Urban Studies, Vol. 38, No.

7, 1083 – 1101, 2001

Why High-technology Firms Choose to Locate in

or near Metropolitan Areas

Amnon Frenkel
[Paper Ž rst received, January 1999; in Ž nal form, March 2000]

Summary. Various studies have provided evidence of the advantages of the ability of metropoli-
tan areas to attract hi-tech industries, which employ advanced technology and are strongly
involved in the process of innovation. This paper presents the results of an empirical study of the
location choice of Israeli hi-tech industries within a metropolitan area, carried out in the
Northern region of Israel (which encompasses the Haifa metropolitan area and its surrounding
localities) and based on Ž eld-survey data obtained from hi-tech plants. The study investigates the
effect of different factors on location choice and also identiŽ es the direct contribution of each
factor to the probability of choosing the metropolitan area as a preferred location. The
implications of these Ž ndings for industrial policy are also discussed.

1. Introduction
Many studies in recent years have attempted tive edge enjoyed by firms located in large
to identify the reasons why specific geo- metropolitan areas (Martin et al., 1979;
graphical locations are chosen by industrial Thwaites, 1982; Camagni, 1984; Northcott
firms. Hi-tech industries make choices which and Rogers, 1984; Alderman, 1985; Fischer,
are considerably different from those made 1989; Shefer and Frenkel, 1998). These re-
by traditional industries. As a result of initial gions possess the most advantageous condi-
product development and innovation, they tions for technological change, where the
locate close to centres of research and sci- headquarters of hi-tech firms, as well as their
ence and to places where they have a good R&D functions, information centres and so
chance of rapid market penetration (Shefer on, are located. Peripheral regions, on the
and Bar-El, 1993; Bar-El, 1989). other hand, are characterised by relatively
The accepted premise of studies focusing low innovation potential (Malecki, 1981;
on the course taken on the time– space axis Sweeney, 1987; Fisher, 1989). Nevertheless,
by new firms, is that they usually begin in spatial analysis of metropolitan areas has
metropolitan areas, which are the urban incu- shown that urban centres are not the only
bators for the appearance of innovative firms places for the growth of economic activities
(Hoover and Vernon, 1959; Jacobs, 1966; (Scott, 1982; Stroper, 1986; Davelaar, 1991).
Davelaar and Nijkamp, 1988). Empirical The working hypothesis of this study is
studies have usually confirmed the competi- that the location decision of a firm is moti-
Amnon Frenkel is in the Centre for Urban and Regional Studies, Technion—Israel Institute of Technology, Haifa, Israel 32000. Fax:
972 4 8294071. E-mail: amnonf@tx.technion.ac.il. The author would like to thank Professor Daniel Shefer for his support, contribution
and invaluable comments, which helped to conduct and publish this study; and also the Vice President’s ofŽ ce at the Technion, Israel,
for the Ž nancial aid which led to its completion.

0042-0980 Print/1360-063X On-line/01/071083-19 Ó 2001 The Editors of Urban Studies

