Untitled

CLONING
SILICON VALLEY
the next generation high-tech hotspots
DAVID ROSENBERG
REUTERS =~t
Published by Pearson Education
London I New York/ San Francisco/ Toronto/ Sydney/ Tokyo/ Singapore
Hong Kong/ Cape Town/ Madrid/ Paris/ Milan/ Munich/ Amsterdam
ABOUT THE AUTHOR
David Rosenberg was born in the U . He completed degrees at Columbia

Universit and work ct for two years on the Asian Wall ·treet Joumal
before moving to I racl, in 1986. Sine then he has worked at varions
times a. a financial journali. t for TIIe Jernsalern Post, Dow Jones
cw wir s and Reuters. He began writing and taking an interest in the
high-te hnology indu. try in th early 1990s a. the Israeli industry began
to develop, and has written freelance articles for publications including
J'lu: New York Times, For/Jes On-Line, Red Jfen'ing, Tile Banker and Tile Wall
treetJoumal.
CONTENTS
Preface/ x
cknowlcdgem en ts / xii
Introduction / xvi
CHAPTER 1 ■ Technology clusters: network architecture / 1
The ingredients/ 2
Silicon implants/ 4
Geography: proximat causes/ 7
Companies: learning to relax/ 9
Venture capital: making do with less/ 10
tock markets: sons of asdaq / 13
Universiti s: founts of IP?/ 15
Government: reducing ri k / 17
CHAPTER 2 ■ Cluster culture: innovation and entrepreneurship/ 21

Innovation: the use of increments/ 22
Entrepreneurship: opportunity knocks/ 28
Global business: a web of clusters / 32
CHAPTER 3 ■ The global tech company: distance learning / 39
Markets: looking out for Number One / 41

fark ting manag ment: th world or bust/ 43
Finance: poor and ne dy / 45
Listing: asdaq versus home / 46
Management I: the road from R&D / 48
Management II: going global/ 49
Management III: Kulturkampf / 52
viii CONTENTS
CHAPTER 4 Cambridge, England: has brains, seeks brawn / 57
History: £al e tart I 58

_,eography: compact cluster/ 60
People: lifestyle cornpanie / 62
Society: technology-wary/ 67
f-inance: con ervcltive capital / 69
ovemrnen t and university: 11011-interventioni t / 71
focus company: ambridge Silicon Radio/ 74
Ahead: focusing on IP/ 76
CHAPTER 5 Helsinki, Finland: on the shoulders of giants/ 81
History: post-Soviet shock/ 83

Geography: a country of clu ters / 85
People: modest to a fault / 86
Society: technophiles, entrcphobes / 88
f-inance: growing pains/ 90
Government: 'Nell-oiled machine/ 92
Pocus companies: Solid Information and Riot Entertainment / 96
Ahead: a little I quiet / 9
CHAPTER 6 Tel Aviv, Israel: martial arts/ 101
Hi tory: ~word to plough hare / 102

1eography: the lure of 1\rnerica / 104
People: a chorus of soloists / 106
ciety: learning by erving / 108
Finance: pure te hnology / 112
Government: exit strategy/ 114
Fo u ompany: Whale ommuni ation / 116
CHAPTER 7 Bangalore, India: silicon island, third world sea/ 123
History: blissfully ignored/ 124

Geography: brand name cluster/ 127
Industry: foot soldiers of software/ 129
Peopl : strength in number~/ 131
CONTENTS Ix
Society: a tudy in contrasts/ 134

finance: underweight/ 136
Government: sticks ,-vithout carrots/ 139
r ocus companies: Corn·ergent Software and Talisma / 140
\head: widening the circle/ 1➔2
CHAPTER 8 Singapore: creativity on command / 147

History: from rubber to silicon / 149
Geography: technology nodules/ 151
People: risk-aYerse / 15-l
Society: rote to ruin?/ 157
finance: easy money/ 160
focus company: elestix ·en\·orks / 163
Ahead: untested waters / 165
CHAPTER 9 Hsinchu-Taipei, Taiwan: arms for the revolution/ 169
History: an i land apart/ 170

Geography: two Chinas/ 173
People: alifomia, here I'm from / 176
Society: don't inno\'ate, do something / 178
Finance: life after the PC/ 181
Government: Chinese handcuffs/ 183
Focus company: Faraday Technology/ 186
Ahead: beyond China/ 188
AFTERWORD Silicon Valley: where next?/ 191
Index / 199
PREFACE
IT'S THE NATURE OF HIGH-TECHNOLOGY that anything that takes long

enough to prepare in that very Old Economy medium of a book will
contain much that is out of date by the time it reaches the reader. Trends
change, companies grow, merge and fold, business plans are altered,
people move jobs and a hundred other things occur at an unusually
rapid pace. The information for this book was gathered mainly between
April and December 2000 and refle ts fa ts as they were at that time. The
companies, people and incidents that are ited are meant to be indica-
tive of broader trends, not as stories in their own right.
Th bigge t change of all to occur over that time vis a vis the global high-
tech industry was the collapse of share prices over the year 2000 and the
wreckage it has left in its wake. The direct impa t of the stock market is,
of cour. e, financial. But the technology revolution is fought with money
that pays the engineers and reward. those risking their money in it. The
share market is the ultimate provider and without it not only docs the
dross not get funded but also mu h of the gold. The sobering experience
of the stock market collapse provided a useful ba kdrop both for the
author and for the entrepreneurs, financiers, policy-maker. and academ-
ics interviewed for this book. In the years prior to the market's
comedown, the internet wa being extoll ct in the popular media and
even among p ople in the industry not just as an immens business
opportunity but the cusp of a so ial upheaval and cultural phenomenon
equal to the 19th century ind us trial revolution; in the aftermath many
people are now tempted to dismi it all a at mo ta te hnology advance
equivalent to the radio and p ssibly littl mor than a fad.
Th pre-collapse views are almost ertainly closer to tile truth. More than
imply reating new, innovative products, the revolution in information
te hnology has spawned a me hanism and . ystem of incentives in tech-
nology clusters in America and around the world that will push the
revolution far beyond the internet phenomenon and into new areas.
)<
PREFACE xi
This book looks at how this mechanism and the incentives have spread
around the world from their place of origin in California's Silicon alley
and how they have been adapted.
A number of pe ple helped me at the variou tage f re earching and

writing thi book. Davi Ellis, my research a si tant, pent many hour on
the internet engaged both in the glories of actual research and th labours
of scheduling interviews. Gwen Ackerman generously read the entire
manuscript and saved the reader many an unintelligible sentence or para-
graph. Many p ople kindly agre d tor vievv variou parts of the book and
offered useful criticism, including Robert Unterman, commercial attache
at the Finni h Embassy in Tel Aviv; Bill Wicksteed of the economic con-
sulting firm Segal Quince Wicksteed; Anjana Vivek, at the time a
vice-president of NVCF Finance and now at Ernst & Young; Nikunj Jinsi,
vice-president of AsiaTech Ventures in Singapore; Jon Medved of Israel
eed Partners; Erkko Autio, H l inki University of Technology; Amikam
Levanon, A ia Gat Technology Finance; Morri Teubal, the Hebrew
University; and Akiva Tor of the Israeli Foreign Ministry. Martin Drewe,
my editor at Pearson, offered a firm but gentle hand in urging the project
along. A great many people agreed to be interviewed for this book and
their stories and insights provide its substance. Except for the few who
asked to speak anonymously, their names appear on the following pages.
Many others, friends and colleagues too numerous to be mentioned here,
offered their encouragement and support along the way. Finally I want to
thank my wife Debbi and daughter omi for tolerating my long absences
abroad doing research and my long absences at home shut off in my
office writing.
David Rosenb rg
Jerusalem
INTRODUCTION
IN THE 20 YEARS THAT I HAVE BEEN INVOLVED in building and financing

te hnology businesses, there has been a sea change in the approach of
funder , suppliers, customers and governments to entrepreneurs and the
companie they create. This is true of all entrepreneurs and new compa-
ni s, but particularly of those working with new and disruptive
technologies.
It was not so long ago that a new technology was the ole domain of the
academic researcher, even in Ameri a. But in Ameri a, they cotton don
early to the potential for wealth creation inherent in commercializing
th results of univer ity re earch. And, in the free and competitive mar-
ket of the developed world, businesses everywhere expected their R&D
to be as productive as anything emanating from the 'ivory towers' of
MIT, Stanford, !vfunich, Cambridge or Pari .
In one lifetime, the way in which we a ce s, store and onvey informa-

tion have been revolutionized by the telephone, the computer, the
internet and telecommunications and wireless technologies. Technical
progress relating to health, food, warfare, space resear h and mobility
have similarly transformed the lives and, in some cases, value of many.
The fact of hange hould not surpri e us so much as its speed and
volume, driven in the developed world by a focus on economic growth
produced by a prolonged era of peace.
The development of a community, or clu t r, of bu ines e in one area of

th US, Sili on Valley, ha b ome a symbol for the way forward for tech-
nology companies. And because ilicon Valley has come to repr sent a
role model to many in the busine s of creating and funding technology
businesse , its influence has been considerable. The ways in which differ-
ent cultures have adapted the model to deploy local trength and meet
synergistic n ed in world markets, and thereby extending the model,
are manifold. Of interest to all of us in this business now is where the
next generation of technology innovations and companies will develop.
xvi
INTRODUCTION ~vii
Of course, if \Ve only knew this w , who fund and work with young com-
panie , would up sticks and move to the hot-spot. But I vrnuld predict
that the next decade will see a proliferation of clusters, such as those that
have developed in Europe, Israel and Asia in the past 10 to 20 years. Many
of the non-Americans nmY working in Silicon Valley vvill return home to
Asia and to Europe, including lsrael, with the skill to build their own
high-tech communities. This has already happened to ome extent.
Some of these newer clusters will differ in many respects from ilicon
Valley and, in the aggregate, may overtake the original model in produc-
tivity and profitability. Other economics have to grow faster in order to
catch up with the US lead. dd to that the spread of US funds to other
parts of the globe, and you have a very fertile environment for success in
both Europe and Asia.
The other dynamic we shall, I believe, see operating in the next 10 years
is an increased flmv of companies from one side of the Atlantic to the
other. It has long been a truism that for a technology company to become
established on the world stage, it has to have a US presence simply
because the US has been the largest homogenous market for technology
product. That will remain the case for a while, but it also works the other
way. With Europe becoming ever more integrated economically, and as
English - in spite of anything the French may do to low the proces -
becomes the lingua franca for new business in Europe as elsewhere, US
companies are beginning to realize, as their Asian counterparts have
already done, that they need a presence this side of the pond. Europe will
be a larger homogenous market than the US.
ln the late 1970s, European entrepreneurship was an oxymoron, at least

for most Americans. Good management was scarce; taxation punitive.
All that has changed. Governments across the continent have, to greater
and lesser degrees, provided the fiscal environments that allow entrepre-
neurs to make real profit from enterprise; industries have been
deregulated; failure in an entrepreneur is beginning to be tolerated.
Because corporations here have ha<l to adapt to US ways of doing busi-
ness, everyone is much more flexible. Indeed, greater flexibility exists in
Europe now than in most U · concerns. Companies such as 'okia that
started off producing for a tin~ home market realized fast that they
would have to tune their offering for other local market:. if they were to
prosper on the world stage. They did it so well that they managed to
o\·ertake the once dominant :\fotorola in the handset market and now
dominate it with a 30 1¼,-plu~ m,uket share - ti,ice that of ~fotorola's.
xviii INTRODUCTION
Silicon Valley has taught us many things: the importanc in t chnology

development of community and being able to talk to people face-to-face;
the influence of venture capital backers who really network for their
portfolios; the need to get pr duct to market fa t. It has also sh wn us
some pitfalls. Backing sixty di k drive compani s when only six could
po ibly survive, yet alone be successful, is not nece sarily the right way
to help businesses. Ironically, having fewer companies to back make
funders outside the US more careful in analysis and selecti n, because
they know they have to work harder to build the winners. onstant job
mobility does not lead to the stable environment that nurtures long-
term growth. The majority of Europeans and Asians still expect to
r main with one company for som years.
Europe and Asia have had to learn from the US. In Europe, we have had
to rediscover the entrepreneurial genes that gave birth to the great
Scottish, Hungarian and German in entors of previous centuries. There
are signs that what started here twenty years ago is beginning to bear
fruit. Horn -grown technology companies like ARM, Cambridge Sili on
Radio, Virata and Autonomy are world-class play rs. And with the
advent of wireless technology, for which Europe has adopted a single
standard, thi proces will accelerate.
The Silicon Valley template has a way to run. But I believe that in the
next two deca~cs it will be challenged by developments in Europ
Hermann Hauser
Director, Amadeus Capital Partners (Lo11do11
and Cambridge, UK)
High-tech clusters
Cities in bold are surveyed in this book '--;i
I
~<
I
I
I \
\ ~
tr~~
;_f't)
5 Cambridge, England
6 Stockholm, Sweden
7 Helsinki, Finland
8 Sophia Antipolis, France
9 Munich, Germany
1 Silicon Valley (California) 10 Tel Aviv, Israel
2 Austin, Texas 11 Bangalore, India
Q
3 Silicon Alley (New York City) 12 Singapore
4 Boston, Massachusetts 13 Hsinchu-Taipei, Taiwan
TECHNOLOGY CLUSTERS:
network architecture
OVER THE PAST TWO DECADES CALIFORNIA'S SILICON VALLEY has come to
mesmerize the world. Like the great textile mill of Lancashire, America's
trans-continental railways, or the Japanese automobile industry each in
their day, alifornia's cluster of high-technology companies and their
supporting cast of universities, financiers and the like symbolize a bright
new era. As such, it is not enough for the rest of the world simply to
admire or envy Silicon Valley: countries th.it have any pretence of join-
ing {or for that matter remaining in) the ranks of the world's adv.meed
economies have no choice but to imitate it.
reated and packaged in America as a way of doing business very much at

variance with traditional industry, the Silicon Valley concept has been
installed in dozens of places around the world. A software house in Helsinki,
Finland; a fablcss chip-maker in Cambridge, England; or a fibre-optic equip-
ment start-up in Tel Aviv, Israel, today will typically conduct its operation ,
structure its management and create physic.ii surroundings to resemble its
peers in San Jose or Mountain View. If these imitators differ from the Silicon
Valley or other American technolobry clusters like Austin and Seattle, it is by
virtue of the fact that they have no choice but to be thoroughly global busi-
nesse~. They don't as yet have huge and tech-hungry domestic markets for
their products, nor the ize and scale that would enable them to provide all
their financing and find all their strategic part~er\ inside their home ch1'>-
ters. Thus, the ..,oftwarc industry in Bang<1lore,India, i~ intimatlly tied to the
2 CLONING SILICON VALLEY
merican technology sector not only for its business model, but as the
source for nearly all its revenues, for many of its most successful entrepre-
neurs and in not a few cases for its financing and intellectual property (IP).
Unlike the industry corridor south of San Fransisco, the denizens of the
planet's other Silicon Valleys function more like outposts of a global
industry than a ector of their national economie .
California's Silicon Valley was not the first agglomeration of high-tech com-
panies, but the others both in the US and abroad proved t be evolutionary
dead-ends. They saw themselves simply as industrial parks for silicon chips
instead of textiles or furniture. Large companies were invited to open R&D
operations or erect manufa turing plants with the enti ement of tax breaks
and protection from imports. But no thought was given to creating the
machinery necessary to produce new companies, share knowledge or
engage in busine s co-operati n in rder to create a elf-generating environ-
ment of innovation. It was a static conception of what business should be
even in the information era. Over the past two decades, however, a crop of
technology cluster ha developed that to one degree or another imitates the
original Silicon Valley. ome clusters, like Taiwan and ingapore, have done
it by studying the phenomenon and systematically putting its features into
place by government fiat. Others like Israel, India and Taiwan (the latter a
combination of both) were built on the talents and experience of expatriates
coming back from careers in Silicon Valley. Still others adopted the Silicon
Valley model.gradually more by example than state policy or returning
countrymen, as wa the ca e in the UK and Finland. o matter how it wa
done, though, America i the undisputed inventor of the model.
THE INGREDIENTS
Just what the 'Silicon Valley' ideal is that has been o eagerly adopted is
amorphous. Its external feature - leek ffice buildings, broadband con-
nection , the pre ence of a few name brand multinational companies and
a government-run research institute or two - are easily enough obtained
for a developed economy. The rules and institutional foundations, su has
low taxes, venture capital and a skilled workforce, are trickier, but not
impossible, to put into place. But the ba. i hemistry is complicated:
there are many more component to the formula; the order in which they
come into play and the reactions they will produce are hard to finesse.
Some of the catalysts arc ,.,,,ithin the power of policy-makers and industry
leaders to manipulate but many others rely on social and cultural factors
not easily understood and certainly not subject to rapid change.
1 TECHNOLOGY CLUSTERS; NETWORK ARCHITECTURE 3
nnaL e ~ax nian, who wrote a 1994 landmark study comparing Silicon
Valley with its East Coast high-tech rival' Route 128 outside Bo ton, 1 sees
the core of the Silicon Valley model as networking. In the traditional
industrial model, which was adopted by Route 128 and even today char-
acterizes many high-technology centres, companie'i may be physically
close to one another but they constitute autarkies built ar und propri-
etary knowledge, and self-sufficiency in developing new products,
sourcing components and manufacturing and marketing them. By con-
trast, ilicon Valley firms established webs between themselves and
related institutions such as universities and venture capitalists. These
networks perform many of these same functions outside any form;:illy
incorporated body but draw on greater resources and enjoy mu h greater
flexibility. IP is shared vvidely, in forums ranging from a lunch break
between two employee to strat gic alliances
IP is shared widely, in between two compani s. Open architecture
forums ranging from a lunch
that lets a multitude of companies develop
break between two employees
products and service'i around a single
to strategic alliances between
two companies. ,
system or standt1rd i the norm. Employees
come and go taking knowledge with them
from company to compt1ny. cw firms arc spun out of old ones.
Universities actively play the role of developing innovations for the com-
mercial cctor. Inv stars aren't passive players but co-managers in
developing enterprises. Inside companies, management follows th same
pattern by shunning hierarchie in favour of teams working laterally.
1 etworking in tum leads to two phenom na. One is the necessity for
physical proximity because no technology, not even the internet, ha~ yet
to supplant the importance of face-to-face conta t on a regular and rou-
tine basis. The other is the speed at which business is conduct d. Silicon
Valley is a ferment not ju t of start-up companies, which attract the most
attention, but of mergers and acquisition , tactical and strategic alliances,
continuously evolving business plans, venture capital financing , public
offerings and product rol!outs - all operating at a pace many times faster
than c nvcntional indu ·try. 1 8 caus of the very intense competition,
time-to-market is critical, as is perfect execution. How do >ou achieve
time-to-market? You do it by subcontracting everything you can to serv-
ice providers. Oon't do everything yourself,' say'i Shlomo Kalhh,
managing p;:irtncr of Jerusalem Global Innovation C..cntcf'i, an Israeli
high-technology investment group. 'Once you have the infrastructure of
Silicon Valley you have that- starting with the. legal firms who can set up
)Our company fast, R&D subcontracting, venture capital, people who
help you in bu iness, manufacturing sub ontracting, exe utive search as

well a people who have contacts with the giants of the industry. If I'm in
the middle of cw Zealand, how d r have acce to the management of
Ameri a Online ...That's why clusters are very important.' 2
SILICON IMPLANTS
By one accounting there are 105 areas around the world (including the U
that have adopted a distinct technology cluster identity. A few hmved at lea t
a little originality in choosing a name, like Dot ommomvealth, Biotech
Beach, utomation llcy. But most want to leave no doubt about the ource
of their inspiration and aspirations: the cluster league include a ilicon
Plateau, Silicon Desert, Silicon Hollow, Silicon Alps, two Sili on Vineyards,
five Silicon Islands, and the improbable Silicon lacier and ilicon andbar. At
TABLE 1.1 Comparing the 'Silicon Valleys'
Start-up Human Venture Global Universities/ Taxes and Composite

activity talent capital links R&D insts. regulations
Britain 3 4 4 2 4 4 3.45
Finland 3 4 3 3 5 3 3.45
Israel 5 4 5 5 4 4.25
India 4 3 2 4 2 2 3.05
Singapore 2 3 4 5 3 5 3.20
Taiwan 4 4 4 5 5 5 4.35
---- -----
Sub1ect1ve rating on a scale of 1-5 based on the author's impressions of the following
components:
Start-up activity Weighting of start-ups in total cluster activity; ease. willingness and
ability of people to form companies (weighting: 25%)
Human talent Innovative and entrepreneurial abilities of people in cluster
(weighting: 25%)
Venture capital Amount of capital available to high-tech sector; experience and
abilities of venture capitalists to aid in building companies
(weighting· 15%)
Global links Companies geared to overseas markets, strong flows of international
venture capital, human talent. and merger and acquisition activity
(weighting: 15%)
Universities and Extent to which companies draw on human and IP resources of local
R&D institutes academic and research facil1t1es (weighting: 10%)
Tax, regulatory Extent to which taxes and regulations are favourable to start-up
environment corn pa mes and venture cap tal funds (weighting· 10%)
worst, these aspiring technolob'Y clusters ha, e little more behind them than a
promotional website and a cle er name. Many of the more serious contenders
can count a chip fabrication plant or a multinational company's R&D facility,
perhaps a nearby university or government laboratory. But almost none of
them would tand the test of a real Silicon Valley cluster. Wired magazine
found 46 worthy of rating a far afield as ustin, Texas; Queensland; Saxony
in ermany; ophia Antipolis on th Fren h Riviera; and Trondh im,
1
orway. But on as ale of 4-16, only five centre out ide the U - Bangalore
(13), Cambridge, England (12), Israel (15), London (14) and Taipei (B) -
scored in the top third. This book examines six locations - ambridge in
England; Helsinki in Finland; Tel A iv and all of Israel; Bangalore in India; the
city-stat of ingapore; and finally the Hsinchu-Taipci corridor in Taiwan -
chos n not becau e they arc the only high-technology clusters in the world
outside merica, nor because they ar necessarily th most promising ones.
Rather it is because they reprec;ent a mix of v ry different social and economic
environments and consequently offer differing solutions to the challenge of
establishing a technology dust r. A subjective rating, based on the author's
personal impressions, ranks Taiwan as the stron gcs t of the six clusters and
India as the weakest, but the fact is all six have r al and dev loping tech
industries with futurcs as promising as any in the world (see Table 1.1 ).
About the one thing they have in common - and this they share with
ilicon Valley, which billed itself America's prune capital before becom-
ing the world centre for high-tech - is that they were not built in an old
and established industrial area. Britain pioneered the industrial revolu-
tion but amhridge was a rural area with few factories. Finland had a
ub tantial re our e-based industry before the mobile phone revolution
parked a high-tech s ctor, but it was not an industrial pmver and
Helsinki itself was a governmental and commercial centre. Israel was an
industrialized economy for most of its history, hut its society's preoccu-
pations were more in the realm of national security and building
n.itional institutions. India to this clay remains primarily agricultural and
is by almost every 111 asure an under-d veloped economy. Bangalore had
no industry to spe.ik of. Tziiwan developed a substantial manufactur"ing
indu try after world war II, but that was on the south side of the island
while high-tech grew up on the northern tip.
In all other re pe ts the six clusters come from very different positions of
economic and hi torical development. Like the US, Britain and Finland
were wealthy and advanced economics before their technology sectors
began, hut that i · arguably an obstacle to evol\ing the ri~k-taking culture
that high-te h cluster. demand. Singapore mer it\ 40-year history devel-
TABLE 1.2 Who's switched on? Who's not?
Web hosts/ Web users/ PCs/

10,000 people 10,000 people 100 people
Britain 280.75 2576.72 33.78
Finland 1022.53 3722.95 39.61
Israel 287.52 1754.70 25.36
India 0.35 49.39 0.45
Singapore 437.56 2986.78 48.31
Taiwan 492.30 2812.60 22.46
us 2928.32 3465.78 58.52
Germany 248.30 2920.57 33.64

Sweden 670.79 4558.29 50.67
Russia 22.22 210.98 4.29
Malaysia 29.33 1590.03 9.45
Hong Kong 336.90 3358.98 34.72
Japan 365.66 3709.45 31.52
These figures for technology and internet penetration in 2000 show a huge gap between
some countries
Source: International Telecommunicat,ons Union
oped its conomy at an unusually rapid pace only to disco er a it has

tried to re-ste r its If towards ntrepreneurial high-tech that people ar
too comfortable and risk-avers . Israel and Taiwan have only r cently
made the jump into the world's ·wealthiest economies, but both have
developed their technology sectors in the shadow of ·war and regional
political uncertainty. Israel has been on a war footing since its establish-
ment in 1948 and Taiwan has faced the threat of a mainland invasion
during it half-century existence. But importantly, neither country h;!s
had s ver internal political dislo ations. India is an extremely poor and
undeveloped e onomy, but its population is massive enough to contain
a large educated and aspiring middle class in absolute terms, even if it
con titutes a tiny percentage of the population.
Like any cultural export, Silicon Valley undergoes a transformation as it

i adopted outside its Ameri an homeland. Local rules, work patterns
and cultural imperative are grafted onto the original product. ome of
these changes are no more than concessions to the limitations of the
◄ Library 1111 cloning silicon valley ■.
1 TECHNOLOGY CLUSTERS· NETWORK ARCHITECTURE 7
local environment. No ountry can provide its technology sector with

the same big, \vealthy and unitary dom'estic market for te hnology as
America. 10 society can perfectly mimic th interpersonal relations, the
attitudes towards work, enterprise and inno-
No country can provide its
vation, or the exact mix or scale of talent
technology sector with the
that exists in California. E en the most
same big, wealthy and unitary
domestic market for
enthusiastic technophile governments
technology as America. haven't put into place laws, regulations or a
tax regime that allows for a wholesale copy-
ing of Silicon Valley practice. Some of the adaptations other countries
have made to the Sili on Valley model will no doubt be so successful
that th y will he adopted by others. More than a fev-.·will prove to be
handicaps, perhaps even fatal handicaps.
GEOGRAPHY: PROXIMATE CAUSES
California's Silicon Valley is a relatively compact area. Th distance

between Marin aunty on the northern extreme and San Jose in the
south is about a two-hour drive, which is the proverbial amount of
time the area's venture capitalists are prepared to spend travelling to a
portfolio company or an investment partner. San Francisco, even
though it's the major urban centre of the region's old economy, has no
particularly significant role as a financial centre or source for profes-
sional services. Reing at the northern end of the Valley, it's not central
enough. 'In ilicon Valley for a long time people said they wouldn't
invest in anything they couldn't drive to - many till don't. For some-
thing to explode entrepreneurially, you have to have a community, a
geographically compact entity. It's not going to happen unless you
have the tom-tom network,' says Israeli venture capital fund manager
Jon Medved, who grew up and began his career in ,alifornia. 'The tribe
gathers at conferences, shows and parties. You go to a conferenc and
you see ev ryone there. That's extremely important in creating an
entrepreneurial community.' 4 Some of that travel-wariness ha di ap-
peared in the past few years as the competitive pressures have driven
. ilicon Valley's venture capital funds to look for opportunities in other
parts of the U and the world. Hut when they travel to Europe or Asia,
they make no pretences of trying to operate in those environments by
remote control; the funds typically set up lo.cal offices and hire local
managers to source deal and build networks.
The greater Tel Aviv area in Israel as well , Hel inl-:i and it uburbs come
close to following the Silicon Valley model of compactness. The companies,
the inve tors, the subcontractors, the univer iti and the professional ·erv-
ices are all an easy dri e apa,t from each other. However, many of the Israeli
industry's leading companies have their headquarters, if not their legal
domicile, in the U . Many 'I raeli' companie are in fact doing only R&D in
Israel. Cambridge comes close to the Valley ideal, too, except in one impor-
tant respect; venture capital and legal and accounting services usually have
to be obtained in London, which is close by but is a global financial and
business centre. London has its own t chnology companies, and its nture
capital funds, investment banks and professional advisers serve the country
as well as Europe. ambridge companies have to ompete for the time and
attention of fund managers, and the intimacy of a Silicon alley-type net-
work doesn't exist. Bangalore is home to a vast software indu try, but the
venture capital funds, attorneys and accountants ar le s likely to b around
the corner than in umbai (Bombay) where th y are servicing local clients
a well as other clusters in place lik Hyderabad.
Taipci-Hsinchu, the two anchors of Taiwan's technology dust r, contain

all the clements of a ilicon Valley but built around a core of strong man-
ufacturing abilities rather than R&D prowes . A tight network exists
between manufacturers, subcontractors and financiers, but the most crit-
ical partner hips are with over ea companie , principally from the US,
that arc suppl ing the. IP, the orders and the branding. Moreover, with
manufacturing cost rising, Taiwan is seeking to widen the scope of its
cluster to include mainland hina. 'Taiwan's indu try may move it
manufacturing plants to utilize the mainland's lower labour costs but the
R&D and financial functions will stay in Taiwan. It will remain the head-
quarter , ' say Tzu-Hwa Hsu, Taipei-based
What Singapore's small
managing dir ctor for Walden International
domestic pool of
lnve tment roup. 5
entrepreneurs and engineers
can't provide is being Then there is Singapore, a country that is so
imported wholesale from the small that it has little choice but to find ways
US, India, Malaysia, China or to expand its cluster beyond it very limited
anywhere else that can
border . It gov rnment-1 ct te hnology drive
provide it.
has sought to make the city-state the finan-
cial and intellectual nerve centre for an A ian mega-Valley, linked by
broadband networks and air connections. What Singapore's small domes-
ti pool of entrepreneurs and engine r an't provide is being imported
wholesale from the US, India, Malaysia, China or an 1'1vhcre else that can
1 TECHNOLOGY CLUSTERS: NETWORK ARCHITECTURE 9
provide it. All si clusters have had to amend California's tiNo-hour-drive

rule becaus they don't have the depth of human and capital resource the
original ilicon Valley has at its command and in all likelihood never will.
But , ingapore i going the furthest in testing the rule's absolute value by
trying to build the element of a luster over a huge region.
COMPANIES: LEARNING TO RELAX
ilicon Valley firms are characterized by flat, non-hierarchical manage-

ment structures, an informality manifested by T-shirts instead of suit in
the office and a porous division bet,veen work and leisure activities.
Work is organized by team rather than through hains of commands.
Employee loyalty is bought through stock options rather than by the
promise of a steady career path or through fealty to the firm or its values.
It's a style that certainly works for younger tech companies that needn't
develop strong lines of authorit as long as they don't become too big
and spread-out. Indeed, it isn't unusual for companies in Silicon Valley
and other technology clusters to spin off operations into separate busi-
ne ses to prevent the parent from growing too big, thereby keeping the
structures and employee-incentives of a start-up. Alternatively, big com-
panies have formed corporate venture capital funds to tap into the
universe of start-ups and their information-sharing networks. In Finland
and Israel, the ilicon Valley etho fits snugly into indigenous manage-
ment t, le but it doesn't come naturally to most of the technology
clusters surveyed in this book. In nritain, India, Singapore and Tai\van it
has meant jettisoning customary ways of working.
lex van Someren typifie , perhap a little in the extreme, the casual
business culture that goes hand-in-hand with high-tech culture. His busi-
ness card identifies him as president and chief executive officer of
n ipher Corp, a ambridge computer encryption company, but he
sports a pony-tail and can be found dressed in a T- hirt emblazoned with
the logo of the US National Security oun il, the company's arch-enemy
for its efforts to rein in advanced encryption technology. His brother and
chi f te hnology offi er, ico, is wan lcring the offices in shorts and bare
feet. Van Som ren recounts ·with glee his battle with the board over
buying an expensive espresso-maker for the staff. 'In the Valley it's
common to offer people free sodas and snacks. ExciteC~ 1Home has slides
between floors which i kind of a programmer-fun thmg, designed to
make it more appealing. We're consciously trying to adopt the relaxed
office environment that exist in the alley. We're doing this to ensure
we can hire people who might otherwise go there,' Alex van omeren
explains. 6 But behind his self-proclaimed hippie demeanour is a busines
executive as hard-driving as any in the Old Economy. Van Someren is
quick to admit his style was influenced by his unusual family back-
ground - born in America, father a high-tech entrepreneur - and that he
doesn 1t look and a t like the typical ambridge high-te h entrepreneur.
t Financial Times dinners he dons a suit to fit in.
Another aspect of Silicon Valley corporate tyle that has been adapted
with understandable gusto by its imitators is the notion of dis-integra-
tion, meaning the segmenting of various operations between
companie horizontally and vertically. Horizontal disintegration
enable firms to hone in on a pecifi and often tiny pe ialization
within their industry where they can e tabli h a deep technological
and market expertise. The corollary is that they therefore need to strike
up strategic marketing and technology partnerships so that their tiny
but elegant piece fits into a puzzle the end-user an make use of. The
vertical side of dis-integration is for the company to fo us on one seg-
ment of the bu iness chain, almost always research and development,
and wherever possible assign other functions to allied compani s.
Outside Silicon Valley, the model of dis-integration has helped technol-
ogy clusters overcome handicaps like unfavourable laws, a limited
labour p ol or poor knowledge of distant markets. With an ossified and
tate-dominated industrial se tor, for instance, India's high-tech efforts
ha e gravitated to the irtual world of software. Even though there are
crowds of low-wage workers, Bangalore companic shun manufacturing
and in tead empl y banks of people writing code. Taiwan, at the other
extreme, acknowledges the limitations of its IP capabilities and has
become the workshop of the high-tech world, turning out integrated
circuit , P s and a host of other products. In the middle arc clusters
lik lsrael, Finland and Britain who e c mpanies are building on their
IP but spinning out marketing, manufa turing and e en some develop-
ment to firms elsewhere in the world.
VENTURE CAPITAL: MAKING DO WITH LESS
The second most popular image of ilicon Valley after long-haired 20-
year-olds hacking awa at their computers is the moneyed venture
capitalist paying the bills and reaping the rewards. This isn't far from the
truth ince together with inno ation, ipvestment is the other engine
that makes high-technology go as companies are starting up and going
through their early growth phases. Angel investors - private individuals
inside and outside the high-tech industry tumping for new companies -
can provide only a limited supply of ca h or management attention.
Banks an't manage their lending portfolios by taking on lots of risky
loans to young companies with little if any revenues and hope that a few
produce windfalls. Even the most technology-friendly stock markets
won't look at young, loss-making companies. But, done properl,, ven-
ture capital provid s th right mix of cash and ~trategi management
that fledgling technology companies need.
In Ameri a the irnportan e of venture capital can't he underestimated.

