GaWC Research Bulletin 72

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The Impact of Globalization on the Boom and Crisis of Israels's High-Tech Industry*

B.A. Kipnis**


This paper is a 'saga' of a place, a small country - Israel, located at a dead end of the global economy (Kipnis, 2001), which has gained the noteworthy status of a high-tech node. Due to its inherent local qualities, Israel swiftly emerged in the global economy scan during the 1990s. The impact of the global economy on the tiny Israeli economic milieu was so significant that, as a result of the contemporary world high-tech crisis, the Israeli economy, with close to 10% unemployment primarily in high-tech and its associated sectors (Aloni, 2001; Atad, 2001b) has been severely disabled. Emergency governmental measures are required to overcome this crisis.

The history of Israel's high-tech revolution is one decade old, but its extent has attracted a great deal of world attention notwithstanding the fact that Israel (area 21,000 square kilometers and population 6 million at the end of the 20th century) is but a small niche in the global economy. The early stages of this revolution have been traced inter alia by Shefer and Frenkel (1986), Steinmetz (1989), Vider and Shefer (1993), and Felsenstein (1993; 1996), and its early climax has been depicted by Arazi (1998), Karp (1998), and Perman (2000). These authors describe the change as one that has substituted production of oranges and diamonds by semiconductors, medical products, and telecommunications; now the main exports are products of young civilian firms that did not exist a decade ago.

The dynamics of Israel's high-tech revolution has been so rapid that in order to follow the ongoing events one has to rely on up-to-date resources. Some, citing scientific research, or journalists' erudite reports in weekly magazines or in highly regarded economics newspapers dated until late 2000, will tell you, that Israel is among the world's leading high-tech centers; that it has the third largest number of firms listed on the NASDAQ (following the US and Canada), and that its companies have started to trickle into European stock markets too; that Israel is ranked fifth in the world in its number of startups and first in the number of startups per capita; that foreign and Israeli VC (venture capital) and FDI (foreign direct investments) have considerably increased since the mid-1990s and have extended their maturity at the close of the century; and that Israel, for the most part the Greater Tel Aviv region, is nicknamed the 'New/Second Silicon Valley.1

If one continues one's search through the 2001 web sites and newspaper articles, one finds out that as a reflection of the global high-tech crisis, the Israeli high-tech industry is in deep trouble, showing sharp declines in all of its economic indicators (Atad, 2001b). From the beginning of 2001some 550 high-tech firms, 100 of them startups, ceased their operations, and some 12,000 high-tech employees have paid the price by losing their jobs. In 2001 the high-tech industry's contribution to Israel's 2001 GDP was negative, subtracting 1% ($1 billion) from its yearly total (Atad, 2001b). Moreover, the previous success of the high-tech industry brought prosperity to many other high-tech supplying sectors. The current crisis has not passed over these sectors either. The most severely affected are real estate, law, and accounting firms, and many other producers' service establishments (Aloni, 2001). Aloni further asserts that the damage seems to have long- range time horizons, since the presently failing young startups will not be around in order to mature in times of recovery.

Other recent newspaper reports and Internet sites try to describe why all this happened. Some blame the global high-tech crisis as the main reason for the collapse, but others criticize the inherent Israeli labor reproduction attributes and its investment mentality (to be discussed latter). Goldman (2001), for example, sharply blames the 'seven sins of Israeli high-tech' - covetousness, greediness, arrogance, opacity, blindness, corruption, and foolishness. Elyada, (2000a; 2000b), Brener (2000), Hes (2000), and Agmon (2000) suggest that some warning signs had lit up earlier: they specify the dangers involved in partial local use of innovative products; rapid labor mobility, estimated at 21-23% of employees who leave their firms, taking with them much of the firm's accumulated knowledge; excessive salaries and other payments to labor; and worst of all, fruitless use of working time by "naughty high-tech youngsters" who spend 25-50% of their long 14-17 working-day hours (an unjustified sin of workaholism in itself) on Internet surfing, including music and sex sites, long private chats, eating, including long out-of-office lunch dates, etc.

This paper attempts to appraise the boom in Israel's high-tech industry under the cloudy skies of a global high-tech crisis, described by Lipshitz (2001) as "The End of the Startup Era". It explores the unique development milieu in which the Israeli high-tech revolution took place during the 1990s, and reveals the errors that have led to its present bust stage. Possible avenues for recovery are explored. More specifically, the following issues are discussed:

  1. Is there an intrinsic association between the high-tech revolution and the Israel's entry to the post-industrial age and its affiliation with the global economy?