DOI: 10.1080/ 00420980120051666
1084 AMNON FRENKEL
vated by the maximisation of profit. There-
fore the optimal location will be determined
by the firm’s technological capability
(treated as an autonomous factor), its at-
tributes and the production milieu.
The technological capability of a firm is
related to the type of products, its production
technology and the need to develop new
products and penetrate new markets
(Markusen et al., 1986; Florida and Kenney,
1990). The firm’s attributes are represented
by its size, age and organisational structure.
On the other hand, the production milieu
refers to providing a physical infrastructure,
business services, government incentives,
quality of life, proximity to a large pool of
skilled labour and so on (Schmenner, 1987;
Calzonetti and Walker, 1991; Gottlieb,
1994).
The purpose of this study is to develop a
locational choice model to test the hypoth-
eses emerging from the literature. The hy-
potheses tested in this study refer to the three
arenas mentioned above. Questions concern-
ing the role of government and local policy
inducing the location of hi-tech plants to the
region and their impact on the regional econ-
omy are discussed and the specific effect of
the production milieu on the development of
innovation activities in the region was tested.
The empirical analysis was performed using
data collected in the Northern region of Is-
rael, which includes the Haifa metropolitan
area and the less developed Galilee, on the
outskirts of the metropolitan area. This re-
gion underwent dramatic spatial changes dur-
ing the early 1990s (see section 4) and it was
therefore interesting to test the impact of
these changes on the location choice prefer-
ences of hi-tech firms located there. The
results of this analysis could help design
policies for spatial regional development.
The study’s analysis consists of two
stages: a comparison between locational vari-
ables of hi-tech plants in the metropolitan
area and plants located outside the metropoli-
tan area, followed by the application of the
locational choice model for hi-tech plants
(logit model).
The remainder of the paper is organised as
follows: section 2 presents the literature re-
view from which the principal hypotheses for
this study were formulated. The methodolog-
ical structure of the locational choice model
of hi-tech firms is presented in the third
section. The fourth section describes the re-
gions selected for the study. The fifth section
focuses on the framework and defines the
variables tested by the model, and the sixth
presents the empirical results. Finally, sec-
tion 7 summarises the main points of the
discussion and presents conclusions that
emerge from the analysis.
2. Metropolitan Choice Effects
The basic assumption is that hi-tech firms’
choice of metropolitan location is influenced
by the characteristics of the region’s pro-
duction milieu as manifested in various loca-
tion factors, the firm’s technological ability
and its attributes related to the life-cycle
phase. These three arenas are presented in
the literature perspectives in this section. The
main hypotheses tested in the study relate to
the Northern region of Israel are thus illustra-
tive.
2.1 The Production Milieu
The production milieu refers mostly to the
agglomeration economies of the region and
the basic infrastructure that the region offers
to induce industrial activity. This includes
the financial and infrastructure factors vital
to information transmission and related to
regional economic agglomerations (Camagni,
1985). Spatial concentration of firms and
institutions also has a positive influence on
firms’ innovative capacity. The agglomer-
ation of firms provides a pool of technical
knowledge and specialisation, which will
later develop new technologies. Concentra-
tions of business services create the market-
ing and commercial knowledge necessary for
introducing innovation into the market. Their
existence reduces the risk level and the cost
related to the innovation process by provid-
ing important information on regulation,
standardisation, marketing, product testing
 HIGH -TECH FIRMS AND METROPOLITAN AREAS
and financial knowledge. Metropolitan areas
are, therefore, the preferred locations for the
development of technical innovation (Feld-
man, 1994).
The structure and size of the labour supply
in the region may also have a positive influ-
ence on hi-tech firms’ location decision.
Skilled labour is of great importance,
especially for the development of technical
innovations. It is attracted to localities with
a high quality of life, manifested in cultural
and educational activities which are more
prevalent in the large metropolitan areas
(Malecki, 1979a, 1979b; Thwaites, 1982;
Bushwell, 1983; Anderson and Johansson,
1984; Oakey, 1984; Johansson and Nijkamp,
1987). The Haifa metropolitan area still
benefits to a large extent from agglomeration
advantages compared to the intermed-
iate zone of the Central Galilee and the
peripheral zone in the Eastern Galilee
(Frenkel, 2000).
Evidence gleaned from many studies indi-
cates that the regional infrastructure is of
great importance for hi-tech firms (Gibbs and
Thwaites, 1985; Camagni and Rabellotti,
1986; Button, 1988). The Haifa metropolitan
area offers a well-developed, physical infra-
structure and therefore it is expected that
hi-tech firms will be attracted to locate there.
However, the availability of land in the Haifa
metropolitan area is quite limited due to the
absence of land reserves. High rates of local
taxation in the region could also influence
the firms’ decision to shift their activities to
the outskirts. Yet there is no clear evidence
of the extent to which this situation could
influence the location decision of the hi-tech
firms in the Northern region, and the purpose
of this study is to shed some light on it.
Systems for telecommunication infrastruc-
ture and information transmission are among
the most important elements supporting the
development and marketing of innovation, a
result supported by both theoretical and em-
pirical studies (Brown, 1981; Shefer and
Frenkel, 1986; Freeman, 1987, 1991). It al-
lows firms easier access to information
sources and contact with markets, and has a
strong positive influence on their economic
1085
effectiveness and profitability. The import-
ance of advanced means of telecommunica-
tion is manifested in the possibilities for the
flow of information to firms. The fact that
high-quality telecommunication infrastruc-
ture is found most frequently in metropolitan
areas, contributes to the attractiveness of
these regions for hi-tech firms. At the same
time, advances in telecommunication might
allow a firm to consider the possibility of
locating outside the metropolitan area, effec-