More than 70%, or some $97 billion, of world private equity and venture
capital inve tment wa in the US in 1999. About a third of that wa in
high-tech firms and about 15% in seed and early-stage companies. VC
investment accounts for 1.01 % of U gross domestic product, more than
double the worldwide average and more than three times Europe's level.
TABLE 1.3 Where the money is (relatively)
% of GDP % of GDP
North America Asia
us 0.0106 India 0.0008
Canada 0.0028 Israel 0.0099
Europe Singapore 0.0047
UK 0.0088 Taiwan 0.0027
Finland 0.0021 Hong Kong 0.0082
France 0.0021 Japan 0.0002
Germany 0.0016 Korea 00012
Netherlands 0.0046
Sweden 00059 Australia 0.0007
Ireland 0.0011
Switzerland 0.0019
Private equity capital invested in 1999 as a percentage of g'oss domestic product

TABLE 1.4 Taking the lion's share
$ billions $ billions
Australia 0.3 South Korea 0.5
Belgium 0.7 Netherlands 1.8
Britain 12.3 Norway 0.3
Canada 1.8 Singapore 0.4
France 3.0 South Africa 0.4
Germany 3.4 Spain 0.8
Hong Kong 1.3 Sweden 1.4
Israel 1.0 Switzerland 0.5
Italy 1.9 Taiwan 0.9
Japan 0.8 us 97.6

--- -
Countries with highest level of venture capital and private equity investment in dollar
terms in 1999
Source 3, Group, PricewaterhouseCoopers
The \VOrld has acknowledged the plac of V in the high-tech con tellation
but acting on it ha proved harder. The raw figure for global V look impre -
sive, a 65% irJcrease in 1999 to $136 billion, 33% of which was put into
technology companies and 16% in seed and start-ups, which is about the
ame proportions as in the US. But when you subtract America's share, tech-
nology venture capital falls to a mere $12 billion worldwide and seed-stage
investing to just $7 billion. V as a percentage of the total economy is
smaller everywhere compared to the US ( ee Table 1.3 and 1.4). All of the six
countries surveyed in this book have V industries that go back a decade or
more, but only recently have they been inve ting in young technology com-
panie in a big way. In Britain and Singapore they were doing mostly
buy-outs and later-stage financing of Old Economy businesses. \. hen the
internet explosion occurred in the late 1990s most of the world's VC indu try
wasn't ready with either the experience or tate of mind needed to identify
good technology and management teams and propel companies forward
with the activist management style that tart-up require. Among the world's
technology cluster only Israel and Taiwan ramped up V industries from vir-
tually nothing to giant proportions on a per capita basis and put V , to work
funding start-up cornpanie . I raeli V inve ted 97% of their monC) in tech-
in start-up and early- tage concerns. 7
nology in 1999, with 5 ?<}·h
Venture capital funds based in technology clusters outside the US operate in

a far more problematic environment thah their American peers. They arc
actors on a far smaller stage so the flow of investment offers coming their
way is constrained and their ability to forge
Venture capital funds
investment syndicates and strategic alliances
based in technology clusters
within their clusters is much more limited. The
outside the US operate in a
pool of experienced managers to staff portfolio
far more problematic
environment than their companies and the funds themselves is con-
American peers. tricted, even more so in the case of managers
with broad international experience. The
amount of capital they can raise is limited, which further restricts their activ-
ities since a small fund can't hire enough partners and professionals to
oversee its companies closely. Yet non-U technology companies are going to
need a lot more cash than their American ounterparts because without a big
domestic market at their doorstep they have no option but to embark on a
global product rollout early in their development. A Singapore, Finnish or
Israeli company might use its domestic market at most for beta site testing or
a limited test market, but when the commercial launch comes this will have
to be in the far bigger and more distant markets of America, Europe or Asia.
In pite of their handicaps, local VC funds play a critical role in their

home technology clusters because they know the local indu try and
player so well. Bigger, better-financed foreign funds can't equal that
without establishing a substantial local presence. Heikki Westerlund,
partner in Helsinki's CapMan Capital Management, says that a foreign
venture capitalist typically won't touch a Finnish company. Even if it has
good technology, the managerial weaknesses and insularity of Finnish
tart-up are likely to lead to a thumb -down. 'But we're able to take that
risk due to our market knowledge in the local situation. Okay, the man-
agement isn't capable of doing the whole path and we have to
strengthen it. But we can hire a new managing director or marketing
director,' says Westerlund. 8 When the company has reached the stage
that its cash requirements and strategic needs are beyond the capabilities;
of local VCs, foreigners can be brought in through syndicates.
STOCK MARKETS: SONS OF NASDAQ
The one great Silicon Vc11leyinstitution not present in the region itself is
the Nasdaq Stock Market. 1 ot long after its creation in 1971 as; a market
for sm,111-capitalization stocks, the '\asdaq also· became the home of tech
companies. a daq i a critical factor in the ilicon Valley equation

because it offers early-stage investors, entrepreneurs and employees a
clear path to realize the value of the investment they have made in
money, time and labour. 'Because you now have a recognition of value,
you have a much more active [venture capital] market. You can confi-
dently pay the valuation that will give the entrepreneurs the rewards
they arc looking for,' says Antony Ros , the Cambridge office director of
the venture capital concern 3i9 .
There are two critical elements to the asdaq phenomenon, one that
has proved ea y for other stock markets around the world to imitate,
and one far more tricky. The first is that asdaq offers companies
easier listing requirements than conventional stock exchanges, such as
lower barriers on capitalization and profitability. All this is tailor-made
to the Sili on Valley culture of start-ups and fa t-moving but capital-
hungry business-development plans. The second and more difficult
element is the cowboy culture of investing in high-growth companies
practised by private and institutional investors on exchanges like
Nasdaq. lnve tor accept bigger ri k in technology shares in compari-
son with older, more established listed firms, but in return the
companies are supposed to deliver much higher growth in revenues
and profits. It's a system that's served Silicon Valley well even if the
internet frenzy of 1999 abused it.
A global industry of asdaq imitators in Europe and Asia took off in

the mid-1990s with infant exchanges taking on names with ' ... daq' or
'new' with the same in istence that technology clusters call themselves
ilicon This or yber-That. In Europe, London counts two growth mar-
kets, the Alternative Investment Market ( IM) and techMARK; Paris has
the Nouveau Marchc; Frankfurt the euer Markt; Brussels the pan-
European Easdaq and Euro M; Amsterdam offer the MAX; and
Switzerland the WX New Market. In Asia, Hong Kong has set up the
Growth Enterprise Market (GEM), Singapore the Sesdaq, Malaysia the
Mesdaq, and Japan has Mother (Market of The High- rowth and
Emerging Stocks). Israel, India and Taiwan haven't gone out of their
way to create separate homes for small-cap, high-growth tech compa-
nies but that is bccau e their main boards tend to be amenable to
technology companies to begin with. In Israel's case, companies have
few hesitations about listing abroad. Ronald Cohen, executive chair-
man of London-ba ed Apax Partners, goes as far a to contend that a
local growth stock market i the hor e that pulls the technology cart
1 TECHNOLOGY CLUSTERS: NETWORK ARCHITECTURE 1S
rather than innovation or venture capital. 'The reason why you're

eeing the development of companies now [in Europe] i due to the
creation of Easdaq and other markets. It's created a pump - although
not yet a great pump - that is pulling money through,' he says. 10
A the spate of ne\'\r grmvth markets te tifies, pulling down the barriers to
technology listings and recruiting companies for initial public offerings
are the easy parts. The problem for asdaq imitators is building a big
enough population of domestic in estors to trade tech share at all. With
the exception of London (a major world
Europe still lacks a broad market where foreign investors have been his-
enough base of investors to
torically big players) and Taiwan, the
power these markets, as does
European and Asian grm-vth markets haven't
most of Asia. ,
been able to generate the kind of liquidity
and only rarely the kind of ompany valuations seen in America. At the
end of 2000, more than 900 companies with a combined market capital-
ization of $1 trillion traded on Europe's six grmvth markets, an impressive
rate of growth considering the sector tarted from nil five years earlier. But
compare that with the as<laq, whose market cap is $6 trillion and counts
some 5,000 companies. Europ still lacks a broad enough base of investors
to povver these markets, as does most of Asia. The fact that all these mar-
kets operate independently with their own rules and in local currencies
only exacerbates the problem by di couraging cros -border trading.
UNIVERSITIES: FOUNTS OF IP?
o elf-respecting high-tech cluster can be seen \vithout a univ rsity and

at least a few government research centres in its midst. The role of
Stanford in Silicon Valley and the Massachusett Institute of Technology
( 11T) in Route 128 has seemed the status of the university as generator
of path-breaking IP that companie can't match becau e of their short
market-driven horizon . In an oft-quoted tudy, the US inve tment bank
nankfioston e timate<l that the r venues produced b, companies
founded by MIT graduates and faculty would together make the world'
2-lth-large,;t economy. A central character in the ilicon Valley creation
myth is rrcderick Terman, a Stanford professor, for his role in convincing
graduate students William Hewlett and Da\id Packard not to go back
east to join an C'italJlishcd company but to start up one of their own. In
fact, Stanford ha not only pro<luLcd graclt1ates to found and staff
regional companie , it has provided continuing education, developed a

research park, aggressively licensed its IP and grants faculty time to
consult and perform other functions in the corporate ,vorld. The region's
other, !es prestigious universities turn out engineers that fill out the pay-
rolls of Silicon Valley firms.
Nevertheless, the university' role a the brain of the technology cluster

has been over-emphasized. Most tech companies are not developing
fundamental IP but applying generic or existing technology to specific
market applications; the, aren't likely to draw heavily on fundamental
research or hire the most highly-qualified PhDs, if they need PhDs at all.
Biotechnology may have these requirements, but companies in software
and telecommunications can often bring an idea from seed to commer-
cial germination ,vithin as little as a few months. Of the six technology
clusters surveyed in this book, only Cambridge has given such pride of
place to its university. As a technology cluster Cambridge tends to gener-
ate the most cerebral kind of start-ups with a heavy emphasis on original
IP, but even in Cambridge the proportion of company founders with an
affiliation to the university or a local research institute has been falling.
In Finland, the universities similarly play a major role in providing IP for
tart-ups. Else,•:here the links between chip and gmvn are weaker. In
Israel the army is a much more robust breeding ground for talent and
ideas. Indian universities are remote from the world of business, and in
Singapore and Taiwan academic researchers are rarely at the cutting edge
of fundamental research.
Traditionally there's been a Chinese Wall between academic science

and commercial research and development. In the US this has fallen
faster than elsewhere, thank in part to the 1980 Bayh-Dole Act, which
opened a floodgate of facult 1 patents and industry-funding of aca-
demic research over the following decade. Universities in all six
technology clusters surveyed have programme to pluck innovative
ideas out of their labs and put them into the hands of entrepreneurs.
In Finland graduate students in relevant subjects complete their theses
in co-ordination with a company, creating an unu ually bri k back-
and-forth flow of ideas and information. But nowhere is it pursued
with the same drive and organization as in America. Meanwhile, rules
governing IP pre ent further obstacles. The laws in the US are clearly
spelled out but in the UK the situation is less transparent and in
Vinland it is chaotic. In Singapore and Taiwan rules have only recently
been changed to facilitate IP pin-outs.
1 TECHNOLOGY CLUSTERS. NETWORK ARCHITECTURE 17
Yet despite these institutional problems, the failure of foreign universities

to act on the same scale as their American peers is at heart cultural. All the
licensing offices and generous IP rules can't overcome indifference by fac-
ulty to commercial concerns which is mostly the ca e in the six cluster
surveyed in this book. Haim ;\\iv, who founded Biotechnology General in
Israel in 1980 ,Nhile teaching at the Weizmann Institute of S ience, recalls
the hostility. 'My colleagues thought it was weird. Basic scienti ts didn't
appreciate in those days any decent scientist getting involved in applied
1
research. If I didn t have tenure I wouldn't have done it. lt would have
been suicidal. Even if you started in applied research your chance of pro-
motion plummeted,' he say . 'The stature of applied research i getting
better. Basic is more pre tigiou but you don't have to hide in hame if you
do applied re earch. The respect has increa ed both in Israel and the
·world, and the US led the way. First there's a large amount of good
research being done at companies, like gene chips, combinatorial chem-
istry - they were all developed in companies. In the past it was one
direction: academia developed and companies applied.' 11
GOVERNMENT: REDUCING RISK
The state can give and the state can take away, but the conventional
wisdom in California's Silicon Valley is that the state does best when it
does little of either. High-technology, goes the argument, is too inde-
pendent-minded to become ensnared in rules and regulations and too
dynamic to benefit much from incentives dangled by plodding bureau-
crat . Advocates of free enterprise will point to the cuts in the capital
gain tax the U implemented two decades ago and the more favourable
tax treatment of stock optiom as the federal government's greatest con-
tribution to high-tech. Nevertheless, even in America, where the
anti-government view is propounded most passionately, government
was a major factor in the growth and de\. elopment of Silicon Valley.
Military spending funded a generation of microwave-technology compa-
nies that were a mainstay of the region before the semiconductor
indu try came to the fore. 12 rhe US Small Business Administration (SB.\)
played an important role in the 1960s by making equity and long-term
debt available to small and medium-sized business through its mall
Business Investment Companies (SBJC) programme.
Of the six technolog) clusters tm·eyed in this book, only in Britain and
India has the industry de\·eloped \\ ithout cop_siderable state interven-
tion. At the other extreme ingapore's government has taken the lead in
seeding the elements that officials believe are needed to create a luster -
from venture capital to a thorough overhaul of the educational system
aimed at making Singaporean more creative. Most governments take a
le s-activi t tance but they do provide
, Venture capital has research and development subsidies and,
shown a pronounced ability
perhaps most successfully, create incentives
to begin growing as a fully
to put muscle onto an emerging private
private sector industry
sector venture capital industry. enture capi-
with just a brief application
of hormones in the form of
tal has shown a pronounced ability to begin
capital injections from growing as a fully private sector industry
state coffers. with just a brief application of hormone in
the form of capital injc tions from state of-
fers. In Taiwan, the state did all that plus it assembled the land and built
the Hsinchu Science Park, thereby putting all the inputs of a technology
cluster into one place in short order. Similarly, offi ials have spearh ad ct
the private sector's technology-transfer efforts. 'If you look at the s ond
Silicon Valleys in the world, if you're going to name the factor in
common it's the government. You can't have business moving all in the
same direction unless the government leads it,' says Tawei un, a vi c-
prcsidcnt at China D velopmcnt Bank. 'Herc in Taiwan, the Hsin hu
cience Park wa the nucleus. It was built for the emiconductor indus-
try. It started with P omponents and th n went on to P s. The
omponcnts were mostly semi ondu tor omponcnts and if you put dif-
ferent functio·ns together you're building a P _,u
Rather than try to get into the bu ine of technology it elf by forming
companie or investment funds or by picking industries through trade
protection or tax incentives, government helps most when it creates
mechanisms for improving the risk-reward ratio for private entrepre-
neurs. The two main routes arc encouraging pri ate venture capital by
passive co-investing programmes and the like and by reducing the finan-
cial risk of undertaking R&D. It is true that R&D aid smacks of
bureaucrat picking technology winners, but that cumulative effect of
more re ear h and researchers generated b the aid seems to offset the
waste from a fev,1 state-aided duds. finally, the governm nt has to know
when the time ha come to stop. ontinuing with programmes that
have already et the wheel of the private sc tor in motion eventually
causes more harm than good by distorting market incentives.
The influence of high taxe and h •avy-handcd regulation is not a,; detri-
mental to technology as fr e-m:uket advocate claim. David Wilkin on,
who heads the enterprise s rvices unit at Ernst & Young, doubt~ after his
12 y ars advising tart-up companies that most entrepreneurs arc moti-

vat d by low tax rates. 'People ah·\lays point to it because it's so tangible,
but it' not what people think about when they start a business,' he says.1-t
Certainly in the early stages of development and assuming that the other
catalysts are there, anything less than a perverse system of disincentives or
particularly onerous rates won't discourage the first stages of entrepreneur-
ial activity in the high-tech sector. It's only after a regional technology
cluster mature and goes global, as it has to if it is succeeding, that taxes
and poor business regulations can begin wearing away at the attractions of
tarting up compani s locally and keeping them local. That has been the
experience in Israel, where rates are high and the rules poorly designed.
Throughout mo t of the 1990s this did little to discourage an explosion of
start-up companies. Rut as the decade came to a close the atmosphere
changed: companies have thrived and penetrated overseas market , serial
entrepreneur arc onto their econd and third companies, first-time entre-
preneur can learn the rap quickly and easily, and for ign investors have
poured into the country. The naive engineer of 1993 or 1994 who set up
his company without a thought to tax implications has been replaced by a
global entrepreneur backed by a team of venture capitalists, lawyers and
accountants who know the relative advantages of being in the US versus
lsrael and act accordingly. The company incorporates in Delaware and the
EO moves his family to unnyvale.
NOTES
Saxenian, Anna Lee ( 1994) Regiowzl Adva11tc1sc: Culture and Co111petitio11

i11
Silirn11 \'alley n11dRoute 128, Harvard University Pres~.
2 Intcr\'iew with Shlomo Kalish, managing partner, Jerusalem 1lobal Ventures,

3 April 2000.
3 www.tbtf.com/siliconia.html; 'Venture capitals,' Wired magazine, July 2000,

www.wired.com/wired/archive.
-t Interview with Jon Medved, partner, Israel Seed Partners, 23 March 2000.
5 Interview with Tzu-Hwa Hsu, managing director, Walden International

Investment Group, 12 December 2000.
6 lnter\'iew with Alex \'an Someren, chief executi\'c officer, n iphcr, 12June
2000.
7 G/o/1a/ J>ril'at<'EcJ11it)'
2000, Pricl'waterhow,eCoopL'rs, October 2000.
8 lnter\'iew with Heih.ki Westerlund, partner. CapMan Capital Management,

26 Jum· 2000.
9 Interview with Antony Ros , director, 3i Group ambridge, 28 April 2000.

10 Interview with Ronald Cohen, executive chairman, Apax Partners, 25 April
2000.
11 Interview with Haim Aviv, chief executive officer, Pharmos Ltd., 10 April
2000.
12 'Th Bigg st "Ang I" of Them All: The Military and the Making of Silicon
Valley,' tuart W. Leslie in U11derstmufi11g
Silico11Falley: Tlie Anatmnr of m1
E11trepre11e11rial
Regio11,Stanford University Press, 2000.
13 Interview with Tawei Sun, vice-president, technology department, China
Development Bank, 11 December.
14 Interview with David Wilkinson, partner, [rnst & Young, 12 June 2000.
CLUSTER CULTURE:
innovation and entrepreneurship
INNOVATION AND ENTREPRENEURIALISM ARE THE PARENTS of Silicon Valley.

One is responsible for the traits that yield the new technology develop-
ments that arc the life and blood of companies; the other contributes the
drive and ability to take that technology and put it into the marketplace.
Roth qualities have come to the fore in Silicon Valley and its imitators in
response to the information technology revolution that started with
computers, continued with telecommunications and culminated in the
convergence of the two with packet-switched networks. The revolution
created new opportunities for start-up companies to take a share of a
market that had once been dominated by a few huge multinational com-
panies. Thirty years ago the capacity to design and produce telephone
switching equipment was the province of a handful of companies world-
wide; today an entrepreneur with an original idea and a few million
dollars can aspire to play in the same market. If he doesn't succeed, the
logic of a marketplace that values IP above all says he stands a good
chance of being bought out by one of the bigger players.
The opportunity is there, but only a fe'w societies ha\ e responded to it.
As the ix technology clusters profiled in this book show, the ones that
have arc not always the obvious candidates among the countries of the
developed world (sec, for instance, Tables 2.1 and 2.2). l he qualities of
innovation and entrcprcncurialism arc diffiet.il.t enough to define; their
origins in societal attitudes and institutions are e\-en more difficult to
trace. In the final analysis, hmvever, th y ar the foundatiom of a le h-

nology cluster. Physical infrastructure, skilled labour, and a friendly tax
and re ulatory regime arc all catalysts but they are not the substance.
INNOVATION: THE MUSE OF INCREMENTS
The myth of ilicon Valley is of companies developing paradigm-breaking

technology and conquering the \Vorld with it. Paradigm shifts do occur,
but the great majority of what goes on in Sili on Valley or any other tech-
nology cluster is the aftermath. Knowledge-intensi e busines es arc driven
by th ir ability continually to develop innovative products that work
b tter and more efficiently. The pace of product evolution is rapid and has
to be for the sake of the ompanies themselves: a technology who c fur-
ther development is slow or stagnant -
The myth of Silicon Valley
perpetually in version 1.0 - eventually
is of companies developing
becomes the territory of conventional indus-
paradigm-breaking
try \'\1hcre co t is the dominant competitive
technology and conquering
the world with it.
factor. But companies do not have to develop
new paradigms; much of it is the kind of
plodding work of incremental improvements on an existing technology,
solving problems or finding a better way of manufacturing it. The high-
te h envirOJH}1ent is not one of two teams of engineers single-handedly
plotting the next revolution but of many engineers and en trcpreneurs
around the world independently identifying the same opportunitic and
looking for hmv to exploit them -.,vithimprovements on the existing stock
of IP. That is why the biggest challenge for the entrepreneur is time-to-
market, says Nir Barkat, managing director of the Israeli internet venture
capital fund BRM Technologies. 'People usually think about great ideas
simultaneously throughout the world. There are bright people all over the
world. We believe the challenge for an entrepreneur is how to establish
himself in a new category that's been created due to paradigm hifts. If
that is the goal, vvhat you have to do is provide him with the resources to
increase his chances of success.' 1 If the high-tech race doesn't ahvay go to
the swift over the smart, it ertainly gives them the advantage.
This more modest conception of innovation and creativity as it relates to

the high-tech industry goes a long w.iy to explaining the low correlation
between the su cess of a cluster and wh.it are onventionally thought to be
the foundation. of innovation. Of the six technology clusters surveyed in
this book, only Britain and Israel and possibly Finland have a real track
2 CLUSTER CULTURE. INNOVATION AND ENTREPRENEURSHIP 23
TABLE 2.1 Miles apart in the information revolution
Rank Rank
Sweden 29 Hungary
2 Norway 30 Poland
3 Finland 31 Argentina
4 us 32 Malaysia
5 Denmark 33 Chile
6 United Kingdom 34 Bulgaria
7 Switzerland 35 Romania
8 Australia 36 Costa Rica
9 Singapore 37 Panama
10 Netherlands 38 South Africa
11 Japan 39 Venezuela
12 Canada 40 Russia
13 Germany 41 Turkey
14 Austria 42 Mexico
15 Hong Kong 43 Ecuador
16 New Zealand 44 Saudi Arabia
17 Belgium 45 Brazil
18 Taiwan 46 Colombia
19 Korea 47 Thailand
20 Ireland 48 Philippines
21 France 49 Peru
22 Israel 50 Jordan
23 Italy 51 Egypt
24 Spam 52 China
25 Portugal 53 Indonesia
26 Greece 54 India
27 Czech Rep 55 Pakistan
28 UAE
2001 !DC/World Times Information Society Index weighs 23 va•1ables that measure a
country's partIc1pat1on in the nformat1on revolution, among them PCs installed per capita,
business internet users and telephone 11.,eerror rates Rank,.,g Is based on year 2000
figures
Source roe
TABLE 2.2 The innovators
Economic Technology Start-up

creativity index index
us 2.02 2.02 2.02

Finland 1 73 2.02 1 43
Singapore 1.63 1.95 1.31
Luxembourg 1.44 1.37 1.51
Sweden 1.36 1.52 1.21
Israel 1.35 1.55 1.15
Ireland 1.31 1.74 0.87
Ne herlands 1.26 1.20 1.32
Britain 1.22 1.08 1 36
Iceland 1.16 0.80 1.51
Switzerland 1.11 1.62 0.60
Hong Kong 1.10 0.58 1.63
Denmark 1.07 1.25 0.88
Germany 1.04 1.66 0.41
Canada 0.99 1.21 0.77
Australia 0.97 0.91 1.04
Taiwan 0.97 0.90 1.04
Belgium 0.95 1.00 0.90
Norway 0.80 0.61 0.98
Japan 0.69 1.59 -0.21
Hungary 0.66 1.06 0.27
New Zealand 0.64 0.73 0.56
Malaysia 0.59 1.08 0.11
France 0.59 1.36 -0.18
Poland 0.56 1.14 -0.01
South Africa 0.51 0.52 0.50
South Korea 0.50 0.82 0.19
Austria 0.45 0.99 -0.08
Turkey 0.44 0.65 0.23
Spain 0.28 0.54 0.02
Brazil 0.20 0.99 -0.59
Portugal 0.13 0.45 -0.19
Chile 0.11 0.36 --0.15
Egypt 0.04 0.24 --0.17
Mexico 0.03 1.29 -1.23
Philippines 0.03 0.54 -0.48
Greece -0.01 -0.04 0 02
India -0.03 0.32 -0.38
Italy -0.07 0.25 -0.39
Thailand -0.11 -0.07 -0 15
Czech Republic --0.15 0.38 -069
S ovakia -0.29 -0.08 -0.50
Indonesia -0.32 -0.66 0.02
-- --- - ---
The World Econom c Forum economic creativity index (2000) 1sa component of the
Global Competitiveness Report and measures effective innovation and transfer of
technology. This is a condensed list of countries
Source World Economic Foru,.,.

2 CLUSTER CULTURE, INNOVATION AND ENTREPRENEURSHIP 25
record of innovation. India has built its industry on writing software code
rather than conceiving and designing new software. Taiwan is an industrial
centre that has brought the business of turning out integrated circuits and
other advanced products to a science and come to dominate many areas of
high-tech. But Taiwan's role has been to improve the design and manufac-
turing process - something that is unquestionably knowledge-intensive but
doesn't involve creating wholly new JP. Singapore's strength ha been in
opening its economy to outsiders and creating an environment for a knowl-
edge-intensive industry so that its achievements to date reflect as much, if
not more so, the talents and abilities of foreigners as Singaporeans.
The question facing policy-makers worried about steering their economies

into the information era and entrepreneurs worried about filling out their
payrolls with qualified personnel is how to create an environment that will
foster creative and innovative thinking on a broad scale and applied on a
day-to-day working basis. aturally, they hone in on the edu ational system,
and here the debate plits in half. In the US and much of Europe, innovative
ability is conventionally regarded to be in abundance - the problem is rather
in doing a better job providing students with the bread-and-butter learning
of an information society in the form of maths and science education. In
Asia the problem is reversed: chools in the most economically advanced
countries have had an excellent record in tea hing maths and science, but
policy-makers fret they are producing fact-laden robots that can't apply their
knowledge creath·ely. The Asian debate is the more interesting and problem-
atic of the two be ause it is based on the premise that educational
achievement isn't enough - indeed it may be a burden.
The Third International Mathematics and Science Stucly (TlMSS), a widely-

cited comparison of students' maths and science performance at the fourth
and eighth grade levels in 38 countries, puts the dilemma into focus by
showing how slim the correlation is between measurable academic achieve-
ment and a thriving high-tech industry {see Table 2.3). 2 Eighth-grade maths
achievement is dominated by Asia, the top five countries being Singapore,
, outh Korea, Taiwan, Hong Kong and Jnpan with scores rnnging betv..een
604 and 579. A clutch of European countries like Slovakia, Hungary and
Rus ia form the next league with scores of benveen 558 and 520. The US
ranks number 20 with a score of 502. finlcmd scores 520 and England 496,
neither of which is regarded b} the report as significantly different to the
US. lsrael ranks as 28 \\.ith a score of 466. The pattern of Asian dominance is
essentially the same for science nchiewment. I our of the top five countries
are Asian (Tai\van, Singapore, Japan and South Korea), with scores of
549-569. European countries form the next fayer down, with Engl,md
TABLE 2.3 Counting on success
Maths Science
Singapore 604 Taiwan 569

South Korea 587 Singapore 568
Taiwan 585 Hungary 552
Hong Kong 582 Japan 550
Japan 579 South Korea 549
Belgium (Flemish) 558 Netherlands 545
Netherlands 540 Australia 540
Slovakia 534 Czech Republic 539
Hungary 532 England 538
Canada 531 Finland 535
Slovenia 530 Slovakia 535
Russia 526 Belgium (Flemish) 535
Australia 525 Slovenia 533
Finland 520 Canada 533
Czech Republic 520 Hong Kong 530
Malaysia 519 Russia 529
Bulgaria 511 Bulgaria 518
Latvia (Latvian) 505 us 515
us 502 ew Zealand 510
England 496 Latvia (Latvian) 503
New Zealand 491 Italy 493
L"thuania 482 Malaysia 492
Italy 479 Lithuania 488
Cyprus 476 Thailand 482
Romania 472 Romania 472
Moldova 469 Israel 468
Thailand 467 Cyprus 460
Israel 466 Moldova 459
Tunisia 448 Macedonia 458
Macedonia 447 Jordan 450
Turkey 429 Iran 448
Jordan 428 Indonesia 435
Iran 422 Turkey 433
Indonesia 403 Tunisia 430
Chile 392 Chile 420
Philippines 345 Philippines 345
Morocco 337 Morocco 323
South Africa 275 South Africa 243
The Third International Mathematics and Science Study (1999) shows the exam
performances of eighth-grade students. Parentheses indicate only one language group in
the country took the exam. Israel sampling was incomplete
Source· Natrona/ Center for Education Stat,st,cs, US Dept. of [ducat,on

ranking ninth (538) and Finland tenth (535). The US is number 18 with a
core of 515 and I rael only number 26 (468). In the bottom ranks of both
surveys are a collection of developing economies, including a fe\v Asian
countries {such as Indonesia and the Philippines).
In Taiwan and especially Singapore the rankings have provided little

ause for cheer. In the view of policy-maker and busines leaders intel-
lectual curiosity and reativity not only aren't being taught but are being
stymied precisely because schools devote so much time to cramming
their students with facts and skills absorbed by rote learning. Singapore
and to a lesser extent Taiwan are therefore making efforts not so much to
reduce the quantity of facts and skills but to add elements of experimen-
tation, elf-teaching and subjects off the usual beaten path to
standardized exams. 'The issue is how you teach the student. We should
pump less, free up more time so the student will have more time to think
and experiment,' says Chong Lit Cheong, managing director of the
Singapore government's ational Science and Technology Board. 3
Singapore's reforms are still in the making and it will take years to deter-
mine whether they bear fruit.
The Israeli experience points away from the view that education or the
conventional notions of creativity can create a hothouse high-tech
environment. Instead, Israel has succeeded in creating an environment
for people in their late teens where they
The Israeli experience learn the skills of identifying problems and
points away from the view
working in team to find solutions, a combi-
that education or the
nation of skills that is more relevant to the
conventional notions of
needs of high-tech industry than raw knowl-
creativity can create
a hothouse high-tech edge or pure innovation. The mechanism is
environment., the army, more particularly the elite tech-
nology units that develop advanced
hardware and software for the air force and intelligence. Veterans of
these unit make up a huge proportion of the class of technology entre-
preneurs in Israel. 'What helped us in the army \\'as the knmv-how and
the ability to develop fast, to react fast, to understand the challenge.
What you have in the army is a constant moving target. You always get a
new challenge, a new proje t and you have to act fast - just like a start-
up environment,' explains one I raeli high-tech executive \\.'ho worked
in army intelligence before forming his company. 'These units are staffed
by people out of high s hool without the background of a formal engi-
neering education. Although many arc getti!1_g their degree while they
scf\'e, the principal education they are getting is in the field.'
Apart from education, the ready and ea y a ailability of the tool of the
information economy would seem to be another prerequisite for build-
ing the innovative capacity of a technology cluster. Certainly the
wireless focus on Finland's technology cluster is based not only on
1okia's undisputed market dominance but on the high penetration rate
for cellphones among the general population and the early adoption of
advanced wireless servi es. An environment like that serv s as a living
laboratory for engineers and helps them to identify the needs and prob-
lems of the end-user. ingapore's drive to wire virtually every household
in the city-state was motivated in part by those goals. The ID , World
Tim s Information Soci ty Index, which measure 23 parameters uch a
PCs per capita, software spending and ev n fax ownership in 55 coun-
tries, put five of the six technology clusters profiled in this book in the
top half. 4 For the year 2000, Finland rank third, Britain sixth, ingapore
ninth, Taiwan 18th and Israel 22nd. Some conventional indu trial
powers like France, Italy and outh Korea are relatively low on the li t o
that the correlation isn't entirely tied to economi development. On the
other hand, India is sitting in the basement ranking 54 behind Indonesia
and ahead of just Pakistan. Tile tiny elite that works in Indian high-tech,
in fact, has access to all the goods of an information society but, even if
it didn't, the nature of Indian high-tech doesn't demand it. India's clus-
ter is narrowly focused on software service for other companies rather
than for end-users. either Indian companies nor their engineers need
the direct inpnt of the market.
ENTREPRENEURSHIP: OPPORTUNITY KNOCKS
Entrepreneurial dri e is the natural complement to innovative ability in

the development of high-technology clusters. But entrepreneurship also
shares the ame amorphou qualities as innovation. ls it a cultural phe-
nomenon or pportunistic? an it be taught? Can gov rnment
encourage it with lower taxes and less regulation? rree market ideologues
assume that all human beings are naturally entrepreneurial. They con-
tend that given the right conditions - at the least a secure and table
environment free of excessive government interference - people will
form businesses. In the broadest sens that is true. People will form trad-
ing and small-scale manufacturing busine se in all but the most
horrendou conditions. But those kind of busine es have low barriers to
entry, few skill requirem nts and operate in relatively static environ-
ments. They depend on learning relatively simple and tested bu ine-;s
TABLE 2.4 Going it alone
% %
Argentina 7.8 Ireland 1.2
Australia 11.1 Israel 4.2
Belgium 2.4 Italy 5.7
Brazil 12.3 Japan 1.3
Britain 5.2 South Korea 14.3
Canada 7.9 Norway 7.9
Denmark 4.5 Singapore 2.1
Finland 3.9 Spain 4.5
France 2.2 Sweden 4.0
Germany 4.7 us 12.7
India 6.3
Global Entrepreneurial Monitor survey of entrepreneurial activity prevalence rates (2000)

measures the percentage of adults either starting a new business or considering starting one
Source; GEM, Kauffman Center for Entrepreneurial Leader5h1p
processes that ar often handed down from one generation to the next.
By contrast, technology demands far more sophisticated knowledge, an
ability to assess dynamic market and foture opportunities, and a critical
attitude towards accepted practices. The difference between opening a
corner grocery tore and starting up a fabless semiconductor company is
not simply a matter of potential market size but is an entirely different
entrepreneurial culture.
The history of the 1990s would suggest that entrepreneurship is a cul-

tural phenomenon but not a deeply cultural one and one that can
change if the opportunities arise. A de ade ago, in all six of the countrie
urveyed in this book, entrepreneurs were at best looked upon as a mar-
ginal phenomenon in the economy and at worst suspected of exploiting
investors, employees and the sy tern generally. But, spurred on by the
ri e of the internet in the econd half of the 1990 , these prejudices
against entrepreneur have given way. The engine for this sudden
change was an exuberant stock market that placed incredibly high valua-
tions on new businesses in the internet arena. With the collap e of
technology share prices in 2000 some of the ~~trepreneurial fervour has
been dissipated but most of it is destined to remain alive. This is because
the engine of the stock market wa pulling behind it a trainload of new

attitudes and institutional structure to aid in forming and developing
start-up companies. The e attitudes and institutions now will run on
their own momentum. Moreover, the telecommunications revolution
led by the internet is a real paradigm hange that ha not yet been bled
of new business opportunities. 'The internet bring with it some huge
opportunities to change the way we do business,' says David
Wilkinson, who advises entrepreneurs in the London office of Ernst &
Young. 'It give entrepreneurs an opportunity to really do something
that an really change markets and therefore create huge value. I think
we've only scratched the surface of what we can do with the internet.
It's caught people's imagination and I think that will continue for some
time. That above all is going to keep the entrepreneurs of this country
and everywhere else on their toes.' 5
everthelcss entrepreneurial activity varies considerably from country to

country as the Global E11trepre11eursllip Monitor (GEM) survey (see Table
2.4) hows. 6 Taken in 2000, the survey of 21 countrie found that the
prevalcn e of entrepreneurial activity (defined as the proportion of
adults in the population tarting a new business or thinking of tarting
one) ranges from 16% for Brazil to 1% for Japan and lrcland. Five of the
ix clusters surveyed in this book are repre ent d, ranging from a high
6.3%>rate for India, followed by 5.291, for Britain, 4.2% for Israel, 3.9%
for rinland and, at the bottom, 2.H 1o for Singapore. The survey relates to
en tire countries, not specifically to the high-tech indu try or to the
regional cluster surveyed in this book. everthcless it gives a broad indi-
cator of the environment inside which the ix du ters operate.
The GEM study certainly found a strong cor-

British society has long relation between the level of entrepr neurial
looked askance at activity and the proportion of the population
entrepreneurs as overly that knew entrepreneurs, respected them and
aggressive and untrustworthy, placed a high value on personal independ-
but that attitude changed ence. But the experience of Britain, whi h in
rapidly with the rise of the
differing degrees is mirrored in all six tech-
internet in the second half of
nology clusters, sugge ts these attitudes arc
the 1990s.
malleable. British society ha long looked
askance at entrepreneur as overly aggre sive
ancl untrustworthy, but that attitude changed rapidly with the ri e of the
internet in the ~econd half of the 1990s. Universities now hold business
plan competition ; company founders arc celebrities and role models;
dedicated social fun tion are held for budding entrepreneurs to meet
2 CLUSTER CULTURE: INNOVATION AND ENTREPRENEURSHIP 31
financiers. In Cambridge the city's bigger companies, such as the con-

tract-design firms, now look to moti\,atc employees by spinning out
companies. 'They would have joined a consulting compan, 25 year ago,
but nmv they want to work for a bu inc s of their 0\\'11 says Peter Hyde, a
1
1
director of The Generics Group, one of ambridge's leading contract-

design firms. 'That is a big change and Cambridge is leading the way.' 7
Much has been made about Silicon Valley supposed indifference to, if
not outright admiration for, failure and bankruptcy. Other societies, so
the reasoning goes, need to ease up a little and look at a shuttered com-
pany as a learning experience for those involved rather than as a black
mark. A better way to characterize the role of failure, however, is to look
at it in terms of the risk-reward ratio facing the budding cntrcprencm
and whether it can be adjusted favourably enough for him or her to
leave lucrative employment and strike out on their own. Ending the
tigma of failure i less important than creating the structure that
reduces the chance of its occurring. This is the gaping hole in many
countries' efforts to cultivate an entrepreneurial class because it involves
creating the institutional infrastructure to facilitate start-ups. For a high-
tech cluster this means access to venture capital, attorneys and
accountants, appropriate office space and a clear route to further growth
or liquidating the founders' investment either by going public or
through acquisition. Together, they form an efficient mechanism for
starting and developing a new enterprise. Bad ideas arc screened out at
the start and an itinerary can be drawn up that will take the company
forward along an established route.
The difference is illustrated by the early histories of two British compa-

nies separated by two decades and the creation of a start-up industry. In
the late 1970s when Britain's Domino Printing Systems was formed on
the basis of IP developed by the contract-design firm Cambridge
onsultants, the founder had to mortgage his house and borrow money
from friends for finance. Twenty years later ..,,vhen Cambridge
Consullanb spun out Camhridge Silicon Radio, the founders simply
called up a number of venture capital funds. 'A queue formed that
wanted to thrm-v money at them. The amount they [the founding part-
ners! had to put in themselves was very, very modest,' say Cambridge
Consultants' Howard Biddle. 'No one had to mortgage his house and
none of them will be poor if the company fails.'ll ambridge Silicon
Radio is still in it5 start-up phase, but the founders face much lower per-
sonal risk and are getting much more expert back-up than their
counterparts clid at Domino. Plunging valuations for high-technology
shares have lowered the reward for start-up entrepreneurs, but this pales
in importance to the risk-reducing machinery in technology clu ters cre-
ated for new tech busine es.
Finally, it would be tempting to join technological innovation and entrepre-

neurial drive with political freedom as three elements working
hand-in-hand to create a broadly dynamic culture of idea . But there isn't
much evidence of that. In its day, the Soviet Union produced new technol-
ogy and employed it where it sought to (mainly in arm ); in the past two
decades hina has loosed an entrepr n urial culture without a similar free-
ing of political or cultural life. Of the six profiled countries, Taiwan was not
democratic or free throughout most of its hi tory, and today freedom of
peech remains constrained in ingapore. Neither country is at the forefront
of technological innovation but they have nevertheles been building high-
tech industries faster than many countries that are freer and more
democratic. The fact is that only a tiny fraction of the conventionally
defined high-tech univer e - that of dot com content - feels the direct
impact of political censorship. The people d signing the chips or lining up
the venture capital don't experience it at all.
Strangely, political threat or economic dislocation may be more impor-

tant. Israel is the mo t obvious instance as it has been in a state of war or
war-preparedness for nearly all its 50-year hi tory and has pent much of
that time in comparative diplomatic isolation. Taiwan has faced th
threat of Chines invasion for five d cades and has similarly had to
contend with political isolation, especially over the past two decades
after the US officially recogniz d mainland China. Singapore govern-
ment policy has historically been driven by the notion that it i a small
and re ource-poor country urrounded by politically unstable n igh-
bours. Finland experienced severe human losses in World War II and
remained under the Soviet shadow until the end of the old War.
Finland's economic regime was undermined by the collapse of the Soviet
Union in the late 1980s and Singapore's by the A ian economic cri i of
the late 1990s - traumas that spurred policy-makers to action.
GLOBAL BUSINESS: A WEB OF CLUSTERS
A fundamental characteristic of the six technology cluster urveyed in

this book is that they have formed links involving flow of killed labour,
finance and market intelligence. ome, most notably Singapore, have
stronger links than others but all to one degree or another interact with
other clusters to compensate for the cluster ingredient that they lack at
home. Naturally, at the centre of this global web is alifornia's ilicon
Valley, which till towers above any other cluster by every measure, but
bilateral links arc growing, too.
The tronge t and perhap mo t critical link is the flow of skilled labour
to California from overseas and the experience, skills and busine s con-
nections the expatriates eventually bring back to their home countries.
Annalee Saxcnian has documented the extent of Taiwanese and
Indian in Silicon Valley going back to the 1960s when the first gate-
way was opened for immigrants. 9 , he estimates that in 1990 one third
of all Silicon Valley scientists and engineers
Large numbers of were foreign-born, two thirds of them in
companies in Hsinchu Science
Asia. In response to discrimination they
Park, the heart of Taiwan's
perceived as blocking their way to career
technology cluster, were
founded by returnees. ,
advancement, many went on to form their
own companies and build networks of
fellow Asians working in Silicon Valley. Saxenian e timate that at least
17% of the Silicon Valley firms formed since 1980 were managed by
hinese (Taiwanese principally) and another 7% by Indian . Although
not included in her study, large numbers of I raelis built careers in
California as well. These expatriates were key players in the develop-
ment of technology cluster in their home countrie .
In the case of Taiwan, the government began actively recruiting over ea

