innovation, leadership and responsibility for the young soldiers, as they have to guide units of at least one hundred soldiers in adverse conditions (Senor and Singer, 2009).
• Migration: Israel has an open door policy for all Jews around the world. This means
that a long its history the country has been forced to introduce, accommodate and integrate millions of Jews. In some occasion the country has been forced to accept waves of migrants due to adverse conditions for Jews around the world. Since 1900 the country has had twelve waves of migrants in different situations. The total number of migrants since 1919 has been 3,374,275 people until 2006. It is important to remember that Israel has a population of around 7.1 million people (Jewish Agency, 2009). Israel’s population is made up from seventy different nationalities, the idea of a unitary culture and background is not applicable in the country. It is a monotheistic melting pot of a Diaspora that brought back with it the culture, language and customs of the four corners of the earth (David McWilliams, 2004).
• U.S. Aid: Is no secret that Israel has become a close ally with the United States in the
This fund is expected to grow to $ 3 billion by 2011. Although this is not a direct investment to the Israeli defense industry, it has helped a lot to purchase different technologies that are not produced in the country, such as jet fighters. 74 % of the aid given by the U.S.A has to be invested in U.S. technologies; the rest (26%) can be invested inside the country (Even, S., 2010). These purchases have allowed the defense industry to create reverse engineering in order to learn and improve the technologies created inside the country.
Figure 3: U.S. Aid to the Israel government during the last 60 years
Source: U.S. Foreign aid to Israel (http://www.fas.org/sgp/crs/mideast/RL33222.pdf)
5.3 Structure of the cluster
5.3.1. Location
Figure 4: Location of the Israel hi-tech cluster
Source: de Fontenay and Carmel, 2002
5.3.2. Transition to a cluster
During the 1990’s Israel saw the transition of the hi-‐tech industry into an established cluster. This transition was the consequence of two factors, cumulative factors and exogenous forces (de Fontenay and Carmel, 2002):
• Cumulative factors: Gradual creation of Israeli ICT firms due to the transformation
of military technology into civil applications and the establishment of foreign firms that started from the 1970s. Some firms like Intel, Microsoft, Motorola, IBM an others have placed their subsidiaries in Israel. Each successful firm created demand for other intermediary services, such as accounting, creation of facilities and most importantly, venture capital.
• Exogenous forces: The internet and financial boom of the 1990’s, the Soviet
immigration wave that brought engineers and mathematicians to the country, a strong contraction in the state-‐dominated military industry in response to fiscal crises and The Oslo peace accords (1993) that reduced the political risk faced by firms in Israel.
These factors encouraged the formation of new high-‐tech firms, bringing in consequence the establishment of the cluster.
5.3.3 Industry composition
As seen in the Figure 5, the ICT sector of Silicon Wadi is composed primarily on Software products and services (27% of the companies), information technology and equipment (17 % of the companies) and telecommunications (17% of the companies).
According to the Israeli government (Invest in Israel, 2011), these are the main business sectors inside the cluster (See figure 6 for the distribution of the companies):
• Water technologies: Due to the absence of water in the region, Israel has been
developing technologies for increasing the efficiency of the use of water and has become a leader in this area worldwide. These systems go from irrigation systems, desalination water systems, and recycling used water for agricultural use among other technologies.
• Life sciences: Israel is the country that has more medical device patents per capita
Figure 5: ICT companies in Silicon Wadi
Source: de Fontenay and Carmel, 2002
• Homeland security: Due to the situation faced by the country, Israel has been able
to create and nurture a well-‐established security industry. In these sixty-‐two years of independence, Israel has been able to create defense satellites, defense tanks, fighter and civilian aircrafts, rifles missiles and much more.
• Communications: 50% of he 2000 Israeli start-‐up companies in 2007 were in the
communications sector. The amount of exports from this industry in 2007 account for 23% of Israel’s hi-‐tech exports and 8% of the country’s total exports that year. This industry has produced around 15,000 jobs in the country and half of the 120 foreign R&D companies operating in Israel develop communications technologies.
• Semiconductor industry: The country has a mixture of national and foreign
Figure 6: Distribution of companies inside Silicon Wadi
Source: de Fontenay and Carmel, 2002
5.3.4 OECD statistics
In order to understand the current situation of R&D in Israel in comparison to the world, it is useful to check the charts created by the OECD (Organization for Economic Co-‐ operation and Development). These charts will be presented in the Appendix 1.
OECD uses its wealth of information on a broad range of topics to help governments foster prosperity and fight poverty through economic growth and financial stability (OECD, 2011).
the country that has the biggest share of value added by the sector ICT in manufacturing (20.9%) and in IT services (19.6%) among the OECD nations.
5.4 Interview
As mentioned in the methodology chapter, an unstructured interview will be presented in order to understand the current situation and the future perspectives of the military industry in Israel. The interview took place the 31 of March 2011 at SIPRI (Stockholm International Peace Research Institute). This institution specializes in studying conflicts, armaments, arm control and disarmaments.