tively substituting for the advantages of lo-
cating within a metropolis (Razin, 1988;
Shefer and Frenkel, 1986).
The availability of information sources is
an incentive that encourages firms to develop
and to adopt innovation. A concentration of
knowledge provides the required critical
mass for innovation and is more frequently
found in central regions, giving them a rela-
tive advantage over other regions (Pred,
1977; Feldman, 1994). The spatial concen-
tration of institutions of higher education,
technological research facilities and centres
of knowledge in metropolitan areas increase
information accessibility (Malecki, 1979a,
1980; Nijkamp, 1988). A secondary influ-
ence of these institutions is that, as time
passes, some of the research staff will leave
to establish new firms (Oakey, 1984; Roth-
well and Zegveld, 1985; Vider and Shefer,
1993), a considerable number of which will
tend to locate near their former institutions
due to the continuing relations between them
(Aydalot, 1984; Roberts, 1991).
Local entrepreneurs tend to establish their
businesses close to places where they live for
reasons of convenience. These considerations
will therefore generally characterise small
firms of local entrepreneurs, but their import-
ance will decrease greatly as the firms ex-
pand and have other locational
considerations. The region’s prestige is also
very important to hi-tech firms that prefer to
locate in areas radiating an aura of success.
The Haifa metropolitan area offers a high
standard of residential areas and urban ser-
vices that contribute to the creation of a
convenient, environmental milieu and to the
increased prestige image of the region, com-
1086 AMNON FRENKEL
pared to the areas on the outskirts of the
metropolitan area.
Government incentives play a significant
role in assisting regional policy aimed at
reinforcing the attractiveness of the region to
hi-tech firms (Felsenstein, 1996; Roper and
Frenkel, 2000). The Israeli government of-
fers capital incentives and substantial support
is available for R&D activities, especially in
the hi-tech sector. The incentives are also
provided on a regional basis designed to
attract firms to lagging regions. Accordingly,
incentives furnished by the government to
firms to attract them to peripheral regions
have a natural, negative influence on any
preference for a metropolitan area.
In the Northern region of Israel, the Cen-
tral and Eastern Galilee sub-regions enjoy
preferred status according to the incentives
policy, while the Haifa metropolitan area
does not benefit from this status. Firms that
decide to locate in the favoured regions de-
serve to benefit from generous capital and
fiscal incentives expressed as capital grants,
reduced taxes and greater government in-
ducements in support of R&D activities.
2.2 A Firm’s Technological Ability
R&D activities are considered a most influ-
ential factor on the capability to develop and
adopt innovation. Therefore a firm’s R&D
investments express, to a great extent, its
technological ability (Rosenberg, 1985; Nel-
son, 1986; Dosi, 1988; Roper and Love,
1996; Frenkel, 2000). Various studies have
indicated that investments in R&D tend to
concentrate more in central and urban re-
gions (Malecki, 1979a). Empirical studies
have usually confirmed the competitive edge
enjoyed by firms located in the large metro-
politan areas which afford preferable condi-
tions for technological change (Thwaites,
1982; Alderman, 1985; Fischer, 1989). Here
are located the headquarters of hi-tech firms,
as well as their R&D functions, information
centres and so on. In contrast, peripheral
zones are generally characterised by low
innovation potential.
2.3 A Firm’s Attributes
The firm’s attributes relate to the product
life-cycle phase and include variables such as
size, age and the organisational structure of
the firm. The connection between techno-
logical change and economic efficiency is
implicit in the relationship between product
life-cycle and technology. Flynn (1994)
views the life-cycle model as an effective
tool for examining the role of a country’s
economic development policy. The early
stage of innovation-related, technological de-
velopment usually requires such highly
skilled labour as scientists and engineers.
Location incentives have different influences
on various modes of production activities. In
the early stages of a product’s life-cycle,
interfirm competition focuses mainly on as-
pects of innovation and product variety,
while the competition between firms produc-
ing standard products is, to a greater degree,
related to production costs. Incentives such
as wage subsidies and reduced taxation
might have greater value for firms during the
later stages of the life-cycle than at an early
stage. Consequently, young firms are more
dependent on the existence of markets and
labour pools, and therefore the probability
that they will locate in metropolitan areas is
greater, since these regions act as incubators
for new hi-tech firms (Davelaar and Ni-
jkamp, 1989).
The size of the firms is indicative of the
scale effect and its impact on their innova-
tiveness and innovation potential. The in-
creased probability that large firms will
innovate may be due to the fact that they are
more likely to procure sources of capital for
financing R&D expenditure and their greater
ability to take risks than small firms. There is
a negative relationship between the firm’s
size and its preference for a metropolitan
location. Large firms, at a more advanced
life-cycle stage, tend, at that point, to locate
in areas outside the metropolitan area
(Frenkel et al., 1998).
Another characteristic is a firm’s organisa-
tional structure, which was found to affect its
propensity to innovate. Studies confirm that
 HIGH -TECH FIRMS AND METROPOLITAN AREAS
multiplant companies, more common in the
hi-tech sector, are more involved in develop-
ing innovation than is a single-plant com-
pany (Geroski and Machin, 1992; Roper and
Love, 1996; Frenkel et al., 1998).
2.4 The Study Hypotheses
From the discussion presented above, we
formulated the following hypotheses:
(1) Hi-tech firms prefer to locate in the
metropolitan area rather than on the out-
skirts of the core region due to (a) its
agglomeration of economies; and, (b) the
quality of life (environment) in the re-
gion considered by the management
(convenience).
(2) The location choice of hi-tech firms is
highly influenced by: (a) the availability
of a well-developed, physical infrastruc-
ture and basic physical conditions; (b)
the supply of telecommunication sys-
tems; and, (c) the prestige of the region.
(3) Hi-tech firms gravitate towards edu-
cation and research institutions located
in the metropolitan area.