Taiwanese in the early 1980s to return home and use their Silicon Valley
experience to help develop the nascent Taiwane e technology sector.
Large numbers of companies in Hsinchu Science Park, the heart of
Taiwan' technology cluster, were founded by returnees. Silicon Valley
Indians played less of a role in developing the Bangalore cluster in its
earliest stages by coming back to start up companies, but by the late
1990s they had b gun to return in mall numbers. Many non-resident
Indians, or NRI as they arc called, contributed without actually coming
home. t a critical jun ture in the early 1980s they lobbied their Silicon
Valley employers to set up operations in India and today many more are
ctting up Bangalore subsidiaric of their American companies. Israeli
began returning home from Silicon Valley in tbe early 1990 as the high-
tech sector took off, while other helped convince their ceptical
employers to set up R&D operation in Israel. I raeli high-tech wa able
to tap the large number of Jewish investment bankers on Wall , trcct to
open a line to the U capital market. With all these countries, expats
who have chosen to remain in the U have often er d a inv stors and
ad i er for tart-ups back home and at the very least as role models.
Each of the three countries ha it pantheon of 'silicon' heroes who have
made it big in alifornia.
The flow of skill ct labour among the six technology clusters i growing
in importance. The most prominent example is Singapore, which ha
thrown open it employment market to outsiders, drawing in Indians
and Chinese in large numbers as well a Europeans, Australians,
Malaysians and others. They not only fill out th R&D departments but
the ranks of upper management and are even encouraged to form tart-
ups. I rael's high-tech industry, closed to large numbers of foreigners
and thirsty for engineers that the home market can't y t supply, has
sent the jobs abroad by setting up softwar -d velopment centr s all
over India principally to do the bread-and-butter work of writing code.
In Taiwan, where industry leaders aren't confident they can compete
on pure IP ability with oth r technology clusters, the solution has been
to buy the skills through acquisitions of semiconductor d ign houses
in America and Europe.
The global knowledge network works along the same lines as the labour
network, with increased sharing between clusters, but the biggest lines of
communications run out of alifornia. Take okia Ventures, a venture cap-
ital arm of th wireless company. Most of the companies it invests in are in
wireless services or enabling companies just outside the periphery of
Nokia's own busines of handsets and network infrastructure equipment.
Th role of these portfolio companies isn't to earn the best return or to give
Nokia an inside line to acquiring them but to provide a radar creen for
imminent developments in the wireless s gment and help the company
avoid the dangers of trying to develop next-generation technoloh'Y in isola-
tion. To do that, 1okia Ventures has its fingers in the US and European
technology clusters. Its first office, opened in 1998, was in Menlo Park,
California, followed by London, Washington D and Helsinki. Of the 24
companie the venture fund had invested in by mid-2000, only four were
in Europe and ju t two in N kia's home base of Finland. 10
maller companies similarly rely on information network , in many

ca e compri ed of expatriates from their home countrie . At ingapore'
iGl E.com, a start-up business-to-business-enabling company, the man-
agers rely on their fellow graduates from the University of ,alifornia at
Berkeley to keep them abrea t of the latest development in ilicon
Valley. 'They advise u on which technology to adapt. A couple of year
ago you would have been talking about EJB [Enterprise Java BeansJ or
not EJB - all these are pretty new technologies,' says Chua l·Pin,
iGINE.com's business development director. 'In the US there's always a
critical mass. They tend to know what's going to be hot in six months'
time. There is a certain buzz among engineers talking among themselves,
and that's likely to be the market leader six months from now.' 11
In technology finance, Silicon Valley is less central. US venture capital

funds have established outposts in Europe and Asia, but European and
Asian funds have also been enthusiastic partisans of cross-border investing
in their regions. Of the six technology clusters surveyed in this book,
London and Singapore have established themselves as regional venture cap-
ital centres, playing host to both domestic V s and regional operations of
US funds. Singapore's Vertex has seven office spread throughout Asia,
Europe and Israel; London-based 3i has built a giant global network of 29
offices in Europe, two in Asia and two in the US; while Apax Partners has
offices in 12 cities, and invests all over Europe, in the US and in lsrael.
In other clusters with smaller VC industries, such as Finland, Taiwan and

Israel, fund managers have sought to counter the disadvantages of their
small home markets by widening their base of operations across borders
into adjacent or at least culturally similar markets. Israeli funds have
begun forays into Europe and even Silicon Valley itself. Taiwanese funds
have looked to America to seek out synergies between the country's
manufacturing strengths and America's IP leadership. Even Finland's tiny
V industry feels constrained by national borders. Helsinki-based
CapMan Capital Management, for instance, has sought to transform
itself into a ordic fund. 'flnland is too limited a market. The deal flow
is too narrow and there are too many domestic deals. You lose the feeling
of the global market. Because we have deal flow from flnland and
Sweden, we have a better base of comparison. We believe that helps us
make better investment decisions,' says Heikki Westerlund of CapMan. 12
Silicon Valley's - or more accurately, America's - dominance of the

public markets for technology share~ is less overwhelming than the
Nasdaq Stock Market's prominence would suggest. With the notable
exception of Israel's Tel Aviv tock Exchange, local stock markets con•
linue to be the principal vehicle for technology companies going public
in the six technology clusters surveyed in this book. Tl1e strongest of the
regional growth stock markets in rurope and Asia attract cross-border
listings. But in terms of mergers and acquisitions activity, America holds
the number one spot by virtue of the market leadership American com-
panie hold in almost every sph re of the te hnology business. Indeed,

for many companie , acqui ition by a US company, or more rarely by a
European concern, is the only ticket to entry into global market . Being
away from the centre of the action in Silicon
Indeed, for many Valley make it difficult to g t the attention
companies, acquisition by a
of customers and potential partners, but ct-
US company, or more rarely
ting up a sizeable US operation is expensive
by a European concern, is
and therefore risky. The trick, then, i to get
the only ticket to entry into
recognized, not by your peers in the local
global markets.
t chnology cluster, but by the indu try lead-
crs in the US. BizTone, a Singapore company, d veloped enterprise
resource planning (ERP) software, and moved its headquarters from
Malay ia to ingapore to win better regional expo ure. Out ide A ia it
has offices in the US and Australia. Nikunj Jinsi, whose AsiaTech
Venture invested in the company, e s no reason why it can't be a
global play. The company has a US sales organization. Rut BizTonc's
Singapore base makes the job tougher than if it were sitting in Silicon
Valley. 'This can only be a global play if you're noticed by large global
players. oming out of Asia, it takes longer to get noticed by the largest
yst ms integrator , the big fiv accounting firms and t chnology suppli-
ers/ says Jinsi. 'Had this company been based in Silicon Valley from day
one we would've had exposure towards the large player . From here, it
takes time to get on the radar screen.' 13
NOTES
l Interview with ir Barkat, managing dir ctor, BRM Technologies, 29 June

2000.
2 Third International Math matic and cience tudy-Repeat, 1999,

www.timss.bc.edu.
3 Interview with Chong Lit Cheong, managing director, Singapore National

Science and Technology Board, 7 December 2000.
-t 2001 ID /World Tim s Information Society Index, hwww.idc.com.
5 Interview with David Wilkinson, partner, Ernst & Young, 12June 2000.
6 Paul D. Reynolds and others, Global E11trepre11e11rsllip
\[011itor, 2000 E>.ernth·e
Report, Kauffman enter for Entrepreneurial Leadership, 2000.
7 Interview with Peter Hyde, director, The Generics Group, 13 June 2000.
8 Interview with Howard Biddle, managing director, Cambridge Consultants,
27 April 2000.
9 Saxenian, Anna Lee (I 999) iiicon \'alley's 'ew Immigrant Entrepreneurs,Public

Policy Institute of California.
10 Interview with Antti Kokkinen, partner, 1 okia Ventures, 19 June 2000.
11 Interview with Chua I-Pin, business development director, iGINE.com,
6 December 2000.
12 Interview with Heikki Westerlund, partner, Cap 1an Capital 1anagement,

26June 2000.
13 Interview with 1 ikunj Jinsi, managing director, AsiaTech Ventures Singapore,
8 December 2000.
THE GLOBAL TECH COMPANY:
distance learning
1F YOU SET OUT TO DRAW A MAP of the high-technology world to refle t

the size and importance of different regions, the United States, with a
bulging west coast, would be set in the middle and cover ome 70°/41of
the surface area. Off to the right would be Europe occupying 15% and to
the left would be Asia with 10°/t,but expanding quickl}. Here and there
you could mark off isolated centres of activity, like Israel in the ~fiddle
East and parts of India on the subcontinent, enlarged into insets since
they are so small. The rest of the world could be scrunched into the
remaining 5%. America's preponderant role in global technology extends
in every direction. E\'erything from the semiconductor to the internet
had their origins or critical de\ elopment there. US companies dominate
almost en~ry segment of the high-tech busine<;<;from operating software
to packet-switched networks.
The US market for the products and services of the ;\Jew Economy is the
world's largest and most important. \mericc1n venture capital funds
tower o\'er their European and .\sian competitors in '>ize and sophisti-
cation. The Nasdaq Stock \lark.ct is in the same position relati\·e to
growth markets around the world. American uni\'ersities as a group
attract the best student and faculty talent, not just from the pool of
Americans but trom around the world. The international language of
the in<lustr) i rngli h.
The geography of high-tech makes the challenge of navigating it

immensely difficult for a company setting out from anywhere on the
globe but its American centre. Companies face a simple choice. The first
i to remain a local player confined to a tiny market in a few segments,
such as consulting, where geographical proximity is an essential part of
the bu iness. The second is to become a global player - and quickly.
There is no mid-point in this pectrum. But being a global company is
no mean feat. It's hard enough for a big and established firm to contend
with the cacophony of national rules and regulations, differing cultural
norms, idiosyncratic markets, and the time and effort it takes to manage
a multinational workforce. A start-up company faces the same problem
set but without the experience nor much time, human or financial
resources to acquire it.
Finland's ybelius Inc, formed in 1998 to develop 3D interfaces for e-busi-

ness applications, illustrates what goes into assembling the major elements
of a start-up multinational in less than two years. The process was capped
by a decision to transfer the centre of its operations from near the Arctic
ircle to the balmy climate of alifornia. 'That's where the marketing,
ales and strategic alliances are; 80% of the onlin software comes from
the US and most of that from Silicon Valley. That's why we needed to be
here,' says Pekka H.T. Parnanen, the company's vice-president and chief
operating officer for North America and the Pacific Rim. 1 ybelius'
re earch and development team is in Oulu and Rovaniemi way up in
Finland's north. Oulu is a small technology cluster in its own right with a
good pool of engineers but it's too remote to make any pretence of being
close to the action. Cybelius's product, which enables website to di play a
virtual working demonstration product, sits at the top layer of an e-com-
merce package and can't be sold as stand-alone. To bring the product to
the end-user, the company needed to form
In valuing world
partnerships with other e-busines solution
technology markets, size
providers, which it did with the likes of ew
ranks first together with
York-based Metastream (now renamed
uniformity. ,
Vi wpoint) and hout Interactive in San
Francis o. When Parnanen was hired to oversee sales and strategy he was
based at the company's European sales headquarters in the Helsinki
suburb of Espoo. But Europe was secondary in the scheme of things. The
real challenge was getting a foothold in the US. 'In 1998 I spent most of
my time in airplanes,' Parnanen recalls. 'If someone asked where they
could catch me I'd say seat 7 . It's an aisle seat.' He logged 200 travelling
days that year developing partner relationships and talking to customer">.
3 THE GLOBAL TECH COMPANY: DISTANCE LEARNING 41
In 1999 yb lius op ned an office in San Jose and sent Parnanen to run it.
At the end of 2000 the company formally moved its headquarter there
and took on a EO a Finn with many years' experience in the U ·. If hy
the end of the year 2000 Cybelius was la king one element in its interna-
tionalization, it was th absence of multinational investors.
MARKETS: LOOKING OUT FOR NUMBER ONE
In valuing world technology markets, ize ranks first together with uni-
formity. Each increment of, say, 10 million consumers or 10 more
Fortune 500 companies to a particular market increases its advantage
over smaller markets geometrically because the cost of reaching them is
so much lower. By this ac ounting, meri a's 275 million p ople are
worth more than four times Germany's 82 million and, in fa t, are worth
more than Europe's 376 million. There are more consumers in Western
Europe and they are about as wealthy, but the region is divided by
national markets, which the co-ordinated regulatory policies and the
single currency of the European Union have not yet erased. Asia has
huge national markets in Japan and hina, but it is divided like Europe
and far less afOu nt. The single US market enables a company to address
it with a single strategy from a single office. Management has to familiar-
ize itself with only one business and consumer culture.
It was with this thinking that the founders of ingapore's E-Book

Systems, whos FlipBrowser software package enables internet users to
ac ess information on w bsites in book format, recognized that Asia
didn't count for much, even though the region has tens of millions of
internet u ers and should have been a natural starting point because of
its location. 'You've got to sell it in the U from clay one. When we ere-
at d the company, we first reated E-Book in Singapore in March 1998
and one week later we flew to the US and started an E-Book Inc in
Mountain View [ alifornia],' says Ri hard Wan, E-Book's chief
executivc. 2 The company started with an office half the ize of its head-
quarters' onferencc room but two year later a quarter of the company's
40-strong workforce i in Ameri a and 80%-90'¾, of its produ ts are sold
there. In its various configurations, the software is aimed at everyone
from ordinary con umers (the company's first product was a photo
album for digital pictures) to server products for the corporate market. Its
success relies on building hrck d market acccptan e as qui kly as po. siblc;
therefore, E-Book b pur~uing a strat gy pio·nccrcd by U~ makers of
internet tools such as Real Network . It i ba ed nan open tandard cre-

ated by the company, and the basic version is given away in
downloadable format. Once end-user have been enti ed, E-Book has for
them a more feature-laden 'Gold' version as well as packages with
authoring tools and another f r web ervers, all available at a price. For
the strategy to succeed, however, the company needs to work in a large
1
market where it can quickly ratchet up its user base. The world's biggest
consumer of high-tech is the good old United States of America and
you've got to have a presence there,' says Wan.
Just as important for the strategy of £-Book and others is that the U is
the world's reference market - the place where companies earn the cus-
tomers and the reputations that will enable to sell el ewhere. Americans
are early adapters of new technology and a product's acceptance there
helps roll out the red carpet to other, more conservative markets that will
consider technology only after it's been proved in the field. Celestix
etworks, a ingapore company making network servers for small busi-
nesse , views the US, Europe and Japan as it top three market and i
pursuing all of them. But before the company can really expect to win
customers in Japan or Europe, elestix fir t ha to c nvince the
American market. A large part of it is perception. If the market perceives
1
that the product comes from Silicon Valley, it's superior technology.
That' what Japanese di tributors told us. You have to ucceed in Silicon
Valley first before you can succeed in Japan,' says president Chia Kok
Hua. 'It's not very likely that the perception will change. We even
thought about moving our headquarters to the S.'3
Two challenges are on the horizon to American dominance, and in cer-

tain niches companies are already expl iting them. The first comes from
Europe, where regulatory flukes have orked in the ontinent' fa our in
a few segments, most notably wireless. America resisted impo ing indu -
try standards while Europe adopted the single G M standard in 1991. In
doing so, the US and Europe rever ed their u ual role : the continent
b came a unitary market by virtue of its single standard while the
American market was balkanized by competing technologies. A German
or Finnish cellphone could be used all over the continent and even a
good part of the world, which helped to build a charmed spiral of higher
market penetration rate , lower equipment and servi e charges, and till
higher penetration rates. In America, the market remains fragmented. In
We tern Europe the cellphone penetration rate in 2000 ranged as high as
87.2 per 100 in Luxembourg and 78.6 per 100 in Austria, more than
double the 36.5 rate in the US.4 A decade later that lead has put Europe
in the unusual position of being the testing ground for new technologies
such as third-generation wireless internet, thereby giving European com-
panies a leg-up on their American competitors, at least for now.
The second challenge to American primacy comes from China. Overall,

the country is poor, its infrastructure primitive and its economy state-
dominated, but China's coastal regions are beginning to resemble the
more advanced parts of emerging Asia and they have populations many
times bigger than the next largest Asian country. That scale can help
compensate for China's relative backwardnes and help propel the coun-
try into the front ranks of world technology consumers. In Asia, many
companies are already building China-centric strategies, especially in the
internet industry where language and culture play a much bigger role
than in hardware. Companies in Asia look forward to the day when
China and its offshoots in Hong Kong, Singapore and Taiwan form the
second great pole of the world technology market.
MARKETING MANAGEMENT: THE WORLD OR BUST
A decade ago, the start-up entrepreneur in Singapore, Cambridge or Tel Aviv

could hope to develop his or her business in the local market and gradually
think about exporting to the US or Europe through distributors or re-sellers.
The market was less global, technology was less interdependent and thus
standards didn't need to be universal, and product cycles were slower.
Finland and the other Scandinavian countries could, for instance, develop
their own mobile phone industry in protected markets over a period of
years and wait till later to conquer the world as Nokia and Ericsson did.
Today that is no longer an option. In the hyper-kinetic market for technol-
O!,J' products that has evolved over the past two decades, there is no longer
any such thing as a Finnish wireless-infrastmcture company or an Israeli
optical-switch maker in the sense that all their
For management, operations and mo ·t, if not all, their cu -
globalization is the necessary
tomers are in a single country. For
and obvious goal but it is one
management, globalization is the necessary
many companies are hesitant
and obvious goal but it is one many cornpa-
to pursue.,
nies arc hesitant to pursue. '[t's human nature
to always consider your own marketplace initially. To start marketing
abroad really ,lltively, to different cultures and languages, does not happen
naturally,' says Pekka Roine, who led his company, Helsinki-based Solid
Information Technology, into the US markctplace. 5
All things being equal, a US start-up can put off globalization for longer.
It has the huge U market in its backyard and enough domestic competi-
tors to worry about. Why think about France or Japan? 'Open the door
in Silicon Valley and there's a huge market that speaks the same lan-
guage. That's not the case in Cambridge,' says Gerald Avison of the
Cambridge-based firm The Technology Partnership. 'When we decided
to focus on the pharmaceutical ector with the automation bu iness, one
of the machines that we old was to Merck in Ra! igh, orth Carolina.
When we were negotiating the contract they sent six very senior guys
here. Five of them had to get a pa sport. hey had never left the United
States. That's because you don't have to l ave the nited States to
address a major market. That's a huge and under- onsidered difference.
The UK is not a major market for anything. The minute you step out of
the UK your customer speaks French or is thou ands of miles way.' 6
Coming from a market small and distant from the centre of the a lion in
Silicon Valley only compounds the problem because the company can
expect to obtain an adequate level of market knowledge only when it
has the mechanisms in place - offices overseas, strategic investors and
partners, and deep customer relations. Even young companies with lim-
ited personnel and money often don't have the freedom to take the
low-cost alternative of relying solely on independent distributors over-
seas. It leaves them one step removed from the market. 'You have to
really dive deep into a major te hnology ulture o you can draw from
it,' says Raine. The Indian software industry is a case in point. Software
coding is labour-intensive and the product can be shipped in tantly and
inexpensively over broadband connection, so that performing the actual
work in India is advantageous. But the internet ha its limitation .
Infosys~ chnologies, one of the country's biggc t software concerns, has
four development centres outside its Bangalore base, at Fremont,
alifornia, Toronto, Boston and London. Five per cent of th company's
workforce is permanently outside India and omc 20% is abroad on a
floating basis. The need for a physical presence close to customer is
growing more intense as the company diversifie its client ba e away
from global Fortune 1000 companie towards internet companies, where
the universe of customers is infinitely larger and the risk factor higher
but the return comes in the form of access to the latest trends and tech-
nologies. A phy ical pre ence becomes an instrument for attracting and
servicing customers. 'As you go toe-business and e-commerce you must
respond quickly to customer needs. There's a lot of front-end,' says man-
aging director Nandan Nilckani. 7
FINANCE: POOR AND NEEDY
The two central and unfortunate aspects of a technology company based

outside the US is that it will have less access to finance than its American
peer but will need more of it. Virtually nowhere in the world does the
venture capital industry have the same amounts of money available as in
America, nor do the funds typically have the skills and experience to
help companies go global. For publicly-traded tech companies, local
sto k markets can rarely match the valuations of the Tasdaq nor do they
have the liquidity to take up share offerings of the same size and scale as
America's capital markets. Yet, companie in non-US technology clusters
face higher costs to finance expansion overseas. For Singapore's Vivid
Technologies, those realities dictated its strategy of remaining a private-
label maker of communications prot col hardware and oftware. 'You
need to raise a lot more money to do successful branding. In the
Singapore context we don't have a fstock] market to sustain that kind of
valuation. We don't have the analysts or the understanding of technol-
ogy here. It will take time for the Asia markets to understand the IT
business better,' says its chief executive officer Desmond g. 'In the US,
tech is one of the hottest sectors because of the high growth potential.
Being in Singapore you kind of lose out relative to the US companies
based in the US who can use the asdaq market to leverage. We're all
fighting in the same global market; they can raise more money with less
dilution; they have an advantage.' 8
ne way of overcoming these obstacles is for companies to seek out for-

eign partners in the markets they are looking to enter. As a strategy this
shouldn't be keyed to the market launch of a product but one pursued
early in the company's development to glean market knowledge, build
personal relationships, and smooth IP integration. Almost certainly
alliances like these will influence the company's basic strategy and prod-
uct development. Therefore, the obvious kind of partners are large
multinational firms with complementary technologies that can he inte-
grated and sold together. But multinational venture capital funds can
serve much the ame role and even act as the first point of contact with a
company's target market rather than a corporate strategic partner. Prime
l'cchnology Ventures, a Dutch V that invests in technology companies
based in small countries, offers its portfolio companies a package of serv-
ices on top of its equity investment. The fund makes introductions to
European distributors and value-added re-sellers, helps the compan, in
setting up a European sales office and re ruits Europ an management. In

the view of Ilja Bobbert, a Prime partner, there's no need to take on a
corporate trategic partner in the fir t funding round. 9
loware Wireless ystems, an Israeli maker of broadhand wireless access

technology, formed relationships with both V s and a major corporate
partner as the foundation of its European trategy. Founded in 1996, the
company was fortunate to be in a segment whose technology would
require millions of dollars and year to develop, thereby making its IP
valuable even to large companies with vast resources. Floware raised ven-
ture capital from a ollection of U , European and Israeli venture capital
funds. Germany's Siemens first took an equity stake a year after Floware'
founding and has incorporated Floware's products into it broadhand
access line to win contracts. 'The US is more tolerant of small companies
than Europe. The olution is to team up with large system integrators
like Siemens,' says Floware's chief executive officer Amnon Yacoby. 10
LISTING: NASDAQ VERSUS HOME
The proiifcration of growth stock markets in Europe and Asia since the
mid-1990s has given young technology companies unprecedented
opportunitie~ to raise equity capital and for investors to cash in their
holdings. asdaq, however, remains way ahead of the pack in terms of
the added value it provides to a global com-
Nasdaq remains way ahead pany. A US offering will typically yield more
of the pack in terms of the
raw cash for a given amount of equity and
added value it provides to a
will provide the company with a host of
global company.
as ets that can be employed in its future
growth, as the Indian software firm Infosys illustrates. It wa already
publicly traded in its home stock market when it made the decision in
1999 to list American depositary receipts (ADR ) for trading on the
Nasdaq. But managing director Nandan ilekani says the $70 million in
capital hi company raised from the ADRs was arguably the least impor-
tant rea on to list in America. Instead, it wa the enhanced tanding a
Nasdaq listing gives the company vb a vis its customer , 99% of whom
are outside India. 'If we want to build a global IT company, our client
want us to be li ted in Nasdaq. It creates comfort. When you talk to a
large Ameri an company, the fact that you're listed in the US i a sign of
financial strength, thnt you have equity analysts following you, that you
3 THE GLOBAL TECH COMPANY; DISTANCE LEARNING 47
have a robust model. It helps to build the brand,' Nilekani say . 11 In

addition, the listing will be a valuable asset when Infosys goes hunting
for foreign acquisitions to fill in gaps in it IT erviccs. The higher valua-
tion a daq awards companies compared with Indian markets \-Vill
make Info ys stock a more valuable currency if it make the acquisitions
through hare waps. Furthermore, as it buys up overseas concerns, the
ADRs will enable the company to attract and retain global employees
with the lure of dollar-based stock options.
Infosys is an older company with a long hi tory in global business and a

track record of profit . The typical young technology company based
over eas isn't a candidate for the asdaq because the demands of a US
listing are severe: the underwriting costs are high and the disclosure
requirements are trict, making it unrealistic for firms looking to raise
less than $100 million to even try. US inve tment banker are rarely on
the ground in foreign technology clusters, doing the leg-work of follow-
ing up-and-coming companies, offering advice and competing for
bu iness. With the exception of tho e based in Rritain and I rael, foreign
high-tech companies arc out of the Wall Street loop.
In any case, Ii ting in a company's home market or a regional European

or Asian growth market ha its own set of benefits. Local inv stors are
more likely to be familiar with the company, and the costs of undertak-
ing a listing and maintaining investor relations arc less. The company'
backer are more likely to have a better under tanding of the local cene
than the ways of Wall ~ treet. Les mature companie that might not be
ready for centre tage of a 1asdaq listing, but are too far along to con-
tinue tapping the VC market, can fit into the more intimate environs of
a local growth market. F-Secure, a Finnish maker of internet ecurity
product , opted in 1999 to do an IPO on the Helsinki Stock Exchange
even though the company was beginning to make it first serious mar-
keting efforts in the US at the time and the stock market was infatuated
with th internet. 'The problem for overseas companies floating in the
US is you're competing for mind-shar of inve tors. With the number of
US companies out there it' hard for a foreign company to attract that
mind-share. That's small foreign companies - the okias can do it,' says
Chris Vargas, who heads F-Secure's US operations. 'We had a strong
brand in Finland, we were ,videly recognized as a rising star in the
European environment. .. The inve tor~ knew us, they knew who we
\Verc.' 12
MANAGEMENT I: THE ROAD FROM R&D
It's the nature of high-te hnology that companies will almost always be
start d by engine rs and scientists. Companies tend to begin with a tech-
nology looking for an application. That tendency among start-ups is
especially prevalent in the early stages of a technology cluster's develop-
mcn t when the re crvoir of management experience and market
knowledge is shallow. ompanies are started up by a few engineers work-
ing in th ir pare time or bootstrapping their operation while they
develop their idea. But even in the ca cs where the founders have identi-
fied a market ni he and work backwards to an IP ol ution, the skills
involved are usually those of an engineer and therefore the founders are
likely to come from that background. The differen e is that the engineer
may be on his second or third company and have a better under tanding
of the forces that will determine it success. Either way, it' a rare engi-
neer that can learn on the job all the skills needed to lead his or her
company through the stages of product development, financing, hiring,
marketing strategy and product rollout. In Cambridge, the only one of
the six tc hnology clusters surveyed in this book where scientists and
engine rs seem most firmly in control, many companies settle into a
leisurely existence that ambridge denizens call 'lifestyle companies'.
They develop elegant, sophisticated t chnology but mak few conces-
sions to mark.ct requirements and don't grow. But at companies with the
goal of growing, the engineer/entrepreneur will usually have to give way
and settle into a title like chi f technology officer.
For companies given birth by engineers, the process of handing over to

experienced managers is often wrenching. At Frends Technology, the
Helsinki company that has developed software to help businesses manage
geographically dispersed sites, giving up control was a long and drawn-
out process of discussions held Finnish-style in the company sauna.
Frends had started as a consul ting company in 1988 and gradually trans-
formed the knowledge and skills it had acquired into a commercial
software produ t. But hy the end of the 1990s the company was still prin-
ipally erving the domestic market. '\Ve realized that this is a jewel we're
holding, we have to take this out to the world. We have to try or we'll
never forgive our clvc ,' recalls Harri Rautio, vice-president for product
crviccs. Li The company raised venh1re capital for the first time in its his-
tory in 1999 and took on Aino-Maija Fagerlund as chief executive officer.
he had b en in the software business for two decade with Siemens
ixdorf and [OS, both in Finland and Furope. Her time in Europe \Vas
riti al in e r latively few Finns have over eas experience. 'In Finnish
oftwar development...there's two major problem : one i how \•vell you
can produ tize your appli ation, how well you can adapt for interna-
tional markets. The other is how you can change your technically
oriented company to a business-oriented company. That's the change om
company has been going through over the pa t three years,' says Rautio.
'It's a very long process and difficult. for all these technical guys, it's very
difficult for them to relca e control to non-technical people.' Five of the
e en founder are till with the company and two sit on the board.
MANAGEMENT II: GOING GLOBAL
The proce~s of globalizing a ompany also entails far-rea hing and diffi-
cult changes. Even in start-ups with a short history, it undermines
established ways of conducting business and the power and authority of
manager . But it' rare that a product an ucceed in oversea market
without trong backing and a deep and early
It's rare that a product can commitment from management. That kind
succeed in overseas markets
of backing requires in-depth market knowl-
without strong backing and a
edge of end-u ers, competitors and industry
deep and early commitment
trends that would be hard for any company
from management.
thousands of miles away to absorb by phone
calls, the internet and even frequent visit . The nature of the technology
busines also requires tapping into the network of other technology
clusters because it's rare for a business to be in a simple one-on-one rela-
tion hip with end-user cu tomer : there are re-sellers, strategic partners
ancl a host of other relationship that companies need to form to oper-
ate u e fully. ln many cases the human talent, ' pcciall, in
marketing, can only be found overseas. 'For mo t ompanie being
international still means having a few people remotely. ow you can
say "we're international". But that docs not have the impact, you have
to really dive deep into a major t ·chnology culture so you can draw
from it. o much netvmrking i being done in the S,' says Solid's Pckka
Roine. 14 For companies in small markets like Hel inki, 'lel Aviv or
Singapore, taking such a strategy to it logical conclusion almo t cer-
tainly will end up moving the weight of their operations abroad to their
mo t important market, often quite early in their development. The
pre. sure is lcs. intense on companies based in big European or Asian
countries, but even they frequently have had ~o bow to the centrality of
the US market and e tabli~h a presen e there.
Young technology companies, therefore, have to grapple with th issues

of structuring a global organization and managing far-flung operations
eparated not ju t by time zone but by cultural difference . Typically
companies keep their research and development functions at home,
ince the kills and knowledge of the R&D team i the ource of the com-
pany's omparative advantage and can't easily be moved. R&D, in any
case, is a back-office function that ha less need to be in immediate con-
tact with the market. Running a US R ~o operation is much more
expensive and keeping employees for long stints is harder. Sales, market-
ing and strategic relations, on the other hand, have to be clo e to
cu tomer , partners and competitors, so they end up in California or
wherever the company' major market is. 'If you're in Silicon Valley and
you want to meet Yahoo, you can see them that afternoon,' says one
I raeli venture capitali t. 'From where we are you have to make an
appointment three weeks in advance and then they might cancel at the
la t minute. Then you've lo ta month or two.' 15
TABLE 3.1 Emphasis on research and development
GERO% BERO%
of GDP of GDP
Britain (1997) 1.87 1.22
China (1998) 0.69 0.31
Finland (1998) 2.92 1.98
Germany (1998) 2.32 1.57
India (1992) 0.74 0.19
Israel (1997) 2.29 n/a
Singapore (1998) 1.80 1.11
Sweden (1997) 3.85 2.88
Switzerland (1996) 2.74 1.94
Taiwan (1998) 1.98 1.25
us(1998) 2.77 2.08
GERD (gross expenditure on research and development) measures R&D intensity BERD
(business expend"ture on research and development) measures private-sector R&D alone
Sources OECD, nac,onal reports

The geographical division between R&D and marketing is usually

self-evident, hut there are a hundred permutations to it. When Helsinki-
based Alpac Solutions embarked on plans to open an office in Dallas to
serve as command post for its US thrust, managing director Heikki
Rekonen wanted to put R&D people there as well. 16 As a develorer of
electronic-design automation tools, Alpac's customers arc engineers who
are likely to he sold on a product only if it is explained and demon-
strated by fellow engineers. And, once they have bought it, they will
need sophi ticated technical support. More than that, says Rckonen, put-
ting R&D reoplc in Dallas is part of a strategy of giving Alpac the look
and feel of an American company rather than a Finnish firm with an
American arm.
lost critically - and psychologically the toughest decision of all for a

company to make - is where to place the headquarters once the com-
pany's functions have become dispersed. 1oving top management to
another country will often mean shedding the last remnants of the
company' national identity. The head of the company will himself
have to re-locate or surrender the top job. Nir Barkat, managing direc-
tor of Israel's BRM Technologies, reasons that the main barrier an
internet company has to surmount is not technology leadership as
much as market acceptance, chiefly in the form of reference accounts
from blue-chip customcrs.17 The company will be made not by what
happens in the R&D department but by the product rollout, so the
CEO' first task is to direct that aspect of the business. The philosophy
at BRM is to put the EO of its portfolio companies close to its primary
market even when the company is still in its development phase. If the
company is an infrastructure play that means the US; if it's a wireless
company that means Europe or Israel. On the other hand, ikunj Jinsi,
Singapore managing director for AsiaTcch Ventures, works with a dif-
ferent business model that sees advantages to keeping the headquarters
of hi portfolio of internet companies close to their Asian stronghold
even though that will make it harder to get the global market's atten-
tion. 'People who move to the States have to he really sure they can get
integrated into the environment,' says Jinsi. 'The cost base rises dra-
matically, hy three to five times. If your cost base increases you have to
raise more money at an earlier stage. There's quite a bit of competition
o you're taking a big risk.' 18
MANAGEMENT Ill: KULTURKAMPF
Managing a multinational start-up is a complicated affair. Hiring

involves taking on people from a variety of cultures and languages and
finding mechanisms that enable them to work together as a single team.
Communication. across distances are complicated, and lack the personal
contact that can help mooth relations between employee·. Differing
time zone and long travel time low deci ion-making and force staff
into working odd hours so schedules between different offices overlap. If
there is any silver lining to the globalization pressure on non- merican
start-ups it is that they learn how to think and act globally early.
The first of the challenges facing managers is finding the right balance
between putting local hires into key management positions and sending
staff from headquarter . Mo t companies are inclined to send abroad their
own people, whom they know and trust, and
The first of the who understand the company. Managers
challenges facing managers is
hired locally will hav tr uble ab orbing th
finding the right balance
company's culture and values and take longer
between putting local hires
forming personal relationships unless they
into key management
positions and sending staff are willing to put in a lengthy stint at the
from headquarters. company's headquarters - a luxury of time
and expense most start-ups can't afford. If the
locals are Am.ericans, they will also impose a heavy financial cost on the
company that may not be justified unle sit is at the stage of development
where it can fully exp! it them. 'At the start, you don't want to be burning
up o mu h money. If you hire an American vice-president for marketing
he'll cost you upwards of $200,000, not including his budget, and he'll
start burning up money like n thing,' says ekstix's hia. 'It's a question
of when we begin to do that. arketing costs money. If you don't pend
you won't get exposure, but you have to be ready. You can't start spending
before you're ready to act on the results.' 19 Strongly in their favour, how-
ever, is that local hires arc familiar with their home markets and fun tion
naturally in their indigenous business culture. They help build an organi-
zation that will be more global in its thinking and approach. Hiring locals
taps a wide array of national ta! nts, most particularly the American talent
for salesmanship and marketing.
Edge111<1trix,a ingaporc ompany founded in 1996 with operations in

five ountries around sia and Australia and plan to expand to the US
and Europe, is trying the hybrid approach. Chief operating officer Adrian
3 THE GLOBAL TECH COMPANY; DISTANCE LEARNING 53
Stewart prefers to put someone at the head of overseas office who has
been with the company one or two years and knows the operation and
practices. But the manager's role when he gets his new posting is to pre-
pare a locally-hired deputy eventually to take over. 20 The company
facilitate communications by having everyone work off a entralized
mail server and enterprise resource planning (ERP) sy terns. But there
i n't any escaping the need for frequent trnvel for everyone involved and
early-morning and late-night hours when different offices can speak to
each other by phone. ross-cultural communication is hard enough in
face-to-face contact but is subject even more to misunderstanding and
lost nuances in e-mail communications. At Finland's F-Secure, for
instance, sales people visit headquarters twice a year and R&D people go
abroad as much as four times a year. 'It's not the money but the time
that's the real expense - people's time away from the offi e. But if they're
out there meeting people and building relationships, it's time well
spent,' says Vargas. 21
, ome managers may bristle at having to work under the authority of a

rival nationality and the rivalries may grow if the national divisions
follow functional divisions, which is likely if a company has put market-
ing in the US and kept R&D at home. The Israeli biotechnology concern
Pharmos has offices in cw Jersey and in Rehovot, a town outside Tel
Aviv. 'In any company you have the tech ulture v rsus the financial or
commercial culture. But here the tech is coming from Israel and the
commercial from the US, which make it harder. It's Israeli culture versus
US culture. It's hanging but there is polarization,' says chief executive
officer Haim Aviv. 22 Pharmos tries to overcome some of these gaps by
moving people hack and forth between its two centres. The president
running the U office is an Israeli living in America while the company's
head of R D discovery is Scottish.
NOTES
Interview with P(.'kkaI I.T. Parnanen, vice-president and chief op~rating

officer, C'ybelius, 22 June 2000.
2 Interview with Richard Wan, chief executive, E-Book sy ..tems, 8 December
2000.
3 Intl'rvie,,· with Chia Kok I lua, president, C'de~lix Networks, 8 December
2000.
4 ITU Tefeco1111111111icatio11
Indicator, International Telecommunications Union,
2001.
S Intervie\v with Pekka Raine, chief executiv officer, Solid Information
Technology, 21 June 2000.
6 Interview with Gerald Avison, TIP Group, 13 June 2000.

7 Interview with Nam.Ian 'ilekani, managing director, Infosys Technologies,
4 September 2000.
8 Interview with Desmond g, Vivid Technologies, 5 December 2000.
9 Interview with Ilja Bobbert, partner, Prime Te hnology Ventures, 12 July

2000.
10 Interview with Arnnon Yacoby, chief executive officer, Floware Wireless
Systems, 21 Mny 2000.
11 Interview with Nanctan Nilekani.
12 Interview with Chris Vargas, president, F-S cure Inc., 21 June 2000.
13 Interview with Harri Rautio, vice-president product ervice , rrends

Technology, 20 June 2000.
14 Interview with Pekka Raine.
15 Int rview with Shlomo Kalish, managing partner, Jerusalem Global Ventures,
3 April 2000.
16 Interview with Heikki Reknonen, managing director, Alpac olutions, 22

June 2000.
17 Interview with ir Barkat, managing director, BRM Technologies, 29 June
2000.
18 Interview with ikunj Jinsi, managing director, AsiaTech Ventures Singapore,

8 December 2000.
19 Interview with Chia Kok Hua.
20 Interview with Adrian Stewart, chief operating officer, Ec\gcmatrix,

4 December 2000.
21 Interview with Chris Vargas.
22 Interview with Haim Aviv, chief executive officer, Phannos, 10 April 2000.
Cambridge region
I
to Peterborough
Cambridge
Research Park
·1
.,,,
•
Newmarket
Cambridge ./ • Peterhouse
University Technology Park
I
Melbourn
Science Park;•
,,,_I
•
Haverhill
Baldock •
to London to London
South of
England
Cambridge
Milton Keynes •
•
Oxford
•
•
London
CAMBRIDGE, ENGLAND:
has brains, seeks brawn
CAMBRIDGE IS THE HOME OF HIGH-FOREHEAD HIGH-TECH. It~ companie

steer clear of the glossiest segments of the business - e-commerce, con-
sumer applications, dot com sites - and concentrate on the stuff that sits
in the bowels of information technology or in biotechnology - the kind
of businesses that require the most sophisticated engineering and science
capabilities. This isn't a place where teenage company founders or CEOs
in their early twenties are mythologized. Business isn't conducted at net-
working cocktail hours. Cambridge managers like to talk about the 'good
science' at their companies rather than cool technology. The cerebral
atmosphere distinguishes Cambridge from other technology clusters,
even those that are equally oriented to engineering and science. The visi-
tor to Cambridge occasionally encounter salesmanship and the
self-consciously techno style that California invented, but it's unusual.
,ompare this with London, with v...