  2. What inherent qualities of Israeli society made the high-tech revolution possible?

  3. What were the main attributes of Israel's high-tech industry during its peak period at the close of the 20th century?

  4. What has been the impact of the recent global high-tech crisis on Israel's high-tech industry?

  5. What are the prospects of recovery for Israel's high-tech industry? Can it take advantage of the optimistic prospects of post-September 11 recovery from the terror acts?

The swift up and down processes experienced by the Israeli high-tech industry in recent years could only be traced through a consistent search of reliable articles and news items published by dependable journalists in the economics columns of leading newspapers. Some of the items presented do indeed contain subjective interpretations by the journalists, as well as misinformation released by a manipulative interested agency or individual. As the current high-tech crisis grew ever closer, the amount of such speculative and of conflicting information amplified in volume and intensity, necessitating careful evaluation of available sources and reports.


Post-industrial economies differ from industrial economies in their method of production. The industrial economies are goods producing, while the post-industrial depend on specialized and complex producer services that help integrate their centralized management (Crook et al., 1992). Castells (1996) interpreted the post-industrial economy as an 'informational mode of development', where information processing is a fundamental activity shaping the efficiency and productivity of production, consumption, distribution, and management. The informational mode of production, according to Castells, is the outcome of the evolution of large corporations and of the transformation from capital and labor to other factors of production linked to science, technology, and management. Post-industrial economies also tend to adopt flexible production processes and organizations, to diversify their scope of activities, and to join global production networks (De Jong et al., 1992; Sassen, 1991). Being socially, culturally, and occupationally hyper-differentiated, post-industrial economies must satisfy the community's diversified needs and aspirations by means of social, cultural, and leisure assets (Coffey, 1992; Felsenstein and Razin, 1993), in terms of psychic income and rewards (Buswell, 1983), and by creating a white-collar environment (Malecki, 1980).

Usually, large urban agglomerations, where timely information and knowledge cluster (Castells, 1996; Gottmann, 1983; Moss, 1988; Sassen, 2000), are the embedded host milieu for post-industrial, globally oriented economies (Illeris, 1991; Short, 1996; Veltz, 1997;Sassen, 2000). These centers, equipped with its most important asset, its top professional know-how and infrastructure, are the arena in which competition among industries, determined by quality and flexibility of their short-production series and by their ability to respond quickly to changing market/production conditions, takes place (Illeris, 1991). They are also the arena where the quinary decision making and control staff meet the quaternary professional experts face-to-face, an encounter that is so important for the exchange of sensitive information and the creation of new knowledge or a new agenda (Illeris, 1991; Gad, 1979; Gottmann, 1983). In these agglomerated urban places the quaternary sector's advanced producer services also tend to cluster in proximity to other complementary producer service firms. This proximity enables the quaternary service sector to establish workable ad-hoc alliances and networks engaged in joint production ventures (Gottmann, 1983; Illeris, 1991; Sassen, 1991; Sassen, 2000). Finally, culturally and service-rich urban agglomerations provide for the expected lifestyle needs and expectations of high-income, knowledge-intensive labor, professional experts, the elite, and those who might become agency actors for an innovative milieu of the high-tech industry.

The leading elements making the evolution of the globally oriented post-industrial Israeli milieu possible, its major attributes, and the essential role of Greater Tel Aviv, a world city in evolution, in the process, were comprehensively documented by Kipnis (2001).


What is that has made Israel so special in its globally affiliated high-tech development? Although it is hard to single out one or a set of attributes that have made the high-tech revolution possible, the following can serve as a checklist of a few factors that might offer an insight. Among the objective attributes, of significance are the hesitant abolition of the Arab boycott, primarily the one imposed on firms that invested in Israel, and the role played by Israel as a 'bridge' between the EU and NAFTA (Raveh, 1991), the world's two leading FTAs. If an American firm that invests in Israel, enjoying inter alia Israel's generous investment promotion grants,2 and if the firm's products hold an ample Israeli manufactured value added, the amount of which is determined by the FTA's rules of origin, the firm is granted reduced or tariff- free admittance to the EU. The same is true for EU firms investing in Israel and shipping their products to NAFTA. In a world of harsh competition the role of a 'bridge' is an important cutting edge in favor of Israel.