(4) Hi-tech firms, with large investments in
R&D and exhibiting a high degree of
innovation, tend to locate in the core
region.
(5) Government incentive programmes af-
fect the location decision of hi-tech
firms.
(6) The types of hi-tech firm that prefer to
locate in the core region are: (a) young
hi-tech firms; (b) small hi-tech firms;
and, (c) multiplant firms.
3. The Location Choice Model
The model chosen to examine the research
hypothesis was based on the utility approach,
which assumes the existence of a utility func-
tion underlying a firm’s choice of location,
as expressed in the following equation:
Uij 5 F(L j , A i , Ti ) (1)
According to the model, the utility Uij
achieved by firm i as a result of its location
1087
in region j is influenced by the characteristics
of the production milieu Lj , by the attributes
of the firm Ai, and by its technological capa-
bility Ti. The model assumes, therefore, that
the firm will choose the location in which it
expects to achieve the greatest utility. De-
spite the fact that these characteristics are not
measured in monetary terms, they neverthe-
less influence the firm’s location decision. In
the long run, locating in a convenient, sup-
portive, milieu contributes to labour produc-
tivity, thereby increasing the firm’s
profitability (Felsenstein, 1996). Factors re-
lating to quality of life, proximity to infor-
mation sources and the availability of labour
pools, all of which create other external in-
fluences, can be quantified by means of the
firm’s priorities (Henley et al., 1989).
Following this approach, a firm’s choice
of location will be influenced by three sets of
variables:
(1) characteristics of the production milieu,
represented by the agglomeration advan-
tages, as reflected by the proximity to
suppliers and consumers, business ser-
vices and so on, availability of govern-
ment incentives, the existence of a
highly skilled labour pool, physical in-
frastructure, advanced means of telecom-
munication and the image and prestige of
the region as reflected by quality of life;
(2) the attributes of the firm relating to the
life-cycle;
(3) the firm’s technological capability, as
expressed by its innovation level, and the
investment of capital and labour in R&D
activities.
We assume that a relation exists between the
characteristics of the firm and those of the
production milieu in which it operates. Firms
belonging to different industrial sectors and
technologies will, however, allocate different
importance to the attributes of the same pro-
duction milieu. The financial incentives of-
fered to a peripheral region are likely to be a
dominant consideration in a young firm’s
location choice, while older and more well-
established firms will view the availability of
1088
cheap labour in the region as the dominant
consideration.
In the study, a logit model was conducted
as a binary choice model. The model is based
on the assumption that plant i is faced with a
choice of two locational alternatives, and that
the choice made depends on the characteris-
tics of the production milieu, on the at-
tributes of the plant and its technological
capability (Pindyck and Rubinfeld, 1981;
Ben-Akiva and Lerman, 1985). In this
model, the locational alternatives are marked
j (j 5 1, 2), where j 5 1 indicates the choice
of a metropolitan location and j 5 2 indicates
a non-metropolitan location. A binary choice
model requires the choice of a specific loca-
tional option and when the choice has been
made the other alternatives are relegated to
zero level (Haynes and Fortheringham,
1991).
The estimated probability of location
choice j by hi-tech firm i in this model is
expressed by the following equation:
P ji 5 F(Z ji ) 5 a 1 b 1L jix 1 b 2A i y
1 b 3Ti z 1 e i
where, P ji is the probability that firm i will
choose region j as a preferred location in
which it will achieve maximum utility; L jix is
attribute x of region j chosen by firm i as a
preferred location (for example, the existence
of a pool of highly skilled labour in region j
required by firm i); A iy is attribute y of firm
i (for example, firm size, firm age); and Tiz is
attribute z of firm i’s technological capability
(for example, the firm’s innovation level,
number of employees engaged in R&D, in-
vestment in R&D activities).
We assumed that the firm’s attributes do
not change in relation to its location—i.e. the
firm’s size, age or even its technological
ability do not change due to the decision to
locate in a metropolitan or non-metropolitan
area. However, variance may be expected in
the attributes of firms located in different
regions as a result of the direct influence of
those attributes on the decision itself. In the
model chosen for this study, the probability
of a firm choosing to locate in a metropolitan
AMNON FRENKEL
area was assessed when the firm’s attributes
were given, as opposed to attributes of the
production milieu which vary among alter-
nate locations, according to the specific con-
ditions characterising each region.
The mathematical development of equa-
tion (1) in the logistic model is as follows:
P ji 5 F(Z ji ) 5 1/(1 1 … 2 Zi)
5 1/[1 1 … 2 (a 1 b 1L ix 1 b 2A iy 1
j b 3Tiz 1 e i)
] (3)
For assessing the firm’s location probability
in a metropolitan area, the maximum likeli-
hood method was used. The hypotheses were
tested using a binary model (see above),
examining the direct influences of the ex-
planatory variables on the dependent vari-
able.
4. The Study Area
The early 1990s brought a dramatic change
in the economy of Israel. The government
headed by Rabin and the Oslo peace agree-
ment altered the attitude of Western coun-
(2) tries towards Israel. One of the spin-off
effects of the Middle East peace process was
a rapid increase in the flow of foreign direct
investment (FDI) into Israel, particularly to
the hi-tech sector. During that period, Israel
enjoyed a very high rate of economic growth
(5– 6 per cent per annum), benefiting substan-
tially at the same time from the inflow of
highly skilled immigrants from the former
Soviet Union. Many of them found jobs in
the hi-tech sector and in the newly estab-
lished technological incubators. During the
early 1990s, the Northern region of Israel
underwent dramatic spatial and demographic
changes. The cities located on the outskirts
of the Haifa metropolitan area (Karmiel and
Upper Nazareth) doubled in size, many in-
dustrial plants expanded and new ones were
established. This phenomenon was linked to
the availability of land for the expansion of
firms, the development of physical infra-
structure and communications systems, and
the relative proximity of these areas to a
large pool of highly skilled labour residing
on the outskirts of the metropolitan area.
 HIGH -TECH FIRMS AND METROPOLITAN AREAS 1089