1 hich ambridge maintains an uneasy
relationship. Less than an hour av,1ayby train, the city is both an object
of Cambridge's derision for the kind of 'high-tech' it spawns and,
through its venture capital funds, a financial lifeline that keeps
Cambridge lab lights burning late into the night. London's froth bubbled
up in 1999 and early 2000, creating an unprecedented start-up boom
exemplified hy budding entrepreneurs \Vith ideas for wedding-planner
\.·vebsites. In contrast, Cambridge has stuck cJose to it silicon knitting.
The problem is whether it's ready to embrace the entrepreneurial spirit
more characteristic of London with any real enthusiasm. Tech compa-

nies abound in Cambridge and its environs, and the region counts at
least 1,250 start-ups. It is one of the oldest technology clusters in Europe,
if not the oldest. But it has yet to produce a real uperstar. The region
had counted three companies which reached the charmed $1 billion
market capitalization level at the peak of the technology bull market in
early 2000, but they are too heavily outnumbered by Cambridge firms at
the other end of the spectrum doing little more than treading water.
The source of Cambridge's achievements as well as its failures lies at the

very heart of its history and geography: the university itself. The 700-
year-old institution has long been strong in the sciences and has
produced som 50 obel laureates. Isaac
The source of Cambridge's Newton studied and taught at rinity
achievements as well as its
College in the 17th century. Charles Darwin
failures lies at the very heart
was a lacklustre student at Christ's College
of its history and geography:
200 year later but began to take his first
the university itself.
serious interest in science there. Charles
Babbage invented the mechanical calculator at the university in the 19th
century. James Clerk Maxwell and Ernest Rutherford both conducted
experiments at the university's Cavendish Laboratories. After World War
II Maurice Wilks built Edsac, the first computer to use stored programs.
Francis Crick and James Wat on di covered the structure of D A in
Cambridge in the 1950s, paving the way for the modern s ience of
biotechnology. The university is an object of veneration and is cited by
the technology community as a source of inspiration and talent far more
than educational institutions at other high-tech clusters.
But the university's faculty and alumni have been notably less successful at
taking that scientific prowess and turning it into big business. Small busi-
nesses sometimes, but not really big ones. The credo of good science comes
too frequently at the expense of aggressive business. To ay ambridge has
failed as a technology cluster would be an exaggeration. But given the envi-
able assets it starts off with, its achievements are still modest.
HISTORY: FALSE START
Britain's industrial revolution largely passed Cambridge by. A kind of

stone age high-tech industry did coale~cc around the university with
Cambridge Scientific Instrument Co, founded by Charles Danvin's on
4 CAMBRIDGE, ENGLAND: HAS BRAINS, SEEKS BRAWN 59
Horace in 1881, and Pye, an electrical company with links to the

avendish Laboratories, that was established in 1896. 1 But the city
remained largely faithful to its medieval role of serving the scholars
enrolled at the university and as a market town for the countryside. In
the 1950s the city made a conscious policy of discouraging industrial
development even at the cost of losing the prize of hosting IBM's
European research and development centre. The city's attitude towards
R&D-based industry began changing only in the late 1960s after the
Mott report urged that planning restrictions be eased and a science park
be developed.
The Cambridge Science Park opened its doors in 1973, quickly to become
the geographic nucleus of the local tech scene, but five years after its
founding it counted only seven tenant . The university regarded the
science park as a property venture, not as a conduit for commercialization
of its IP. The real catalyst for the first real tech wave was a quirky and short-
lived initiative undertaken by the local managers of Barclays Bank that
energized the industry at a crucial juncture. 'What Barclays did in the late
1970s and early 1980s was to put people into the street to grow and sup-
port bu ines cs,' recalls Walter Herriot who was a Barclays manager for five
years from 1978. It was the kind of lending that wouldn't get past financial
controls in today's banks, but managers were inspired by local patriotism
and were prepared to take on more than the usual level of risk. Among
their best-known beneficiaries was Acorn, an early maker of computers. 'In
the early 1980s we financed Acorn for about £1 million,' says Herriot. 'The
product didn't work ...and they had an overdraft. There were no a ets in
the business. But they had a contract with the BBC and the management
was technically able and the company could trade out.'
Other factors contributed, too. The science park altered its leasing policy
to provide smaller units on shorter terms, thereby making itself more
hospitable to stc1rt-ups. Venture capital became more ,videly available for
the first time in the early 1980s. The t John's Innovation entre, a non-
commercial incubator span ored by one of Cambridge's colleges, opened
its doors in 1987. But appearances were deceiving. The leading compa-
nies of the region, like Acorn and Sinclair Research, didn't become
Micro ofts; they simply flamed out. Take 1orch Computers, which
started in the 1980s as a developer of peripherals for the BBC Micro and
eventually produced a desktop business computer. 'The 1 invented
things, got th 111 to m;irket very, very early - before their time. They
didn't make a lot of money but they had an. awful lot of fun doing it,'
says Ke\·in utt, who worked at Torch at the time. 'The only thing they
failed in was that the markets were not ready for them. Also, being in the
UK, as what was effectively a P manufactur r, was a problem. The
British aren't early adopt rs, willing to take on products from an
unknown company. nusiness is much more conservative in the UK. In
the U you probably could have gotten the thing off the ground.' 2
Cambridge wasn't constructing th magic triangle of technology, entre-

preneurship and finance that was developing in California. There was
innovation in abundance, but the willingness and ability to start
dynamic and growing companies were missing and gradually the finance
dried up, too. Britain's first-generation of venture capital funds, like
tho c elsewhere in Europe, abandon d seed tage investment. Apax
Partners, for instance, launched its first fund model) ct on Silicon Valley
financiers in 1981, but by I 990 was putting two thirds of its capital into
later-stag investm n ts. Ronald Cohen, who lieads Apax, blames th
absence both of stock markets for growth companies like America's
asdaq and of interim private fin,mce, which forced venture capitalists
to hold on to portfolio companic too long to yield an adequate return.
'People in the UK never understood that v nturc capital is part of a
ystem. It's an cnginc ...Thc pump is the public markets,' he says. 'So long
as there wer n't public mark ts that would ace pt young companies the
risk profile was too high.' 3
The current vyavc gathered force only over the 1990s, prompted in part
by th undeniable succ ss of California' Silicon Valley, which in turn
inspired a new generation of investors and entrepreneurs (and not a few
old-g neration ntrcprencurs giving it another go). This time around
ambridge had a relatively stronger base, with great r numbers of com-
panies, a wider array oft chnologics, more experienced entrepreneur
and access to gr ater amounts of capitc1I.
GEOGRAPHY: COMPACT CLUSTER
By tc hnology-clustcr standards, ambridgc is a mall, almo t rural

place. A suming the traffic i n't particularly vicious, a 20-minute drive
from the centre of town brings you to the farms and quaint villages, not
a few of them housing tech companies behind the facade of old school-
houses and mills. Most companic , in fact, arc no longer in Cambridge
itself. Silicon Fen - as the c1rnbridge cluster is called, at least by
promoters - extends well beyond the city limits to cover a 20-mile radius
4 CAMBRIDGE, ENGLAND. HAS BRAINS, SEEKS BRAWN 61
extending from the city to the towns of Huntingdon, Tewmarket,

Royston and the mcdi ~val cathedral town of Ely. 'People by and large
will work within 20 minutes of their homes,' ays one denizen of the
region offering a way to mea ure the cluster's geographical limits. A half-
dozen science parks dot the area, the central one heing Cambridge
Science Park.
Academic science and commercial technology play a major role in

Cambridge economy. Between '.15,000 and 40,000 people arc employed
directly by the industry, with 1,500 more in related businesses, and
another 5,000 researchers in educational
Academic science and
institution . Greater Camhridge is the
commercial technology play a
chosen home for 50-80 new start-up compa-
major role in Cambridge
nies annually, more than three-quarters of
economy.
them launched in the ambridge area a
opposed to re-locations from outside the region. Cambridgeshire was the
UK's fastest-growing county for the 15 years to 1996, exµanding more
than four times the 4.3%, average rate nationwide. JOVernment aid for
infrastructure and education tends to be be towed on deprived areas,
thus Cambridgeshire, as the second wealthiest county in Britain and at
near full levels of employment, suffers from under-investment.
Meanwhile, planning constraints have squeezed furth r development of
either housing or offices. All this means that companies find it difficult
to expand in the area, even though that i what most of them would
prefer to do as opposed to moving out or sprouting new centres some
distance from head office. Jnexp nsivc housing is hard to find even in
outlying villages. 4
Herriot and others argue that by itself Silicon Fen can never rival Silicon
Valley. Hut combined with Oxford and the wide swathe between the two
university towns it would no longer be a welter-weight. dven the poor
transportation links and the absence of a unified governmental author-
ity, that may be unachievable; therefore, many advocates are suggesting
a stepping-stone cluster stretching between the tv,o university towns,
with a third town, Milton Keynes, in the middle. Others sec a technol-
ogy triangle evolving over time to comprise Oxford, Cambridge and
London. (In foct, I ondon is already effective!, part of the Cambridge
region at least for purposes of finance, and is within commuting distance
at least from tile southern part of the region.) Still others look e\'cn fur-
ther, to extend the boundaries to Ipsv\'ich in the ca'>t and Peterborough
in the north.
For now, however, both London and Oxford are ri al technolobry centres.
London is less of a ompetitor, because of its bent towards internet con-
tent and e-commer e. As the vcnturc-capital capital for the rest of the
country it forms a vital part of the ambridgc tech Juster. Oxford comes
closer to the ambridgc mould and has the distin t advantage of being a
much bigger city than Cambridge witll a long indu trial history, even if
the university is traditionally more oriented towards the humanities.
'Oxford has a cluster the size of Cambridge, but their PR isn't as good,' says
Herriot. 5 Elsewhere in the UK, the Thamc Valley is also home to a sizeable
number of te h ompanies, and there .:ire more clusters in the north and
Midlands, gathered around Edinburgh and Warwick University. But they
lack the dynamism and more importantly the venture capital that clusters
in England's south-cast enjoy.
PEOPLE: LIFESTYLE COMPANIES
Cambridge companies exhibit many of the symptoms of other emerging

clusters - firms are started up on the foundation of an ex iting new tech-
nology by cngin ·crs with little knowledge of the market or experience in
leading a rapidly growing business. any companies subsequently
undergo an often wrenching change from being technology-driven to
market-driven_, and newer companies arc being set up on a more sophis-
ticated model with the input of serial entrepreneurs and activist venture
capital fund . Biotechnology ompanie , who e ore te hnolo 6ry is more
linked to acad mic science th,rn any other area of high-tech, accounts
for nearly 14l¼i of all Cambridge businesses, a high percentage compared
with other technology clusters. The difference between ambridge and,
say, Helsinki or Tel Aviv, is that it has been a technology entre for 20, if
not 30, years. The evolution has tak n longer to get underway, and it'
occurring more slowly thJn elsewhere.
One way this rnanif st itself is in Cambridge's tepid links to Silicon Valley.
High-tech companie around the world unhesitatingly Jcknowledge
alifornia's sta tu as the industry pace-setter and are eager to cxploi t it,
often setting up offices there early on in th ir business development and
sending their EOs and other top officers for long stints. With English as
its mother tongue, stronger cultural connections to the US than virtually
any other country in the world, and some of the best air connections
imaginable, Cambridgeshire and Santa 'Iara should be sister counties. Yet
Cambridge has been astonishingly reluctant to exploit links with ilicon
Valley on either a corporate or personal level. It is unu ual for a ambridge

firm to have a substantial US presence orfor its top officers to spend much
time there, either at their present level or early in their careers. Companies
tend to be UK-focused first, European second and global third. The leading
ambridge companies, according to one estimate, obtain only 75% of
their revenues from over eas. That's a low figure given the relative ize of
the UK market for high-tech product, the fact that it has few companies
like a Cisco or Nokia that source high-tech components for products des-
tined for global markets, and the fact that the US is such a dominant
factor in the global high-tech market.
nCipher, a netvvork security company, is an exception to that rule. CEO

Alex van Someren founded the company in 1996 ·with his brother Nico
and had a US subsidiary up-and-running a year later. 'We absolutely
established the business in the belief that products we were making,
which accelerate electronic commerce, would have their primary market
in the US. That's where electronic commerce was best advanced. We
would have markets in other major regions of the world but they were
likely to take time to mature,' says Alex van Someren. 6 Half of nCipher's
employees are in the US, van Someren is there one week of every month,
and 75% of revenues deriv from America. The failure of most other
Cambridge companies to follmv nCipher's example often prevents them
from recognizing emerging opportunities and competitors, or from being
able to achieve the scale to remain competitive against international
rivals. 'I th ink that there's a very powerful tendency in the UK for busi-
nesses to remain quite parochial and still be considered quite successful,'
Van omeren says.
The weak Silicon Valley connection is symptomatic of a wider problem

of ambridge companies exploiting innovation. Companies tend to start
with a technology proposition rather than ·with a business or market
opportunity. Managers regard marketing and
Companies tend to start management functions as secondary - chal-
with a technology proposition
lenges that can easily be overcome simply by
rather than with a business or
ha\ ing the br-,t technology in the market-
market opportunity.
place and letting that do the selling for you.
Brian Birtles, chief operating officer for Cambridge i\'envorks, an organi~
zation \et up to bring together the area's high-tech community, has
spent part of his career on both side-; of tile fence and llas seen how the
two fun tion_ are valued. 'I was a techie and an engineer, and moved
into sales and spent fi\e years on the road seTTing,' he 'itl)S. 'The cultural
thing in the UK is that (as a marketing person) you 1rc re ardcd a no dif-
1
ferent to a double-glazing sale man. It's not taken seriously even if you re
a sales engineer. ' 7 Investors havcn t been adverse to putting technolo-
1
gists at the helm of their portfolio companies, the vi w b ing that an

innovative product is more important than a carefully planned and exe-
cuted business model. That principle holds even with companies that are
past the R&D stage, or at least ones that should be.
The most extreme manife tation of engineers' predominance in manage-

ment come in the form of 'lifestyle companies' who c founders and
managers are less interested in aggressively expanding their business
than in using it as a platform to develop interesting new technology
without the con traint of belonging to a large organization. 8 One mall
company based in a villag ju t out ide Cambridge that is involved in
adapting older platforms to the Windows environment and the internet
illu trate the phenomenon. Founded in the late 1980s and boot-
trapped, it has gone through a series of strategic zigzags over the years.
That is not unusual for a software company trying to keep up with a fa t-
paccd market. But the company never tried to build a large mark t, even
though plenty of its US competitors did in the same market space.
Instead it was sold almost exclusively in the UK as a super-sophisticated
product that was difficult to implement and scrvic . 'It wa intentional,'
ays the CEO. 'The product we have is very service-intensive and to
recruit compai1ies that service is very difficult. We vc never tried to build
1
up a distribution network because the tool is too complicated to sell

through distribution.' The company in theory is looking to develop a
simpler shrink-wrap rsion of its product and to ell more overs as. But
to do that it would have to raise v nture capital, and the CEO concedes
that he ha no immediate plans to do that. He also recognizes that the
company would do better to identify a niche segment in web enabl -
ment rather than ompete in the broad market, but again he has no
active plan for this. 'We will find a niche, I know we will,' he concludes
without radiating any sense of urgency.
he life tyle company phenomenon is not unique to am bridge and it

may be less wide pread than a decade ago, but it i common enough as
to be an is uc here more than anywhere else. Nor i it easy to measure,
since few companies will own up to it. A survey conducted for Tile
a111bridgeP/Je110111eno11Revisited found th.1t only 6% of companies openly
expre sect lifestyle goals. But when researchers defined a lifestyle com-
pany a one in bu iness for at least 10 years and employing 10 or fewer
people, the portion swelled to an estimated 22% of all firms.
4 CAMBRIDGE, ENGLAND; HAS BRAINS, SEEKS BRAWN 65
Not urpri ingly, the typical Cambridge company is founded by someone

from the technology side - academics making the jump from teaching
and research or researchers from the handful of contract design compa-
nies that are such an important part of the Cambridge scene.
Entrepreneurs have al o tended to be people outside the establishment -
immigrants, graduates of second-string educational institution and
people coming from unorthodox careers. This might explain the com-
paratively narrow trail running hack from start-ups to Cambridge
University, which is a premier establishment institution. The absence of
hugely successful fir t-generation tech firms from the 1980s and early
1990s ha n't in many cases discouraged their founder and managers
from trying again, but Cambridge uffer a dearth of erial entrepreneurs
who have founded more than one successful company and can act as
mentors and advisers.
Adam Twiss and Damian Reeves, who founded the web-server maker
Zeus Technology in 1995, fit into the non- stablishment mould in many
ways although they arc graduates of Cambridge's hurchill College.
They began running a website out of their college rooms and developing
software in the early 1990s. Their brief stints working at big establish-
ment companies w re frustrating, although the corporate world was the
preferred career path for the Cambridge colleagues. They quickly opted
to set out in bu ine on their ovm. 'Our peer group thought ·we were
mad. Damian and I thought it was exciting. Working in the IT depart-
ment of a bank didn't seem exciting,' Twiss recall .9
London dot corns often have CEOs a year or two out of university. But in
ambridge, storie like that of Twiss and Reeves have been rar .
Reflecting its scientific bent, 'ambridge company founders also tend to
he older than the boy and girl wonder who are such centr.:il characters
in the Silicon Valley legend. 'If you start a company with someone
'itraight out of university, it's not going to be based on very sophisticated
technology,' reasons Howard Biddle, of contract design firm Cambridge
Consultants. 10 'If you're going to acid a lot of value in engineering - and
frankly that is where high-value companies come from - they have to do
an apprenticeship and that h.:is to he 10-15 yc.:irs. Dot co1 1 companies
were formed out of nothing, but if you want to create a company like
Cambridge Silicon Radio (CSR) or AR;'v1 or Cambridge Antibody
'Jeclmology, you need a lot of science and underst,mding of science.'
Cambridge\ contr.:ict design firm - J unique and important part of

the city's success as a high-tech cluster - '1ave long been a source of
innovation but more lately have become a source of entrepreneurial-
i m, too. Between them, they employ omc 2,500 people, three quar-
ters of them scientists and engineers, to develop inno ati e products
under contract for other companies. ambridge onsultants, which
pioneered the business concept 40 years ago, specializes in engineered
products in uch disparate areas as healthcare, tele ornmuni ations
and consumer durables. It even invented a circular teabag for Lyons
Tetley, which is more of a technical triumph than it appears. 'Cutting
cir le at a rate of 2,000 a minute and producing a really even, high-
quality weld is very difficult,' says Biddle. The ontract design firms are
all profit-making businesses, but their ethos has traditionally been very
tech-ish. erald vison, chief executive of The Technology Partnership
(TIP), another one of the big five consultancie , ays the firm didn't do
any Y2K work in the run-up to 2000 simply be ause it wasn't te !mi-
cally challenging enough and wouldn't
Where they were once
have made good u e of the firm' multiple
content to take a passive
expertise. 11 But where they were on e on-
approach to R&D, the
tent to take a passive approach to R&D, the
contract design firms are now
seeking to retain and exploit
contract design firms are now seeking to
their innovations. retain and exploit their innovations. Thi
can involve anything from retaining rights
to IP they have developed beyond the customer's needs to spinning
out new companies. Many of the firms have formed their own venture
capital funds, like TIP's £35 million TIP Venture Managers set up in
1999 with outside investors.
Among the pin-outs a team at TTP is developing , n instrument that

automates drug discovery using fluore ent labelling and a scanning
laser to monitor events at a molecular level. Avison says the strategy is to
turn it into a profitable bu ine s within TIP and then de ide what to do
with it. He holds up this as a b tter model for business development
than starting up a tand-alone company at the R&D stage. 'We run and
manage it as a pr duct, not as a busine s. When we've got a product
then we can turn it into a business,' he says. 'You have much more flexi-
bility about direction and timing ... If you do it the other way around you
pend the first few month on the bu incss plan, which bear no relation
to the produ t. You also spend a lot of time putting into place company-
like featur 'S, which have nothing to do with the product. You've got to
have a per onnel department, and an ac ounts department. It diverts
resources cmd attention and slows you down.'
4 CAMBRIDGE ENGLAND. HAS BRAINS, SEEKS BRAWN 67
SOCIETY: TECHNOLOGY-WARY
The British are ready to accuse themselves and most other Europeans of
being slow adopters of new technology, although the raw data don't
seem to bear this out. l11temational Telecommunications Union (ITU)
statistics show the UK with 2,577 internet users per I 0,000 inhabitants
and 281 hosts in 2000, both figures twice the average rate for Europe and
ahead of much of Western Europe. 12 But Hritain lags behind not only the
US but the Scandinavian countries, which is hard to explain given that
English is the international language of the internet, making the hulk of
its content much more accessible to Hritons than, say, to Swedes. The fig-
ures for PC use reflect the same trend, with the UK showing 33.8 per 100
inhabitants, higher than much of Western Europe but lower than
Scandinavia and the US. Alan ane, the telecommunications correspon-
dent for the Fi11a11cial Times, says the raw numbers in fact overstate the
depth of internet penetration in the UK and Europe, compared with the
US. 'The level of understanding and enthusiasm for the Internet here is
nothing like Silicon Valley,' he say . 'In the US there is a greater aware-
ness of what you an do with the internet than in Europe. Europeans are
more hardheaded and don't invest in something unless they see you can
do something with it.' 13
In the broader measure at edu ational achievement English students

don't stand out in international surveys. Admittedly \sian countries
always dominate these rankings, but in the 1999 International
Mathematics and Science Study survey Engli h students lagged behind
all but one of their Western h1ropean peers in maths, although they did
considernbly better in science. 14 In maths, English eighth-graders scored
an average of 496, ranking them number 20, while in science they scored
s:rn,putting them in eighth place. In terms of education spending as a
percentage of gross domestic product, Britain spends a low 5.3'¾1com-
pared with other European countries, although n relatively high 29'½, of
its students in higher education study the sciences. 15 Britain's undis-
puted scientific prowess, like America's, doesn't shov-.' itsl'if in secondary
school but at the universities and in post-graduate work.
Practically speaking, for UK tech companies this makes for a kind of cog-
nitive dissonance. They employ some of the world\ most talented
scientists and engineers to create state-of-the-art technology but are sur-
rounded by a country of crnJ-uscr'> who arc sceptical about its effiu1cy,
hesitant to experiment with it, or to ada·pt business and pcrrnnal
practices to make full use of it. 'Until you focus on !>pccitic applications
of the t chnolog , us rs fine.I it diffi ult to . ee hovv it will < ffe t them.
They want to know, "I Im is th t chnolog, going to .iff ct me? I low is
it going to make my life better?" In the States, where t hnology is
adopted more readil and quickly, if you tell people the concept they say
"I'm µrepared to take a risk" and they do it,' sa s J<evi11 utt of
ambridge's Soft Option Tcchnologic ·. 16
The British, at lea!>t until lately, hav looked askance at entr preneurs
and the notion of being in business for oneself as a desirable career path.
In the Glo/1al E11trepreue11rs1Iip
Monitor 2000 survey, which me.isured both
actual and planned start-ups i1121 countries around the world in 1999,
the UK was a middling performer. 17 Th report estimated that 5.2% of
the adult population was actively s eking to start a business, ahead of
I. rael, Singapore and Finland but \Veil below tile U 's 12.n1,. survey of
experts said llritain's social and cultural norms were unfavourable to
entr preneurs, especially failed nes. Rut, interesting\ , an earlier version
of the report publi ·hed in 1999 concluded that fear of failure was not the
main deterrent to pot ntial entrepreneurs; r.ither it was a lack of re pe t
for entrepreneur· as a class.
Those attitudes began to change at the end of th 1990 . 'There is

much exp ctation from p ople to spin out companies and create om-
panies. You can almost say that in the UK that entrepreneurship has
become acceptJble, the thing to do almost. Now in your local pub, if
you say you're working for a high-te h ompany, people ask when
you are going out on your own. That doesn't yet exist in other
European countri . In the pa t 20 years it's been the case in merica,
Palo Ito, and I suppo. c it's here now in the 1990s,' says Phil
O'Donovan, managing dire tor of -.unbridge Silicon Radio. 18
~1argar t Thatcher in her era preached the virtue of private enterpri~e
and Tony Blair chimed in via a 1998 whit pap r encouraging the
ountry to mutate merica. But the real motivation ame from the
emergence of the intern tin 1999. Suddenly there were twenty-!>ome-
things in pony-tails making twenty million in the internet business
and in piring others to do the same. Nevertheless Britain has fe\v
entrepreneurs to act as role models out ·ide the London dot com scene
that ambric.lg looks down on. In ambridgc three names usually
make up the entire list - Mike Lynell of · utonomy, hris i:vans of
elltech and Robin Saxby of R 1 Holdings.
FINANCE: CONSERVATIVE CAPITAL
Kritain\ private equity and venture capital industry is by far the biggest
in Europe. In 2000 it invested just over f.8 billion, or 38<¼>of the
European total. Venture capital as a proportion of gross domestic prod-
uct is higher for the UK than anywhere else in Europe except Sw den
and Iceland, equal to 0.859% of output versus a European average of
0.183%. The leading funds, lik Apax, 3i and Advent, have hundred of
millions of dollars available for early-stage investment. Moreover, Britain
is the favoured staging area for much of the technology investment hy
US funds in Europe and naturally British companies capture a lot of that
Luropean investment simply because of their proximity to London. Like
the rest of Europe, the UK industry saw tremendous growth in the last
three years of the 1990s, a pace that continued through most of 2000.
Britain's lead looks likely to hold for the foreseeable future - UK funds
raised £10.8 billion in 2000, equal to 37% of the European total. 19
The UK venture capital industry, howev r, has not used the funds at its
disposal to create a thriving high-tech sector. After being burned had Iyin
the first wave of venture capital financing in the 1980s, British funds
became reluctant to invest in high-
After being burned badly technology and turned to leveraged and
in the first wave of venture
management buy-outs of Old Economy
capital financing in the 1980s,
companies. 20 By the late 1990s technology
British funds became
was coming hack into fashion, and many
reluctant to invest in high-
technology.
buy-out funds on their own or with experi-
enced technology investors were starting to
invest in tech companies. But technology still accounts for only a small
portion of total private equity. Although high-tech investment grew 54'¼1
in 1999 to £1.09 billion (not counting bioteclrnology), it accounted for
only 14r¾i of UK private equity funds' total i11vestrnent. Across Europe
high-tech took up 3]% of all private equity investment and in the US it
accounted for double that. Many private equity funds arc only gradually
making the transition away from the hands-off approach thev normally
take with the mature companies they buy out, to catering to the greater
demands of start-ups and their i!lexpericnced managers.
By their own admbsion, 111<1ny investors arc tellrnologically-challcnged.

Zcm' Ac.lam rwbs complains that the venture capitalbts he was meeting
in the early days of his company came from investment banking back-
grounds and had never shepherded a '>ll ce.,~ful technology company.
s late as 1998 they didn't understand the internet enough to evaluate

his busines . 'People weren't investing in us becaus they thought it was
more ex iting to in est in wedding.corn or paper lips online. Our busi-
ness took a bit of under tanding, whereas organizing wedding lists
on line ... You just said, "We'll get xx p r cent of all the market" and you
got funded,' Twiss recal\s. 21 A slew of commercial technology in ubator
created in the waning months of the bull market for technology hares
in late 1999 to early 2000 wa uppo ed to fill gaps in the UK venture
capital industry's skill set. In fact, the incubators epit mized the indu -
try' war t tendencic : financiers and other with little or no technology
ba kground raised lots of money at startling sto k market valuations
and then proceeded to invest it in dot com ompanies. The in ubator
edifice came crashing down less than a year later. 22
On the other hand, Britain has met the challenge of establishing

public market ho pitable to young high-technology companies. The
London Stock Exchange (LSE) established the Alternative Investment
arket (AIM) in 1995 to host smaller and younger ompanie that
couldn't meet the usual listing requirements of the L E. After five
years AIM counts some 660 companies that ha e rai ed some £5.8 bil-
lion through public offerings. But it hasn't succeeded in completely
imitating the a daq: the companies that tract there have often been
floated early in their dcvelopmen t and use the market as a substitute
for venture capital. Slightly more mature companies with a stronger
track record trade on techMARK, which is part of the main board of
the LSE. S t up in 1999, techMARK gathered all thee tablished LSE
tech companies under its umbrella and has easier Ii ting requirements
( uch as a three-year operating history) for new companie demonstra-
bly in a technology sector. As an indication of its size and standing
relative to the IM, tcchMARK counted 240 companies a year after it
was formed and they had rai ed £9.9 billion. If the UK ha yet to
develop the kind of technology-investing ulture that has e olvcd in
the U , it is under le s pre ure to do o than other technology-growth
markets in Europe and Asia. American investors are already accus-
tomed to trading in London and can take up the slack. All the major
U inve tment b( nks have a presence on the L and quality research
is readily available on Rritish companies.
GOVERNMENT AND UNIVERSITY:

NON-INTERVENTION 1ST
The UK government intervene far Jes in the economy than other

We tern European countries and high te h i no exception. The govern-
m nt didn't have a co-ordinated science poli y until r latively recently
and let it science budget decline in the 1980s. This began changing over
the next decade with the creation in 1992 of the Office of Science and
Technology to manage policy that ought to tre collaboration between
academic researchers and industry. Gradually more money has come to
the lab table, and the government sponsors a wide array of programmes
mainly through the Department of Trade and Industry (OTT). But these
programme have mall overall budget and rarely offer sizeable grants.
Poli y tends to be re-distributive rather than helping to develop trategi-
cally important areas defined either by geography or market. On balance
the British gov rnment's role in private-sector R&D is at the marginP
For instance, the DTI nms a programme called SMART that provide grants
to individuals and small husines es (up to 250 employees) to develop new
products and make better use of technology. But the grant only rarely
exceed £150,000, compared with up to $750,000 that the US Small
Bu ine s Innovation R earch Program (SBIR) makes available. More
money is available for collaboration between academic researchers and
business through the Ll1 K programme, which sponsors chemes running
for between two and three years focused on specifi te hnology and
market segments. The biggest LINK programme, begun in July 2000, is a
£30 million effort in applied genomi for healthcare, half the funds
coming from the tate and the re t from industry. But compare that with a
German initiative amounting to some $135 million a year to build its
biotechnology scctor. 24 In venture capital, the aggre sivc programmes
undertaken by the Finnish, Israeli and Taiwanese governments have not
been matched by Britain. But a more modest effort got under way in 2000
in the form of a £150 million fund comprising £20 million of government
money, that will inve t in seed-stage venture capital funds. Th effort isn't
designed to help the high-tech industry but to coax Britain's conservative
institutional investor to risk more money in the technoloh 1 ' SC'ctor.
If the government docs not give much to high-tech neither docs it take
too much away in the form of taxes. 25 Vlargaret Thatcher began rccluring
marginal rates starting in 1979 and at 30 1¾1 Britain\ corporate tax rate is
among the lowest in h1rope. The corporate and capital gain taxc'> h,I\ e
been equal for a long time, but the cap gains rate has more re ently b en
ut to 10<¼1 for share held for at least four years, which is a great bonus
to entrepreneurs. The tax regime is less attractive for employ es hut
improving. Share schemes arc an c ·sential clement of th re ruiting
package that younger, high-tech companies hav to offer to woo people
away from bigger, less risky and usually better-paying big orporate
employer . Yet it has made little sen ·e to grant mployees option
because the company vvould have th n be n liable for n,Hional insurance
payments. The options holder is also taxed on the current value of the
option. Th result is that most start-ups offer the mploy es hare~ out-
right, which increases the odds that the holder \\.'ill have them for the
four-year minimum needed to qualify for the reduced capital gaim rate.
The problem for companies is d 'vizing programmes to ensure the shares
ve t later and act as an incentive for ·mploy '' to stay.
The role of ambridge University in the high-technology industry has

passive and active elements to it. Its passive rol, is its normal function
of training stud nt who start up companies after they graduate, or
through its employing faculty which, in i-
If the government does
dentally, de elop JP, forms ompanie or
not give much to high-tech
act· as corporate adviser. The university's
neither does it take too much
active role comes into play when it on-
away in the form of taxes.
ciously act to foster the industry'· growth
through R&D collaboration or systematic efforts to commcr ializc IP.
The broad picture shows that over tim' the university's passive role has
de lined while its active role, especially under its urrent vice-chancel-
lor, Sir Alec Broers, has grm n if not quite to the high pitch of some
merican universities.
The scientific resources of the university (not to mention a host of

other institutions in the amhridge area like the Laboratory for
Molecular Biology and the Wellcome Tru t 1enome ~ampus) ,He
strong enough that for mo. t of its 30-ye.ir history the area's technol-
ogy cluster could draw on them without th univer ity's .ictive
a sistance. Even though the university numbers a relatively small
15,500 students, it dru,-vs a disproportionately l<1rgc amount of
res arch funding and its departments consistently enjoy the highest
ratings in the country. According to a ambridge Phenomenon
survey, an impressive 25(}1,of all independent ~tart-ups said one or
more founder· had been emplo ed at the uni,·crsity or a local
re~earrh institute. 26 But the figure has been falling: some 3 F¾.1of com-
panics founded before 1990 fell in tlrnt category while only 17 1¾>of
those founded since then did. There are no exact figures on
,ambridge alumni-start-ups, but people in the industry say that
despite a few high-profile figures, graduates have not played a partic-
ularly large role in forming new companies.
Sir /\lee does not hesitate to acknowledge that it would be difficult

for ambridge to stay in the first ranks of science-research universi-
ties without the presence of both large multinationals and smaller
high-tech companies nearby. Perhaps because he spent some 20
cars working for lBM in the US, he is comfortable acknowledging
the leading role corporate R&D ha-; played not just in new products
but in fundamental research. 'Many of the major technological
advance that have made modern technology possible have evolv cl
in industrial research, Bell Labs being the archetype. Look at Xerox,
IBM, and Hewlett-Packard - this is pretty fundamental stuff,' he
says. 27 for some time, university and corporate researchers have
been working side-by-side in campus facilities funded hy businesses
called 'embedded laboratories'. But Sir Alec is expanding this con-
cept to multi-million-dollar proportiom at a 150-acre ite in West
ambric.lge where companies can lease pace and bring their own
personnel on condition that they conduct fundamental research
related to the university's own research priorities. Microsoft is
spending £50 million developing a software research centre and
Britain's Marconi is giving money for a new building as well as a
general grant of £28 million.
ambridge, by many e timate , has had trouble getting the IP sitting

in its labs into the ommercial arena. One government programme,
cience Enterprise hallenge, is setting up eight regional university-
based centres, one of them in Cambridge, to facilitate the
commercialization of academic research. rI1c Cambridge-MIT
In titute, an alliance between the British and American universities
set up in July 2000, is seeking to encourage entrepreneurship and
competitiv 'ness in the UK hy bringing in practices devclotiect at MIT
in technology management, logistics and proc.luct development. The
British government is funding the programme to the tune of £67 mil-
lion over five years with more money coming from the pri\ ate sector.
Whether this will, over time, help contribute to a flow of innovations
out of the university and into the surrounding high-tech sector has
yet to be seen.
FOCUS COMPANY: CAMBRIDGE SILICON RADIO
Cambridge Silicon Radio (CSR) is very much a second-wave Cambridge

company. Founded in 1998 as a spin-out from Cambridge Consultants,
the company has raised a comfortable cushion of venture capital,
taken on an experienced EO with strong Silicon Valley connections,
and has e tablished strategic relationships with leading global players.
All of this has been done in very short order in a race not simply to
have the first product of its kind out in the market but to ensure it is a
leading player.
CSR got its start as an internal project of Cambridge Consultants (CCL)

to develop single-chip radio devices that would enable appliances to
communicate with each other over short di tances. Project manager Phil
O'Donovan and others laboured on the basic technoiogy for some two
years, developing their own spread-spectrum technology for the commu-
nications link. Shortly after the Bluetooth wireless standard was
announced in early 1998, O'Donovan dropped the in-house technology
in favour of the nev\' standard and spun off the company from
ambridge Consultants with co-founders James Collier and Glenn
ollinson. O'Donovan credits the unusual environment at CL for his
ability to move so quickly to develop the first single-chip technology for
this application. 'We started earlier than anyone else and we dared to do
it. In big companies they do things incrementally: if you set out to do
omething you'd better do it,' O'Donovan says. 'At CCL, if we said we
want to develop a single CMOS at 2.4 gigahertz and we didn't, it would-
n't be a disaster. We were able in CCL to take risks, which is important
for entrepreneurs.' 28
Within a year of setting off on its own, CSR was already raising big
amounts of money from venture capitalists and strategic corporate
investors. Amadeus, 3i and Gilde each put in
Within a year of setting £2 million in April 1999 and Intel followed
off on its own, CSR was
early in 2000, about the time CSR intro-
already raising big amounts
duced its first product. CCL got about 10%
of money from venture
capitalists and strategic to 15% of the equity at the outset for its
corporate investors. early support and for transferring IP into the
company. The fundraising continued over
the course of 2000 so that a year later the company had a whopping S70
million contributed by such blue-chip investors as Compaq, Philips,
Sony and AR\f as well as venture capital funds. The corporate capital
comes from both the companies themselves and from their venture capi-
tal arms, but either way O'Donovan ees the investments not just as
money but as a way to cement cu tomer relationships. 'We could have
taken money from banks or we could have taken money from compa-
nies. Given that money from companies is as good as bank money and
you get to work mor~ closely together with companies as partners, we
took it from companies,' he says.
From the start C R's managers knew they would focus on their
strengths in design and develop them in marketing, leaving the
actual fabrication of the chips to others. 'It was quite clear from the
beginning. We had been a fabless group inside Cambridge
Consultants and we decided to do the same thing as a company,' says
O'Donovan. The chips are made in Europe, but some of the work was
due to be moved to Asia. CSR's marketing effort got under way rn the
third quarter of 2000, with the first product shipment and the open-
ing of two sales offices in Dallas, Texas, and in Tokyo, both adjacent
to major concentrations of customers. More offices were et to open
up in the fir t half of 2001. To preside over this global marketing net-
work, C R took on a US-based chief executive officer, John Hodgson,
a British native who has been in the U since 1985 in marketing post
at VLSI Technology and Lu ent Technologies. 'We're going to do a lot
of business in the States and he had a lot of semiconductor experi-
ence,' ay O'Donovan. 'With the three founders here in Cambridge it
makes sense for the CEO to be in America.' Chris Ladas, vice-
president for operatiom hired in May 2000, was also to be based in
merica to oversee production.
What becomes evident from CSR's rollout over the course of 2000 is tl1at
it has made the transition from Cambridge-based R&D company into a
global concern with research in the UK; manufacturing in Europe and
Asia supervised from the US; and sales, marketing and applications
development in the US and Asia. The investors are a multinational poly-
glot, but critically, with the exception of ARM, none of the trategic
investors is British. O'Donovan says big UK companies are rductant to
invest in young high-tech ventures compared to their US and Asian
peers, but e\'en if they \Vere prepared to do so rt wouldn't be relevant to
SR's strategy. 'We must have visibility with American, far Fastern and
some European companies for the wireless m,uket,' lie -'>ays.,·1here aren't
so many UK companies in that sector as there used to be.'
AHEAD: FOCUSING ON IP
Cambridge can retain much of its acad mic aura yet su c ed by k ping
to its natural trength rather than trying to mimic the more aggre sive
Sili on Valley model f big companies that undertake everything from
R&D, through manufacturing, marketing and distribution and finally to
service and maintenance. ambridge iii on Radio i doing ju t that by
concentrating on its ore R D apabilitie and eff ctively tran ferring to
its licensees the ,vork of bringing the t hnology to the end-user. CSR's
technology i 'marketed' to a relatively small number of companies and
their engineers who fully appreciate the value-added. o ne d for mas-
sive product rollouts, a phy ical pres n e in a larg numb r of global
markets, nor the huge financing rounds needed to pay for all of thb.
This could be seen as a step down for a country that pioneered and built
huge industrial combines during the industrial revolution. ambridge
won't have the psychological satisfaction of one day being home to
another okia. But the UK doe n't em to have the kill and o t-stru -
ture to ompete in high-technology manufa tming, even for
sophisti ated produ ts with small produ tion runs, against the likes of
ingapore and Taiwan. or doe it have the vast and path-breaking
home market, financial re urce r elling abilities of U ompanie . Yet
/\RM, a muc~ older c mpany than C R with a proven tra k record in the
field of RISC pro essors, has shown that a similar model bas d on pure
licensing of its IP can '"-'Ork and create value. 'There's a huge am unt of
intellectual horsepower, and what the ARM model d e i pa kage and
sell the know-how. It doesn't package a thou and people and a pr duc-
tion line; it packages SO guys in the development lab,' says TIP's Gerald
Avi on. 29 Many ambridge companies have yet to get down from their
ivory-tmvered labs and into the marketplace in the street below. If they
do, they have the wares to sell.
NOTES
Segal, N.S. and Quince, R.F (1985) 'The ambridge Phenomenon and the
N w Role of the ambridge cience Park' in Sci('llcePar/...sand !111wvatio11
Ce11IC'n:Their Eco110111ic
Social hnpnct, Elsevier, Siliconfen.com, and interview
with Walter llcrriot, St. John' Innovation Centre, 28 April 2000.
2 lntcrvievv with Kevin utt, Soft Option Technologies, 27 April 2000.
3 Interview with Ronald ohen, partner, Apax Partners, 25 April 2000.