However, the connection between the 'bridge' and advanced, R&D- intensive high-tech, has other prerequisites to produce the real desired benefit for the investing firms. These prerequisites ought to be an integral part of the society and culture of the 'bridge', in our case, Israel. For the sake of simplicity we highlight only four such main subjective attributes, which represent, of course, this author's point of view. The foremost is the relatively high level of education of Israelis, regardless of their ethnic and social affiliation. At the end of the 1990s the national median education was 12.4 years of schooling; 17% of the population aged 15+ had 16+ years of study, and only 13% had eight or less years of education. There were 142,000 university or regional college students, 35,000 of them M.A. and Ph.D. students. Education seems to be one of the main reasons behind much of the restructuring of Israeli labor and industry (Israel, 2000; Sade, 2001 quoting Mr. Henzler3).

The second main trait is the role played by one million immigrants, mostly Russians and many of them well educated in science and humanities, the performing arts, and engineering. The immigrants brought priceless benefit to Israeli society as a post-industrial economy and as an R&D- oriented high-tech center. In the second half of the 1990s, for example, Israel had 135 engineers in every 10,000 industrial workers, far above the US (70), Japan (65), and the Netherlands (53), the top three after Israel among the developed countries (Israel, 1999; Perman, 2000). The development of R&D- intensive high-tech industry was so swift that by the end of the 1990s it generated added demand for qualified engineers and programmers, and initiated a public debate on whether to allow the import of high-tech foreign workers. The main arguments in favor were that Israeli firms already employed, either directly or as subcontractors, qualified foreign workers in their own countries, and that many advanced countries already enjoyed the 'brain drain' from Israel, a factor that had helped them upgrade their creative potential. The arguments against emphasized the negative impact of the poorly paid foreign high-tech workers on the salaries paid by the high-tech industry to Israeli engineers, and this might increase the 'brain drain' from Israel (Elyada, 2000b). The demand to import foreign high-tech labor was listed by Goldman (2001) as the sin of arrogance.

The role of the Israel Defense Forces (IDF) in promoting a high-tech ambience, as conceptualized by Perman, (2000) and Hiltzik (2000), is the third main attribute explaining the scope and of the high-tech revolution. Hiltzik emphasized the pivotal role of the IDF in creating a high-tech ambience and a training ground for its high-tech leaders in many aspects of Israeli society. Perman identified the key elements and means of creating the military high-tech environment. The IDF initiated its production of the next generation of R&D- motivated entrepreneurs in late 1970s and fulfilled a role equal to that of "MIT, Stanford, and a handful of other academic hothouses that have nurtured the talent and research from which many high-tech powerhouses emerge in the US" (Perman, 2000). Perman named, 'Talpiot', 'Mamram', and 'Mamdas', the IDF high-tech units and academic programs, as the key military incubators, charged with improving or inventing military technologies for use in everything from digital switching to wireless telephony. Military intelligence elite units, which function as basic training for startup entrepreneurs, are small working groups of highly motivated teams; they work brutal hours and get little sleep; and they face immense pressure to innovate for the sake of national survival. They more than any other single factor are responsible for Israel's technological skills. Among the worrying shortcomings of the IDF is its passive role in respect of Arabs and ultra- orthodox Jews, who are excluded from military service, thus ending up on the wrong side of Israel's widening digital divide.

The fourth attribute lies in the theory of 'labor reproduction',4 reflecting the outcomes of the social and cultural characteristics of the society. The 'labor reproduction' attribute suggests that the Israelis' most relevant cultural high-tech-related characteristic is their ability to improvise, invent, and innovate.5 Mr. Henzler is quoted as singling out this characteristic ['reproduction'] in the phrase "the Israeli attitude has been let's do it" (Sade, 2001). Labor reproduction, with education and the IDF, are what has made Israel so strong in innovative high-tech industry. Yet labor reproduction has also implied a few negative elements. Hiltzik (2000), for example, claimed that soldierly discipline, which was so beneficial for high-tech startup entrepreneurship, became an obstacle when firms needed to grow into mature organizations and required, in addition to innovative ingenuity and skills, also managerial and marketing capabilities (Myers, et al., 1986; Ganot, 2000; Nesheim, 2000; Treen, 2001).


