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Israeli High-Tech

Along Israel's Mediterranean coast, a few minutes drive north of Tel Aviv, an area know archaically as the Herzliya Industrial Zone rises abruptly out of the sand dunes. Amid the glass and steel office buildings and construction cranes, one can see the signs of a few well-known international companies, like Digital Equipment, 3Com and Motorola.

But for the most part, the companies inhabiting this patch of roughly two square miles are unknowns; at least their fame does not spread beyond their respective markets - everything and anything from network communications to semiconductors. The more successful and established ones - those that are more than a year or two old - dwell in new high-tech office complexes that have started up over the last five years. The younger companies make do with a few rooms in the older buildings, many of them former textile plants and metal workshops that gave the Herzliya Industrial Zone its name.

High tech accounts for two thirds of Israel's industrial output and 80 percent of its industrial exports

Herzliya is not unusual. The same phenomenon is taking place elsewhere along the coastal stretch between Tel-Aviv and Haifa, up in Jerusalem, out in peripheral towns like Migdal Ha'emek, which as recently as a decade ago were economic backwaters, and in dozens of other places where homegrown technology companies are being formed at a rate of about one every 36 hours.

The importance of these small companies is reflected in the development of Israel's economy over the 1990s. High technology has fueled much of Israel's growth, certainly since the middle of the decade when the rest of the economy began slowing down. The Bank of Israel estimates that high technology accounts for two thirds of Israeli industrial output and 80 percent of its industrial exports.

With the exception of the United States, no other country in the world has managed to build a technology sector based on start-up companies rather than older, established businesses. Israeli engineers have shown a remarkable readiness to risk leaving secure jobs in big companies to form businesses of their own. Just as remarkably, the country has rapidly spawned a financial community that is prepared to invest in them, through venture-capital funds which already have, or are in the process of, raising as much as $1.5 billion, nearly all of it destined for technology companies.

In its early years, the Israeli economy was micro-managed by the government, which not only controlled companies but also imposed strict rules on the capital markets, trade, land development and labor relations - hardly the kind of environment in which free-wheeling high technology is supposed to flourish. Although there has been substantial liberalization in recent years, by Western standards, the Israeli government continues to be interventionist.

In the last five years, Israeli high-tech companies have produced more millionaires than Israel had during its first 45 years of existence

Why, then, has high technology thrived in Israel? The first reason is the application of a national policy of not merely focusing on the development of high technology by backing research programs, but positively encouraging the development of technology start-up companies and letting business people rather than bureaucrats set the R&D agenda. The government has a range of programs to support technology, from incubators to aid start-up companies, cooperative programs to foster basic R&D, and research subsidiaries for established companies. For a few years, the state even operated a venture capital fund. What these programs have in common is an emphasis of letting the private sector set its own R&D agenda and insisting that it assume at least part of the risk.

High technology can create vast wealth very quickly, sometimes in a matter of months. In the last five years, Israeli high-tech companies have probably produced more millionaires than Israel had during its first 45 years of existence - people with fortunes (at least on paper) in the tens, even hundreds, of millions of dollars, often created in a matter of months, and largely by people in their twenties or early thirties.

Israel's development of an entrepreneurial high-tech economy over a few short years and against immense odds is a remarkable achievement.

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