4 Segal Quince Wicksteed (2000) The Cc1111bridse Revisited and
Plle110111e11011
interviews with Walter Herriot and Bill Wicksteed, egal Quince Wickste d,
l 2June 2000.
5 Interview with Walter Herriot, 28 April 2000.

6 Interview with Alex van omeren, chief executive officer, nCipher, 13 June
2000.
7 Interview with Brian Birtles, chief operating officer, ,arnbridge Networks,
May 2000.
8 Tlie ~n111briclge Revisited, pp. 31-32 and pp. 69-70.
Plm10111e11011
9 Interview with Adam Twiss, Zeus Technology, 13 June 2000.

10 Interview with Howard Biddle, managing director, Cambridge onsultants,
27 April 2000.
11 Interview with G raid Avison, TIP Group, 13 June 2000.
12 ITU Teleco1111111111icc1tio11
!11dicator, International Telecommunications Union,
2001.
13 Interview with Alan Cane, the Fi11n11cialTi111es,25 pril 2000.
14 Third International Math and Science Study-Repeat, 1999,
www/ti mes. be. edu.
15 H11111m1 Report 2000, Oxford University Press, 2000.

Develop111e11t
16 Interview with Kevin Nutt.

17 Paul D. Reynolds and others (2000), G/o/Jal E11treprene11rsllip
Mo11itor,2000
Exernti1•eReport, Kauffman Center for Entrepreneurial Leader-;hip, 2000.
18 Int rvicw with Phil O'Donovan, managing director, Cambridge Silicon
Radio, 28 April 2000.
19 EVCA 200 I Yenrbook, European Private Equity and Venture Capital
Association, 2001.
20 British Venture apital Association 1999 Annual Report, press release.
21 Interview with Adam Twiss.
22 Interview with Antony Ross, director, 3i Group Cambridge, 28 April 2000.
23 Gristock, Jenny and enker, Jacqueline, J111blicSciencen11tfl\'t'altl, < .reatio11i11
Uritnin, British Council.
24 Lord ~ainsburr and others, Hioted111olo,\?'

( l11ste1s,Department of Trade and
Industry, 1999.
25 Interview with David Wilkimon, partner, Ermt & Young, 12June 2000.
26 Tlte Ca111/>ritlse Rt'l'i~itetl,pp. 32-3:~ t the author,; note that thl'
/'lie,10111<'11011
sampling of 169 compa111es might be too small to draw any firm conclusions).
27 Interview with Sir Alce Broers, vicc-chan liar, ambri<lgc: University,

28 Apri I 2000.
28 Interview with Phil O'Donovan.
29 Interview with Gerald Avison.

Greater Helsinki
Tekes
•
Otaniemi
HELSINKI
•••
Science Park
•
lnnopoli
University
of Helsinki•
~-.
..........
Helsinki centre:
VC funds
Start-ups
Sitra
Finland
Russia
-e Oulu
Tampere
•
Helsi•~~
Espoo .(
_,,,,:--
( Estonia
HELSINKI, FINLAND:
on the shoulders of giants
NOKIA STANDS TALL OVER FINLAND'S HIGH-TECHNOLOGY SECTOR like a

hugely successful older brother who has accomplished more than his
many younger siblings could reasonably ever aspire to. He is admired, if
at the ame time a little feared - a source for inspiration, for practical
assistance and money. /\nd you can ride on the coat-tails of his success.
When foreigners aren't mistaking it for a Japanese company, Nokia
opens doors for young Finni. h companies, many of whose managers lack
the talent for self-promotion and net\vorking needed to win attention
for their companies and for the country's industry as a whole. The maker
of mobile phones is the only truly global Finnish tech company and as
uch acts as a p digree for many a Finnish high-tech start-up trying to
make it way in overseas markets. 'Finland is known as an internet and
wireless society, so it's a good calling card. People say, "Ah, tl1at's the
okia country",' says Markku Kangas, chief executive officer of SSH
ommunications, an Internet security company. 1
okia looms large over the Finnish economy. Its direct sctlcs accounted
for 491>of gross domestic product, and perhaps a third of the country's
economic activity is tied to the company either directly or through sup-
pliers. The company accounts for 7091>of the market capit.ilization of the
Helsinki Stock Exchange. It directly employs nearly one in every 100
Finns and a much bigger percentage of weal~hy Finns: all of the coun-
try' top 50 income earners in 1999 \\Cre past or pre~cnt Nokia
executive .2 In the high-tech indu try, okia' role goe e\en de per.
Start-up companies are the b nefi iarie of technology that okia spins
off simply b cause it happens to be outside its core busines . For th s
companie , it often acts as a first (and therefore an important reference)
cu t mer. The exccuti cranks of okia arc virtually Finland's sol our e
of managerial talent with global e perience
, The executive ranks of
in high-technology. Nokia ev n op rate its
Nokia are virtually Finland's
own venture capital fund. The fund inve t
sole source of managerial
primarily utside Hnland, but for the few
talent with global experience
Finni h ompanies blessed by a okia
in high-technology.
investment the benefits are huge: they gain
acces to okia engineers and executive , Noki<1 opens the door to
customers and it may even a t as the c mpany's distributor. Indeed,
Finnish companies will even choose their overseas headquarters based
on where Nokia has a presence.
J\plac Solutions illustrate ju t how exten ive a role okia can play. A
maker of electronic-design automation equipment, Aplac was formed in
1998 with cor te hnology more than a decade in dev lopm nt inside
okia. Because of that, Aplac could boast before it had made its first sale
that 20% of the world's cellular phones were de igned using its software.
From the day the c mpany was spun out okia wa Aplac's main cus-
tomer. 'We had a steady cash flow from okia in the first fc\v months, so
money was not a problem,' re alls managing director Heikki Rekonen,
himself a ' pin-off', having previously be n in charge of okia's radio
frequency de ign. 'We old [to oth rs] if om one desperately wanted to
buy it, but they had to ask for it.' 3 J\ J\plac wa getting ready for it· big
move into the U market in the ummer of 2000, Nokia continued to b
a major factor: Rekonen chose Dallas, Texas, as his Ameri an base largely
because Nokia has a big operation th re a do a lot of its subcontractors.
More than that, okia was pr suring the national airline, Finnair, to
start direct flight b tw en Dallas and Helsinki. okia ha the power to
do that kind of thing.
Th Finns aren't resting on okia's laurel , howev r. Finnish high-tech

has going for it a strong foundation of creative engineering, a well-
developed tate-spon ored m chanism for funding re ear h and develop-
ment in th universities and in companies, and a growing venture
capital industry, all set inside a consumer population that is espe ially
enthusiasti about making us of the newest technology, wh ther it'
next-generation cellphones or the latest automobile acce sory. There are
a lot of weak spots in the foundation, uch a th Finns' resistance to
5 HELSINKI, FINLAND. ON THE SHOULDERS OF GIANTS 83
entrepreneurialism and the high-tech industry's insularity (1 'okia aside).

But Finnish companies are starting to recognize and overcome them. The
year 1999 saw th emergence of Finnish companies that start out as truly
global and market-oriented businesses. The high-tech and venture capi-
tal sectors are shedding their insularity and gradually integrating into
the global high-tech arena through mergers, acquisitions and alliances.
HISTORY: POST-SOVIET SHOCK
Finland has a long industrial history based on its huge forest and water
resources; these had enabled it to create a major paper and pulp industry
by the end of the 19th century. From there the country expanded into
textiles, metals and engineering. World war II brought disaster to finland
but ironically helped to create an industrial base and industrial tradition
that its technology sector would eventually build on. The Finns ·were
invaded in 1939 by the Soviet Union and later counter-attacked with
German support in a bitterly fought conflict that cost 100,000 Finnish
lives. Ultimately Finland was defeated, compelled to hand over vast
swathes of territory and pay massive war debts to the Soviet Union. The
silver lining, such as it was, was that the obligations were paid in kind
rather than cash, thereby forcing Finland to turn out machinery, ships
and commodities. When the last of the debts were paid off in 1952, the
metal and engineering industries continued to sell to the Soviet Union.
okia wa very much a part of this industrial history, having started life
a a vvood-pulp mill in 1865. In the early part of the 20th century sepa-
rate businesses in cables and rubber (hence 'okia's legendary origins in
the rubber galoshes business) \'\'ere founded, all of which were eventually
merged in 1967 into the No.l...iagroup.
The comfortable relationship Finland had with the Soviet Union began
unravelling in the 1980s in parallel with the disintegration of Communist
rule and the centrally-planned Soviet economy. A frothy financial sector
masked tl1e extent of the crisis for some time, but by 1990 Finland was in
an unavoidable recession that set off a wave of bankruptcies and boosted
unemployment as high as 18%. In the next three years gross domestic
product contracted by I 0 1Yc1,forcing the government to raise taxes to
onerous levels to fight a gaping budget deficit. It wa, during these lean
years that, okia took the fateful 1992 decision to shed its other busi-
ne ~es and focus on telecommunications. ·rhe Finnish economy did not
really begin climbing out of recession until 1996.
Vis a vis the high-tech industry, the tate began to take a pr a live role
in the 1980s. Tekes was formally e tablishcd in 1983 as a state agency to
ub idize industrial re earch and in 1991 Sitra was spun off from the
Bank of Finland to begin making venture
The first Finnish science capital investments. The two state bodies
parks date from the 1980s,
became the catalyst for getting innovations
but they weren't overwhelmed
out of the universitie and tate research
in the early days by anxious
young entrepreneurs seeking
in titutcs and into the private sector. The
space for their new trouble was that the private sector it elf was
companies. often proving to be a dead-end. 'They [the
government] were screening applicants
none of whom had any entrepreneurial experience what oever,' says
Erkko Autio, a professor of technology-based venturing at Helsinki
University of Technology who has tudied the Finnish and other tech-
nology sector . 'They were companies that lived off ub idie and grant .
You had two or three people, but no one with commer ial abilitie or a
pro-active attitude.1-l
The first Finnish science parks date from the 1980s, but they weren't over-
whelmed in the early day by anxious young entrepreneur seeking space
for their new companie . The first venture capital fund date from that era,
too, but the limited capital they had \Vas de tined mainly for buy-out deals
in the Old Ec?norny. Finland's entrepreneurial drive was in low gear. In
part that failure had to do with the anti-entrepreneurial atmosphere that
pervaded government and academia - and, for that matter, business. Most
people were content to be employee of large companies. But things were
starting to change at the end of the 1990s, a phenomenon that an be
measured roughly by the history of CapMan Capital Management, one of
Finland's oldest V s. In 1990 it raised 66 million markka, by 1996 it had
raised another 200 million markka for its third fund, and at the end of
1999 closed on a €200 million fund. The charmed circle of venture finance
and entrepreneurialism was finally taking shape.
The history of Finni h telecommunications is an abject Jes on that there

are time when the government should stay away, and equally time
when it should tep in. At a critical juncture in the evolution of telecom-
munications more th,m a century ago, the state took a fateful decision to
tay out of the industry. Finland' 19th century Russian rulers were con-
vinced that the phone would never be as important as the telegraph, and
therefore not an overriding state intere t. So while the rest of h1rope was
putting its phone net½orks under the monopoly control of postal author-
5 HELSINKI, FINLAND, ON THE SHOULDERS OF GIANi 7
itics, Finland had a privately-controlled and competitive industry.

Without a single state-owned phone company there was no politically-
generated demand for Finland to create a single state-owned supplier of
telecoms equipment. When Nokia began to expand out of cables and into
switche in the 1960 , the company didn't have a home market to call its
own - it had to compete. Finland's human geography created another
opportunity for Nokia: to serve the country's small and wid ly-disper ed
population Nokia had to develop small and flexible switches just like the
kind mobile phone operators would eventually need. However, having
given the phone network its freedom for a century, the state took an
active role in 1981 by creating a single mobile telephone standard
together with weden and Norway. ordic Mobile Telephony (NMT) was
the first multinational cellular network, enabling Nokia and its Swedish
rival Ericsson to supply equipment to a single and relatively big market a
decade before GSM became the European standard.
GEOGRAPHY: A COUNTRY OF CLUSTERS
Helsinki and its suburb Espoo are at the centre of Finland's technology
cluster, with secondary centres in Oulu, Turku/Salo and Tampere. They
are among Finland's largest cities, although they arc hardly great urban
conclaves: Helsinki, the largest of them, counts only 500,000 inhabi-
tants, while the whole of Finland has only 5.2 million peopl . The more
important thing they have in common, given the country's tight links
between university research and the technology sector, is that they are
each home to at least one major university and (except for Turku) a
branch of the Te hnical Research entre of Finland (VTf), a government
R&D organization. Espoo is home to the Helsinki University of
Technology as well as other institutions. Despite its remote location 150
kilometres from the Arctic Circle and a population of just 110,000, Oulu
is ho t to Oulu Polytechnic, one of the country's leading technological
chools. The existence of the e secondary centres belies the notion that
every company and its investors in a technology cluster h1s to be no
more than two hours' drive apart: Tampere and Turku might just pass the
test; Oulu would certainly fail.
Oulu attracts a lot of attention because of it unlikely site amid S\-vamp

in the freezing north - not the kind of surf and sun that characterizes
California's Silicon Valley (although Oulu is on the shore-; of the c;ulf of
Rotlrnia and summer days are nearly 24 hours' long).s A Wirecl m11gazine
p 86 CLONING SILICON VALLEY
urvey of leading technology centres ranked Oulu an unimpressive 10 on

a scale to 16, but it didn't even mention Helsinki in the rankings. 6 This is
not to say that Oulu isn't an important high-tech centre - after all, it
counts some 120 companies, and about 5% of its population is employed
directly in the IT industry. But the real centre i Hel inki. He! inki host
far more companies. It is the centre of high-technology finance - the
home of the great majority of the country's venture capital funds as well
as it's tock exchange. The main government agencies arc there, as are
the legal and accounting firms that support the industry. Helsinki has
the only airport with significant international connections.
Many Finnish tech companies make use of the country's ommcrcially-

developed science parks. The biggest of them, Otaniemi Science Park
beside the Helsinki University of cchnology in Espoo, houses some 250
companie , with 40-50 tart-up entering its in ubator programme
every year. The science parks arc a comfortable location for start-ups.
Besides providing proximity to a lot of fellow tech tart-ups, they provide
office services, conference rooms, network ace ss, and arc close to legal
and other professionals whose practices are geared to high-tech; there arc
the nearby university facilities too. D spite these enticements, many
companies opt for central Helsinki, often setting up base in turn-of-the-
ccntury art nouveau apartment buildings, offices and factorie~.
PEOPLE: MODEST TO A FAULT
Tl1e typical Finnish tech company is a sober, husi ncss-like kind of

place. The sauna found in nearly all Finnish offices is not a pretence
but an integral part of Finnish business life, the place where deals are
finally scaled amid steam and sweat. Finns tend to be low-key and, as
one American working for a leading Espoo firm says, they are straight-
forward and honest even to a fault. Finns arc generally poor at
networking among themselves and even more so with foreigners,
although they are getting better. 'The current generation has been
pending so much time abroa(i that they' c picked up that kind of cul-
ture,' says Mikko Puhakka, managing director of Holtron lCT
onsulting, which advises high-tech firms and more re ently has
begun to provide them with venture capital. 'Tiley know networking
has to be done, but they still don't know how to do it. They're thinking
about how to do it, l.Jut they're not happy about it.' 7
S HELSINKI, FINLAND: ON THE SHOULDERS OF GIANTS 87
rhe Finns' dis omfort with engaging in chutzpa - the practice of ramping
up your image and abilitie before you have e tabli hed them - can affect
the very core of their business. Toke a llelsinki-based ompany like
Hantro, which was formed in 1992 and has been developing wireless
video based on the MPEG-4 standard since the end of 1998. It has raised
one round of financing at a $10 million company valuation, has 35
researchers and two salesmen on staff, and was expecting to omplete a
working prototype for two-way compression in the summer of 2000. ow
take a look at its US competitor, PacketVideo, founded in 1998. It raised a
first round of finan e from Intel and iemens in Jun' 1999, a sc ond
round six months later that included Reuters, redit Suisse First Boston
and Sony, and a third in May 2000 that
Finnish high-tech is
included Texas Instruments and Philips, for a
insular. There are few
total of $41 million. It has 28 salespeople for
overseas companies active
its 32 researchers. It had filed for an IPO in
in Finland in either R&D or
March 2000, which was later pulled be ause
manufacturing.
of market conditions. And all that was based
on plans for a prototype offering one-way compre sion.x 'It tell you
something about peed and finance,' says Peter Seligson, wl1ose Menire
Venture apital is one of Hantro's ba kers. 'They say openly where they
are, which is that they don't have a product, like everyone else.'
Finnish high-tech is in ular. There are few over eas companie active in
Finland in either R&D or manufacturing. In the absence of any regular
English-language news, most outsiders arc unaware of vvhat is happening
in the country. Few Finnish companies have foreigners in key positions
at he.ic.lquarters. Although that is less the case than in the past as the
industry matures, start-up companies often build themselves nrouncl a
technology or application without first investignting what else is being
done in the world. 'High-tech companies have their friends .is tl1e first
customers, classmates from university - at least they're buying their pro-
totypes. People have the feeling from talking with their friends that
they're the best in the world,' says Frkki (r.rc) Kariola, managing director
of the venture capital fund SfK 1-inance.<J okia managers, who by the
nature of their job have a more global perspective, arl! becoming a
major source of tart-up entrepreneurs, but the outflow i n't nearly at the
level you would find in the US or Israel. Finns - okia employee· in par-
ticular - arc trnditionally loyal to their employer. People inside and
outside okia say that fidclit) is gradually waning. The company\ next
employee to k option programme vests at the end of 2001, which could
give quite a number the final push.
SOCIETY: TECHNOPHILES, ENTREPHOBES
Like the rest of Scandinavia, Finland spends heavily 011 education -

among developed economie , it rank fourth in the world as a percent-
age of gross domestic product, after Sweden, Denmark and lsrael. 10 In
terms of the number of students going on to higher education, it is
fourth at 71 % (behind Canada, the US and Australia). Finns score rea-
sonably well on international measures of education achievement: in
the Third International Mathematics and Science Study of 1999,
Finnish eighth-graders ranked fourteenth in maths and tenth in sci-
ence among students in 38 countrie . 11 But the system doe n't
en ourage excellence, especially since effort to equalize tandard were
made in the 1970s and 1980s as part of the country's o iali t orienta-
tion. 'In high school 1 had friends who \Vere in the toughest rnc1ths
classes and they got through them without doing any \'-.'Ork,' recalls
one venture capital fund manager.
Where Finland's education system stands out from the point of view of
the technology sector is at the university level and especially at the level
of graduate studies. Students doing their masters or doctoral theses on
engineering, science and business subjects traditionally do so in co-
ordination vdth a company - in the past, for one of the big Old
Economy corp?rations, and now increa ingly for tart-ups. This in effect
provides a huge flow of information and idea that feed both the uni-
versities and companies. Erkko Autio and another professor at Helsinki
University are usually upervising a score of the es. In one typical term,
about half the tudent were conducting re earch in conjunction with
okia, one was working with S H Communi ations, another with
Razorfish.com, a British e-commerce provider, and many theses \Vere
being done for start-ups. 'When you supervise 10 to 20 strategy theses
per year just for 'okia, you get a pretty good insight of what's happening
in the ompany,' Autio says. 'It opens up the interface so it' completely
transparent. You have a lot of technology transfer occurring through this
mechani m and then the tudent goes to work for the company.' 12
Finns lend the world in adopting many new technologies, espe ially in
the wireless area where all the Scandinavian countries rank highly. Finns
\'\'ere glob.11leader in mobile phone penetration in 2000 at 72.6 per 100
people, compared with 80.2 in Hong Kong and 36.5 in the LJ<;_In P ·
per capita, Finns were at number 10 with just over 39.6 per 100 inhabi-
tants. In internet hosts they rank number three on a µer cnpita ba-;is
5 HELSINKI, FINLAND: ON THE SHOULDERS OF GIANTS 89
( 1,023 per 10,000 people) and an astonishing number 12 in absolute

terms (or 529,261). H In pure technology it's hard to heat the Finm, with
th ir strong and readily admitted bent for tinkering if not for actually
communicating. 'We arc very technically-oriented people. We always
appreciate being the first one when there is something new,' says Harri
Rautio, vi e-president for product service at Frends Teclrnology, which
develops software that manages applications and data dispersed over dif-
kren t lo ations. 'In many niche areas we arc the market leaders. The
penetration for etc tric toothbrushes is the highest in the world. Braun
used Finland as a test market. You can find ar models here you can't
find anywhere else. We like to test fcatures.' 14
The challenge has been making a business out of this fondness for cut-
ting-edge technology. The ,lo/Jal E11trepre11e11rsliip Mo11itor2000 study
ranked Finland (along with Japan) at the lower encl of the average range
of a group of 21 countries for entrepreneurial activity with only 3.9911of
the population estimated to be involved in a start-up (high-tech or oth-
erwise), putting the country welt below l3ritain .ind .it about the same
level .is Israel. 15 The study faulted Finland for failing to establish a .strong
entrepreneurial culture. This is changing. Like other Europeans, Finns
hav become mesmerized by the American example of the fantc1stic
amounts of money start-ups can make for their founders in the stock
market (if not from actual operating profits). ls this new-found attraction
to entreprcneurialism a passing fad inspired by the sto k market's dot
com mania? Autio, for one, is convinced that the Finns can make the
transition from Organization Man to Self-Made Man fairly quickly. Being
an entrepreneur, he maintains, is a career choice, not an inherited trait
or a deep cultural imperative.
,\ntti Kokkin n, a partner with Nokia's corporate venture capital fund,

Nokia Ventures, observes that the typical Finnish entrepreneur is willing
to put in the hours and dedication when the circumstances demand,
raising the finan e, getting the prototype done in time and rolling out
the product to the market. But once he has one successful company
behind him, he is more likely to concentrate on his golf o, sailing than
think about his next start-up. ·1hat's a problem if Finnish high-tech is
going to build up a sizeable cadre of experienced managers \\-ho move
from one start-up to another. Kokkinen thinks the relative scarcity of
serial entrepreneurs could slow the· development of the entire industry.
'The y le will probably he longer than in the S because the spill-over is
less,' he sa 'S. 'People arc not a. driven a'> much a<;in the US.' 1h
FINANCE: GROWING PAINS
The Finnish venture capital industry got its start in the mid-1980s, but
like the rest of Europe its focus was on leveraged buy-outs and replace-
ment capital until the end of the 1990s. The industry counted about 40
funds at the end of 2000 and has been growing rapidly: in 1999 it rai d
€569.6 million in new funds down from €628.3 million in 1999 but still
high compared with the rest of the 1990s. Government agencies, one a
big backer of Finnish VC, contributed only 12% of the funds' total new
finance in 1999 although that rose to 20% in 200 . Moreover, Finland's
VC indu try was making the transition from the old private quity ori n-
tation to venture capital fa ter than the rest of the continent. According
to European Venture Capital A so iation (EVC ) figures, Finni h funds
had slated some 58% of this new money for high-tech companies from
start-up to mature firms, compared with 13.3% in 1998. For all of
Europe, the average allocation for high-tech in 20 0 was 32%. 17
But lurking behind these figures is an immature industry that cannot yet
provide all the firepower of cash and human resource needed to take
start-up compani s and turn them into multinational play rs. Th re is
more venture capital in Finland than ever
, There is more venture before, but it isn't enough. Finland can count
capital in Finland than ever only four sizeable V managem nt compa-
before, but it isn't enough. , nie with more than €50 million in capital -
Eqvitech, Cap an Capital anag ment, SFK
Finance and Nexit Ventures - and not all of them are wholly committed to
early-stage Finnish companies. Most funds are in the €10-20 million
range. The situation has been exacerbated by the failure of Finnish funds
to do syndication deals either among themselves, or more crucially with
foreigners, to leverage their financial resources. Some would argue that
Finland, at least for now, doesn't hav the deal flow or large enough com-
panies to justify fund much in excess of €100 million; others say Finland
is too small to develop a home mark t and must at the very least establish
a single V market with the other 1ordic countric . Regardlc s, the typical
Finnish placement i in the ingle-digit million of dollars or low teens.
Without getting large amounts of capital doled out in a ingle round, or at
least the assurance that first-round investors can finance follow-on
rounds, companies can't ramp up as quickly as their competitor in coun-
trie where more V is availabk. The fastest-growing and most dynamic
firm can find th m elves in a perpetual fundraising mode rather than
concentrating on their actual business.
S HELSINKI, FINLAND. ON THE SHOULDERS OF GIANTS 91
Most fund manager will readily admit that the Finnish VC industry also
lacks the managerial resources to guide companies into global markets.
'There's a lack of understanding of exit markets by Finnish venture capi-
talist . There's a lot of money and plenty of experience on the technical
side. But doing the M&As, getting to the public markets, doing secondary
rounds of financing are weak,' says William Cardwell, an American who is
a managing dir ctor of Eqvitech Advisors Ltd, a leading I Iclsinki fund
manager. 18 Corporate-backed VC operations like Nokia's are virtually
non-existent. Typically, a Finnish VC will involve itself with a company
only at board level and shun seed-stage investing because of the time and
attention early-stage companies demand. Of course, without a big
enough capital base, the funds are in no position to hire large numbers of
manager . But the more fundamental problem is the V industry' youth
and the absence of managers with truly global experience.
Holtron Management Services is the exception to the rule in most

respects. It has nine people (including one American to give it a more
international outlook) to manage just 10 million. Holtron's portfolio
is all seed-stage companies, and some need little if any help. But the
firms that do, like AVS Technologies, an Espoo-based video technol-
ogy start-up, find Holtron right in the thick of things. AVS's founder,
Antero Alvcsalo, is a typical Finni h start-up CEO: an engineer by
training and a former Nokia employee, he had been running a small
company that had been treading water for three years. By hi mvn
admission, he had accumulated little experience in growing a firm.
'We've been involved with everything from writing business plans,
designing the strategy, setting the spe s, finding the next round of
funding, putting into place the administration, recruiting the people,
finding the offi e,' explain Tom I lcnriksson, a Holtron partner. 'We
don't give the best valuation but we give the most hands-on.' 19 In
fact, lioltron's efforts paid off with Nokia Venture agreeing to take a
stake and giving AVS an important seal of approval.
rhe growing presence of foreign funds will help correct ome of the
industry's deficiencies and open up the Finnish venture capital industry
to the world. Just 71¼1 of all V money in Finland raised in 1999 came
from outside the country, and none from outside Europe, according to
EV .A figures. ,ardwell estimates foreigners were involved in just l O VC'
placements in 1999 but that in the first half of 2000 the number doubled.
Foreigners are also entering the industry at. the fund le\'cl: SfK Finance,
one of the oldest players in Finland, \\'as acquired hy Britain's 3i in July
2000 and Menire Advisors was acquired by Denmark's 2M Invest A/S in

January 2001. Robertson Stephens became the first foreign investment
bank to open a Finnish operation, in conjunction with Eqvitech in 1999.
Another important contributor to the industry's growth and maturity is

the development of domestic and European high-growth stock markets
that can provide the funds with acceptable exits without having to make
a huge leap across the Atlantic lo Wall Stre t. 'We don't have the interna-
tional marketing and business teams capable of bringing a company to
the stage of an international IPO,' complains SFK's Kariola. 20 Unlike
Israelis, he says, the Finns don't have the Wall Street conne tions to
bring their companies to the attention of investment bankers. No
matter, the great majority of f-innish high-tech firms are too small for the
asdaq and the industry's relative isolation precludes easy trade sales to
foreign companies. Fortunately Europe has sprouted a collection of
national growth stock markets over the past few years that have put out
welcome mats to cross-border firms.
But the most important public market for Finnish ompanies has been
right at home, with the opening of the Helsinki Sto k Exchange's New
Market in 1999. It is true that the listed companies are midgets in terms
of market capitalization; their products tend to be geared to local cus-
tomers, and the market itself in its first year resembled America's Wile.I
West more than staid Scandinavia. Helsinki is no rival to 'asdaq, but it
has the mechanism in place to perform a valuable function by enabling
small companies to raise capital lo ally, to help them learn the ins-and-
outs of being a public company without the severe regulatory pressures
and costs of a US listing, and to teach Finnish inv stors the rules of high-
tech investing in the easier schoolroom of their home turf.
GOVERNMENT: WELL-OILED MACHINE
The government is a very active player in the technology sector both as

a backer of research and as a financier. Indeed the distinction between
university and government R&D and pri ate sector is blurred to the
extent that it is often impossible to credit one side or the other, espe-
cially given the state of Finnish intellectual-property la\VS. The core
technology behind Apia , the company spun out of Nokia, was origi-
nally developed at the Helsinki University of Technology, starting in
1972. 21 Only 16 years later did okia join in as a sponsor and through-
S HELSINKI, FINLAND: ON THE SHOULDERS OF GIANTS 93
out that time Tekes, the government research-assistance agency, was

funding Aplac's de elopment. Indeed, Tekes funding kept the project
alive during Nokia's lean years when it
The government is a would have probably been axed. Because of
very active player in the
the government role, okia couldn't shut it
technology sector both as a
so easily. Even today Tekes helps fund
backer of research and as
a financier. plac's R&D, and other, basic research for
the company i carried out by a second
agency called VTT. 'Tekes is like a fairy godmother. It gives a lot and asks
for little back,' says Aµlac's R&D manager, Olli Peknonen. 'Without it,
the risks would have been much higher.'
Tekes (the Technology Research Development Center of Finland) is at the

centre of a ,veil-oiled machine for channelling government money into
university labs, research institutes and companies, and then transferring
commercial parts into the corporate sector. The budget for Tekes, which
is a part of the Trade and Industry Ministry, ha grown quickly through
the 1990s and today it has about €420 million annually to spend on
R&D, 60<¾.> of which goes to companies, hoth high- and lmv-tech, and
the rest to universities and research organizations. Grants for companies
run from 25% to 50% of the co ts of salarie , raw materials, machinery,
subcontracting, travel and patents. Tekes will also lend firms money for
up to 60<¼> of their costs. All the funding is for specific projects as against
general re earch, and ha to have an industrial application. The organiza-
tion sees itself as more than a conduit for funding. It initiates between 10
and 15 technology programmes annually, each of which bring hundreds
of projects together for three to four year periods in areas such as object-
oriented information technology. The programmes encourage
networking and sharing of ideas. 22
Tekes has a difficult balancing act deciding how to allocate between the
public and private sectors, small companies versus large, and local proj-
ects ver us foreign. Increasing amounts of funding go to smaller
companies, today just o er half the total. Most of the funding goes
directly to small firms, but a fair amount is funnelled through bigger
firms. It is almost a prerequisite that large companies applying for assis-
tance do so in joint project ,.vith a public institution or a smaller
company. Smaller ompanies arc entitled to higher grants and to capital
loans that go into their h,ilance sheets as against a typical R&D loan.
Tckcs has a strong international orientation-: it has eight offices abroad -
partly because it is Finland's co-ordinating body for EU R&D
programmes but also because it wants to encourage Finnish-a erseas

partnerships. Tekes doesn't require all its funded R&D to be done inside
Finland nor docs it demand that products derived from the re earch be
manufactured there. 'We're a small country. ln high-tech, we need to
find the best partners globally. Our resources aren't that extensive so the
smaller you are the more co-operation you must engage in,' reasons Petri
Peltoncn, Tekes' executive director for licen ing technology in networks
and communications.
Tckes has few critics. The industry's view i that the organization is effi-
cient and unbureaucratic. If the government R&D machinery does fail it i
because it treats R&D in isolation and it encourages a bias in corporate
development towards research at the expense of marketing development.
Tekes gives very little funding for marketing, perhaps a vi it to a trade how
or two. For larger companies withe tabli hed management and marketing
operations, that's not a problem. For smaller companies, the research
money comes without a co-ordinated effort to commercialize the re ults.
In the wor t ca es R&D aid can become a motorway to nowhere.
The other major leg of government support for high-tech is Sitra (the
Finnish ational Fund for Research and Development), which sin e
1991 has fo used activities on venture capital in addition to conduct-
ing research and training activities. Sitra used to be the recipient of
money direc:tly from the tate budget, but over the past four to five
year that ha diminished to just a token sum. Instead itra finances
it activiti s from an endowment that at the end of 1999 had bal-
looned to $1 billion, thank to a good stock market that year. Sitra
allocated €100.7 million in 2000, a 116% increase fr m €46.7 million
in 1999. 2 :i About 80% of the allocation are plit evenly into invest-
ments in companie and in other venture capital funds, and the rest
in research and training. That is a pretty big piece of the V pie when
J
you consider that the total industry in 1999 invested 248.5 million.
In earlier year itra's share was even bigger. It has inve ted over the
years in orne 160 companies, close to a third of which it has exited.
itra will put as much as 3.4 million in a financing round for a stake
of 10%-40 1¾1of a company's share capital. Lindblad says return on
capital is not the primary criteria, o Sitra can be more daring in the
kind of investments it makes.
Even critics will concede that itra was a critical factor of the develop-
ment of Finni h venture capital in its early years. 'It was very valuable.
The whole V , structure and how V acts wa unknown in the Finnish
markctpla c,' r calls SJ'K's Kariola, whose management company oper-

ates two funds, Telecomia Venture I and Forenia Venture I, both
launched in J 996. 'When I was fundraising for Tclecomia and Forcnia in
1995 I was visiting the boards of directors of the insurance companies,
and ( was the first person ever to tell them what V is about. Investors
didn't know. The Sitra fund educated investors and cntrepreneurs.' 24
owadays it needlessly competes with the private sector and should b
wound down, contend Kariola and others. 'The government is disturbing
the mark tplace. They don't have the same role and they don't have the
same target as private money,' Kariola says.
Lindblad doesn't deny that much of Sitr<1'sjob is done, but he still sees
holes to fill. Private-sector venture capitalists, for instance, were not
doing much start-up financing until 1999, so it was up to the state to
provide that. row that private-sector start-up capital is more available,
itra is focusing on seed stage. It also invests in areas that are out of
favour with the privates ctor, like biotechnology. Sitra no long r invests
in domestic V funds (except for some regional funds, which are aimed
at general economic development), but it does put money into overseas
funds, forming strategic alliances.
Oddly for a society still wedded to socialist values, Finland's tax code
favours capital over labour. The corporate tax rate is below 3(N1i but the
personal income tax rate, which was raised to help the government get
through the 1990s recession, reaches a mar-
,,oddly for a society still ginal rate of 6091,, not counting social
wedded to socialist values,
security. finns may be inured to such rates,
Finland's tax code favours
but it virtually precludes bringing in foreign
capital over labour.,,
managers who arc already put off by the
country's high living costs. 'Scanuinavia is a paradise for entrepreneur-
ship. It's a disaster if you're employed,' says Menire's Seligson. 'If you're
employ ct you pay easily 50 1¾>taxes, or even a bit more; if you're an
entrepreneur you will end up paying maximum 29% on exit, that's total
tax, so for building value it is a great place to be. Otherwise the govern-
ment doesn't help very much. If you im•est $1 in your own company
and you sell it for$ IO million, you get taxed 29%; if you earn that same
$10 million as an employee you'll be taxed 69%.' 2 c; l:mpioyce stock
options are treated as ordinary income and taxed arrnrdingly. As a result
most companies offer their employees the more expensive hut tax-
friendlier alternative of buying stock outriglJt.
FOCUS COMPANIES: SOLID INFORMATION AND

RIOT ENTERTAINMENT
There are two kinds of companie that hara t rize the Finnish high-te h
se tor today. The first is a sleepy, earlier-generation te h company now
making an often wrenching transition to a global enterprise; the second
is a start-up with a global vision that predicates its founding strategy on
a worldwide rollout.
When Pekka Roine took over a chairman of olid lnformation

Technology in 1996 his job was to make the then four-year-old company
into a world- lass contend r. Taking over from one of the company'
four founders, Raine himself was the first step in the transition. He had
helped found Digital Equipment orp's Finnish unit in the 1980s and in
recent years has had his finger in everything from a handful of tech om-
panics to a etherlands V . 'I'm the bald hezid and gray beard. I'm the
one who's been around,' he says. Solid's data management software was
excellent and the company had been profitable or br 'aking even, but it
was pursuing a futile strategy of competing head-on with raclc. 'If the
Solid product performs better, costs less, and is a nicer product, then cus-
tomers will be happy to switch,' says Raine, recalling the credo of the
company when he joined it. 'What olid failed to pay attention to is that
Oracle ha a f~w more marketing dollars and salesmen than Solid.' 26
Roine took the company through two rounds of product-focusing: the

first, in 1996 and 1997, wa to concentrate olid's product on the embed-
ded market where he reasoned its low cost and small footprint would
give it an edge; the se ond, in 199 7 and 1998, was target networking
where he thought the company's strengths in data synchronization
would play wclI. At the ame time he took measures to make 'olid a truly
international company (whi hr ally means a US-centred one) rather
than a Finnish firm with a lot of exports. For the company he chose
Mountain View, alifornia, as its headquarter and has set uµ other
office in Burlington, Massachusett , and Hyderabad, India. Solid has
even dispensed with the notion sa red to many companies that R&D
should be done at home. Core R&D is still done in Finland, but technical
work is also carried out in alifomia, and the company has 15 people in
Hyderabad conducting quality assurance. The last piece of the puzzle was
put into place in the summer of 2000 when the company raised $50 mil-
lion from European and US investors led by Britain's Apax Partners and
America's BancBoston apital.
5 HELSINKI, FINLAND; ON THE SHOULDERS OF GIANTS 97
Riot Entertainment is an especially stark example of the second kind of

enterprise. The company makes no pretence that its games and entertain-
ment services for wireles'i are at all technology-driven; its business is
principally deal-making. Tile founders c1IIcome from backgrounds in adver-
tising and film produ tion and have MBAs, not engineering degrees. That
orientation comes across in everything Riot-F docs, from its glitzy Helsinki
headquarters to the fundamentals of its business st rate!:,')'. '1 here's no ques-
tion that the wireless industry will change the world by 2003. The whole
life tyle and culture will change around that as well,' ays chief executive
officer Jan Wellmann. 'All the new start-ups in that field have been techno-
logically oriented. Our point of view was to think of it as the film industry
in the early days. The real money-makers were people like the founders of
United Artists - the haplins, Mary Pickford and Douglas Fairbanks. Their
money came from great stories and real characters.' 27
Riot-E's business development has proceeded at a breakneck pace.