Data Used

Five data resources were used in order to draw the functional and spatial patterns of Israel's high-tech industry at the close of the 20th century. The first was Neto-Hi-Tech (2001), Israel's High -Technology Directory, an Internet site providing a list of Internet sites of 17 major high-tech branches, and a detailed list and profiles of 1,980 firms belonging to each of them. Data from the main and the secondary lists were used to analyze the function and space aspects of the industry. The second is A Guide for High-Tech Employees (2000), providing information on 600 Israeli high-tech firms along with a detailed list of industry affiliation and location of 476 firms. The third is an article (Kipnis and Noam, 1998) on the restructuring of Herzeliyya Pituach industrial park, a Tel Aviv suburban industrial high-tech park, later described by Sendler (1999) as "a high-tech Mecca on the coast", also known as the "Silicon Valley Coast, where between the highway (Tel Aviv - Haifa Hwy 2) and the sea, global giants, Israeli veteran firms and a welter of startups are nested." The data, collected in late 1995 and 1996 disclose the 'take off' stage of the restructuration process, which reached its peak in 2001 when the construction of a series of new modern industrial buildings with hundreds of square meters of high-tech working space were completed. The fourth data source was compiled in a series of field surveys carried out in the mid- 1990s in the metropolitan CBD of Tel Aviv and in all of the office clusters of Greater Tel Aviv (Kipnis,1998a; Kipnis and Borenstein, 2001). The data concerned the metropolitan CBD and two of its most advanced suburban office and high-tech satellites, the 'Bursa' (the diamond stock exchange) on the boundary between Tel Aviv and the city of Ramat Gan, and Herzeliyya. The fifth, and the most recent data resource, was compiled by Erlich (2001) for the December issue of High-Tech End of the Year. It depicted the changing venture capital recruitment patterns between 1999 and the third quarter of 2001, in which period the Israeli high - tech industries flourished (mid 2000) and collapsed (in mid 2001). For exposure some of the important factors they were rendered into coefficients of concentration Ci, where

Ci = the raw percentage of i / the raw percentage of ∑i

and where i is the attribute under consideration. To arbitrarily highlight only the most important coefficients, only Ci =/> 1.20 are shown.


Table 1 shows the distribution of high-tech industries based on different classifications and sample size. Despite the differences in the samples three industries were singled out: communication, information technology, and the Internet. According to the guide for high-tech employees, these three accounted for 79% of all the outlets, and according to Nato Hi-Technology (2001) they constituted 48%. The difference is explained by the different sizes of the sample and by the fact that the latter resource also contains high-tech tertiary elements that are not manufacturing industries proper; for example, advanced services containing high-tech elements accounted for 15.5% of the sample. The value of the phenomenal role of advanced services was highlighted by Beaverstock et al., (2000). Almost the same functional distribution of high-tech industries exists among the first ten detailed industries. Observe the salience of the data for communication networking and telecommunication (together accounting for 29.5%) and the various elements of the Internet industry (altogether 17.9%). Venture capital, E- commerce, data management, and advanced services functions totaled almost 18% among the first ten detailed industries.

The spatial distribution of high-tech firms is shown in Table 2. Observe that close to 99% of the firms are spatially nested in Israel's three major urbanized regions (Figure 1), particularly in the Greater Tel Aviv region, with over 85% of the firms. This is in conformity with the nature of highly aggregated post-industrial economies. Tel Aviv, now considered a 'wannabe' world city (Kipnis, 2001), controlled all industries, but chiefly the three main ones: communication, information technology, and the Internet. These totaled more than 81% of the high-tech firms of Greater Tel Aviv.

The entry of the Israeli economy into the post-industrial age was followed by the speedy restructuring of its economy and space. This process was more advanced in Tel Aviv than anywhere else in Israel (Kipnis, 1998a; 1998b). The early restructuring processes were fully depicted in the Herzeliyya industrial park (Kipnis and Noam, 1998), one of the most striking high-tech ambiences in Greater Tel Aviv and in Israel at large. Figure 2 shows some of the early restructuring processes in terms of entry period of the firms that existed in the park during the 1995/6 survey; the growing and declining industries, and the tendency of newcomers to occupy old or modern industrial buildings. As indicated earlier, at the end of the 1990s Herzeliyya became known as the 'high-tech Mecca on the coast', or the 'Silicon Valley Coast' (Sendler, 1999).


At issue is who actually benefits from Israel's high-tech industry. This concern ought to be examined from both, its formal and its functional aspects. From the formal point of view, Trachtenberg (1999), for example, reported that from 1968 to 1997 some 7,000 Israeli patents were registered in the US, but only 35% of them carried the name of an Israeli organization. This gap was explained by the fact that patents are named according to the nationality of the sole/first inventor, but the organization's affiliation is usually that of the organ that had sponsored the R&D. Another report related to formalities was that of Cox (2001), who detected the "Israeli firms' stampede from the Holy Land to Delaware". This flight began in 1998 following Israel's relaxation of foreign currency control, which made it easier for Israelis to set up offshore companies. According to Cox, more than 1,000 Israeli high-tech firms, 60-90% of those believed to have formally formed in Israel, relocated to Delaware, with the incentive of securing funds and avoiding taxes.