Figure 1. Israel’s Northern region (scale: 1:625/000).

A new outline and development plan was
prepared for the Northern region in the early
1990s (Shefer et al., 1997). The strategic
development concept suggested by the plan
is to stop the urban sprawl of the Haifa
metropolitan area by concentrating the main
development effort in the Central Galilee—
i.e. the cities of Karmiel, Upper Nazareth and
Migdal Haemeq (see Figure 1).
In 1996, some 1.5 million people, com-
prising about 26 per cent of the population of
Israel, resided in that region, which includes
the Haifa metropolitan area (the largest urban
centre in the North), the intermediate zone
1090 AMNON FRENKEL
(comprising the areas that surround the core,
within an acceptable commuting distance)
and the peripheral zones (comprising the less
developed regions in the North). These per-
ipheral zones are removed from the influence
of the metropolitan area and are not within
an acceptable commuting distance (for more
details, see Frenkel, 2000).
5. The Framework of the Study
The locational choice model developed in
this study was implemented using empirical
data gathered from industrial plants located
in the Northern region of Israel. The method-
ology of the study included three testing
phases.
In the first stage, the importance conferred
by the plant on location factors was exam-
ined, including those having a direct influ-
ence on location considerations, such as the
availability of a labour force, accessibility to
transport, proximity to concentrations of
other firms and so on. In addition, indirect
location factors which, it was hypothesised,
might influence a plant’s considerations,
were examined, such as proximity to re-
search institutions and universities, quality of
life, government incentives and proximity to
services. (The full list is presented in Table
1.)
In the second stage, the overall influence
of the explanatory variables on hi-tech
plants’ decisions to locate in a metropolitan
area was examined. The explanatory vari-
ables represented the three groups of at-
tributes for which hypotheses were made
regarding their possible influence on the
plants’ location decisions. These included the
plant’s attributes, parameters of its techno-
logical capability and the characteristics of
the production milieu in which it was located
(see details in section 2 above).
In the final stage, the direct influence of
the various location factors on the probability
of a plant’s choosing to locate in a metropoli-
tan area was calculated. The coefficients ob-
tained in the logit model in the previous
phase were used to calculate the direct influ-
ence of location factors on the choice. Since
these factors were defined as categorical, the
possible influence of a change in the vari-
able’s category on the probability of choos-
ing to locate in a metropolitan area was
computed (using the coefficients obtained in
the previous phase). Direct influences are
measured in terms of calculated probabilities
(D p) using the following equation:
D P5 exp (L1)/[1 1 exp(L 1)]
2 exp(L 0)/[1 1 exp(L 0)] (4)
where, L0 5 the probability value received in
the logit model before altering one unit in the
independent variable x j ; L1 5 the probability
value received in the logit model after alter-
ing one unit in the independent variable x j
(for example, L0 1 b j ).
The empirical analysis is based on data
collected during a field survey of industrial
plants located in the Northern region of Is-
rael. A research questionnaire was designed
for the field survey by means of which infor-
mation was collected on the plant’s spatial
behaviour, its location considerations and the
innovation level characterising its activity.
At the same time, information was collected
on the plant attributes indicating its branch
affiliation, ownership, size, investments in
R&D and so on. Interviews were held with
high-level executives in each of the 211 in-
dustrial plants included in the sample, be-
longing to fast-growing, hi-tech industrial
branches such as electronics, precision in-
struments, optics and electro-optics, and to
more traditional branches such as metal and
plastics products (for details of the survey,
see Frenkel, 2000).
Since the present study focuses on the
influence of various factors on hi-tech plants’
location decisions, the data used in the analy-
sis were derived from the entire sample in-
cluding only the hi-tech sector located in the
study region. This group of plants was found
to differ significantly from the rest of the
sample. The statistically significant variance
was presented in parameters that most stud-
ies recommend using to identify the hi-tech
sectors, such as the level of highly skilled
labour employed by the plant and the quan-
 HIGH -TECH FIRMS AND METROPOLITAN AREAS
tity of R&D activities.1 Of the 211 plants in
the sample, 86 belong to the hi-tech sector
and comprise 72 per cent of all hi-tech indus-
trial plants located in the study area, which
was randomly selected for examination.
However, for the particular research analysis
in the current study it was necessary to ex-
clude kibbutz-owned hi-tech plants, due to
the fact that their location decision is not
flexible but rather a direct result of the geo-
graphical location of the kibbutz. The final
hi-tech sample that was used in the analysis
thus encompasses 76 industrial plants.
The explanatory variables used in the em-
pirical analysis include indices representing
the three groups of factors which were hy-
pothesised as influencing the probability of
hi-tech plants choosing a metropolitan area
in which to locate (the dependent variable in
the model).
5.1 Production Milieu Variables
This group comprises a series of location
factors, included in the list, presented to
those interviewed in the survey, for which
they were requested to determine the degree
of importance of each factor in the plant’s
location decision. (The list of 14 factors is
presented in Table 1.) In the first stage of the
analysis, the order of considerations was
analysed according to the answers received
in the survey. In the second and third stages
of the analysis, in which the data were pro-
cessed using the logit model, the factors in-
cluded were those whose influence was rated
by the plants as having primary importance
on location considerations.
5.2 Attribute Variables of the Plants
This group includes three variables repre-
senting the structural characteristics of the
plants:
(1) Organisational structure: the plants in
the sample were divided into two princi-
pal groups: a multiplant group and a
single-plant group.
(2) Plant age: measured by the age of the
1091
plants as a continuous variable—i.e. the
number of years since its establish-
ment—or as a categorical one, by divid-
ing the firms into three groups according
to their year of establishment.
(3) Plant size: measured by the number of
workers, to which end the sample was
divided into 2 groups: small plants up to
30 employees, and large plants employ-
ing more than 30 employees.
5.3 The Technological Capability of the
Plants
Two variables were used in this group:
(1) R&D investment: the plant’s investment
of human capital in R&D as measured
by the percentage of employees engaged
in R&D activities.
(2) The plant’s innovation level: the level of
innovation produced by the plant ex-
presses its technological ability. This
variable is measured by means of a cate-
gorical parameter dividing the plants into
three groups: plants in which there is
radical innovation; plants whose inno-
vation is evidenced in developing new
products or by the significant improve-
ment of existing products (developing
their next generation); and, plants whose
entire innovation is manifested by their
adopting new products developed by
others.
6. Research Results
6.1 Location Factors
During the field survey, plant directors were
requested to state the importance they would
allocate to various location factors that influ-
enced the plant’s locational decision. Those
interviewed were presented with a list of 14
location factors which were ranked on a 1– 4
scale representing their importance at the
time of the location choice: (1) no import-
ance; (2) marginal importance; (3) important
and (4) very important. For each factor, the
sum awarded by those interviewed and the
mean score were calculated. The higher a
1092 AMNON FRENKEL
factor’s score, the greater its influence on the
final score. In addition, a chi-squared test
was conducted to examine the interregional
differences in the importance allocated by
the plants to each of the 14 locational factors.
The results are presented in Table 1.
Before examining the results of the rank-
ing analysis, it is worth making a cautionary
point about drawing conclusions on plant
location behaviour from these results. This is
related to the credibility and consistency of
survey-type responses in studies dealing with
industrial location, a common dilemma in
social science research. The problem stems
from the ex post rationalisation of the de-
cision-makers, respondent bias, faulty per-
ceptions and problems concerned with
collecting accurate and representative re-
sponses (Calzonetti and Walker, 1991). The
level of credibility of the survey increases as
the criteria examined are more objectively
observable and measurable (Barkley and Mc-
Namara, 1994).
The three principal location factors in the
entrepreneurs’ order of priorities (presented
in Table 1) indicate the importance they
grant to: physical infrastructure as a means of
development ability; the possibility of bene-
fiting from government incentives pro-
grammes; and, the existence of a highly
skilled labour pool in the region.
The most important factor, related to the
availability of physical infrastructure in the
region, confirms our hypothesis 2(a) (see
section 2.4). This result is valid for both
groups of plants located in the metropolitan
area and on the outskirts; therefore the inter-
regional differences are not statistically sig-
nificant.
The second-most-important factor is
government incentive programmes. The find-
ings from interregional analysis show that
statistically significant differences exist be-
tween the two groups of plants. This result
confirms our hypothesis 5 (see section 2.4),
based on the spatial orientation of the incen-
tive policy. Indeed, most (83 per cent) of the
plants located outside the metropolitan area
ranked this factor as important or very im-
portant, compared to only 22 per cent of
plants located within the metropolitan area.
The third-most-important factor is the
availability of highly skilled labour in the
region, expressed as its agglomeration of
economies, confirming hypothesis 1(a) (see
section 2.4). This result is not surprising,
although its level of importance is lower than
is usual in other countries (Felsenstein,
1996). The great importance that hi-tech
plants allot to this location factor stems from
their technological ability and their need to
employ many highly skilled workers.
The substantial weight allocated by plant
managers to the convenience of their plant’s
location was, as expected, directly related to
firm size. Of small firms, 58 per cent ranked
the convenience factor as important or very
important, compared with only 29 per cent of
the large firms. The interregional differences
related to convenience considerations were
found to be statistically not significant and
are contrary to expectation (see hypothesis
1(b) in section 2.4).
Two additional factors, which received a
relatively high importance ranking, were the
location’s prestige and the existence of trans-
port and a high level of telecommunication in
the region, and confirm the study’s hypoth-
eses 2(b) and 2(c) (see section 2.4). The
significance allocated to the high level of
accessibility and the existence of telecommu-
nication systems in the region is of great
importance, especially in Israel with its rela-
tive geographical distance from the Western
world’s centres of technology. In addition,
the local market’s size forces these plants to
rely, to a significant degree, on developing
foreign markets and creating dependence on
advanced communications systems which re-
duce the disadvantages of their geographical
location. The interregional analysis shows
statistically significant differences between
the two groups of plants for both factors.
Finally, it is worth noting those factors
which were ranked as having less import-
ance, to a relatively surprising degree, than is
usually assigned to them in other countries.
One of these is the proximity to academic
and research institutions, generally con-
sidered a very important location factor by
 Table 1. Location factors ranked according to the mean scores of the level of importance (n 5 67)