Rabing money in the first round of financing was probably the stickic'it
part of getting the business up and running. The founders began pitch-
ing the plan to inve tors in the autumn of 1999 and only closed on a €4
million placement in April 2000. By the summer the company was
already gearing up for another round for something like four times that
amount. Riot-['s backers are coming to the table with a lot more than
money. Nokia Venture is bringing the busines the knowledge of hard-
ware technologies and expects to gain in return exposure to new
markets, business models and technologies. epartners, a media venture
company hacked by Rupert Murdoch's 1 'evvs
In the summer of 2000 orp and Japan's Softbank Ventures, brings
Riot-E was a frenzy of
links to the media world and experience in
activity as it undertook a
building internet hminesse'i. It was
global rollout.,
oftbank:'<; fir t Finnish investment. 'We had
to make a choice of either a high valuation with purely financial
investors or a lower valuation with a brand name like Nokia. We went
with the latter,' says Wellmann. Riot completed a second, bigger round
of $15 million in October with Nokia and Softbank as well as new
investors like the European arm of America's Carlyle group.
In the summer of 2000 Riot-E was a frenzy of activity as it undertook J
global rollout. Its goal was to h.ive offices in 12 cities around the ,,\orld
by the end of the <iu1111ncrand I 7 by the end of the year, and ultimately
a London headquarters. Wellmann is <;till weighing up where to domicile
the company, noting that Finland is convenient from a tax point of vie,"
but expressing no visceral feelings about keeping the business Finnish.
When the dust settles, Finland will simply be a de elopment centre that
employ only about half the total payroll. 'We don't consider ourselves a
Finnish company. Within the company we peak Finnish only as much
as we have to. Our A ian-development team is ,,vholly American and
Asian,' says Wellmann. Where will he be based? 'I think I'll be in a 747
most of the time.'
AHEAD: A LITTLE LESS QUIET
Finland has assembled nearly all the element required for a succes ful
technology cluster - the technological talent and resources, a supportive
go ernment, and, more recently, the beginnings of adequate financing
mechanisms, the urge to build busine se , and a global attitude. An
analysis of recent developments in th country shows it i pointing in
the right direction, but that assumes that progress wasn't unduly and
temp rarily influenced by ky-high company valuation created by an
overblown US sto k market. Like the rest of the world the dri e of
Finnish entrepreneurs and investors will be tested in an era of more real-
istic expectations.
If Finland ha one fundamental deficit to overcome it's the lack of self-pro-

motion. This is all the more important being a mall country in a far corner
of Europe. Membership of the European Union help , but only marginally
and then in the few markets, like wireless, ,vhere Europe leads America. Vis
a vis the giant US market, which is nearly always the one that counts in the
high-tech universe, Finnish companies will not only have to move their
CEOs there for a year or two but pay careful attention to their U competi-
tor . They '"'ill
al o have to adopt some of the American penchant for glitter
and self-promotion. It's a critical leg-up in a world saturated v,:ith new and
often very clever innovations, and with comp titian for investors, man-
agers, and strategic partners - not to mention cu tamers.
NOTES
Interview with Markku Kangas, chief executive officer, SSH Communications,

lSJune 2000.
2 'Quirky culture paves, okia's road to fortune,' Reuter , 18 '\'O\embt:r 2000.
3 Interview with Heikki Rekonen, managing director, and Olli Peknonen, R&D
manag r, Aplac Solutions, 22 June 2000.
4 Interview with Frrko Autio, professor of technology-based venturing,

I lelsinki Univer ity of Technology, 22 June 2000.
5 ' ulu: The town that thinks IT,' Fi11m1dalTi111e~

f"inland Survey, 1 July 2000.
6 'Venture Capitals,' Wired magazine, July 2000,
www.wired.com/wi red/archive.
7 Interview with Mikko Puhakka, managing director, Holtron ICT Consulting,

16 Junc 2000.
8 Interview with Peter Seligson, Menire Venture apital, 15 June 2000.

9 Interview with Erkl-:i (Ere) Kariola, president, SFK Finance, 20 Jun 2000.
10 ff11111m1 Repo,t 2000, Oxford University Press, 2000.

Oe1·clop111e11t
11 Third International Math and Science Study- Hepeat, 1999,

www/times.bc.edu.
12 Interview with Erkko Autio, Helsinki University of Technology.
13 fnrlirntors, International
ITU Te/ecu1111111111icatio11 Telecommunications Union,
2001.
14 Interview with Harri Rautio, vice-president, Frends Technology, 20 June

2000.
I5 Paul D. Reynolds and others, Global Fi1trepre1w11n/1ip Monitor, 2000 £xerntive

Report, Kauffman Center for Entrepreneurial Leadership, 2000.
16 Interview with Ant ti Kokkinen, partner, Nokia Ventures, I 9 June 2000.
17 EVCA 2000 Yearbook, htropean Private Equity and Vent me Capital

Association, 2000.
18 Interview with William ardwell, managing director, ~.qvitech Advisors,
22 June 2000.
19 Interview with Tom Henriksson and Mikko Puhakka, Holtron JCT
omulting, 16Junc 2000.
20 Interview with Erkki (Ere) Kariola.
21 Interview with I kikki Rckonen and Olli l'eknonen, 22 June 2000.

22 Interview with Petri Pdtoncn, executive director for licensing technology in
networks and communications, Tckcs, 26 Junc 2000.
23 2000 111111110/Report (200 I) Finnish National Fund for Research 1nd
Development.
24 Interview ,vith Erkki {Ere) Kariola.
25 Interview with Peter Seligson.

26 lnter\'iew with Pekl-.a Roine, chairman, and l·.rl-.kiWirta,, ice-president !or
rnmmuniration and organization, Solid lnformatio11 lhhnology, 21 Junl' 2000.
27 Interview with Jan \\'cllmann, chic! executive officer, Hiot-r, 26 June 2000.
Israel
Lebanon
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'I I '
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Yokneam
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Ra 'anann~
West Bank
. ~e=ylia(, Jordan
Herzylia lnduttrial Zone
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Tel Aviv '
Kiryat Atidim \
Tel Aviv University\
•
Rehovot
Weizmann Institute' ...- ,,..,.....- - - -
Weizmann Science Park •:
Jerusalem
Har Hotzvim Science Park
Manhat Science Park
,,,- -·Hebrew University
''
TEL AVIV, ISRAEL:
martia I arts
THE PREMIER INCUBATOR OF ISRAEL'.S HIGH-TECHNOLOGY INDUSTRY is an

unlikely place. It's a motley collection of fibreglass huts and scruffy office
buildings outh of Tel Avi et amid eucalyptus tree and neglected
lawns. The preferred mode of transportation is a Jeep, not a RMW; the
mandatory mode of dress for both men and women is khaki green and
an automatic weapon. There's a coffee bar or two at the entrance to the
campus but most of the informal networking takes place at mess halls
and in barracks. The management is hierarchical, to say the least, but
that is because it's an army base - in fact, it's home to the Army Signal
Corps programm rs' school, where the army teaches most of its com-
puter professionals, as well as to the army's central computer centre
(Mamrarn), where many of the programmers land their first job.
Over the past decade Israel has taken an enormous leap from sputtering
state-dominated economy to high-technology powerhouse. If in ab olute
terms Israel is a small player in the global context, without a ingle major
multinational company in it stable, it certainly punches well above its
weight. Measmed hy the amount of venture capital per capita, the ratio
of technology exports to total exports, the number of tart-up companies
or the extent of global mergers and acquisitions involving local compa-
nies, I rael has become a major player in the global technology industry.
\s a seedbed for start-up activity, Israel trailc; just behind Silicon Valley
itself and is unrh ailed elsewhere in the ,vorld.
It would be facile to ascribe a phenomenon like Israel's high-tech indus-

try to a single factor, but it's impo sible to ignore th army a the
dominant one. The large majority of Israelis, both men and women, do
mandatory servi e after high hool, o that the army way of doing
things ends up radiating through society in ways ranging from a mysteri-
ous taste for botz (a strong brew of ground coffee mixed in hot water
with the re idue ettled at the bottom of your cup) to a needless
predilection for conducting busine s meeting late into the night. Mo t
Israeli shed their uniforms after two or three years' service, but the army
mentality is ever-present. And the role of the army, formally the Israel
Defence Forces (IDF), has been particularly important for the technology
industry as a source for innovative thinking, researchers and managers,
and for a work style that migrates easily into the Silicon Valley ethos.
'What helped us in the army was the know-how and the ability to
develop fa t, to react fast, to understand the challenge,' recall nenny
Levin, chairman of Nice Systems, a company that makes integrated digi-
tal recording and quality management systems. 1 Nice is an early but very
characteri tic example of an I raeli start-up: it wa formed in 1986 by a
group of friends who had worked together in army intelligence and
brought to their new business not only technological kill but a certain
approach to problem-solving and the ability to function together closely
as a team. 'What you have in the army i a constantly moving target,'
Levin ay . 'You are always getting new challenges, a new project, and
you have to act fast - ju t like a tart-up en ironment.'
HISTORY: SWORDS TO PLOUGHSHARES
Israel has a history of producing good academic cienti t and advanced

technology, most of the latter geared in the first 20 years of the industry
towards upplying the need of the IDF in Israel's continuing war vv:ithit
Arab neighbour . The first generation of technology companies, like ECI
Telecom, Elbit and Tadiran, got their start in th 1960s in defence elec-
tronics. They were given a big push after an arms embargo imposed by
France after the 1967 Six Day War that convinced Israel' leader hip to
reduce their reliance on defen e import .
But defence electronics was virtually all the globally-competitive industry

there was in Israel. And, like the rest of the economy, it was very much
beholden to the government. The state was deeply entrenched in the finan-
cial and labour markets, it owned almost a third of all industry outright, and
6 TEL AVIV, ISRAEL MARTIAL ARTS 103
it thoroughly regulated the economy through currency controls, price super-

vision and a host of other mechani m . Even the big holding companies
that dominated the private ector were closely aligned with the government
or the mi-go ernment labour union establishment. This forbidding envi-
ronment for entrepreneurs grew even more ho tile in the tagnant economy
Israel suffered in the 15 years following the 1973 Yorn Kippur War. Growth
slowed to almost nil, inflation soared to triple digits in the mid-1980s and
many of the most talented Israelis fled to America for better opportunities.
I racI was in a state of near-con tant war from its founding in 1948 but the
burden of military spending ballooned in these years.
When change in the economic environment ctid come it o curred on a

number of different fronts. ln the mid-1980s, the government made a
fateful decision finally to clamp down on hyperinflation and gradually
to pare back its role in the economy. If Israel
In the mid-1980s, the
remains a relatively socialistic economy
government made a fateful
today, the government gave entrepreneurs
decision finally to clamp down
on hyperinflation and enough leeway to form and expand compa-
gradually to pare back its role nies. In the wider world, the collapse of
in the economy. , communism opened the border of th oviet
Union, enabling hundreds of thousands of
highly-educated immigrants to come to Israel. The collap e of the
Eastern Bloc opened new export markets to Israel and ultimately paved
the way for the Middle East peace process. Investors could put a ide mo t
of their fears of political risk of doing business in Israel.
As the deteriorating economic situation of the 1980 forced the IOF to

cut ba k pending, the defence electronics companies were starting to
scout out civilian businesses. Many engineers left or were laid off, found-
ing companies of their own. E I Telecom, the premier example, had
started to move back into civilian electronics in the late 1970s to forn
on technology for increasing the capacity of phone lines. The entrepre-
neurial spirit and the drive to penetrate world market was still in
infancy, but companies like E ~I pur ued that kind of strategy with a
naive enthusiasm. 'We didn't have a home market. We had no entrec to
th Mini try of Posts, as it wzts called at the time. We were a small com-
pany and had no experience in telecommunications. It took a lot of
personal courage and Israeli chutzpa to go to the world ancl offer this
equipment,' rec.11ls Dztvid Rubner, who joined ECI Telecom in 1970 ancl
eventually rose to the job of chief executive officer. 2 ·1he tech industry
was still operating under enormous handicaps. Rubner recounts that in
1986 ECI's bid to supply line multipliers for a new transatlantic cable
were nearly frustrated by the buyers' concerns about security ,rnd about
using such a small, unknown company as a supplier of critical technol-
ogy. 'AT ,..Tin isted we keep a set of drawings in the U ,' Rubner ays.
Despite all this, Israel was beginning to produce succe sful companie .
ot only ECI, but citex, founded way back in 1969, came to dominate
the electronic pre-press market, and El cint became a strong niche player
in medical imaging. Improbably, some of these companies were trading
on the US stock markets thanks to a large extent to the assistance of lead-
ing Jewish figures on Wall Street like Harvey Krueger and Fred dler.
These high-tech pioneers s rved not only a reservoirs of managerial
talent but gave the next generation role models to emulate. In 1993, the
government stepped in to supply the missing critical ingredient by set-
ting up the Yozma venture capital fund to help coax private-sector
investor into the industry. Start-ups were getting funding and the first
big IPOs and trade sales were soon following. The ale of companies like
Mirabilis, which was acquired by America Online for more than $400
million in 1998, and the Wall treet success story of Check Point
Software Technologies, inspired a generation of entrepreneurs. By 1996,
the high-technology and venture capital segments were in orbit. Israelis
who had fled to the US in the past and later coaxed their employer to
set up small R&D operations in Israel were now coming back themselves
in large numbers, bringing home a wealth of managerial know-how and
an imider's knowledge of the U market.
GEOGRAPHY: THE LURE OF AMERICA
Israel is small enough to be a single technology clu ter. In fact it ilicon

Valley - or ilicon Wadi, as publicists are wont to call it (wadi ironically
being an Arabic not Hebrew word for a river that fills with water only in
the winter) - is concentrated in the greater Tel Aviv area. It e tends from
the Galilee up north, the same region where Jesus is said to have grown
up and preached, south to Reh vot, the home of one of Israel's most
important universities, the Weizmann Institute. Jutting out of this
north-south axis is a concentration of high-tech companies in Jerusalem,
the country's capital nnd a city better known for its holy sites than its
semiconductors. Tech companies themselves nre clustered in commer-
cially-owned and operated scienc parks in Tel Aviv and a few of its
suburbs like Nctnnya, Herzlya Pituach and Ra'anana in the north, and
6 TEL AVIV, ISRAEL: MARTIAL ARTS 105
Givatayim and Or Ychuda to the cast. J3ut for all intents and purposes
it's one extended community. Within Silicon Wadi nothing is more
than two hours' drive, even taking into account traffic snarls and the
occasional bomb scare.
Silicon Wadi not only encompasses the huge number of high-te h com-
panies, from 30-year-old industry veterans to mere ideas on a piece of
paper; it also counts a huge number of venture capital funds and a host
of other crvice also designed to help ramp up young companies
through product and market development. Law and accounting offices,
most of them based in Tel Aviv, have developed practices geared towards
the industry. The leading banks have special programmes to lend money
under special terms to young, loss-making business with growth poten-
tial. Although the majority of companie e chew them, commercial
high-tech parks abound where virtually all the tenants are similar.
Companies can tap a network of subcontractors to do the basic manufac-
turing and assembly. Foreign high-tech companies arc a major presence,
mostly in the form of R&D operations set up since Israel's high-tech
indu try boomed. Intel has two semiconductor plants, but foreign-
owned, manufacturing operation are rare and have contributed little as
a source for manag rial training.
The Israeli industry has formed extraordinarily tight links to America,

whi h in the early years of its development aided its marketing and
financing efforts to no small degree. But that connection has pro ed to
be a two-edged sword: lsraeli entrepreneurs and their investors feel com-
fortable and confident enough in the American environment that they
have taken their U connection to it logical conclusion and simply form
companies there to begin with. Israelis express few of the fear their
peers in lndia or Singapore do about jumping into Silicon Valley. In the
final quarter of 2000 only 4S<Yci of eed-stage companies being funded by
l raeli venture capital funds were registered in Israel, according to
the Pricewaterhouse oopcrs Money Tree
Whether the exodus to survey.·{ From a strategic standpoint, setting
America presents a
up a company in the US make:. sense. The
fundamental threat to the
research and development can stay in lsracl
Israeli industry is a matter of
where it was originated and can be further
intense debate. ,
cultivated while marketing and much of
management is sited near the customers. It is telling that of the three
reigning stc1rs of Israeli hightech in 2000, Comvcrse Technologies is
based in the U~ and only doe\ R&D in Israel;· \mdocs Ltd is domiciled in
the hannd hlands, employs half its ,vorkforce abroad and tluct' of its
top five officers are Americans; and only h ck Point is wholly Israeli in
the ense that its headquarters and its legal domicile remain in the coun-
try. But ahovc all, the tax treatment for investors in Israeli companies is
unfavourahle, which explains why start-ups without marketing consider-
ations weighing on them begin as US companie .
Whether the exodus to America presents a fundamental threat to the

Israeli industry is a matter of intense dehate. It is certainly not brain-
drain in the cla sic ense since the R&D of the company almo t ahvays
remain at home. I raeli US-domiciled companie keep their I racli har-
acter hy retaining Israeli managers and hy raising at least a portion of
their money in lsrael. But it's the nature of things that, once the head-
quarter and EO pack up for Ameri a, the ompany becomes more
Ameri an as more US employees are taken on for important tasks. The
profits, the managerial experience and abilities, and the reputation stay
there as well.
PEOPLE: A CHORUS OF SOLOISTS
Without trying to consciou ly imitate it, Israeli society emhodies many -

hut by no means all - key elements of Silicon Valley culture. The country
has a strong ~ocialist legacy, one where the government is expected to
ol e problems and take care of people. But it ha alway c -e isted with
an etho of elf-reliance, teamwork and improvisation that comes from
the distinct army culture huilt up over Israel's half-century existence.
There is widespread acceptance of the notion that you can break the
rules; authority, wheth r in the form of your sergeant or your school
teacher, can always he challenged, if not simply ignor d. In the Global
Entrepre11e11rslzip
Monitor survey of 21 countries conducted in 1999, Israel
was ahout average in terms of entrepreneurial activity with an timated
4.2% of the population involv ct in a new bu ine or planning to be. 4
However, with one in 30 adults investing in c1 new business, the rate of
angel investing was among the highest of the survey countries.
Furthermore, the amount of venture capital invested as a proportion to
gross dome ti product, a better barometer of high-tech start-up activity,
was econd only to the US.
Shlomo Kalish, who presides over the Jeru alem Global venture capital
group, worried in the early 1980 , when he was teaching management at
Tel J\viv University, that Israelis were industrially doomed. Management
thinking wa~ dominated by concepts like just-in-time m,mufacturing

and total quality control, all of which demanded the kind of discipline
his fellow countrymen lacked. But n decade rater the demands of the
ew Economy have changed the rule , he ay , putting a premium on
the creativity, flexible thinking and determination that characterizes
Israeli society. The e are the qualities, in Kalish's view, that helped lsrncl
leapfrog ahead of Europe and Japnn, to create a culture of entrepreneurs
despite it unpromi ing history. 'In Japan, people Iike security, they like
hierarchy, they want lifetime job security, they will follow order to the
letter, everything is by consensus. It's difficult for them to deal with
unexpected changes. Europe is similar. Israel is far, far to the left. The US
is somewhere in the middle,' says Kalish. 5
Excessive quantities of brashne~s have their drawbacks, especially as

companies go out of their home market and into the wider world where
business culture follows more civil norms. The kind of Israeli chutzpa
Rubner talks about when E I went out into global markets as a young
and unknown company to compete against multinationals isn't comple-
mented by savvy interpersonal relations. Rubner, who was born in
Hungary, educated in Britain and worked in the US before coming to
Israel, recalls having to teach his EC! employees the norms of business
culture. 'Our installation team would tell people at British Telecom, "You
don't understand, don't tell me what to do". We organized a course with
Dale Carnegie on how to behave, how to eat in restaurant ... We till
have courses on how to behave.' 6
There arc at least two way , however, thttt Silicon Wadi differ from the
Va1ley. One is the ab ence of a sense of fun that typifies the global dot
com culture and is even in evidence in sober kinds of places like Finland.
Israeli cornpanie provide New Economy amenities to their employees
like cappuccino bar , company trips and health clubs. The tttmosphere is
informal in the extreme (even in the Old Economy, Israeli dre s for
work like other people dress for vacation) but it is almost always sober.
But perhaps the most important difference to Silicon Valley is the role
that company loyzilty plays - like nearly everything else, quality that
almost certainly arises from the army. Loyalty is manifested not only
through a sense of obligation by employees, evidenced in the relatively
Iow personnel turnover at Israeli compnnies and strong teamwork capa-
hilitics, hut also by the investors and managers tmvards the compnny.
ornbined with the drive to overcome obstacles, it mcnns Israeli\ arc typ-
ically unwilling to give up the business as· quickly as tlieir California
peers. 'When you're in America and you clos down to a company in

California, your employees can mov to Massachusetts or Florida,' ays
Ed Mlavsky, a founding partner of the Gemini venture capital group. 'But
here everybody knows each other from school, the army. You know the
people personally and you have a much higher threshold for giving up.
America is much more cold-hearted. In I rael we play the odd but in a
slightly different way.' 7
That attitude was demonstrated when the U -1 raeli company

ommTouch Software suddenly found it elf not t o many years ago in
one-on-one combat with nill Gates. 'It [CommTouchl had $3 million -
$4 million in ales for an e-mail product, but then Microsoft said it was
offering the ame product for free and the company was wiped out
o ernight,' recounts Mlavsk."Y,whose fund helped back CommTouch. 'If it
had been in California it would have been closed down. What these guys
did wa say, "We got flooded and we have to learn to live under-water.
With a little change of technology, a little of thi and little of that, we can
do omething else", which was web-based e-mail. They had smart people,
they knew the rules of the business and they adapted to the change.'
SOCIETY: LEARNING BY SERVING
The role the educational y tern play appears to be small at least as meas-
ured by the tested abilities of young students. The Third International
Mathematics and Science Study ranked I raeli eighth-graders close to the
bottom of the class - 28th among tudent in 38 countrie for their maths
ability and 26th for scicnce. 8 That put I rael well behind the ascending
Asian economic powers and behind all of Europe. Nor does lsrael push
the envelope in term of technology consumption in broader society. In
fact, of the six countries surveyed in the
Although Israelis like to
book 1 rael comes out ahead of only India in
use the latest devices, the
terms of internet usage and P ownership.
government as of the end of
international Telecommunications Union
2000 had only gradually
begun to break the regulatory (ITU) figures for 2000 how that Israel had
logjam blocking fast internet only 25.4 PCs per 100 population, less than
access. half the level for the US and behind Britain's
9
33.8. I rael counts only 1,755 internet u er
per 10,000 population and 288 internet hosts per 10,000 population,
versus 3,982 and 1,925 respectively in the US. This, however, probably
reflects the high cost and poor service available rather than any disincli-
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Infosys Headquarters, Bangalore: The city that software built. Bangalore is home to dozens of global and local technology
companies and an estimated 75,000 software professionals C
Bangalore: A semiconductor chip designer works on a computer component at the Indian unit of Texas Instruments Inc.
Texas Instruments was the first computer software company to set up its operation in the city in 1985.
Photo by SaVIraK,r/oskar© Reuters 2000

Shophouse District Singapore: Writing code by day, clubbing by night. Courtesy S,ngapore Sira,rs T,mes
...._........, - f"~
Hsinchu Science Park, Taiwan: A size and scale that dwarfs the others. Courtesy Ta,w,.mGovernment
nation to mak use of the net. Only 17.5% of Israelis regularly surf the
internet, according to a June 2000 survey, compared with 45.6% of
mericans. 10 In most cases Israel is not the place to asses where technol-
ogy is going and it is too tiny to act as a springboard to bigger markets.
Although I raclis like to use the latest devices, the government had only
gradually begun to break the regulatory logjam blocking fast internet
access over 2001 and was only in the earlie t stages of setting up the
framework for third-generation (3G) er ice .
Israel boasts a network of excellent universities and engineering pro-

grammes where most of the high-tech community gets at lea t their first
degree (graduate schools arc excellent, too, but many Israelis go abroad for
advanced degrees in science). If Israeli MBA programmes are weaker, the
universities have at lea t recognized the predominant role high-tech plays
in the local economy and many have in the past two years created pro-
grammes specially geared to the New Economy companies. But the direct
connection between strong university-based science programmes and the
high-tech ector is weak. Take the biotechnology sector, where Israeli chol-
arly performance hould have pro ided the basi for a flourishing industry.
ome 35% of Israel's scientists work in the !if sciences and account for
40%-50% of academic research funding. 11 Israeli bio-scientists a count for
1<J,bf the world's academic journal content, even though Israel itself makes
up 0.001 % of the world's population. Yet the industry has lagged well
behind other high-tech egments; biotcch, for instance, captured just 8% of
all venture capital in Israel in 2000, down from 13% in 1999. 12
Israel's Old E onomy was never developed enough to a t as a fe der for

experienced managers to move into ew Economy ompanies. or have
the hundreds of thousand of Rus ian immigrants now living in Israel
be n a well of entrepreneurial talent: Rus ians have often (but not that
often) been the party to bring the technological innovations to the new
enterprise, but Russians arc almost never found in the EO's office.
Israelis returning from Silicon Valley have been an important source of
founding teams, as ha e executives from high-tech industry itself which
has been around long enough to he creating serial entrepreneurs on their
second or third companies.
But the real source of Israel's technological and entrepreneurial abilities

is the army. It's certainly no coincidence that where the army's needs are
the greatest (secure computing, guidance systems, communications, etc.)
that is where Israeli high-tech has made its mark. The nature of the !Dr's
role ns educator and breeder of high-tech leaders is the subject of debnte.
One school maintains that it is imply a ma ive, nationwide crccning

programme: after they finish high school nearly all Israelis - male and
female - arc drafted, and from this pool the army can elect the best and
most motivated for its technology training and development pro-
grammes. The selection process for Israel's army-trained technology elite
starts when they apply to programmes, usually in their last two year of
high school. The highly selective Talpiot programme, the toughest of all,
takes only 30 applicants a year; others, like the Signal Corps computer
programming course, take a few hundred. 'Out of every 10 candidate
with high potential for the programming cour c, we hoo e only one,'
says Albert Tregar, the army colonel who oversees the Si nal Corps' com-
puter programming courses. 13 The course serves the entire arm . 'It's a
very tough selection process - and that's before they start. During the
course there's another winnowing process. During the half year [of
studies] the drop-out rate is about 10%.'
The army doesn't make much pretence of looking for such fuzzy
qualities as creativity or leadership; rather it want hard- ore ability in
science, maths and computer studies demonstrated b the appli ant
through a battery of exams. Like a Harvard degree, the right army experi-
ence on your resume signifies not so much what you learned but that
you were good enough for the privilege of learning it in the most cov-
eted place. That' how Jon Medved, of the Israel Seed Partners venture
fund, looks at IDF service when he creens re ume . As an investor in
start-up companie , Israel eed devote a lot of time to management
recruitment and even keep a headhunter on taff. 'When you examine
an Israeli's business plan you don't look at whats hool he went to but at
what unit he served in. The army i a great screening programme. If he's
come from Talpiot that means he's good. Even Harvard can make a mis-
take, but the army congregates the be t and brighte t,' says Medved. 14
The other chool of thought says the army doesn't just screen but
teaches, both in formal courses and later when the graduate of these
courses go out into the field. Once you're in the course, it's not so much
what you learn but how you learn it. The programmers' course is just six
month 'long, but it' an inten e routine of classes running from eight in
the morning till 10 at night five days a week and a few extra hours on
the sixth day. Tregar doesn't make any great educational claims about it;
ies simply the only way to cram in a lot of information in very little
time. But Lior ~[a'ayan, a vice-president at ompugen Ltd whi h devel-
ops computer-based re earch tools for biotechnology, says the intensive
methods force you to learn qui kly, efficiently and to tackle problems
6 TEL AVIV, tSRAEL MARTIAL ARTS 111
with the group. Ma'ayan went through Talpiot's gruelling study routine,
then worked in the air force, and finally was recruited by one of the
three Talpiot graduates who founded C'ompug n. 'lt' not a good way to
learn, but you are obliged to be focused. The pressure creates a focus: you
have to understand something,' Ma'ayan says. 'My way was to be
humble and ask colleagues. If we were in a totally isolated academic
environment, I'd go to the library and read a book. It may not make you
a better mathematician but it makes you a more goal-oriented person.' 15
The education continue in a different format when the soldiers move

from textbooks to the battlefield - or more probably to something like a
naval R&D unit or to operate advanced communications systems. It is part
of a continuum of the IDF's learning style that's focused on identifying
problems in the field and devising solutions with limited time and
resources. By their early twenties the best soldiers are overseeing important
projects, often in conjunction with private-sector defence contractors.
This i where the typical I raeli start-up CEO acquires his ethos of team-
work, innovation, leadership and the pursuit of technical excellence.
The premier example of the kind of place these soldiers are sent is the
Israel Air Force's (IJ\F) Operational Development Software Centre, known
by its Hebrew acronym Mamdas. The several hundred \vho \vork there
ombine an eclectic mix of extremely talented young people just out of
army training programmes; seasoned officers
The IAF is one of the few who finished the same programmes and have
in the world that develops so
over the years obtained advanced degrees;
much of its advanced systems
and other who bring experience in the field
in-house.,
to the organization. They create some of the
IAF's most rarefied communications, command and control, and avion-
ics, te hnology. In fact the IAF is one of the few in the world that
develop so much of its advanced systems in-house.
But as senior officers at Mamdas sec it, the differences bet,Neen Israeli and
US programmes are as big as they are instructive. For one, the IAF is small
and its budget tiny relative to America's; at the same time, the security
threats the lAF meets arc immediate and right next door, not a theoretical
conflict that may some day be fought in some di tant part of the world.
That means the JAi· doesn't han~ the kind of money and time the US has;
to throw at vast projects, or the capacity to start e\'erything from scratch,
taking years to complete. New developments tend to be C\'olution,ir),
strnctured as solutions to in1111cdiate11l' ds ratl1er tl1an creating Ill'\\' para-
digms. 'Our budget h very small,' explains Lieutenant Colonel Zafrir. 'Our
creativity is elllployed in putting more features onto existing S)"itenl',.'
Another difference is work tyle. The average age at Mamdas is 23-24,

and the most senior officers are out by their early forties. But the
younge t engineers are gaining experience and a level of respon. ibility
well in excess of their years. 'They reach a high level of profc sionalism
from zero experience ... It's a very qui k and very efficient process,' says
Lieutenant olonel Ze'ev, another Mamdas officer. 'Someone who leaves
here has had a lot of management roles equivalent to many more years in
the bu iness sector.' One way that is achieved is by as igning each project
to a mall team, a system that demands that each member is involved in
every aspect of the ,vork from conceptualization to the r suits in the field.
The process of building systems at the starting post involves detailed
planning o that the execution of the idea is relatively simple; at the
finish line, success is measured not in delivering a product that meets pre-
set specifications as much as in building a successful solution. 16
FINANCE:
__ _
PURE TECHNOLOGY
..........................................................
The development of its venture apilal industry has been an accomplish-

ment equal to the country's ability to come up with innovative
technology. Venture capital was virtually non-exi tent at the start of the
1990 , but by the end of 2000 there were 88 funds with S7.74 billion in
capital.17 The fund rai ed just about half that amount in 2000 alone. On
a per capita basis, Israel ranks only after the US in the level of VC
invested domestically to gross domestic product and the amount of V
invested in informati n technology to DP. Virtually every cent of
I raeli private equity is devoted to technology companies and very little
to pure cros -border play ; Israel' private equity industry has no buy-out
capital. Israeli funds have accounted for an increasingly smaller propor-
tion of total high-tech finance while other sources, principally US V s
and orp rate investors, have increased their share. In fa t, I raeli V
accounted for le s than half of the $3.1 billion in private equity rais d by
domestic tech companies in 2000. But the values that Isrneli V brings
to the industry arc the critical factor - domestic venture apitalists arc
the investors a short drive a,vay who act as lead inve tors and enforce
product and management standards, time-to-market and the other disci-
plines needed to get companie off the ground.
It wa n't the case in the first fe,v years, hut since 1999 many L raeli
VCs have grmvn big enough that they can finance companies at every
stage from seed to mezzanine. J\f any of the ne,ve t funds have in
6 TEL AVIV, IS RAEL: MARTIAL ARTS 113
excess of 100 million at their disposal, and the higgest have $500 mil-
lion or morc. 18 The funds arc no longer just sources of pure cash. They
have the financial re ources to employ a big enough team of skilled
managers to be of service to their portfolio companies. They can
finan e bigger rounds, thereby letting portfolio companies focus on
their business rather than on turning the V trough every few months.
'When an entrepreneur comes to us very early we will provide a lot of
templates and knmvledge of how to do thing ,' says ir Barkat, whose
BRM group has $500 million available for tart-ups and represents the
cutting edge of the new, activi t fund . 'We have a full staff of human
resources people, financial people, marketing, bu iness development -
all here to help the entrepreneur to build his team, laun h the com-
pany, structure the finances. Our goal is to dramatically decrease
time-to-market by providing that knuwledgc. Plus we now work with a
ignificant amount of third parties, lawyers, analysts, headhunters,
research firms - we can provide the entrepreneurs with better starting
points leveraging those third partie .' 19
\ here Israel has failed in the realm of technology finance is at the two
far ends of the spectrum. J\t one end, most of the capital raised for
Israeli V s comes from abroad, mainly America because of an absence
of Israeli institutional money due to regulatory restrictions. From the
VC funds' point of view, blue-chip US investors are an important strate-
gic asset for funds trying to bring their portfolio companies to the
American market. But, from the economy's perspective, it meam the
profit accrued from high-technology arc flowing overseas. At the other
enct of the spectrum, the Tel Aviv Stock Exchange (TASE) has failed to
make itself a competitive market for initial public offerings, creating a
scriou gap in the finance chain. The U markets, principally asdaq,
have been the preferred venue for floating shares despite the heavy
costs associated with the IPO itself and meeting US disclosure require-
ments. Fnough companies have successfully listed on Wall Street that a
large number of US investment bank have set up shop in Tel Aviv.
Their presence further encourage the preference for the Nasdaq over
the TASE. After Canada, Israel has the largest number of companies
Ji ted on the asdaq. But because the choice for so long was Nasdaq or
nothing, many Israeli companies that ·would have done better going
public on a smaller, less demanding market, ended up as flops on Wall
Street. They could neither get the long-term support of their invest-
ment banks nor could they handle the SOI?histicated kind of investor
relations Wall treet demands.
The European high-growth tock exchange have begun in the past two
year to fill that role as a stepping-stone market for I rael. Even the TASE
ha made efforts to court young technology companies and has attracted
some IPOs since 1999, but it remains a backwater. he same lack of insti-
tutional investment that has made the V industry o reliant on foreign
capital ha al o made the TASE a thinly-traded and illiquid market rela-
tive to the size of the larger e onomy. Inten e bureaucracy and
needlessly complicated rules also discourage companies from listing
domestically. 'We raised money twice in orth America and once in
Israel,' says Levin, whose ice System is a rare instanc of a high-tech
company going public first in Tel Aviv and only later in New York. 'The
regulations in I ra I ar more difficult than in the State . We mu t simply
copy what they do. W spent hours in J rusal m xplaining to regulators
there \\Thy we need the money and \\That our business is. In Americc'I I
d n't know where the SE is - it' a post office box. 120
GOVERNMENT: EXIT STRATEGY
The government' role in taxation and regulatory issu s r lating to com-

panies in general has been poor, although not a critical obstacle to
high-tech's development. I raeli corp rate taxe are high but it is rela-
tively easy to mitigate them by obtaining 'approved enterpri e' status
from the government. Most Old Economy companie use the status for
capital-sp nding subsidies in designated development zones far from the
centre of the country; high-tech companies t nd to make use of the tax-
holiday option, whi h is good even in the
Foreigners are rarely
Tel Aviv ar a. ln any cas , early-stage compa-
brought in to managerial
ni s tend to lose money; when they move
positions inside Israel so
into the black, they have los any-forwards;
companies don't meet
resistance. and when those run out mo t companies
hav their approved enterprise tax breaks.
Personal income tax is high, too, but Israelis seem relatively immune to
it a a labour disincentive. Foreigners are rarely brought in to managerial
po itions inside Isra I so companie don't meet resistance.
Cliff Felig, an attorney at Meitar, Liquornik, Geva & o, says the main
problem with the tax code is it is too reliant on one-off rulings. 'The most
important thing for the bu ine community in th legal emironment i
ertainty: you want to a k your lawyer, is the ans\ver "ye " or i the answer
"no".' 21 The treatment of capital gains taxes for foreign investments is a
6 TEL AVIV, ISRAEL. MARTIAL ARTS 115
case in point. Unlike most countries, Israel insists that foreigners arc liable
and exempts them only if a bilateral tax•trcaty says it must. Venture capital
funds typically get approval for a rate set at the US level of 20 1¼i rather than
the Israeli rate of 36(¾>,but European investors typically me an ofbhore
domicile, a ,;tatus Israel doesn't recognize. 'Getting the ruling is real hassle,'
says Felig. 'They've never published the ruling, and their policy changes all
the time. You learn about what you can get by word of mouth. You have to
find out what the last fund got.' The same kind of mechanism works for
mergers done through share swaps. Technically shareholders arc liable for
tax even if they arc simply cxch.mging shares and arc not getting any cash
to pay the tax bill. There arc laws that allow investors to defer paying taxc
but they have many conditions that often don't fit with the market's
demands. The Income Tax Authority will sometimes agree to waive these
conditions, but that is not ideal and the ruling is made on a case-by-cas
basis. Merger arc often conditioned on the Israeli side's ability to get the
mling. Not surprisingly, a lot of Israeli companies opt to domicile them-
selves in more tax-friendly America.
s the high-tech sector was developing in the late 1980s and early 1990s,
the government's role in dire tly aiding the high-tech industry through
venture capital and R&D funding was critical. During its four-year exis-
tence, the state-sponsored Yonna venture capital fund played a critical
part in getting the venture capital industry off the ground. YoLina, a gov-
ernment company given $100 million in capital by the state, would
invest up t $8 million or 40(% of a proposed V fund's total capital. The
only condition was that the fund included local and foreign partners,
the object being that the foreigners would get their feet wet investing in
Israel for the first time and Israelis were learning the ropes of the VC
industry. Yozma limited the funds' downside risk by permitting them to
buy back the Yozma stake after five years effe tively at the cost of money.
'Raising a venture.· capital fund is an intrinsic Catch 22: investors want to
know \Vhat you did in your previous fund. It needed some additional
push,' says Mlav ·ky, whose 1emini fund was sponsored by Boston's
Advent. 'Ry risk-sharing in the funds, they [Yozmal were able to attract
foreign investment and foreign expertise in venture capital methodol-
ogy.'22 i\11 told, Yozma leveraged some $200 million in VC. l>efore closing
up shop in 1996 three years before it was scheduled to do so.H
Yozma was privatized, but the government remains heavily involved in

aiding private sector l{&D through the Office of the Chief Scientist
(OCS), a unit of th Indmtry and Trade Ministry. With a budget that was
approximately S300 million in 2000, the OCS will fund 50 1¾>of the cmb
of a company's designated r s ar h project in return for royalties if the

project leads to a commer ial product. Thi reduce the risk-reward ratio
for R&D and is, needless to say, hugely popular with the high-tech indus-
try. But the OCS programme ha come under attack from outsiders as an
inefficient use of government money. There certainly was a time when
acce s to capital, e pecially for young companies, was hard to come by
and the O S quite arguably did have a role to play. Today, with so mu h
money sloshing around the venture capital industry, critics of the O S
contend that even start-up companies can find financing for viable proj-
ects. They also fault the allocation of grants, noting that only about 15%
in dollar term is going to start-ups. To the e criticisms, chief cientist
Carmel Vernia responds that the OCS aids fundamental research aimed
at significant technology breakthroughs, which V s arc loath to
finance. 24 A more serious problem is the conflict between the O S's
mandate to help Israeli industry and the grmving globalization of the
technology ector. The O has until now forbidden t chnology devel-
oped with its money to be transferred abroad, creating seriou problems
a Israel has become an integral part of the world of eras -border mergers
and acquisitions. Ukewi e, the OCS does not allow produ ts resulting
from its aided research to be manufactured abroad. Between these restric-
tions and the availability of V , many of the most promising companies
are shunning the O S altogether. The government is in the proces of
easing the rules. but they are not expected to become law until 2002.
FOCUS COMPANY: WHALE COMMUNICATIONS
Whale ommunications Ltd i typical of the current generation of Israeli

