Silicon Wadi: Israel’s economic future

Chances are, you have heard of Silicon Valley. Often mistakenly attributed to successful entrepreneur Ralph Vaerst, the term “Silicon Valley” refers to a large swath of Bay Area land replete with both large and small technology firms — the growth of which has contributed immensely to the powerful and resilient San Francisco Bay Area economy. The concentration of successful high-tech firms is so great that Silicon Valley often represents the entire American technology industry and stands at the pinnacle of the world’s high-tech landscape.

Today, another such “magical” high-tech zone is emerging. Israel’s “Silicon Wadi” is lesser known, but is rapidly gaining momentum in its quest to challenge Silicon Valley in global significance and innovative power. Perhaps to say that Silicon Wadi (a clever pun — “Wadi” means canyon in Hebrew) is emerging would be inaccurate, since companies such as IBM, Motorola, Intel and Microsoft have been operating in the area for decades. Within the last 10 years, however, growth has been explosive, with name-brand companies such as Google, Apple, eBay and SanDisk establishing offices and acquiring Israeli companies at an increasing rate.

In 2008, the Economist printed a feature entitled “Israel’s technology cluster: land of milk and startups” in which it acclaimed the growth of Israel’s high-tech industry and noted its striking similarity to the parent “cluster” it imitates. The opening line of the article asserts that “if highway 101 south of San Francisco, Silicon Valley’s main artery, were mysteriously connected to one of the roads around Tel Aviv, many drivers would not even notice.” The resemblance goes far beyond physical and architectural features — the “entrepreneurial infrastructure” in Silicon Wadi incorporates many of the same properties that foster success in its Californian counterpart.

For example, to quote at length from the Economist piece, “In both places corporate hierarchies are despised, risk-taking is rewarded and failure tolerated. Israel also boasts several elite universities, such as Technion in Haifa, and research centres run by big technology firms such as Cisco and Intel. Entrepreneurs have their pick of providers if they need legal or other services. And, as in California, there are plenty of well-funded venture-capital (VC) firms providing cash.”

Each structural parallel between Silicon Valley and Silicon Wadi identified in the article can be deposited straight into the chapter of an economics textbook that deals with urban agglomeration and growth. Access to world-famous universities and research centers, lack of rigid and hierarchical corporate structures, a reasonable appetite for risk, and appropriate access to capital are all crucial factors that lead to clustering of firms, and, more generally, to urbanization. It’s no surprise that Israel is 92 percent urbanized (only 14 countries have a higher percentage of total population living in urban areas), according to the Kaiser Family Foundation’s Global Health Policy website.

One potential issue that the Economist article identifies is that there is a big emphasis on innovation and little interest in management and marketing. As a result, “there is a huge pressure to exit” — Israeli firms never grow to become multinational corporations, instead opting to be sold to large corporations from other countries and accepting a role as the research and development divisions of those firms. This phenomenon partly explains the high density of large, non-Israeli companies in Silicon Wadi.

The danger is that “soon, Chinese engineers, in particular, will be as good at building start-ups and developing intellectual property,” and therefore threaten to push Israel out of the picture. To be fair, Israel is not alone in facing China — an economic beast poised to emerge (or already emerging) from hibernation — in the world’s technological arena. Israel has an edge, for now. But it is one that must be cultivated in order for the advantage to be sustained in the long run.

Despite potential issues, what Israel has managed to accomplish is incredible by anyone’s standards. The 2009 book “Startup Nation” by Dan Senor and Saul Singer examines the answers to some astonishing questions, such as: “How is it that Israel – a country of 7.1 million, only 60 years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources — produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada, and the UK? How is it that Israel has, per person, attracted over twice as much venture capital investment as the U.S. and thirty times more than Europe?

According to the Business Insider, Israel currently has about 4,800 startups, second only to the United States in number. Furthermore, U.S. investors are flocking to Israel in droves — about 700 of its startups are backed by Venture Capital firms, many of which are American. This striking vote of confidence signifies that Israel’s burgeoning high-tech industry may be the key to its economic future. More specifically, apart from its obvious economic benefits, Israel’s technology sector can catalyze employment of Haredi Jews, who must join the workforce in large numbers if Israel is to avoid a large-scale economic collapse.

Indeed, the high-tech industry has begun to reach out to the ultra-Orthodox in an attempt to integrate them into the economy. A Phys.org (a science, research, and technology news service) article reports that Jerusalem Venture Capital firms have begun to initiate conferences tailored to meet the needs of Haredi men and women. In addition, some claim that “although [the ultra-Orthodox] may lack basic math and science skills […] their intense, methodical study of ancient religious texts provides tools that are oddly applicable to computer programing.”

Yitzik Crombie, a Haredi and chief executive of iSale, states that “Someone who finished yeshiva and studied Talmud and Gemara, his brain is built for high-tech. With a little faith, we can make a major breakthrough and become leaders in the field.” An attitude like that will take Israel far, especially if it is able to tap a huge (and growing) market of potential high-tech workers.

One of the first things taught in an introductory economics class is that specialization is good. In other words, firms should focus on what they do best in order to maximize profits. The same is true on a national level in this case, within the context of the technological sector — Israel currently has a substantial global advantage, but it must continue to promote and encourage entry into its high-tech industry as it moves into an increasingly competitive 21^st century.