Percentage of Ž rms indicating the location factor

as important or very important Statistical examination

Mean Standard Plants in Plants on Level of

2
Location factor score deviation Rank Total plants core region outskirts v signiŽ cance

Availability of physical 2.78 1.15 1 65.7 58.1 72.2 1.481 0.224

infrastructure
Government incentives 2.66 1.40 2 55.3 22.6 83.3 24.860 0.000
Proximity to highly skilled 2.38 1.23 3 47.8 58.1 38.9 2.455 0.117
labour pool
Convenience 2.36 1.30 4 44.7 54.8 36.1 2.363 0.124
Prestige of the region 2.03 1.06 5 35.9 54.8 19.4 9.077 0.030
High level of transport and 2.00 1.09 6 37.3 51.6 25.0 5.044 0.025
telecommunication
Proximity to similar plants 1.82 1.07 7 25.4 29.0 22.2 0.408 0.523
Proximity of cheap and 1.82 1.14 8 26.9 12.9 38.9 5.725 0.017
non-skilled labour
Support of the local authority 1.79 1.09 9 23.9 12.9 33.3 3.825 0.051
Connection to academic and 1.67 1.05 10 22.4 32.3 13.9 3.235 0.072
HIGH-TECH FIRMS AND METROPOLITAN AREAS

research institutions
Proximity to ex-location 1.66 0.99 11 25.4 35.5 16.7 3.115 0.078
Proximity to services 1.64 0.88 12 17.9 22.6 13.9 0.856 0.355
Proximity to markets 1.31 0.63 13 9.0 9.7 8.3 0.037 0.848
Proximity to investors 1.25 0.64 14 4.5 6.5 2.8 0.526 0.465
1093
1094 AMNON FRENKEL
hi-tech plants. It contributes to their R&D
activity, especially for those firms in the first
stage of the life-cycle. In Israel, its import-
ance is significantly less than was postulated
in hypothesis 3 (section 2.4; see also Felsen-
stein, 1994, 1996). This result contradicts our
expectations, particularly in view of the aca-
demic and research institutions located in the
Haifa metropolitan area (the Technion—Is-
rael Institute for Technology and Haifa Uni-
versity).
Two other factors, proximity to services
and to markets, are granted a surprisingly
low level of importance by the plants in the
sample. These results partly contradict our
hypothesis 1(a) regarding the ability of the
metropolitan area to attract hi-tech firms due
to the existence of agglomeration economies,
expressed by the concentration of suppliers
and consumers. This finding may be related
to the country’s physical size (which is not
perceived as a limitation), which generates
significant remoteness from markets and ser-
vice-providers. At the same time, the local
market is too small to support hi-tech plants
and most of them rely on foreign markets.
6.2 The Logit Model
The results of the logit model tests, presented
in Table 2, were obtained by using six separ-
ate models (variations of variables), each of
which included a different location factor.
The six factors included in the models were
those which were ranked as most important
by the plants in the sample (see Table 1).
Separate models were used, as it was not
possible to include all the location factor
variables in one equation because of their
multicollinearity. Results obtained from run-
ning the models (see Table 2) indicate the
contribution of the variables tested to the
probability of plants’ choosing a metropoli-
tan area as a preferred location. The t-values
in the table indicate the level of statistical
significance of each of the coefficients, as
well as the direction and scope of the vari-
ables’ effect. The overall strength of the
model is also presented in the table, as the
final likelihood obtained, and the model’s
overall level of explanation (p2 ) provided by
the independent variables included in the
model.
The results indicate that the plant’s tech-
nological ability is a decisive factor in its
choice to locate in the core area, confirming
the study’s hypothesis 4 (see section 2.4).
The two indices used in measuring the
plant’s technological ability were found to
have a significant statistical influence on the
choice of location.
All the models used show identical results
regarding the influence of the plant’s size on
the probability of its choosing a metropolitan
area location. The probability of small plants
(employing less than 30 workers) doing so is
greater than that of large plants. This result,
which is statistically significant for all the
models, confirms the study’s hypothesis 6(b)
(see section 2.4) and was anticipated because
of land limitations and the high level of rates
and rents in metropolitan areas. Plants’
growth and expansion force them to relocate
outside the metropolitan area where land is
more available and less expensive.
However, the statistically significant result
regarding the influence of plant age on loca-
tion was unexpected according to the litera-
ture, and contradicts hypothesis 6(a) by
indicating that there is a higher proportion of
veteran plants in the metropolitan area. This
finding can be explained by the organisa-
tional structure of hi-tech plants which, at the
mature stage, tend to establish subsidiary
plants, engaging mainly in mass production.
These subsidiary plants are moved out of the
metropolitan area while their mother plants
remain in the core area and concentrate on
research and developing innovations. Thus
small and well-established plants which fo-
cus on R&D are situated, to a greater extent,
in the metropolitan area, while larger,
younger plants that engage mainly in mass
production, are more commonly found out-
side the metropolitan area. An examination
of the sample data in this context shows that
58 per cent of the multiplants are located
outside the metropolitan area; of these, 83
per cent are young plants established after
1980. On the other hand, 69 per cent of the
 Table 2. Logit model results for the metropolitan locational choice model analysis (t-value in parenthesis)
Independent variables Model a Model b Model c Model d Model e Model f