technology tart-up . The company was founded in ovember 1998 by
four partners - Eldad Baron, Daniel Steiner, Yossi Morie] and Mo~he
Livne. The four met in the army in the mid-1980s vvhen Baron and Livne
\'\1ereworking as programmers in the ignal orps and teiner and Morici
in the army's central computer centr . 'Wh n we had to design a system
to contact the army' mainframe ,-ve also had to work on a y tern to
communi ate to their mainframe,' Baron recount . 'That's when \Ve got
to know them. '25
The four didn't waste any time setting up their first businc es. They
formed Softlink in the first wave of late 1980s start-ups. Livnc is still
managing the company, which develops mis ion-critical filc-tramfer
applications. Baron and Steiner split off to form \Vhale and not long
6 TEL AVIV, IS RAEL. MARTIAL ARTS 117
after that the group formed a third company, RepliWeb, which is devel-
oping web ite replication technologie and ,vhich foriel is running.
Ea h partner ha an equal equity stake in the three companies. 'We can't
split any more, now everyone has his own company,' says Raron. The
pace of development in this amoeba-like empire says something about
the evolution of high-tech industry development in Israel: the four sat
on their one company for some eight years and then created two more
in rapid succession, a phenomenon that can be traced, first, to the inter-
net that has created unprecedented market opportunities, and secondly
to the well-oiled mechanism of the I raeli start-up indu try that can get
companies up and running in time measured by weeks and months. It
also speaks about the maturity of the Israeli start-up industry.
Start with Whale' core technology - a segment of the network security

sector known as 'air gap' that lets companies give outsiders acce s to
their internal re ource . It didn't originate as a good idea looking for an
application; rather it was developed in response to perceived market
needs. 'We started SoftLink and were doing
The pace of the internet very nicely. We had big cu tamers in the US
industry didn't allow either
like asa and the SE . Just by listening to
company or investor to wait
their needs when we implemented SoftLink
very long in implementing
solution we came to the idea of Whale. The
their solution.
security need came up from cu tamers who
wanted our site-transfer solution,' says Baron. It all came to a head when
one bank customer told them he wanted to call a halt to a Softlink proj-
ect out of concern for security. 'We a ked him what would be a safe
solution. He said, "I want only safe things connected to my network".
He was kidding, but we came back home and thought nbout building a
small robot to carry disk from one network to another. We didn't do
that, but this is in effect what we do in Whale: we keep the back-end net-
work disconnected and shuttle the data back and forth.'
SoftLink was bootstrapped, and the di u ions the partner had with
V s about additional financing led nowhere. In the case of Whale,
BRM Teclmologies joined nearly at the outset, not long after an angel
round and a few months away from the alpha stage. The pace of the
internet industry didn't allow either company or investor to wait very
long in implementing their solution. 'We liked the entrepreneurs a lot.
We thought that they were very scaleable. You could see these guys
could take on the challenge \'cry nicely. We really liked the concept of
what they were proposing. \Ve immediately saw the solution. We
closed the round very quickly with th m - less than two week~ to com-
plete the term heet ,' ilys RRM'- Barkat. In June l 999, BRM invested
over $2 million. 'You ha e to prove you have real cu tomer , that
they're happy and that it works. Even on a small scale that puts the
company in a very strong po ition,' -ay Barkat. ' nee they do that
they can go to the next round of financing. We bclicv b giving a
company $4-5 million we allow it to grow, get the front and back office
establi -hed, get refercn c accounts, get the management team together
without the burden of fundraising.' A Whale was ramping up it led
another $2] million round in first-quarter 2000 with investors like
Goldman a hs and the oros funds.
o I~rneli technology company can build its business from the home
market. Israel may be a relatively advanc d mark t for t chnology,
but it's not a utting edge market and its too mall for anything more
than beta testing purposes. Therefor th big question is whether to
ct out for the US or uropc first and then how mu h of the com pan
to move there. In mo t ca es, the U' win hand down a the primary
market, but in Whale's ,ise the decision was a little more compli-
cat d th,in u ual. 'The Europ an mark tis in a w,iy more appropri,ite,
although now it's starting to hange,' says Baron. ' e urity in the U
has not been such a concern for business. Their attitude is, "Get to
the cu tomer", and nothing that can low thi down i a ceptahl .
Security holds you ba k a little bit, o it wa n't o natur,il. In Europe
se urity is a higher priority.' But Whale decided not to base in
urope. 'You have to get the seal of approval from the US even
though it' more diffi ult to penetrate there an I it \.vould hav been
easier in Europ .'
Raron ac!mits that BRM was pushing hard for either teiner or him to
mo e to the US right after it put money into the company. BR t insists
the EO of th ir portfolio companies sit in the US (or Europe, if it i
appropriate). Barkat say~ he has no tr ng feelings about whether the
CE is an American or a qualified braeli, although in practice about two
thirds arc mcricans. In Whale's case, Barkat ays he wa - confident
enough in the founders to send one of them to the talcs. Baron made
the move, his pregnant wife in tow, setting up operations in 1 'ew Jersey
to handle all \ bale's operations a.side from R\: D and Luropcan sale-;.
Within a year of BRM's coming on board about 20 of Whale's 50 employ-
ees were in the US, virtually ,ill local hires.
Ne\\ Jersey is far from Silicon \"allej but Baron and Steiner reasoned that
it would enable the two wings of\\ hale to better communicate. There
arc direct flights from Israel to ~cw York, and the time zone differential
isn't as ,vide. 'From the ,,.-est coast it's a nightmare,' says Baron. 'You
come in at 8 o'clock in morning, it's 6 pm in Israel. Here) ou have three
more hours that you can work. The guys in Israel stay very late naturally
anyhow. We obviously invested from the beginning in video conferenc-
ing. When the CEO goes to the US you have air gaµs between sales and
research, but we had two equal partners [running the company] and that
helped to close that.'
:\'ot every Israeli tech company is on the same fast track. But the engines
for this kind of growth and de,·elopment are there, and they are part of
an institutionalized structure. This is a critical element as the time
allowed to get products to the market narrows and Israeli companies
start with the handicap of being so distant from where the action is in
terms of customers and competition. The natural acl\·antage Israeli soci-
ety has in developing innovation technology, and the entrepreneurial
attitude that turns these innontions into products and companies, have
after a decade of development created a nearly complete total environ-
ment for them to flourish in.
That is 'nearly complete'. The failure of the government to make its

tax and regulatory policy conform more with international practices
(read: those of the U ) could be ignored in the early, growth phase of
the high-tech industry. Companies were relati,·ely less global, struc-
turally they were less sophisticated and Israel had fe,\ contenders
globally for mergers and acquisitions. This is no longer the case.
Israeli companies operate vvholly in a global marketplace. 1 hey can be
based where it is convenient, with the profits thereby accruing to for-
eign investors and tax authorities. Indeed, some industry leader<; fret
about Israel becoming a global R&D laboratory with management and
control in the hands of overseas investors and managers. That is a
threat but not an imminent one. Too much of what Israelis bring to
the market in terms of cicntific and entrepreneurial kills are not
easily exportable, unless Israelis are willing and able to emigrate.
Brain-drain of that sort has not occurred on a lc1rge \Cale, but compa-
nies are migrating and when they do the natural tendency is to turn
more and more managerial functions o\'er to r\mcricans. Israeli
polrcy-makers should be worrying.
NOTES
1 Interview with Benny Levin, chairman, 1 ice Systems, 25 May 2000.

2 Interview with David Rubner, former chief executive officer, E I Telecom,
l 9 March 2000.
3 'Money Tree urvey, Fourth Quarter 2000,' Pricewaterhouse oop rs,

10 January 2001.
4 Paul D. R ynolds and other , Global E11treprme11rship
Mo11ito1;2000 Exerntive
Report, Kauffman Center for Entrepreneurial Leadership, 2000.
5 Interview with Shlorno Kalish, managing partner, Jerusalem Jlobal Venture ,

3 April 2000.
6 Interview with David Rubner.
7 Interview with Ed Mlavsky, Gemini Capital Fund ~anagement, 19 March

2000.
8 Third International Math and Science Study - Repeat, 1999,

www/ti mes. bc.edu.
9 ITU Teleco1111111111irntio11
i11dicators1 International Telecommunications Union,
2001.
10 Survey conducted by Teleseker and published in June 2000.
11 Biotecli1Iology i11Ismel (1997) Industry and Trade Mini try.
12 IVA 2001 l'earbook, I rael Venture Association, 2001.
13 Interview with Col. lbert Tregar, Israel Defence Forces Signal orps, 18 fay
2000.
14 Interview with Jon Medved, Israel Seed Partners, 23 March 2000.
15 Interview with Liar Ma'ayan, Compugen, 22 May 2000.
16 Interviews with Lieutenant Colonel Zafrir, Ze'ev and t\vihai, 7 June 2000 (the
IDF cen or reque ted that their last name not be published).
1 7 IV,\ 2001 l'earhook, Israel Ven tu re Association, 2001.
18 'Money Tree Survey, Fourth Quarter 2000,' Pricewaterhou e oop rs.

19 Intervie.,v with Nir Barkat, BRM Technologies, 29 June 2000.
20 lntervie;v with Benny Levin.
21 Interview with Jiff rclig, Meitar, Liquornik, Geva & Co, 6 March 2000.
22 Interview with Ed Mlavsky.
23 Interview with Yigal Erlich, former director of Yozma Venture Capital,

7 August 2000.
6 TEL AVIV, IS RAEL: MARTIAL ARTS 121
24 Interview with Carmel Vernia, Israel government chief scientist, 23 July

2000.
25 Interviews with Eldad Baron, chief executive officer, Whale
Communications, 17 May 2000, and Nir Barkat.
Bangalore
.' alk
to lnternat1on
Techno Iog Y Par
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(16 km) ,·--
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o Electronics City
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Chennai
India
BANGALORE, INDIA:
silicon island, third world sea
BUMPING ALONG BANGALORE'S SARJAPUR ROAD in a spanking nev,·

l 950s-styled Hindustan Ambassador sedan, a visitor is hard-pressed to
convince himself he's in the epicentre of India's Silicon Valley. A few
glass office buildings emblazoned with This Technologies or That
Software whizz by, as do a few luxury housing complexes - the v ilia dcl
\1ar, Prestige Acropolis. But they're just an occasional interruption in
this mise en scene. The road is hemmed in for miles by jerry-built and
decaying stalls selling food and other items. Cows arc grazing amid the
trash and dirt on the roadside. Bullock carts, identical to the one'i
depicted on tone carvings displayed at the local museum, fight for
room on the crO\'vded and potholed road with swarms of motorized
ricksha,•,1s and motorcycles. It's all the standard trappings of a vibrant
but di tinctly poor and underdeveloped economy.
\s the road gets narrower and the surroundings become more rural, a
sign for Wipro Ltd, with its distinct logo of a rainbow-coloured flower,
pops up. A left turn brings the \'isitor into Wipro's sparkling new office
campus. The complex, put up by one of India's biggest software homes
only a few months earlier, is surrounded by manicured lawns. C.asually
hut smartly-drcs'ied employees arc strolling between building'i. \\!ipro\
campus may be a degree more elegant and expami\'C than most of the
hundreds of software facilitie'i in Bangalon:,. but it is not unique. It h ju')t
the biggest island of a 'iilicon archipelago set in a Third World sea.
This is not another meditation on the great chasm between ·wealth and
poverty in India. It exists, but it is probably less obvious in Bangalore
than elsewhere in the country. The city i by Indian standards wealthy,
thanks to a large extent to it booming software industry. Rather Sarjapur
Road is testim ny to India's vastness - a country so huge that it can
accommodate a large and thriving information technology sector side-
by-side with poverty and backwardness, one barely impinging on the life
of the other. Hmv many countries can uffer from an illiteracy rate of
some 45% yet turn out tens of thou ands of top-flight electronic and
software engineers every year. Halfway through 2000, India had an inter-
net penetration rate of 1%; bringing it to just 8% (an ambitious goal
considering only one in seven Indians has a
Over the past two telephone) would be equal to the entire pop-
decades India has gradually
ulation of a large European country. 1 Yet
become one of the world's
over the past two decades India has gradu-
leading centres for IT.
ally become one of the world's leading
centres for IT. How to explain the anomaly? 'What's India have to do
with this. It's 200,000 people ·who happened to be born here, schooled
here and live here,' responds one Mumbai venture capitalist.
Far more than elsewhere in the high-tech world, sheer numbers are a
critical factor for the Indian industry. The Indian high-technology sector
is virtually all software services. Indian companies don't dev lop and sell
their own products. Rather, they take on assignments from overseas
companies, principally from the US. India offers a lot of talented bodies
to produce lines of sofhvare code, more often than not according to
specifications and an architectur de igned in places like San Jo c. This
isn't a business that depend on the next big thing or new paradigms. It's
a business based on cost, quality and on-time delivery. That the Indian
IT sector has done what it ha is no mall achiev ment, but it's a differ-
ent kind of industry to that of Cambridge, Helsinki or Tel Aviv.
HISTORY: BLISSFULLY IGNORED
India embarked on a path of socialist elf-reliance after it achieved inde-

pendence from Britain in 1947. This didn't o much mean nationalizing
the private sector as putting it under the thumb of an esp cially heavy-
handed regulatory regime. ompanies were required to seek government
permission for everything from capital spending projects to launching
new produ ts. Im port were ubject to severe restriction in an effort to
7 BANGALORE, JNDIA: SILICON ISLAND, THIRD WORLD SEA 125
protect home industry. High tariffs did the rest of the work of cutting off
India from the global economy. Policy' was guided by Soviet-style five-
year plans and the tate's hare of GDP grew from 10911to 25% in the 25
years to 1985. one of this acted as a spur to economic growth, which
became especially apparent as the Tiger Economies of Asia began to
emerge in the 1980s. India's economy grew by just 4<Yc, annually in the
three decades to 1990, compared with 7% in Thailand and 9<Yc, in outh
Korea. Nor did it have the salutary effect of enhancing social develop-
ment. The nited 1 ations ranked India 128 out of l 7 4 countries in its
1998 Human Development Index and estimates its per capita gross
domestic product at $2,077 on a purchasing power parity (PPP) basis.
China, the country closest to India in terms of shear enormity and the
social and economic challenges it faced 50 years ago, had per capita GDP
of $3,105 and ranked 99 on the index.
That India's industrial policy kept antiques like the Hindustan

Ambassador car in production was a symptom of deeper problems. Only
the old industrial elite, with its access to regulators and government-con-
trolled capital, could really work the system. That discouraged the
emergence of up-and-coming entrepreneurs \vho could shake markets
up. Instead, many of them drifted off to greener pastures in the US and
Europe in the 1970s and 1980s, a loss for which the country continues to
suffer. 'Basically there are no highly-motivated Indians bet\veen the ages
of 30 and 45 because they all left the country under Mrs Indira Gandhi.
Anybody worthwhile buggered off,' ays Bharat K walramani, who was a
refugee himself. 2 He went out to Silicon Valley in the 1980s and returned
to India in 1994 to head up Indocean Chase apital Advisors, a Mumbai-
based venture capital fund.
The stifling economic atmosphere gradually began to ease in the middle

1980s under Indira ,andhi's son Rajiv. Liberalization really gathered
pace in the 1991-1993 period and continued throughout the decade.
India is '\till a tate-dominated economy, especialJy vis a vis the Old
Economy industries, hut hy the middle of the decade the government
had cut enough lack for entrepreneurs to get started.
India's IT industry benefited directly from the 1990s liberalization, too. f3ut
it \vould be an exaggeration to say it was the only factor. The sector never
suffered quite the ~ame constraints older manufacturing indmtries did.
Unlike steel, textiles or automobiles, ">Oftwarcwas not on the bureaucracy's
radc1rscreen, so it didn't ti") to regulate it. 'TlJc best thing the government
did was to ignore it,' says Raji\ Sahney of the \fumbai office of the
European high-tech incubator, antfa tory. 'Th IT industry was not as

dependent on regulation or government capital. They weren't really facto-
ries, so you didn't need a licence. All you needed wa a room full of
computers. They were catering to the international marketplace. Export
weren't going through our creaky infrastructure. You didn't need a customs
Ii ence to export a cli k.' 3 On the other side of the coin, IT did benefit from
government interference, principally after IBM and other big IT multina-
tionals were forced out of India in 1979. That created an opportunity for
Indian companies like Wipro, which had been a maker of ooking oil and
consumer products, to move into the unoccupied IT sphere.
Entering overseas markets wa a bigger challenge. An Indian introdu ing

himself to an American client as an IT company from Bangalore in the
1980 might ju t a well have opened the conver ation with 'greetings
earthlings'. Nanclan Nilekani, one of Infosys Technologies' even found rs
and the company's point man in the US from 1981 to 198 7, didn't even try
to sell Infosys as a company; rather, he worked with a ew York-based soft-
ware firm that old a pa kage the Indian firm d v loped and implemented.
Telecommunications in India was incredibly
One early player in the low and unreliable. 4 One early player in the
IT segment sent his code by
IT segment sent his cod by facsimile machine
facsimile machine and then
and then telephoned in any corrections. More
telephoned in any
typical wa Infosys' approa h, whi h wa to
corrections.
move the entire development team lock, stock
and barrel to the client for the duration of the project. In spite of the e
obstacles, the Indian ' reputation grew over the 1990s, ulminating in a
deluge of YZKwork at the end of the decade.
Bangalore - a edate administrative centre during the Briti h Raj that later
evolved into a pensioner's paradise - began to draw in IT companies from
the first days of the industry. The city had been home to the Indian
Institute of Science, a graduate sch ol, ince 1911, and after independence
th city became the ba e for defen ompanies and research institutes like
Hindustan Aeronautics, the ational Aero pace Laboratories and the
Aeronautic Development Centre because it was geographically distant
from India' main military rivals, Pakistan and China. Bangalore' early
high-tech day were as much geared to hardware a oftware, since that is
where most of the local engineering talent lay. Infosys started up in
Bombay and Pune in 1981 and moved to Bangalore two years later becau e
the ompany's seven founder were impres ed by the quality of life, cli-
mate and chooling. Texas Instruments, the first multinational in the city,
arrived in 1985.
7 BANGALORE, INDIA: SILICON ISLAND, THIRD WORLD SEA 127
GEOGRAPHY: BRAND NAME CLUSTER
Bangalore is a flat and sprawling city of 5.5 million people in the south
of India, set on a low-lying plateau whose pleasant weather year-round
has earned it the moniker "the air-conditioned city". The inevitable
socioeconomic divide between the wealthy and cosmopolitan IT sector
and the rest of the city i accentuated by its geography. Bangalore's Old
Economy industries, the city's ramshackle central business district, as
well as some of it poore t neighbourhoods, lie mainly to the north and
we t of the great green divide of ubbon Park. The IT industry is dis-
persed south and ea t of Bangalore' original centre mainly because, until
recently, companies needed line-of-sight wireless communication to the
city' ingle satellite earth station, the IT indu try's lifeline to customers
over ca . Former village like Koramangala, Indira Nagar, J.P. 1agar and
Whitefield that have been ,vept into the city' expanding borders not
only serve as a base for corporate offices but as the neighbourhoods of
choice for the cyber set. Whitefield's International Technology Park's
office tower have come to symbolize Indian IT, but the bigge t concen-
tration of ompanie i in the giant government-de ignated high-tech
industrial zone, Electronics City. The internet cafcs and American fast-
food franchi e patronized by the city's IT elite are gathered around MG
(Mahatma 1andhi) Road.
Companies are hou ed in office complexes indi tinguishable from their

peers in the U or [uropc. In the case of the bigge t and most prosperous
ones, campuses are replete with cafe and re taurants and health clubs.
With the labour market for IT professionals so tight, companies have to
entice employee with more than a alary and tock option . Info y 's
43-acre campus in Electronics City, for in tance, has three food courts, a
gymnasium and a small golf course and an amphitheatre to serve 3,500
employee . The company is building an entertainment centre to round
out the offerings. As much as Infosys and other IT companic create their
own world heltercd inside a campus and tied to America and Europe by
satellite, the oth r India can't help but make itself present. 1t's a 24-hour
journey by crotchety train over the 1,200 kilometres to Mumbai.
Bangalore's poky airport is a purely dome tic terminal and international
connections through Mumbai arc poor. The city's population has
approximately doubled over the past 20 years and the infrastructure
ha n't caught up \\ith it. J>m,·ercuts arc so common that hotels leave a
candle and matd1e in tile rooms and co1_npanics typically have their
own back-up generators. l{oads are horrihl} overcrowded.
Bangalore is the biggest and oldc t of India's high-tech centre , but it is

by no means the only one nor is it a self-contained one-stop shop for IT
companies. The rule that says high-tech lusters have to offer firms all
the ancillary services they need doesn't entirely apply to Bangalore.
Although the city counts about 15 venture capital funds, the VC indus-
try is centred in Mumbai as are the big law firms. Hyderabad, 800
kilometres due north, is a growing centre and is the base for Microsoft's
Indian operation. Pune is developing into a centre for AD/ AM soft-
ware and engineering portals; Mumbai, with its (by Indian standards)
strong infrastructure, is an IT service hub. Second-tier centres exist in
places like alcutta and hennai (Madras). Even cities urrounding
Bangalore like ysore are gunning for some of the pillover from the
city's high-tech.
evertheless Bangalore remains the leading IT cluster by a wide margin

and the preferred place to start up companies. 'Bangalore has been sold
outside India. If I go to, ay, somebody in Dallas and I'm from Bangalore,
they say, "Oh, that's a high-tech city". When I go to ustomers world-
wide I don't need to sell where I'm from,' says Mani ubramanian,
managing director of onvergent oftware T chnologies. Bangalore's
estimated 130,000 IT professionals - a number swelled by a steady
tream of immigrants from el ewhere in India - is an unparalleled
resour e. 'We need to have a talent base and that talent base is available
in Bangalore. As a start-up company I need to get these people to come
here. The labour market i tight, but th talent is available h r ,' says
Mani. 'lf l wanted to get people who worked on GSM or mobile comput-
ing, I don't think I could get tho e people in Hyderabad, maybe I could
from Delhi. It's expensiv h r but at I ast it's availabl .' 5
udhir. ethi, director of the Mumbai-based Walden- ikko India venture

capital management company, estimates the number of start-ups nation-
wide grew to 6,000-7,000 in 2000 from 3,000 the year before. 6 But the
growth of start-ups was almost certainly inflated by one-off factors.
threatened change to the law that would have don away with the 10-
year tax holiday for software exporter which would hav gone into
ffect in arch 2000 spurred a flood of company registrations. Also, not
a few young entrepreneurs were hoping to make quick money on the dot
com boom that shook India as much as it die.Ithe US and Europe at the
end of 1999 and early 2000. With tile Indian stock market nose-diving
and te h stocks pointing the way down, the dot com start-up phenome-
non has lost n lot of its lustre. The test will be whether the rate of
start-ups ke ps up to its 2000 level. In any event, most start-ups being
7 BANGALORE, INDIA; SILICON ISLAND, THIRD WORLD SEA 129
formed arc businesses with little potential to grow or to attract the inter-
e t of the investment community. 'I don't call a 10-man software shop a
te hnology company. It may !Jecome one eventually, but if you can't get
$100 million in sales in three to four years, forget it,' says Kewalramani
of Indocean hase. 7
INDUSTRY: FOOT SOLDIERS OF SOFTWARE
The Indian IT oftware and service industry has grmvn enormously over
the past five years to revenues of $5. 7 billion in the 1999-2000 year, of
which $4 billion represented exports, according to the ational
A ociation of Software and Service ompanies ( ·ass om) industry trade
group. 8 Some 185 Fortune 500 ompanies have outsourced their IT
requirements to Indian companies. As a
Some 185 Fortune 500
share of India's total exports, software grew
companies have outsourced
to 10.5% in 1999-2000 from 2.S'Xi five years
their IT requirements to Indian
earlier. The ize of Indian IT i indi putably
companies.
big, especially if you consider that its co ts
and pricing are low by international standards. But sophistication is
another matter. Research and development pending in 1999-2000 was
ju t 3.4(¼>of total pending, up from 2.5% in 1997-98 but hardly an
impressive number for a high-tech industry.
The rea on is that the great majority of Indian companies, including

the biggest and most successful, like Bangalore' Wipro and Infosys,
arc in the main dedicated to undertaking project work as ubcontrac-
tors - writing code for software designed by others, conducting
testing and verification, doing maintenance and manning help-line .
At the very bottom of the scale thi kind of work i done on a time~
and-material basis: the cu tomer defines the project specifi ation and
the Indian company bills for the number of hours. In the early days
of the Indian indu try, a lot of this work was done on-site, meaning
on the u tomers' premise· in Europe or more typically the US. On-
ite vvork accounted for virtually all of Indian software exports a
decade ago. s telecommunications have improYed and Indian IT'
reputation ha-; grown, much of this work is being taken offshore, i.e.
back to India itself, but on-site still accounted for about 5891i of
export rc,·enues in 1999-2000, according to Nasscom estimates. A
step up from time-and-material arc fixed-cost projects, which proba-
bly comprise 15% of the Indian industr 1 tocLI). In fixed-cost the
fndian company still acts as a subcontractor but harge a flat fc .

'This is the place where you need larger expertis . It' where an under-
standing of end-user applications is important,' says Prndeep Kar, the
chief executive officer of Microland Ltd, an IT services firm focused
on the internet. 9
The challenges of doing IT services on a global basis shouldn't be

underestimated. It involves juggling awkward time zones, cultural dif-
ferences, maintaining quality and deadlines, managing large numbers
of people and finessing the tricky task of cultivating customers thou-
sands of miles away from headquarters. Microland, for instance, has
four ales offices in the S a well a a proximity d velopm nt c ntre
in San Jose that handles smaller projects; the big jobs go to Microland's
army of developers back in Bangalore. 'We have a lead technology
architect on-site. We have a head of project management on-site,' says
Kar. 'As far as the customer is concerned, he interfaces with local
people. Our US office work with the development centre.'
evertheless, this is worlds apart from developlng wholly original IT
and undertaking the challenges of rolling out the products in succ s-
sivc generations in a global market. Most Indian companies will
readily admit they are not up to th task of dev loping products, or at
least don't feel any pressure to trek into risky and uncharted territory
when they arc doing just fine where they are now. 'In the software
ervices business, you can be either very successful, slightly successful
or a little less successful. In products either you succeed or fail - it's a
binary bu ine ,' ay Rekha Menon, India country manager for
Talisma orp. 10 Talisma is a r,Hc instance of an Indian company
evolving from services into product .
To the extent Indian companies are moving up the value chain, it is to

get into areas like e-commerce services, which involve closer links with
cu tomcrs and a deeper understanding of end-u er needs; building inter-
nal libraries to p ed implementation; and finally offering what Azim
Premji, Wipro's founder and chairman, calls 'semi-shrink-wrap' solu-
tions, in effect productizing certain ervice . 11 Wipro pulled back from
the product s gm nt in the early 1990s to concentrate on services. Even
with 7,000 employees, a global business presence and oodles of cash,
the company still doc n't have the brand equity to make a go of it today
either, Premji maintains.
7 BANGALORE, lNDIA: SILICON ISLAND, THIRD WORLD SEA 131
PEOPLE: STRENGTH IN NUMBERS
The usual balance in high-tech favouring the quality of human resources

over quantity doesn't quite apply to India. Absolute numbers of people
are critical for an industry that isn't creating very much original IP but is
developing the components for products, making sure they work, and
keeping them running. Take the lsr;:ieli company e-sim, which develops
internet-ba ed imulation te hnology and opened a development centre
in Bangalore in 1999. The core intellectual property is developed at its
Israeli headquarters and marketing is done out of the U ', both functions
employing a total of l25 people. Implementation, which in the main
entails building interactive product manuals to he accessed over the
internet, is done in Bangalore by 138 contract workers - more than half
the total payroll and a number planned to rise to 400.
The software industry's payroll has ballooned over the past three years,
growing to 340,000 as of first-quarter 2000 from 160,000 in 1996-97,
according to Nasscom. 12 So far, India's universities have kept pace with the
industry's needs. India graduates betvveen 73,000 and 85,000 software
engineers annually vvhile private institutes - which turn graduates of other
discipline~ into software engineers quickly but with mixed results - con-
tribute another 40,000-50,000. Thus, the supply should slightly exceed
what asscom forecasts at total demand of 140,000 in 2000-2001. But the
labour market is tight, especially in Bangalore, and wag s by some esti-
mates have skyrocketed by some 40<¼> in 1999 alone. Yet as big a rise as
that is, it does little to jeopardize India's status as a low-cost place to do
business. , tarting salaries for software engineers generally range between
Rsl0,000 and Rs20,000 a month, or about
Bangalore's reputation as 2,700- 5,300 a year. Salaries like these are
a cyber Emerald City of very competitive by Indian standards; a
opportunity and wealth, even
worker at a state bank might make half that
for mere developers, lures
level, without the stock options and the
streams of IP immigrants.
promise of big raises over the years. Thus the
industry has an immense drawing power - so long as enough people can
be trained: with Na ·scom predicting total IT employment of 2.2 million by
2008, the Indian IT sc tor will face labour capacity constraints.
Bangalore's reputation as a cybcr bnerald City of opportunity and

wealth, even for mere developers, lures 'itreams of II' immigrants.
Recruiters have no problem convincing promising candidates to leave
Delhi and Mumbai. Nevertheh.'ss, the labour market in Bangalore h
excruciatingly tight, and the annual attrition mt for Bangalore IT

companies is a steep 15%-20%. Re ruitment and attrition horror sto-
ries (always about other companies, of ourse) abound. One small
company had to hire 185 people over a three-year period to maintain
an average staff level of SO. One US multinational is alleged to have
short-listed 40 people for a position but only two bothered to how up
for an interview.
Besides a huge reserve of IT professionals, the other edge India ha , not

only over other developing economies but most of the industrialized
world, is that all educated people peak a high tandard of Engli h.
Studies at elite primary and se ondary schools and all higher education
are conducted in the language of the country's former colonial masters,
but its penetration goes deeper than that: it is the lingua franca of the
Indian middle class, who speak a large number f mutually unintelligible
regional indigenous tongues. Bookstore have more titles in English than
in local languages. Advertising, ertainly for the kinds of produ t and
s rvices available only to th middle class, is in English. Although
Indians may exaggerate how much they speak it personally among
them elve , but when it comes to pure bu iness matters they will always
u e English, even the thousands of code writers who will ne er have any
reason to travel or meet foreign customers. 'Communi ation with client
happens in English, product definition is done in English. Very few
1
private-sector. businesses in India talk in any other language, says
Microland's Kar.D
Unfortunately the combination of low wages and fluent English is a

double-edged sword for Indian IT: not only does it make the country
an attractive offshore centr but it mak s Indians cmin ntly suitable
for employment in a welcoming America. At Wipro, some two thirds
of employee attrition is through people finding work in the US.
Graduates tart out at an Indian ompany, gain a f w years of experi-
ence and then go off to America. Faced with its own shortage of
qualified IT personnel, the US in 2000 issued 200,000 H-1 B isas,
which entitle people with skills in demand to work in merica for up
to six years. Nearly half the H-1 Bs went to Indians and many find
way to stay permanently. The skimming off of many of the best and
brightest to the US has had a debilitating effe ton the IT labour
market, particularly be ause those leaving are at the stage in their
careers when they are ready to become project leaders and middle
managers. 'It1s more or less a fact that to get people with three or four
years' experience in India is impos ible b cau everyone wants to go
to the States. We tried for months desperately to recruit team leaders,'

says /\ri Blo h, who heads e-sim's Bang'alore operation. 'After one year
we started to have a lot of attrition. It's a social factor working in the
software industry. If you have two people engaged and the mother of
the bride secs that the guy hasn't received an offer to work in the
tates, she'll say, "What's wrong, you're not doing well enough". We
had an on-site team in the States, and the girl met an Indian there
and she's getting married.' 14
The worst loss for India is at the very top, where the brain-drain to
America is so painfully apparent. The roll call of non-resident Indians (or
NR!s, as they arc popularly called) who have made it to the top ranks
of American high-tech includes Vinod Kholsa, founder of Sun
Microsystems; Sabeer Bhatia, who developed Hotmail and then sold it to
Microsoft; Oesh Deshpande, founder of Sycamore etworks; and K.B.
Chandraskhar, co-founder of Exodus Communications, to name a few.
According to one study by Annalee Saxenian of the University of
California at Berkeley, Indian immigrants were the top executives in 7%i
of all Silicon Valley start~ups between 1995 and 1998. 15 Had they stayed
in India with all its attendant obstacles to building and developing an
enterprise, their achievements would no doubt have been less. But the
record certainly speaks for the Indians' ability, given the right environ-
ment, to build and manage companies.
With the knowledge and network<; they have, NRls could be a major
cataly-;t for moving the Indian IT industry up the value chain. Mohan
Rao, a vice-president at Texas Instruments, was the one who first sug-
gested the company consider an Indian operation. Srikanth
Manchikanti came back to India after eight years in the US to found
Siri Technologies together with Oilip Panicker. Of late, a group of
American Rls has s t up an organization called IndU Entrepreneurs
to foster links between India and Silicon Valley. But the examples arc
few .1nd far hetween, and they typically take the form of the NIU start-
ing up a US comp.1ny with .1n Indian development subsidiary, thereby
leaving most of the skills in marketing, finance and mant1ging outside
India. rl1e typical Silicon Valley NRI got his undergraduate degree in
India, \\lorked a few years for a local company and then left for the
States, or went there for grt1duate school. He never ran a busine\s in
India and docm't know the environment. Th.1t is starting to change,
but a thriving Indian IT -;cctor still rnn't compete with tlH' re\.vards of
doing business in America.
CLONING SILICON VALLEY
The Bangalore-based arms of foreign multinationals have similarly failed

to play a significant role as a generator of new entrepreneurs. Foreign
companies have generally used India f r implementation, with the archi-
tecture done back at headquarters in the US or Europe. As a result, local
engineers haven't had the experience, knowledge or skills that could
serve a a platf rm for forming a new mpany. Over time more Indians
are being put into upper-management positions, but the impact has yet
to make its way into the supply of new entrepreneurs. Instead, budding
entrepreneurs tend to come from the senior
Budding entrepreneurs management of existing IT servi e firms -
tend to come from the senior often after topping off that experien e with
management of existing IT
a few years in the US. The five founders of
service firms - often after
K hema Technologies, a Bangalore IT serv-
topping off that experience
ices firm, all started at small companie that
with a few years in the US. ,
grew bigger over time but didn't give
employees a piece of the company's rising equity value. Anant Koppar,
Kshema's chief executive officer, was at BFL Software, one of Bangalore's
biggest IT concerns. 'I was the second employee at BFL. We built the
company from zero to a very large number of 'mployees - when I left we
were around 700 people and I wa head of technology - but I didn't own
any shares in the company, except what I bought in the public market,'
he recall . 16 The kind of backgrounds Koppar and others like him bring
to start-ups is an invaluable combination of indu try experience and
entrepreneurial drive, but by itself it doesn't give them the tool to move
beyond basi IT services.
SOCIETY: A STUDY IN CONTRASTS
The statistics on the level of Indian education and PC/internet penetration

are sad even by the standards of the developing world. Only 55% of the
population is literate, compared with an average of 69% for low-income
countrie .17A little over three-quarters of Indian children in the appropri-
ate age group arc enrolled in primary hool, compared with an average of
83'¾) for low-income countries. Vis a vis other low-income countries, India
spends a comparatively generous 3.1% of its 1DP on education, but that
money goe di proportionately to educating the middle class. 18 India had
about 3.7 million internet u ers in 2000, or a rate of about 37 per 10,000
inhabitants, versus a worldwicle average of 440 at the end of 1999. India
counted only 0.45 personal computers per capita, ver us a worldwide aver-
age of 7.7 P s per l 00 people at the end of 2000. 19
7 BANGALORE INDIA. SILICON ISLAND, THIRD WORLD SEA 135
The fact is, llmvever, that none of these nationwide statistics matters to Indian
IT because the industry only dra,vs from the skills and talent base of a small
part of the population - bearing in mind that jmt a small part of India is enor-
mous. Numbering in the ten of millions, the Indian middle class is so huge
in absolute terms that the supply of competent labour is seemingly endless.
Taking the middle class in isolation, India is suddenly transformed into an
education powerhouse. The sons and daughters of the Indian middle class
grow up with computers and online access. Education is considered a valuable
commodity, and competition to get into lndi.i's 1,832 educational institutions
and polytechnics is intense, es1 ecially the six Indian Institute of Technology:
only 3,000 of the 98,000 students who took the entrance exam in 1999 \-\'Oil
admission. Science and maths t1reconsidered prestigious disciplines, and even
humanities and social science students are required to study them.
trangely for a high-technology clu ter, Bangalore ha only one top-notch ci-
ence and engineering school, the Indian In titute of Science. That hasn't held
the city back because Im1ian industry and academe have never forged the
kind of training and research partnerships seen in most other Silicon Valleys.
'There is more stre s on fundamentals here. There's a lot of theory, a lot of
basic concepts. What happens in the process is that applications knowledge is
compromised,' says Sanje v N. Das fohapatra, who manages university pro-
grammes for Texas Instruments in India. 'If you go to the labs, the labs arc not
really great compared to the labs in the U or Europe. When student go to
the U , it' over there that they can put their ideas into practice.' 20 Texas
In truments and others have begun funding university research programmes,
but they are fighting against an attitude that academic re earch and teaching
should keep its distance from business.
Even ,vhcn tile state-directed economy was in its heyday, Indians

demonstrated an unusually strong entrepreneurial spirit. everthele ,
the most talented people usually chose to work for multinationals (if
they didn't end up going abroad altogether), preferably in marketing and
in tile consumer good arena. 'It was almost impossible to get good
people to join young companies. It used to be that the societal comfort
was not there. If you told )Olll wife or parent'i you were working for
some start-up it wasn't impressi\'c. You were looked up to if you worked
for a large multinational in manufacturing or con umer goods,' sa 1 s
Vijay Angadi, m,maging director of !CF Ventures, a Bangalore VC fund. 21
Thl' stock options wealth genl'rated by high-teli1 companies has begun

to undermine the.' old standards - high-tech_careers are now the place to
he and starting up a company has a cache it never had before. Just mu
27<¼1of Infosys and nearly 18% ol ipro employee!\ were millionaires in

