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High Tech Innovations

Local versus International Knowledge Network

Case study Israel

Michiel Dijk

In this summary the major outcomes will be presented of an empirical study about Israeli high
tech companies which are traded on foreign stock markets. This research is part of a joint
research headed by Tamar Almor of the College of Management about knowledge intensive
small and medium sized companies.1 This is also my final doctoral paper for my studies
International Economics & Economic Geography at the University of Utrecht.

In the first part of this thesis an overview is given of the literature on innovation, networks,
the position of SME’s in the economy and the role of the region in the innovation process.
The two main questions in this thesis are: To which extent and how is the knowledge network
of small and medium sized Israeli high tech companies localized? And are locally networked
companies more innovative?

It can be argued that for the majority of the companies their knowledge network is more
internationally orientated. Companies with a more localized knowledge network tend to be
more innovative. When this is controlled for the influence of other variables, like size and
age, this connection turns out to be not significant anymore. Companies which are locally
networked are only half the size of the companies with an more international knowledge
network. So, the difference in innovativeness is partly due to ‘size’ and partly due to their
local ‘knowledge network’.

To conclude this we first examined how the knowledge network of the Israeli high tech
companies is organized. It turn out that external knowledge is not of big importance for the
innovation process of these companies. About 80% of the companies did use external
knowledge for innovations developed in the last three years, but on average the external
knowledge is of little importance. Most companies use external knowledge or technologies
which are developed by other companies. They also source knowledge and technologies from
universities and government institutions, but to a less extent. The most important motives for
using external knowledge or technologies are in the first place ‘access to complementary
technology’ and second ‘saving developing time’.

The most common way to acquire external knowledge or technologies is through some sort of
cooperation agreement. Different forms of cooperation are distinguished and for each
category is examined whether the knowledge or technology is from Israeli origin or from
foreign origin. On average most cooperation is with foreign companies. Only in the category
‘Joint Ventures and Joint Research Corporations’ there is more cooperation with Israeli

Only eight companies turned out to be more locally networked and 46 companies have a more
international orientated knowledge network. The companies with a local knowledge network
are on average 1.32 more innovative than companies with a more international knowledge
network. Correlation between the two variables is low; there is only a weak connection. When
this connection is controlled for the influence of ‘size’ and ‘age’ the correlation is not
significant. The hypothesis that locally networked companies will be more innovative has to
be rejected.

Dr. Tamar Almor, Head Organization and Management and Integrative Studies. College of Management,
Academic Studies.
After the empirical analysis some implications will be given for theory, region’s and
companies. This study shows us that the importance of the region in the innovation process is
limited. The knowledge network of high tech companies is mainly organized through different
forms of cooperation. Which form of cooperation and whether a local or international partner
is chosen, can be adequately explained by the transaction cost theory.

Although the knowledge network is for the biggest part internationalized, the firms are still
for a large part dependent for knowledge and technology on Israel. The internal knowledge
base is still the most important for the innovation process and this is mainly localized in
Israel. There are not many companies in this sample with substantial R&D operations

Companies that want to expand their external knowledge network do not have to take in
account all kind of local synergistic and cultural factors. For the choice between a local or
foreign partner, companies should weigh out the extra transaction and coordination costs a
foreign partner brings against the extra benefits a foreign company can give. Extra benefits to
cooperate with a foreign company can be technological, but as turned out in the interviews
also marketing considerations are important.

Michiel Dijk
International Economics & Economic Geography
Faculty: Spatial Sciences
Utrecht University, Utrecht, februari 2001
In cooperation with Prof. Dr. E.Wever & Dr. T.Almor