Constant 2 4.856 ( 2 2.73)** 2 4.225 ( 2 1.86)** 1.476 (0.85) 2 6.076 ( 2 2.98)** 2 4.410 ( 2 2.85)** 2 3.288 ( 2 1.60)
Technological level
R&D employment 0.509E-01 (3.05)** — — 0.511 (2.97)** — 0.548E-01 (2.96)**
(percentage of R&D
workers)
Product innovation level — 1.470 (2.39)** — — — —
(1 5 adopt.; 2 5 developed;
3 5 radical innovation)
Plant characteristics
Small Ž rm 1.723 (2.11)** 1.806 (1.97)** 2.366 (3.24)** 1.729 (2.10)** 2.336 (2.94)** 1.546 (1.84)*
(less than 30 workers)
Age of Ž rm 0.289 (3.40)** 0.183 (2.67)** — 0.255 (3.09)** 0.152 (3.04)** —
(years)
Period of establishmenta — — 2 1.270 ( 2 3.04)** — — 2 2.288 ( 2 3.41)**
Type of plant 2 0.934E-01 ( 2 0.12) 0.110 (0.13) 0.139 (0.21) 2 0.616E-01 2 (0.08) 0.261 (0.38) 2 0.161 ( 2 0.21)
(multiplants)b
Locational factors
Physical infrastructurec 2 0.886E-01 ( 2 0.29) — — — — —
Government incentivesc — 2 0.840 2 (2.98)** — — — —
Proximity to highly — — 0.388 (1.62)* — — —
skilled labour pool
Conveniencec — — — 0.315 (1.10) — —
Prestige of the region 1 1 — — — — 0.5421 (1.82)* —
High level of — — — — — 0.622 (1.87)*
HIGH-TECH FIRMS AND METROPOLITAN AREAS