Two major functional concerns exist regarding the Israeli high-tech industry. Elyada (2000a) argued that the Israeli market has not yet reached the threshold enabling it to fully enjoy the fruits of its own innovations; in Elyada's words: "Is the Israeli high-tech for export only?" Advanced Israeli Internet and communication technologies have been successfully adopted abroad, but have failed to be incorporated in Israel. ". More worrisome is the issue of functional affiliation of the Israeli high-tech industry. More specifically, the question is whether Israeli high-tech has been functioning just as a 'node' of foreign interests, and as such its role played in the Israeli economy in terms of growth-inducing linkages has been marginal (Felsenstein, 2001). Felsenstein asserted that Greater Tel Aviv's high-tech 'hot spot', the nation's high-tech core region, has not yet evolved into an 'anchor', namely one that maintains strong intra-regional linkages. Instead, and since Tel Aviv's advanced high-tech 'hot spot' has mostly concerned stock options and raising VC abroad, many of its industrial linkages are with firms overseas. From a functional point of view, according to Felsenstein, the Israeli high-tech industry has functioned purely as a 'node' or an 'enclave' in a global network, and only as a backdrop to the global economy.

Although similar findings on the emerging intensive ties of Israel's high-tech with the hard core of the global economy were reported in Kipnis's (2001) study on Israel's startups, their meaning was different. Israel is a small economy with a small local market - - an identical point to the one raised by Elyada's (2000a) threshold argument discussed earlier. Israeli firms, be they in high-tech industry or in any other advanced services, aim at the global economy for financial resources and for markets. One also ought to bear in mind, that many FDI ventures have chosen Israel in order to take full advantage of its unique status as a 'bridge' between NAFTA and the EU FTAs, allowing large savings in export tariff fees. Lastly, using advanced communication, globally oriented Israeli firms have striven to establish workable network alliances, mainly with their US counterparts. These have facilitated R&D and prototype development operations that have been carried out in two shifts around the clock and around the globe - one in Israel and the other 12 hours away in western US. Around-the-clock operations have become a must in today's innovative high tech, where the time span between startup to IPO has significantly narrowed. Table 3 shows Ci > 1.20 coefficients of the linkages maintained by Tel Aviv metropolitan CBD and its two satellites office and high-tech firms with clients, subcontractors, and suppliers in the mid-1990s. Observe how in spite of the strong linkages with/dependency on markets, subcontractors, and service suppliers abroad, the surveyed firms also revealed a distinct pattern of linkages (Ci > 1.20) with firms located in Tel Aviv City, in the rest of the metropolis, and in Israel at large. With quite a number of high-tech firms in the sample, and considering that local linkages have slightly intensified since the mid-1990s, one ought to conclude that Greater Tel Aviv's high-tech 'hot-spot' has emerged as a promising 'anchor', in addition to its complementary, or rather must, production ties with other global high-tech centers.


This manuscript was written during a severe bust period of the global high-tech industry. Israel, which evinced remarkable success during its peak growth at the close of the last century, has been one of the economies most badly hit by the break. This is , because much of the decline has occurred in its leading industries - communication, Internet, and information technology, which constituted the hard core of the Israeli high-tech and startup activity. The blame was apportioned at once, most of it mentioned in the previous sections, pointing mainly to the inefficient handling of labor and other resources, poor management (Molco, 2001) and marketing capabilities, along with the other 'sins' listed by Goldman (2001).

Two other slip-ups, probably of a world nature, that led to the present high-tech collapse were reported by Globerman (2001). Both seem to have greatly affected Israel's high-tech industry. The principal one was the failure of the global high-tech industry to realize that the anticipated merger of communication, entertainment, and computerization into one integrated entity had been too early to adopt. The industry most severely hit by this 'hopeful' merger was communication, a leading Israeli high-tech industry. The second error was the failure of entrepreneurs, investors, and workers to set up a practicable 'time horizon' for their high-tech development efforts. In their striving for a quick entry into the market, to secure IPO, and to make large profits, they failed to realize that the market was not ready to absorb their successive innovations and product updating created in too short 'time horizons'. More specifically, the public was not eager constantly to upgrade its PCs and software; moreover, a large segment of the public showed a wide generation gap in skills, a prerequisite for taking full advantage of the technologies updated so quickly. The best-known examples are the Internet and the cellular telephone. A realistic time horizon, according to Globerman, should have been five to seven years longer than initially planned. The rush to the market with consecutive innovations led to unrealistic stock market prices and to costly labor salaries and benefits, all of which played a pivotal role in the failure of the market. Yuval Dror (2001) quotes Giga Information by saying that information technology will bring to a halt the American economy in 2002. The American (and probably the global) business community will reduce its computerization expenditures next year (2002), and that American (and probably global) Internet users will eschew the use of the new services offered by Microsoft, Liberty, and AOL.