6. Discussion
6.1 Origin of the cluster
As seen on the case study, the origins of Silicon Wadi can be traced to the birth of the military industry in Israel. Although the colonization of the country during the first half of the XX century brought to Israel the application of science through the development of the irrigation systems, it was the military industry that created a catalyst in order to develop research and development inside the country.
This catalyst was nurtured by the constant threat of war that the country has felt since the independence of the nation. As mentioned in the study performed by Arian (1989), nations are willing to take any measure needed in order to reduce the risk of personal harm. In the case of Israel, it meant to create a path dependency into a defense industry. As a consequence of this path dependence, it is not a surprise to look at the investments made by the Israeli government in the defense sector and in R&D, making it the third country in the world with the biggest investment of GDP in military spending in 2008 according to SIPRI and also the country that spent the biggest portion of its GDP in R&D among the OECD nations in 2010 (See appendix 1).
Silicon Wadi meets the necessary requirements to be considered a cluster. According to the definition of a cluster given by Michael Porter (2000, pp. 254): Clusters are geographic concentrations of interconnected companies, specialized suppliers and service providers, firms in related industries and associated institutions (e.g. universities, standard agencies and trade associations) in particular fields that compete but also cooperate that are linked by commonalities and complementarities. Although it started with only one industry, these days the cluster contains several industries that contribute to the development of new products and services that are geographical clustered in order to facilitate the transfer of knowledge between them.
6.2 The transition process
Unlike in the case of the cluster in Route 128, Massachusetts where the cluster had a difficulty to achieve the transition between the defense industries into other civilian technologies, Israel succeeded in this transition. This transition was needed in order to diversify the entry of resources in order to invest in R&D. Some companies like ICQ and CheckPoint are a clear example of military needs created inside the Israeli army that were adapted into different uses. The reasons for the success are the openness and transparency between the army and the social networks, encouraging experimentation, creating a knowledge base economy and empowering the creation of new companies. As mentioned in the study “Clusters and entrepreneurship” (2009), a country can enhance entrepreneurship thanks to the establishment of a strong cluster environment.
In the case of Israel, the small cluster created to achieve independence in the military sector transformed into a diverse hi-‐tech cluster. This entrepreneurship environment inside the cluster among with the help of venture funds allowed the creation of several companies in various sectors of the economy.
This transition process from military technologies to civilian applications has helped to promote collective learning between the academia, business sectors and the army. In the long term, these complex horizontal networks inside the country allowed the integration of the needs of customers in the development of new technologies. As mentioned in the study made by Kaufmann and Schwartz (2008), the existence of a level of trust within a network enables the firm to reduce many of the costs that are inherent in the research and creation processes.
Being a country with a knowledge base economy, Israel has not only been able to create a great amount of start-‐ups in the hi-‐tech sector, but it has been able to attract a lot of foreign companies and investments. Microsoft, IBM, Intel and other big companies in the hi-‐tech sector have placed some of their biggest R&D centers in Israel in order to gain some influence from the environment, the networks and the educated workforce. In return, these companies help to develop the country thanks to the support to public universities in order to create research laboratories, giving high quality jobs to the educated workforce and creating knowledge inside the country.
6.3 Immigration and foreign aid
(2002), exogenous forces such as the Soviet immigration wave that brought engineers and mathematicians to the country are also a cause of the success of Silicon Wadi. In theory Israel is the country of the Jewish people, but in reality it is country based on immigration. This factor has turned Israel into a melting pot in which cultures, languages and customs from all over the world are interacting between each other. As a consequence, this factor helps to create a diverse country, a country that is more open to discussion and acceptance of different points of view.
As seen in the case study and in the interview with Pieter Wezeman, the aid provided by the United States to Israel has been substantial in the last forty years. This aid has helped the country not only to acquire military technologies from the United States but also to develop certain military technologies inside the country that are later used by the United States army. This transfer of technologies creates a platform to test military technologies, creating feedback from customers in different situations and environments, improving the development of the products.
Although Israel is not the only country supported by the United States with military funds in the Middle Eastern region, it has been the only one able to establish a hi-‐tech industry or to develop complex military technologies. As mentioned in the interview with Pieter Wezeman, Israel was the first country that decided to create an independent military defense industry in the Middle Eastern region. This decision has allowed the country to create a certain gap of military technologies between the nation and its neighbors, allowing Israel to gain an advantage over the countries that threatened the existence of nation during the first years of existence.
In recent years, some neighboring countries like Saudi Arabia, Oman and Iran have been increasing their investments in defense technologies, but they haven’t been able to balance their military spending with investment in R&D and education, increasing the difficulty to create and sustain a hi-‐tech cluster.
6.4 Final remarks
the production of other technologies and applications in different sectors of the economy.
As mentioned in the abstract of this paper, the main motivation for creating this thesis was to learn what are the implications in the hi-‐tech sector for lacking an indigenous defense industry or a threat environment in order to explain why my home country, Costa Rica, has been struggling to develop a hi-‐tech cluster.