telecommunicationc
N 66 66 66 66 66 67
Initial likelihood 2 45.75 2 45.75 2 46.44 2 45.75 2 45.75 2 46.25
Final likelihood 2 27.79 2 23.35 2 34.10 2 27.22 2 32.74 2 26.59
p2 0.39 0.49 0.27 0.41 0.28 0.43
p̄2 0.39 0.49 0.26 0.40 0.28 0.43
** indicates signiŽ cant at the 5 per cent level; * indicates signiŽ cant at the 10 per cent level.
a
Categorical variables (1 5 before 1970; 2 5 1970– 79; 3 5 1980– 89; 4 5 1990 1 ).
b
Dummy variable.
c
Categorical variables (1 5 no importance; 2 5 little importance; 3 5 important; 4 5 very important).
1095
1096 AMNON FRENKEL
Table 3. Changes in the probability values according to the level of importance of the locational factors
Average
Locational factors plant
Government incentives 0.435
Proximity to pool of highly 0.398
skilled labour
Status/prestige of the region 0.464
High level of telecommunication 0.451
multiplants located within the metropolitan
area are older plants, established before
1980. In all the models tested, however, no
statistically significant impact of the plants’
organisational structure on their choice of
location was found—results that contradict
our hypothesis 6(c) (see section 2.4).
Testing the location factors included in the
third series of variables, as defined in the
choice model, shows that the estimated ef-
fects were mostly in accord with the study’s
hypotheses. Four of the six factors included
in the models were found to have a statisti-
cally significant influence on the probability
of choosing a metropolitan location. The in-
fluence of the existence of a good physical
infrastructure, a factor which was ranked first
in importance in the location choice for
plants (see Table 1), was not statistically
significant. This result might be explained, at
least partially, by the fact that the factor’s
importance is considered to be substantial
both by plants located in metropolitan areas
and those which choose to locate outside the
region—that is, it cannot be determined on
the basis of this result that the Haifa metro-
politan area has a leading edge in the field of
physical infrastructure over the outskirts, or
vice versa. The same results were found for
the convenience factor.
Salient location factors influencing the
preferred location in the metropolitan area
include the agglomeration of economies in
the region, expressed in the large pool of
highly skilled labour and well-developed
transport and telecommunication infrastruc-
tures. These results confirm our hypotheses
Level of importance
No Marginal Highly
importance importance Important important
0.755 0.571 0.365 0.199
0.280 0.364 0.457 0.554
0.329 0.457 0.591 0.713
0.306 0.451 0.605 0.740
1(a) and 2(b) (see section 2.4). Another fac-
tor related to the metropolitan area’s positive
image and prestige. Its contribution to the
probability of locating in the metropolitan
area is statistically significant, confirming
our hypothesis 2(c) (see section 2.4). Since
the incentives provided by the government
aim to attract firms to the peripheral regions,
their influence lessens the probability of
choosing the metropolitan area as a preferred
location. These results were found to be
statistically significant and confirmed our hy-
pothesis 5 (see section 2.4).
6.3 The Direct Effect of the Location Factor
Calculation of the direct influence of loca-
tional factors on the probability of choosing
a metropolitan area was performed for the
four variables whose influence on the choice
of location had statistical significance. They
were: granting government incentives, the
existence of a regional pool of highly skilled
labour, the region’s prestige and the exist-
ence of a high-level telecommunication in-
frastructure. The results of the calculations
are presented in Table 3. Average values of
the plant sampling were introduced for dif-
ferent variables as a starting-point for com-
puting the change in the probability of
locating in a metropolitan area, resulting
from a change in one unit of these explana-
tory variables. Accordingly, Table 3 also pre-
sents the probabilities of an average hi-tech
plant choosing a metropolitan area in which
to locate.
The results indicate that the probability of
 HIGH -TECH FIRMS AND METROPOLITAN AREAS
such a choice by an average plant is lower
than the probability of it choosing to locate
outside the metropolitan area. These results
would seem to reflect a trend among hi-tech
plants to shift to the outskirts of the Haifa
metropolitan area—a trend, which has been
growing stronger in recent years.2 However,
as mentioned above, the plants referred to
are, for the most part, large manufacturing
plants, while their relatively small develop-
ment units remain in the metropolitan area.
The probability of small hi-tech plants (em-
ploying less than 30 workers) choosing to
locate in the metropolitan area is thus higher,
in the 0.66 – 0.77 range, compared with the
lower probabilities (0.24 – 0.30) which char-
acterise large hi-tech plants (employing 30
workers or more).3 A metropolitan area’s
advantages would therefore seem particularly
appropriate for small plants which do not
need large land reserves in which to expand
and which enjoy the agglomeration advan-
tages that exist in that region.
The change in the probability of choosing
to locate in a metropolitan area is determined
by the change in the importance the plant
confers on each of the 4 location factors
(Table 3). The results indicate that the influ-
ence of government incentives on plants at
the different sites is decisive. The probability
of choosing a metropolitan area drops to 0.20
for plants which gave a high degree of im-
portance to this factor. It can therefore be
expected that 80 per cent of those plants will
choose to locate outside the metropolitan
area in places where they will be able to
enjoy government incentives. On the other
hand, among plants which cited this factor as
unimportant, the probability of choosing a
metropolitan area rises to 0.76. It should be
noted that the incentives granted in regions
outside the metropolitan area are related
mostly to erecting buildings and purchasing
equipment. These incentives are usually less
relevant for plants whose main activity is
R&D and these tend, as previously men-
tioned, to locate in the metropolitan area.
The three other location factors exam-
ined—namely, the availability of skilled
labour, the region’s prestige and the presence
1097
of a developed infrastructure of advanced
telecommunication—all have a positive in-
fluence on the choice of locating in a metro-
politan area. The most prominent of these
factors is the influence of the availability of
knowledge and advanced means of telecom-
munication. The region’s prestige has a simi-
lar effect on the choice of location; thus a
metropolitan area, which enjoys a relatively
prestigious image, is likely to attract those
plants for which it is an important factor. The
influence of a large pool of highly skilled
labour is more moderate. Its impact is found
to be decisive only among plants ranking this
factor as having a high degree of importance
in choosing to locate in the metropolitan
area. This finding is surprising considering
the importance of this factor in the general
ranking (see Table 1). The explanation is,
apparently, that most hi-tech plants located
outside the metropolitan area, choose to lo-
cate on its outskirts—i.e. within a reasonable
commuting distance. They are therefore also
likely to profit, in no small measure, from the
labour pool found in the metropolitan area.
7. Conclusions
This study focuses on the choice of a metro-
politan area as the location preferred by hi-
tech plants in Israel. An attempt was made to
examine the influence of various locational
factors on plants’ spatial behaviour, the inter-
action and trade-off that exist between them,
the plants’ internal attributes and the charac-
teristics of the production milieu at alterna-
tive sites.
The general conclusion drawn from the
results of the empirical analysis regards the
influence of a plant’s technological ability on
the probable choice of a metropolitan area.
The plant’s life-cycle attributes, and in par-
ticular the scale effect, also influence the
choice. The results thus indicate that metro-
politan areas hold strong attractions for small
plants with high technological ability. These
stem from their relative advantages with re-
spect to the presence of well-developed,
telecommunication infrastructures and means
of knowledge transmission, their prestigious
1098 AMNON FRENKEL
image and the availability of scientific and
academic labour.
On the other hand, government incentives
have a negative impact on the choice of the
metropolitan area by these hi-tech plants.
The results relating to the various variable
groups reinforce the assumption that a plant
chooses a location (metropolitan or other-
wise) that maximises the utility attained from
the combination of the plant attributes and
the characteristics of the production milieu.
Among the location factors tested in the
study, the importance of the possibility of
physical development and of the existence of
an appropriate physical infrastructure is
prominent, more so among multiplants than
among single plants. This reflects the greater
physical needs of production plants (sub-
sidiaries). A very influential locational factor
is that of government aid incentives in direct-
ing plants that were ranked second in import-
ance. This finding emphasises the great
significance of government policy in per-
suading hi-tech plants to locate in less central
regions, which it could help to develop by
creating opportunities for attractive jobs for
young and skilled populations.
An important conclusion drawn from the
study shows that hi-tech plants in Israel do
not consider proximity to academic and re-
search institutes to be important in their
choice of location. This finding contradicts
those reported in the international literature
(Rogers, 1983; Saxenian, 1985; Smilor et al.,
1988; Roberts, 1991; Massey et al., 1992). It
does, however, coincide with the findings of
Felsenstein (1994, 1996) whose studies were
conducted on firms located in the Tel-Aviv
metropolitan area and indicate a relatively
low level of interaction between hi-tech
plants and academic institutions in Israel.
This contradicts the accepted situation in the
US, where there is a prominent, direct con-
nection and the universities support feedback
for young and innovative hi-tech plants.
It is worth examining why the connection
between industry and the universities and
academic research institutes is so tenuous
and considered unimportant. This is of added
interest, especially in view of Israel’s excel-
lent technological and scientific ability, man-
ifested by its scientific output which, when
measured in relative terms, is higher than
that of the Western world (Maital et al.,
1994). An encouraging public policy might
increase the academic contribution to the
development of advanced industry in Israel,
beyond its important contribution as mani-
fested in training and generating a skilled
technological labour pool, which provides
the principal basis on which this industry
grew.
The results reported in this study indicate
the relative unimportance of locational fac-
tors, such as proximity to market and service
centres or to a concentration of similar
plants, in choosing a location. In contrast to
the findings of other studies world-wide (Ca-
magni, 1985, Malecki, 1991), the relatively
short distance between the metropolitan area
and the peripheral zone in the Northern re-
gion of Israel may be a contributory factor.
Moreover, Israeli hi-tech plants are based
principally on the development of overseas
markets, mainly because of the limited size
of the local market, and therefore these fac-
tors are less important than they are in larger
countries. On the other hand, locational fac-
tors related to the agglomeration of telecom-
munication networks for transmitting
information, and to skilled labour pools,
were found to have a significant, positive
influence on the location choices of these
plants. The connection to external markets
stresses the importance of telecommunica-
tion systems for transmitting knowledge.
These systems are prevalent in metropolitan
areas and are thus linked to the need for
finding abundant highly skilled labour,
which is also one of the salient advantages of
the metropolitan area.
Notes
1. The t-test was performed to examine the
differentiation between the two groups of
plants. The explanatory variables used in the
analysis included: percentage of highly
skilled labour, average number of R&D em-
ployees, percentage of R&D employees, an-
nual expenditure on R&D and R&D
 HIGH -TECH FIRMS AND METROPOLITAN AREAS
expenditure as a percentage of total expendi-
ture. The results of all the parameters used in
the test were found to be statistically signifi-
cant at a level of (a 5 0.01)
2. Such findings did not emerge from the
Felsenstein study (1996).
3. The ranges represent the results received in
four models in which the location factors
were tested alternately, as presented in Table
3.
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