For the Israeli high-tech industry the recent global high-tech collapse is well illustrated by the early October 2001 NASDAQ market prices of the ten Israeli largest firms. The value of the ten was $28.3 billion, compared with the pre- crisis value of the Israeli Checkpoint Co. that had reached alone the $25 billion mark during its late 1990s peak (Shulman, 2001).

Add to this Israeli and global political volatility. Leading the instability has been the ongoing belligerency between Palestinians and Israelis, the brutal September 11 terror attack on the US, and the anti-terror war that has followed. As a result, first airlines and later foreign companies stopped flying or sending their representatives to Israel, demanding that business meetings be held in Europe (Lipkin, 2001).

Yet at the same time as this was happening Asis (2001) reported that Boston Scientific had negotiated the $100 million purchase of three Israeli firms that had invented medical applications allowing minimal intrusion into the human body. Mr. Himovsky (Israel's former economic attaché in the US and now an high-tech investment promoter) in an interview with Morgenstern (2001) stated that Argil Co. would Invest $100 million in Israel the following year, mainly in highly reputable electronic firms that were capable of handling and developing real substance products. The right time to buy, Himovsky said, was now (mid- 2001), since 2002 would be the recovery year, and prices would go up.

Contradictory reports on the Israeli high-tech crisis have been aired by the media and decision makers. Figures 3-5 show a few economic indicators of the Israeli high-tech economy. Figure 3 reveals the role of startups in the annual GDP. The two peak GDP increases were in 1996 and 2000, probably representing the end of high-tech take-off and its full drive to maturity. The estimated GDP for 2001 is 1.7%, but in spite of the high-tech crisis, the GDP produced by startups was almost three times larger than the national. Figure 4 shows that notwithstanding the crisis and the political situation, the amount of foreign VC that entered Israel in the first and second quarters of 2001 was not much below the amount that entered during the same quarters of 2000. Figure 5 shows that the Israeli national growth estimates by the IMF (International Monetary Fund) for 2002 will be 5.6%, the highest among the most developed countries following the G7, and more than the 4% estimate made by the Israeli Ministry of Finance (Basok, 2001a). At the same time, Standard & Poor, a US credit rating company, suggested that neither estimate is realistic, and that the real growth rate will be 2.5 - 3%. The reason for lower rate, according to Standard & Poor, is that it will take Israel longer to recover (Atad, 2001a). Uncertainty over the future is so great that a subsequent report by the IMF reduced the growth rate predicted for 2002 to only 2.8% (Basok, 2001b). Similar trends also shown in Figure 6 that depict employment changes in Israeli high- tech and in the traditional industries in 2000 (the end of the peak period), and in the first two quarters of 2001 (Coren, 2001a). The figure demonstrates the severity of the labor crisis in high-tech, but at the same time reveals some encouraging signs of recovery.

A wide-ranging array of bad news related to Israel's high-tech industry was presented by Hermoni et al. (2001). He and his colleagues told us on October 19th that over 10,000 jobs had been lost in high-tech in 2001; that high-tech salaries had plunged 10-30%; and that some 550 of the country's 2,700 technology firms had shut down. The number of people seeking to retain their high-tech fields has consequently dropped and the market for newly skilled workers in this sector has fallen by 80%. In 2000, some 3,100 high-tech firms raised investment funds of $3.3 billion, but the estimated numbers for 2001 are 1,700 firms and $800 million respectively. To these may be added the statement on September 18 by Mr. Marani (Director General of the Israeli Ministry of Finance ) that the real annual growth would not exceed 0.5 - 1% (Coren, 2001b).

At issue is what will bring about the so needed recovery, and how soon will it be? In normal times the theory of economic waves might give a clue to what might come out of the present situation. Paradigms generated from the classical Kondratieff Cycle theory (the one offered by Mensch, for example) suggested that major technologies would be invented every 50 years, mostly during a particular moment in the cycle downswing, when businesses were looking for new ideas and technologies to market. These years, according to Mensch, are the 'implementation' or the 'radical' years (see also Short, 1996). Implicit in this argument is that the present time should be devoted to the next generation of inventions. To this end firms that aim to survive should keep their best people, those who will make the breakthrough for the future. Encouraging signs were published in a newspaper report indicating that many laid-off high-tech employees have established new startup firms aimed at identifying new technological avenues.

At the time of writing the war on global terror is under way and the economic media are busy speculating about the impact of that war, particularly about the effect of the horrible terror event of September 11, 2001 in the US on the world high-tech industry, the Israeli high-tech industry included. Globerman, who unveiled the causes of the high-tech crisis discussed earlier, also conveyed the emerging stimulators for recovery, and the behavior by industry necessary to revive. He cited a 'virtual' pessimist as saying that the current high-tech crisis would not be over before 2003. The cited 'virtual' optimists, on the other hand, would assume that thanks to the vicious September 11 terror attack on the US, the crisis would be over soon because private and public agencies in the US and elsewhere would invest in anti-terror technologies. This might include the upgrading of their technological systems in order to avoid any future terror threat, and the upgrading of the technological capabilities of security agencies, airports, and air companies as well as the military machine needed for the [electronic] war against global terror. These activities, fueled by the spending of many billions of dollars, will help the economy out of its crisis; they will be the main driving force behind the likely recovery of the high-tech industry. In addition, since the terror has minimized the risk differences between Israel and the rest of the of the developed world, and since there is no place that is 100% safe, investors, holding hot money will eventually look for promising places to invest, including in Israel. The optimistic scenario is supported by a survey by Business Data Israel of industry executives. It reported that 65% of the interviewees expected sales to increase in 2002. Only 25% envisioned a decline, and 10% foresaw that no changes in sales would take place (Ynet, 2001).

VC will always seek the most promising undertaking to invest in. Figure 7 reveals that while VC funds have significantly declined (figure 7 A.) the tendency of its operators is, and have always been, to look for new and safer industries and development stages to invest in. Figure 7 B. shows that high-tech industries centered on life sciences are much more stable, and that firms entering the market with new products (beginning sales in figure 7 C) are the most attractive for today's nongovernmental VC support. Interesting too is a comment made by an accountant consulting young Israeli startups. The Delaware tax shelter of yesterday is no longer attractive to Israelis. This is because Israeli government VC funds are usually given to young startups at their early recruitment stage (at which stage other VC funds shy away from the beginners) as long as the startup venture files its investment in Israel. In fact, this government fund is the easiest for infant startup firms to get during the current confusing days of the global high-tech industry crisis.

The lessons learned regarding the origin of the recent high-tech collapse should be taken into consideration. Foremost is to avoid the sins described by Goldman (2001) that made Israel's high-tech industry vulnerable. Important, too, for the recovery path is a return to the slow and traditional way of operating (Globerman, 2001) and a search for a fresh mode of management (Molco, 2001).

Equally important is the fact that the role of the central government in the globalization age is probably not over yet. The assumption that globalized economic management means "think locally and act globally" (Gappert, 1989), and Sassen's (2000) proposition to focus on cities, "allowing us to specify geography of strategic places on a global scale", rather than on central governments, deserves a fresh conceptual reevaluation.6 At the time of writing, the Israeli government is in the midst of intensive deliberations on how it should act in order to save the collapsing national economy. Shachar (1994), in portraying the economic scenarios for Israel in 2020, insisted that even in the most globalized economic milieu the main role of the public sector would remain the supply of national infrastructure and communication, and readiness to take action in a situation of severe economic lapses. Unfortunately this moment has already arrived at the turn of the 20th century.


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* The first draft of this paper was presented at the International Workshop Places of Innovation, Sites of Discovery, Hebrew University, Jerusalem, ISRAEL, November, 2001. It was continuously updated until late December 2001.

** Baruch A. Kipnis is a Professor of Geography in the Department of Geography at the University of Haifa, Israel. At present he is the Director of the University's library.

1. Among the list of sites describe Israel as the second Silicon Valley are Sagee and Dagoni (1997); Arazi (1998); Consulate General of Israel in New York ( 1998); Karp (1998); Kellerman (1999); Lashinsky (1999); Sendler (1999); (1999); Brener (2000); Dolev and Sarel (2000); Global News Analysis (2000); Perman (2000); Hermoni (2001); Sade (2001); ( 2001).

2. In late September 2001 the Minister of Finance exempted foreign high-tech firms from local company income tax. This ruling is an addition to other grants offered to firms investing in Israel.

3. Mr. Henzler, president of Europe Division of McKenzie, suggested that Israel has a real chance of becoming Europe's Silicon Valley (Sade, 2001).

4. For labor reproduction theory refer to Storper and Walker (1984).

5. Short (1996) defined an invention as an act involving the creation of a new technique, gadget, or process. An innovation according to Short, is the successful adaptation of an invention as marketable.

6. This might be also true with respect to Stanley (2001) who proposed to view the Middle East world cities as a unassociated entities with their parent state governments.


Table 1: High-tech industries of Israel in 2000 (percentages)



Main Industries

% of outlets

(N= 1,980)

First 10 Detailed Industries

% of outlets

(N= 939)

Main Industries

% of outlets


Communication 18.4 Software 22.6 Communication 31.9
Software 17.3 Data Communication Networking 18.6 Information Technology 30.0
Advanced Services* 15.5 Internet Software 12.7 Internet 16.2
Internet 13.4 Telecommunication 10.9 Semiconductors 5.0
Information Technologies** 12.4 Hardware &equipment 7.2 Medical & Medical instruments 3.4
Electronics 11.3 E Commerce 6.6 All the rest 12.0
All the rest*** 10.4 Data management 6.4 Total 100.0
Total 100.0 Internet Services 5.2    
    Semiconductors 5.1    
    Venture Capital 4.7    
    Total 100.0    


A: Neto Hi-technology (2001) data

B: A Guide for High-Tech Employees (2000).

* An aggregate of 7 industries.
** An aggregate of 3 industries.
*** An aggregate of 3 industries.


Table 2: Spatial distribution of Israeli high-tech industries by region (percentages)

Industry Greater Tel Aviv region Greater Haifa region Jerusalem and region Rest of Israel Total
Information technology
Medical & medical Instruments
All the Rest


Industry Greater Tel Aviv region Greater Haifa region Jerusalem and region Rest of Israel Total
Information technology
Medical & medical Instruments
All the Rest


Table 3: Location of clients, subcontractors and suppliers of services of firms located in Greater Tel Aviv CBD and in its suburban clusters the Bursa and Herzeliyya (coefficients Ci > 1.20)

  Geographical location of
Area and function
In Tel Aviv city
In the rest of the metropolis
In the rest of Israel
Location of clients
CBD of Tel Aviv
NR (2)
Business services
NR (2)
FIRE (1)
NR (3)
Bursa cluster
Herzeliyya cluster       1.64 4.82
  Geographical location of
Area and function
In Tel Aviv city
In the rest of the metropolis
In the rest of Israel
Location of subcontractors
CBD of Tel Aviv          
Headquarters NR (2)       1.91
Business services NR (2)   1.26    
FIRE (1) NR (2) 1.83      
Bursa cluster   2.97 1.67   5.94
Herzeliyya cluster   4.51 3.71    
  Geographical location of
Area and function
In Tel Aviv city
In the rest of the metropolis
In the rest of Israel
Location of suppliers of services
CBD of Tel Aviv          
Headquarters NR (2)   1.26 1.22 1.82
Business services NR (2)        
FIRE (2) NR (2) 1.43      
Bursa cluster   1.94 1.61    
Herzeliyya cluster   1.28   1.81 5.17

Source: Field survey, 1995.
(1) FIRE = finance, insurance and real estate.
(2) NR = not relevant. Locally refers to Tel Aviv city.

Figure 1: Greater Tel-Aviv in the national context in the year 2020 



Figure 2: The restructuring of Herzeliyya Industrial Park 

Source: Noam, 1997


Figure 3: Israel's annual increase in GNP 1996-2001 

Source: Tal, 2001
* GNP for 2001 is projected on the basis of first quarter (Jan. to March 2001).
** Between 1996-2001 Israel employed an inflation restrained economic policy, reaching annual inflation rate of 1.3% - 2.5%.


Figure 4: Foreign venture capital in Million $US (2000-01) 

Source: Hermony, 2001


Figure 5: Israel's annual national growth (in percentages) 

Source: Basok, 2001b
* The 2001 and 2002 are the estimates of the International Monetary Fund The first estimate of 5.6% increase (Basok, 2001) was made public in late September . At the beginning of October, the International Monetary Fund corrected its estimate (Basok, 2001b).


Figure 6: Percentage change in the average salary, each quarter compared with the previous one 

Source: Koren, 2001


Figure 7: Recruitment of venture capital 

Source: Erlich, 2001

Edited and posted on the web on 14th January 2002