the middle of 2000, even after the collapse of tech shares on the local
stock market in the spring. 22 Billionaire Rls capture newspaper head-
lines. The (,'Jo/JalH11trcpr('//£'/lrsl1ip
Mo11ilor 2000 report estimates that 6.]%
of adult lndic1ns are engaged in new businesses, c1lthough l)C'Cause the
economy is predominantly agricultural it is hard to ompare the figure
with more developed countrics. 2:1' ow ifs sexy to say you're working for
Philips or Siemens and iust as sexy to say you're working for your own
company or a start-up,' says J\ngac..li.
FINANCE: UNDERWEIGHT
The Indian IT companies of the 1980s and mo t of the 1990s didn't need
large amounts of c.1pital nor the kind of strategi counselling that ven-
ture capital funds are supposed to provide. Azle Software & Technology
Services, which spccializ 'S in c-commer ·e applications, is a ca e in point.
It was ~tarted by S. Parthasarathy anti ovindarajan ( ovi) V.R. with cap-
ital from family and friends in 1996. Aztec was air ady the second
slcnt-up for Parthasarathy while Govi had worked for Digital Equipment
in the Sand 1B 1 in ln<li,1. 'Since we were able to get good projects from
day one, like from ticro oft, we were able to generate revenu , so we
didn't h,we to burn our scec..lmoney so much,' recalls Govi. 24 Aztec took
space in a kind of incuhc1tor facility in Electronics ity .1nd when it
exµandc<l a year later moved to cheap digs in a former garment factory.
'We wanted to build our ornpetence, platforms and Iibrarie rather tl1an
go for VC.' By 1998 Aztec was ready to enlist venture capital but d cided
to go to ,alifornia to do it, first restructuring the company so that the
Indian op ration became ,1subsidiary of a U' parent. ' 1ost of the Indian
V sat the time were very conservative. It was more like working with c1
bank,' he says. In the end, Aztec raised money instead from K. B.
handrashckar, the co-founder of Exodus ommuni ·ations.
The family-and-friends model has been updated somewhat \Nith the

boom in Indian IT share prices. The millionaire employees produced by
older companies like Infosys and Wipro have created a huge reservoir of
angel finance provided hy people with at least some industry experience
an<l knowledge. Unfortunately, they typically lack experien e in starting
companies. or do they devote the time and attention 011 the board
level that serious investors should be providing. tuch of this angel
finance wa~ friltl'red a\·vay on dubious dot Lom ideas during the internet
7 BANGALORE, INDIA SILICON ISLAND, THIRD WORLD SEA 137
.
frenzy that hit India in 1999 and earlv, 2000. Anjana Vivek, who follows
the venture capital industry and was editor of the Indian Venture ( a pita!
Association annual report, recall eeing 10-12 billboards for dot com
com panie on her way to work every morn-
Much of this angel finance
ing in the spring of 2000 - most of them
was frittered away on dubious
erected for the purpose of impressing bad~-
dot com ideas during the
ers rather than bringing in customers. By the
internet frenzy that hit India in
1999 and early 2000. summer and after the !>tock market collapse
the number was down to two or three. 25
The government hrst issued guidelines for the venture capital industry
back in 1988, but the indu try's grm\·th vvas hamstrung by draconian
regulation imposed by variou government authoritie a the price for
pecial tax conces ions. Limit \\'ere placed on what industries the funds
could invest in, how big an equity stake they could take and when they
could exit. These rules have been gradually relaxed, oversight has been
concentrat ct in the Securities and Exchange Board of India (SERI) and
tax treatment improved as the government increasingly understands the
critical role that VC plays in high-tech. In these condition , it' not ur-
prising that V ' 1,vas mall and marginal to the IT industry. A sets under
management doubled from 1996 to 1998 but only to the equivalent of
$660 million. A big rush of money began in J 999 when the total assets
grew, according to various estimates, to 1 billion-$1.S billion and the
number of funds doubled to about 40. The number of funds may have
reached as high as 60 over 2000. But overall the VC industry remains
small by international standards. 26
1or should the recent growth be taken by itself as a bedside chart of

the industry's health. A lot of this capital has not yet been invested
either be ause it's ju t been raised and due diligence takes time, or
becau c the dealflow is too paltry, depending on who you ask.
According to Nasscom, Indian tech rnmpanics raised S370 million in
the 1999-2000 year and were on the way to raising $700 million in the
2000-200 l year but these figures include not only VCs but angels and
other private-equity investor . The average fund . ize in India is ')!l1all,
which makes it financially difficult to employ enough staff to closely
manage the portfolios. Home-grown Indian funds typically have capi-
tal of up to $25 million while dollar funds whose capital is raised
globally but which invest cxclu ively in lndicl generally have between
$25 million and (at the outer limit) S 75 million 111 Gip ital. Bigger global
dollar funds, which are the Indian arm.') of multinational funds,
account for 30%-40c¾, of the industry. Admittedly this money goes a lot
further in India because the cost of ct ting up and running new bu i-

ne s is o low, but lndoccan base's Kcwalramani contends that is not
enough of an off etting factor. Indian tart-ups need much handhold-
ing and a large part of their operation have to be located abroad,
thereby raising their apital osts and the management costs of the
fund. 'You'd have to be brain-dead to come here as a venture capital-
i t...Early stage i tough. You have good technology here but no
management experience what ocvcr. You have to go over ca , which i
what we're doing,' he says. 27 By Kcwalramani's estimate to make it in
the Indian VC market, a fund need capital of $500 million o that by
inve ting it at a rate of 100 million a year it would upport annual
management overhead of 15 professional staff and $10 million.
The one area of finance Indian investor need not worry about i exits.
Indian company founders arc famously loath to give up control, but
antfa tory's Sahney ascribes that mainly to the industry's immaturity,
which creates few ituations that call for strategic mergers and acquisi-
tion . 'The mind- et of a lot of people has been control-driven as
oppo cd to value-creation-driven,' he says. 'They don't mind sacrificing
growth and value to retain control. They don't mind floating [shares] a
long a they remain EO, and they don't want to ell out.' 28
Those attitudes have begun to recede, as evidenced by the frenzied pace

with whi h Indian IT companies have been going public. India doe n't
have a growth market for high-te h ompanics, but the Ii ting require-
ment are ea y enough for tech companies to list on the main board. The
market capitalizati n of IT companies listed on the Indian Stock
Ex hange grew from $4 billion in January 1999 to $95 billion a year later
(although that was shaved down to $59 billion within a few months
when global te h share pri es plummctcd). 29 In the heat of the action in
1999, omc companies were appending 'software' to their name to get a
piece of the action even if their IT activities were marginal. The biggest
companies like Info y , Satyam Infosystems and Wipro have found
acceptance in the asdaq market, thereby clearing the path for other,
smaller Indian companies to follow. lt i not simply the money that
founder an mal-:e through an initial public offering. An IPO puts value
into the stock options programmes that companies need to recruit and
retain employe s. Floating hares in the S give companie a higher
profile in their main market, make stock option available for overseas
employees and provide the currency for the increasingly important task
of acquiring foreign companies for expansion.
GOVERNMENT: STICKS WITHOUT CARROTS
The Indian government hasn't ad pted so much a carrot-arn1- tick policy

towards IT a much as tick or withhold-stick stance. Over the past decade
it ha come to recognize !T's potential to create jobs and earn foreign cur-
rency, but government policy starts from a principle of heavy-handed
intervention, which extends even to the relatively liberalized IT sector.
Helping IT means removing some of the most onerous aspect of state
intervention and only rarely docs it entail corning directly to its aid with
the kind of favour richer governments might be tow, like R&D assis-
tance. The mo t prominent of the withhold-stick policies arc the various
export processing zone schemes that shield companies from the normal
onslaught of regulations and taxes. ompanies wholly export-oriented
can set up shop in the zones (one category being software technology
parks (STP ), like Electronics City, designed for the IT industry) or have
their own premise de ignated a zone. These entitle companies to a 10-
year tax holiday and exemption from import duties and licences on
capital goods. STPs offer special facilitic like high-speed data networks.
Yet the bureaucracy entailed can be intense. At STP companies, to point
to one prominent example, visitors must undergo tight security, includ-
ing the requirement that they provide their laptop computer's serial
number. Yet mo t Indian managers regard this as a reasonable trade-off
for the red tape they are avoiding.
In the case of the IT industry the government has similarly dropped its
unwelcoming attitude to foreign investment. Foreigners can own up to 1009{1
of an Indian infotech company without seek-
Foreigners can own up to
ing pedal permission. The fact, however, is
100% of an Indian infotech
that the red tape is so entangling, most foreign
company without seeking
companies avoid setting up Indian subsidiaries
special permission.
altogether and simply contract with a local IT
company to provide crvicc . Oddly, however, the government has set a ceil-
ing for the size of foreign acquisitions by Indian companies, which has put a
crimp on the industry's first forays into global M&A.
One of the few carrots is provided by India's national government as well

a~ a handful of state governments sponsoring venture capit.il funds.
Bangalore's state government was the first of the batch, having set up its
Karnataka IT Venture Capitnl Fund (}dTVfN) in 1998, capitali1ed at Rps
150 million ($3.5 million). Unlikr mmt gon:-nunent-sponsored VC funds
.ibroacl, Indian government VCs aren't designed to be catalysts for devel-
oping private-~cctor VC but to help smaller companies.
The governm nt has similarly made great trid in opening up lhc

telecommunications sector to private initiative and competition,
although like much el e in Indian liberalization the proce is tarting
from a very low ba cline. Tariffs arc extraordinarily high and ervice
downright primitive in many cases. Private internet connection were
not allowed until 1995 and private-sector companies could not offer
net service until 1998. In the ummer of 2000, the government
announced a flurry of new telccom-reform initiatives: the monopoly of
the tate-own d Vid h San har igam (VS L) on international data
links was eliminated, international dialling was opened up to unre-
stricted competition, foreigner were given permi ion to own up to
100% of certain telecom bu ine e like internet crvice providers
(ISPs), and the D partment of Telecom S r ices wa told to convert
itself into a state enterprise.
FOCUS COMPANIES: CONVERGENT

SOFTWARE AND TALISMA
Mo t Indian IT companie are content to remain in er ice , but

Convergent oftwarc and Talisma are determined to make the evolution
to products - or more accurately integrated product and services. 'Why
are we doing it? It' ego rea on . When we started we took our best devel-
opers whom we could have farmed out to bring in lots of revenue . Each
of them could have run a 100-person team,' say Tali ma's Menon. 30
Both she and Convcrgent's Mani also sec the move to product a a mi -
sion to prove that an Indian IT can compete in the toughe t and mo t
sophisticated sector of IT. They also sec it as a strategic nece sity: in the
lower end of the IT bu ine s, particularly in upport service , India faces
competition from place a far afield a the Philippines and lrcland; at
the upper end, the incrca cd convergence of product and services make
it more difficult for companic to remain pure IT service plays.
Convergent was formed in 1999 in Bangalore by Mani and Ramu Thota

to offer high-end solutions for tclecom, datacom and e-commerce. The
two had a hand in building India' fir t private ISP before going out on
their own. Unlike the typical Indian IT house, onvergent's customers
typically come with an idea and no pecifications and get an end-to-end
solution. on ergcnt' original bu iness plan envisioned the company
undertaking product development but didn't propose what it would be.
'You have to be succc sful first of all. Nobody cares what Infosy i doing,
but it's a successful company. We said we'll be <1 focused company, hut
we'll do the ervices business for th~ first 18 months,' Mani says. 31
onvergent ha in e begun development for two products aimed at the
e-commerce and tele oms sectors.
Talisma also began in services, as a spin-off from Aditi Corp, a Seattle-

based company which was founded in 1994 by Pradeep ingh, an NRI
who made his millions from stocl, options while at Microsoft. /\diti
started by offering technical support for Microsoft and other companies,
using engineers based in India to an wer internet querie . Over time
diti moved up the value chain to high-end IT services and finally to a
product Iaun hed in November 1999 for the electronic customer rela-
tionship management (e RM) segment. Talisma plit off from Aditi in
early 2000, taking with it the complementary product and support serv-
ices busine ses. By continuing to offer technical support services on a
contract basis, Talisrna has one hand directly in the industry at which it
software product is aimed. 31
The service bu ine demand that both onvergent and Tali ma be

US-centred busines e . The Indian IT industry is more closely synchro-
nized to the US market than Europe or Asia both because of the
presence of American multinational development centres in India and
be ause of the flood of Indians entering the U industry. The US
market, in any case, is almost always technologically more advanced
than Europe's and easier to penetrate. 'Europe is multinational and has
different languages. It' a little more complex to do busine s there,
whereas in the US it's very simple: if you speak English, you can do
business,' says Microland's Kar. 'If you're not US-centric, you won't be
a significant player.' 32 Convergent has an office in the Dallas suburb of
Plano that employs about 1or¾, of its 100-strong workforce. It was
chosen both for its central location and the low cost of doing business
there. The company also has office in Australia, Singapore and
London, but when he's not in Bangalore it's the U where Mani pends
most of his time. 'I was there for all of June and I'm leaving for Sydney
for one week next week. I'll leave for the US the end of eptember and
I'll be there all of October,' he says.
Talisma sells extensively to the Indian market, which accounted for 2Q<¼i
of unit sales as of mid-2000, and has offices in Europe and Hong Kong.
'The reason for selling to India is not to make money. It provides feed-
ba k to our development team, which sib here. The second reason is
great PR - to be able to say we have Ci!~, Citibank and all the dot com [in
lndiaJ helps me to attract and hire the best guys,' say Menon. More than
that, Talisma does as much as possible to keep IP in India: all the archi-
t ture, de ign and program management is done from India. Even o,
Tali ma's Bangalore-based engineers need a steady flow of information
from America to keep up with the latest developments in the eCRM field
and development teams are frequent visitors there. Tali ma's EO is in
attle (although he pend four month out of every year in Bangalore)
a i the marketing team.
AHEAD: WIDENING THE CIRCLE
India's success in developing IT is counter-intuitive. ny one of it

defi its - the ountry's underd veloped infra tructure, the high degree of
state intervention in the economy, the low level of ocial and educa-
tional development and mas ive brain-drain - should have been enough
of an obstacl ; togeth r they should hav onstituted an insurmountable
one. Yet India doesn't look like a promising role model for other devel-
oping economies to leapfrog into high-tech.
India doesn't look like a
The prevalence of Engli h, the Indians'
promising role model for
demonstrated entrepreneurial abilities in
other developing economies
to leapfrog into high-tech. America and the country's strong middle
cla all give the ountry critical as ets that
aren't widespread elsewhere in the world. Except for IT-enabl d ervices,
like web content development and call centre , where India could feel
the heat from oth r low-cost, English-speaking countries like the
Philippines and . outh Africa, no country looks likely to succeed in repli-
cating the unique Indian hybrid of inexpensive and highly-skilled
human resources on a massive scale.
The Indian indu try therefore shouldn't b feeling any immediate pre -
ure to move up the IT value chain. If it does, however, a lot of its
strengths will pro e to be increasingly irrelevant ,,vhile its weaknesses
will have to be more eriou ly addressed. These include a la k of manage-
rial talent unless it can be lured ba k from th US, a bigger and more
sophisticated venture capital industry that can help firms enter more
ophisticated markets ·gments, and finc1lly and most riti ally a commit-
ment to widen the opportunities and benefits of IT beyond the narrow
segment of the population it encompasses today.
NOTES
H11111m1
Devclop//JelltRc'Jmrt2000, Oxford University Press, 2000.
2 Interview with Bharat Kewalramani, Indoccan Chase, 31 August 2000.
3 Interview with Rajiv Salmey, antfactory, 31 August 2000.
4 Interview with Nandan ilekani, lnfosy Technologies, 4 . eptember 2000.
5 Interview with Mani Subramanian, Convergent Software Technologies, 6

September 2000.
6 Interview with Sudhir Sethi, Walden-Nikko India Management, 31 August

2000.
7 Interview with Bharat Kewalramani.
8 'Indian IT software and services industry,' National Association of Software

and Service Companies ( ass om).
9 Interview with Pradeep Kar, ~ficroland, 11 September 2000.
10 Interview with Rekha Menon, Talisma, 12 eptcmber 2000.
11 Interview with Azim Prernji, chairman, Wipro, 7 September 2000.
12 Nasscom HHD survey, 14 April 2000.
13 Interview with Pradeep Kar.
14 Interview with Ari f\Ioch, e-sim, 12 September 2000.
15 Annalee Saxcnian, Silico11\'allc>y'sNew hm11igm11tE11trc>p1e11e11rs,

Public Polic)
Institute of California, 1999.
16 Interview with Anant Koppar, Kshema Technologies, 4 eptember 2000.
17 Nasscom survey, July 2000.
18 Human lkvelop11w11tRepmt 2000, Oxford University Press, 2000.
19 /11dicators, International
ITU Telecv1111111111irntio11 Telecommunications Union,
2001.
20 Interview with SanjC'ev '. Oas !\loh.ipatra, Texas !nstmments, 11 September

2000.
2I Interview with Vijay Angadi, I r Ventures, 4 September 2000.

22 Ecmw111icTi111e!i,S September 2000.
23 Paul D. Reynolds and others, (,/olial F11treprmc>11rs/Jip

.\fo11itor,2000, Kauffman
Center for h1treprcneurial Lendership, 2000.
24 Intl'rvic,,· with Govindarajan V.lt, Aztec Software & Tccl1nolog) Services,

6 ScptunbC'r 2000.
25 lnteniew .,,ith ,\njana \'ivek, '\'Cl FinanCl' I;riv1tt• I td., S ,<,,eptcmber 2000.
26 Indian Venture apital Association Venture ct1vity Report - 1998 and

interview with Anjana Vivek.
27 Interview with Bharat Kewairamani.
28 Interview with Raiiv Sahney.
29 'Indian IT software and s rvices industry,' Nasscom, undated.
30 Interview with Rekha Menon.
31 Interview with Mani Subramanian.
32 Interview with Pradeep Kar.

Malaysia
Nanyang Technological
University of Singapore
• •
Pasir Ris & Tampines
National Wafer Fabs Parks
University Kent Ridge
of Singapore Digital Labs
•• • Buona Vista
Economic Development
• Singapore Science Board£
Parks I and II
National Science & •
Technology Board ~\.'
•-.~.?-
.\- ~ Financial centre
~ 'Shophoose dist,ict
Southeast Asia
China
Taiwan
India
\
D
Malaysoa, ~
(
b
SINGAPORE:
creativity on command
FROM THE ECONOMIC DEVELOPMENT BOARD'S 24TH-FLOOR reception

room, visitors .:ire invited to look down through a telescope on a wide
swathe f ingapore. To the outh is the city-state's main financial and
business district. Toward the west is the great stretch of shopping malls
and yet more office towers that dominate Orchard Road. Off a fe\'\' kilo-
metres further to the west are the country's two science parks and its
leading univer ity. Beyond that ties the Jurong lndu trial Estate, home to
a vast multination.:il chemic.:ils and phmmaceuticals industry. In virtually
every direction apartment towers of va t housing estates stretch for sev-
eral mites out of the city centre. At street level, traffic moves smoothly,
litter and grime are almost entirely absent, trees and other greenery are
in orderly abundan e. Compared with Hong Kong and Taiwan, the other
great ethnic-Chine e outpost of A ia, it all looks carefully planned and
controlled, which it is. .1overnment bodies like the Economic
Development Board, the National Science and Technology Council and
the lnfocomm Development Authority do more than monitor and regu-
late the country's development, as the telescope might suggest. Rather,
they arc in the thick of it - anticipating, plnnning, financing, cnjoling,
co-ordinating and setting targets.
This kind of economic management is not unusual to Asia, but unlike

Japan or South Korea Singapore's version h 4s sen ed the country consb-
tently well over the past four decades. At $24:,000, its per capitJ gross
domestic product makes it one of the world's wealthi t ountrie .

Economi growth ha averaged 8% annually over its near 40-year history.
Despite the state's mi romanagcmcnt, the Heritage Foundation, a politi-
cally conservative, free-market oriented think-tank ba cd in Washington
still ranks as the world's second freest economy. The Institute for
Management Development (IMO) rates it the second most competiti e
economy in the world right after th U . Th Economist Intelligence Unit
plac s it number six in a global league table of busines environments.
ingapore has achieved all this not by developing home-grown entrepre-
neurs and companies but by turning itself into one of the world's most
hospitalJI places for multinational corporations to do business. From the
Borders Books outlet on rchard Road to the giant hevron petrochemical
plants and regional headquarters for Lucent and Hewlett-Pa kard,
Singapore is a creature of merican, European and Japan se business.
The Economic Development Board and the rest of the economic policy-
making establishment know this mode of development can't last.
High-cost Singapore can't compete as effectively any longer with its
Asian neighbours for the Id conomy industries that have been much
of the economy's mainstay. Thus, the same agencies that catal zed the
first econ mi mira le are now trying to re-invent th economy for high-
tech through a flurry of initiativ scorning under the Technopreneurship
21 rubric. At i_tssimple t level it means coaxing older industries up the
value chain to manufa ture more advanced produ ts, creating a better-
educated workforce and building the physical infrastructure technology
companies require. But the most critical task for ingapore's bur aucrats
are more delicate. The government i trying to transform the cream of its
workforce from disciplined c rporatc team-players wh serve multina-
tionals into free-thinking, risk-taking entrepreneurs. It is working to
build a community of tech-savvy financiers and a r gulatory environ-
ment friendly to small and growing
The government is trying
busines es. And what it an't develop at
to transform the cream of its
home it aims to import wholesale by remov-
workforce from disciplined
ing the barriers to imported labour,
corporate team-players who
serve multinationals into free-
management and capital. finally, to meet
thinking, risk-taking the needs of a tiny country, it is developing
entrepreneurs. a model of ilicon Valley that i different to
the conventional one where R D, capital
and scrvi e are all clustered in a concentrated geographical area. Rather
Singapore sec itself as the bigg st and most important town - the nerve
centre of a cluster that stretches from Korea to Australia.
8 SINGAPORE: CREATIVITY ON COMMAND 149
HISTORY: FROM RUBBER TO SILICON
Even Singapore itself didn't happen spontaneou ly. Far from evolving
over th centuries it was founded as a colonial trading post of the British
East India ompany by Sir Thomas tamford Raffles in 1819. By the
early years of the 20th century wa beginning to tran form itself into a
proce ing centre for commodities like ruhher and tin brought in from
the adjacent Malay Peninsula. A British naval installation established
after World War I became a major source of employment and of demand
for mor sophisticated goods. Singapore's economic importance and its
cons quent need for manpower turned it into a magnet for cheap for-
eign labour from China and to a lesser extent from India. Thus the city
took on a greatly different ethnic composition to the surrounding British
colonic , populated mainly by indigenou Malays.
Because it was dominated by the Chinese, Singapore only reluctantly

joined the new country of Malaysia formed in 1963 from the British
colonies on the Malay Penin ula and th i land of Borneo. ingapore
pulled out under pressure from Malaysian leaders after only two year , a
move that might have been politically d sirable but left the city rnt off
from the plantations, mines and forests that had fed it trading and pro-
ce ing economy. Another blow to the economy came when Britain
announced in 1968 it would shut down the naval base, \\.'hich employed
some 20% of Singapore's lahour force. In the face of these desperate
circumstances the authorities came to adopt the outlines of economic
policy that teered ingapore over the next three decade to pro perity
and tability. The government embarked on a programme to develop
industry geared to the wider world economy by inviting foreign compa-
nie to set up operation·, an unusual step for a Third World country in
the 1960 . Infra tructure was developed, law were changed and the edu-
cational y tern adapted to meet their needs. Taxes ,vere low and,
keeping to the colony's entrepot tradition, barriers to trade were virtually
non-existent. But not all was free enterprise. The government national-
ized what domestic industry and services had been left o er from the
British. The state exercised tight control of economic policy and in social
policy put a tight lid 011 freedom of expression and other tools oppo-
nents might use against tl1e government. ingapore Inc was founded.
There can be no denying that the policy \vorked. Building around pe-
cializations in petroleum refining, petrochemicals, le tronic a seml>ly
as well as trade-related and financial services, ingapore's economy grcv.,•
by leap and bounds, virtually impervious to rece sion. By the late 1990s,
however, Singapore' leaders were coming to understand that the model
wasn't sustainable: Singapore was too wealthy and its workforce growing
too educated to engage in anything but the most sophisticated and high-
est value-added industries. Government-affiliated enterprises, with a few
notable exceptions like Singapore Airlines and Chartered Semiconductor,
weren't world-class competitors. Thus the systematic pursuit of a knowl-
edge-based economy, or KBE a the government likes to call it, got
underway, finally becoming formalized in 1997.
The early phases of Singapore's high-tech quest adhered closely to its old
model of developing gleaming infrastructure and enticing foreign com-
panies. For instance, the nationwide broadband network, Singapore
NE, was built in 1997 under a government initiative to bring high-
speed internet and multimedia applications to every home in the
country. ln a typical instance of government ocial and economic engi-
neering, Singapore O 1E was intended to make Singaporeans feel
comfortable and competent on the internet
Creative Technologies was and add it to their skills while giving multi-
an oddball when it started in nationals a testing ground for products. Ilut
1982 and didn't serve as a the city-state lacked the ferment of Sili on
model for the next generation Valley and its start-up culture. Creative
of entrepreneurs. Technologies, the maker of tile ubiquitous
ound-blaster for P and today the flagship
of Singapore's start-up fleet, \'\'as an oddball when it start ,ct in 1982 and
didn't serve as a model for the next generation of entrepreneur .
Desmond Ng was an exception and therefore a pioneer. Inspired by

reative Technologies, he and two others left a government research lab
to set up Vivid Te hnologies in 1995. But he admits he had no under-
standing about what went into Creative's success. There was no
networking or mentoring, nor any buzz surrounding the world of start-
ups. 'We didn't realize that Creative Technologies wa u cessful because
of venture capital. There wa no uch write-up of how Creative made it.
All of us thought it was the work of the team,' g recalls. 1 The three
started off as a consultancy, plowing back the profits to develop their real
busine of P cards used for high-speed internet, until one day a myste-
rious female left a message on Ng's voice-mail. 'She was searching for
technology ompanies in Singapore, and he was with Walden [the ven-
ture capital fund!. She invited us to her office and that was my first
exposure to the venture world. She started to explain to us what it is. We
didn't know what the heck it ,.,,,as,' Ng says. \Valden's local office ,vasn't
allowed to make investment decisions in those days so Ng and his part-
8 SINGAPORE CREATIVITY ON COMMAND 151
ncrs had to fly to the S and when they got funding it was just SS 1 mil-
lion (about U, 55 70,000). second rouhd followed with Walden in 1998,
this time in the more entrepreneur-friendly environment Singapore wa
creating. The financing was syndicated with the government's
Technology Development Fund. Vivid now had the capital to grow and
could eliminate the distractions of the cash-cow consulting business.
GEOGRAPHY: TECHNOLOGY NODULES
If Singapore could be picked up and dropped into California's Silicon

Valley - an idea Singaporeans might not be adver e to, considering the
political tensions and e anomic gyrations it has to contend with among
neighbours in South-cast Asia - there would be plcn ty of room left over.
The entire island, separated from Malaysia on the mainland by a narrow
channel, covers an area of just 250 square miles. Nothing is; more than
an hour or so drive away along the city-state's efficient road and rail
transportation network. In effect it's all one big technology cluster. In
1999, ingapore aw 500 technology tart-up formed, according to a
1 ational Science and Technology Board (NSTB) urvey. That was a 70C.¼'1
increase over the previous year, an impressive number when you con-
sider that Singapore's population is only 3.9 million people, 700,000 of
whom are resident foreigners.
ingapore is phy ically small, but companies arc nevertheless congre-

gated in a few tech nodules. The STB has two privately-managed
science parks adjacent to tl1e National Univer ity of Singapore and
Singapore l'olytcchnic employing some 8,000 people working in compa-
nies ranging from giant Chartered Semiconductor to start-ups at the
parks' incubators. The tv,ro parks never really took off because (by
Singapore standards) they \Vere far from the action in the centre of town.
Nevertheless, the STH has big plans to expand this area into a science
hub that not only provides a tech-friendly workplace but entire tech
lifestyle. The Buona Vist<1Science Hub, which will be developed over tl1e
next two decades, will include !lousing, parks, rccrcation<1l facilities,
commercial activities and act as a place of refuge from Singapore's dra-
conian zoning lavvs that among otl1er things had banned home
businesses. Of course, Buona Vi. ta ,viii also be densely "''ired but as a tes-
tament to Singapore's ,llrcad: advanced broadband infrastructure,
officials don't put much emphc1si on that clement. The Buona Vista
project is a perfect example of the govcrnnHmt\ effort\ carefully to plan
and construct freedom and creativity. '\\'e \\<lilt to have untidim•ss, we
1S2 CLONING SILICON VALLEY
want to have flexibility. Here i where we'll have a live, learn, \ ork and
play environment ar a ... we hop to attract start-up companies, incuba-
tors, and schools that are willing to experiment in news ways of
teaching. There will be venture capitali ts, law firms, research labs,' ays
hong Lit Cheong, the TB' managing director. 2
In fact, something approaching the fre spirit thos the tate hope
to cultivate in Buona Vi ta exists in another technology nodule, the
Shophouse di trict that it sma k in the middle of central Singapore.
few square blocks of colonial Singapore that c caped the notice of
the property developers who built the skyscrapers ringing it on virtu-
ally every side, the district is the home of Singapore's dot com
industry and its funkier high-t ch companies. By night, its cafes and
pubs keep the employees of these same firms entertained and f d,
making the Shophousc area possibly the only centre for informal net-
working in Singapore. Rent are high but the di trict ha a tech cache
unobtainable elsewhere, says ikunj Jin i, managing dire tor of the
Singapore arm of the internet investors AsiaTech group whose office
occupies one of the district's low-lying buildings. 'One of the reasons
I moved into thi area i that thi i one of the few, if not the only,
trendy start-up centre in Singapore,' he ays. 'Four of my in e tee
companies are in five minute ' walking distance. It's got that
technology-chic atmosphere.' 3
Most high-tech companies a rifice that for far le glamorous but

cheaper office pace in the rnultistorey factory and work. hop com-
plexes outside the central city, sharing space with Old Economy
businesses. The office towers and complexes of central Singapore have
lots of office space and the newest de clopments promote them elves
as fully wir d, but rents are too high for most start-ups and manage-
ment isn't friendly to companies whose employees work late into the
night and want the air onditioners on while they arc there. In
Singapore, where mo t pe ple live in high-rise apartment buildings,
there aren't the proverbial garages that got Hewlett-Packard started, but
the government recently eased up on zoning rule to allow tart-up to
operate out of residential areas.
To say that Singapore's technology cluster ends at the shoreline would

be not to under tand the country's role in the greater Asian cluster - a
role that Singapore is intent on enhancing to make up for its small
ize. The outline or that regional cluster differ depending on who you
ask, but it certainly encompasses Hong Kong, China, Taiwan, r-.lalay<;ia
8 SINGAPORE: CREATIVITY ON COMMAND 1 S3
and as far north as Korea. Most ingaporeans sec Japan as too insular
and culturally different to fit that sirngly into the regional cluster;
more would include Australia and at a stretch India. In a strategy
shared by the government and the private
In a strategy shared by the sector alike, Singapore is drawing on the
government and the private
labour resources of surrounding countries,
sector alike, Singapore is
setting up back-office type operations in
drawing on the labour
low-cost areas like Malaysia and importing
resources of surrounding
countries. the managerial and technical talent from
China and India. ingapore venture capital
funds are encouraged by the government to invest outside the coun-
try. Multinationals tend to put their regional headquarters in
Singapore, not just their local operation. either entrepreneurs nor
investors feel compelled to be two hour ' drive away from their part-
ners. The government has made big stride in developing it dome tic
telecommunications links to the world so that the island can pull in
and push out vast quantitie of data to meet the needs of multina-
tional knowledge-based industrie . To realize those ambition quickly,
the government cut short the telecoms duopoly of Singapore Telecom
and Starhub in April 2000 and within seven months had approved
175 licence application for various telecommunication service for
private-sector providers.
This vision of Asia as a massive Silicon Valley come to its fullest expres-
sion in the internet industry. Entrepreneurs not only tap financial and
labour re ources from around the region but see it as their market, too.
Indeed, the two elements go hand-in-hand. Grounded in local knowl-
edge, Singapore internet companies reason that they stand a chance of
taking on their U competitors de pite the latter's tronger finance ,
experience and technological skills. As head of Pricewaterhou eCooper's
Venture Accelerator in Asia, Chia Tek Yew has mapped out an internet
investment strategy based on a regional vision. In exchange for equity,
tl1e Venture Accelerator acts as an incubator providing space, business
development and other services to internet start-ups in Singapore, Hong
Kong and Beijing. ' ingapore i · the intellectual part of [Asia's) 'ilicon
Valley, Hong Kong is the entrepreneurial part and China is where the
market is in terms of size. China is probably the equivalent to what the
US hinterland is to California' ilicon Valley,' he says. 'If you look at
start-up companies you see Hong Kong and Singapore, and you sec
China as the big target market.' 4
PEOPLE: RISK-AVERSE
olhl'rwisc c11vi.lhlL'pool ol h1gl1 tel11 l:llmur ~ulkrs from two

Si11g:1porl'':-i
critical sltmtromings: tl1L'rl',HL11't L'nougll Singaporeans and thL'Y arl' too
1
nl)L'dk11t for till' rnll'-hrc,1ki11g cultlll'L' of high-tL'Ch. With onl , 2.1 1¼1 of
thl' population l'ngaged in or thi11king about starting a nL'Wln1sincss, the
country has (lllL' of the lowest rail's of llL'\Vhusim·ss st,irt-ups among the
21 countries surn-y in thL' Ulolwl t'11/rc1nc11c111:,·hi/' i\loJJitor 2000 surwy.-c;
For nc:1rly four Lkcades, Sing,1pmL''s L'duc;1tional systL'lll had IK'L'llgeared

towards tr,1i11i11~competent and l'fficiL'lll tl-;1111-playlrs for multinational
1
L·orporations and thL' state burl•,nirrac . On a pure ~kill~ basis they cXCL'I
hut whL'll it comes to till' spl'cial 11L'L'lis of the terlrnolngy sector, cspl'-
cially u)mpanics in till' L',1rlystagl's of growth, tl1L' typical Singaporean
1
dOL'S11 t 11,lVL'the right mind-'il't. Jdfrey Cnh, chil'f L'XL'Cuth·L'officer of
LightspL'L'tl Teclrnologics, ,1 start-up dl'vl'lnper of compact network
SL'rwrs for small business, says th:it nHHL'tilan 95 1¼1 of till' job applicants
he gets don't fit the persona lit · profile ill' rL·quircs. 'They ca11110t con-
l'L'iVL'what might hL' hut only what is. It's a miml-sl'I thing,' (,oh says.
'But almost nohrnly i11this oftkL' tails into this ca\L'gmy. The va'it maim-
ity of peopiL' we hirL'd gr;1du;1tcd frnm universities i11 orth AmL·rica and
Australia.'t• IIHIL'L'll,except for a hrid welling-up of inlL'fL'Stat the pL'tik of
l 999's intL•met craze, Si11gaporc;111sha\'l' prl'l°L'ITL'd
the 1m·Liicta\Jlc career
btilkr ;md fin,mdal security of working for ,m L'StablishLd company over
1
,1 s111alkr, nL'WL'rhusim•ss, L'\'L'n Olll' with signific;mt upside potential.

'\\'ho can hlanH.' thL'IH'?Tlwrc"i sul'11 a largl' numhL'r of big omp,rnics
and 111ultination.ils,' says Goh.
Like l'\'L'ry lligh-tcril L'ius\L'r, SingaporL' suffl'rs a \;1\mur shortagL'. The

country L111ploys some 9],000 IT professionals, and ;1cL·ording to the
1
Economic \)L•vrlopmL'llt Board thL' numlll'r will so;ir to 2.S0,000 hy 2010.

I ocal unin•rsitil's produce about 6,000 graduatL'S with rrle\'ant degrees
l'\"L'ry 'L'itr and priv;1te institutcs such as co111putL'rprogramming schools
turn out anothL'r 10,000. Th;1t is probably close to lllL'l'ting o,·crt1ll
tkmand for IT profL•ssio11;1ls,hut hccausc thL' labour market is so small to
\)L'gin \\'ith PL'opk with ccrt;1i11 spL·rialill'd skills ,1rn1 a depth ot experi-
l'lll'L' an· in ,·l'ry short supply 1f thL')' cxist at all. Cisco ~ystL'llh
co11solidatL'S :1\1its m·twmking prok.-;,sionals at ih Asi:111hl't1dqua1IL'rs in
Sin~aporL' ;111dSL'IHbtliL'lll off lo wherl' tllL'y'fL' m'L'lkd for two- m thrl'l'-
111011\hstints, r;1tlll'1 th,rn permanently statinning thL'lll whcrl' they are
llL'L'lkd. lwr:1usL' thL'l'L'arl'n't L'nou~h sh.ilkd jK'opiL' to go. In a long-tL'rnl
8 SINGAPORE CREATIVITY ON COMMAND 155
bid to alleviate the prnhk111, tile company otters progr;1m111L'S to tl'acli

as
networking tech11ology to stt1<k11ts early as high school rntller tl1an
waiting until they ar i11uniVL•rsity or in-lluusi11g training progr.1111rnes.
'It's thl' d<..pth of .')kill.')we're looking for,' says Bill Chang, tile company\
1
ingaporc managing <lirector.7
ingapore being Singapurl' the government is actiwly pursuing solutions

to the labour problem. Long-term, the L'ducational system is being shaken
up to produce more gradti.lles imbued with creativity and dyna1nis111.
Short-term, Singapore is importing the people with till' skills ;llld person-
alities that can't be found at 110111c to a dl'gree probably u11paralll'IL•din
the world. Companies are not only permitted to bring in qualified
employees a11d their families but the EDB will l'\Tll help rL'Cl'llittlll'm
through its International ManpoW<.'r l'rogrn111mL'.At Vivid Tcdrnologics
two thirds of the staff are expatriates from lndi,1 and China, wl1ich are till'
two prcferrl d countries in which to r<..'cmit.'l:rnm where they ome from,
1
Singapore is 100 times bl'ttl'r tl1an /\111L'ric1.We spl'ak thL' ~a111cl,mguagl',

and it's easy to integratL' them,' says Vivid\ Ng. 8 Rl'lying on fore1g11crs
isn't a p rfcct solution: small companies don't have the resources to fly in
job candidates from ,1bro,1d and m,111yof tile L'Xp,its are still L'yeing a
career in ,\merica rathL'r tlwn m;ih:ing a long-tl'rlll commitment to
Singapore. But the fact is high-tech couldn't sun·ive without its exp.its.
Cultivating ,1 class of entrepreneurs poses the s;1111ed1:ilknges tor

Singapore as developing high-tech employees - only rnorL•so. The char-
acteristics of enterprise and creativity must he l'\'l'IJ n1ore prn1wu11cL•d1
the local t,1knt pool is even 111oreconstricted and the risk-rew,ird ratio is
even less favourable than to be employed ,It a st,nt-up. The st.Hus
accorded to cntrepr<.'ncurs h,1s traditionally Ileen low, thcrl' han• Ileen
fc,.,vroll' models to inspirl' Si11gaporL'a11sand the tinancial risk of giving
up a sal,11ied job is steep when tile u1st ot
Singapore does spawn living is so high. Ne, ertlwlos, Sing,ip<HL'
entrepreneurs - people bored docs spawn entrepreneurs - jlL'opk bored or
or dead-ended in their careers dead-ended in their l,HeL•rsat 111ulti11,1tionals
at multinationals and and government l'L''>l',irt:hlabs, and more
government research labs. , recently 'donwin owner.s', people srl'l-:i11gto
transform their Old Fcrnwmy h.nowll'dg(_'
into internct-hasl'd businesses. t\ few peoplL', not least Creali\'L'
Teclrnologil's' founder Sim Wong Hoo, don't ha\'c the forni.il edura-
tional Lrl'lklltiab. to mal-.l' it in till' corporate world ,111dll,1, L'no Llrnicc
but to set out 011 their O\\ 11 in l1igh-tecl1, it they h,1,·L'th(_'skills. A'>odd .J'>
it 111.iysound, peopll' haw been inspired 11~·till' gm<..•mlllL'llt\ Ill'\\ pro-
entrepreneur attitudL', .say.')Jam· C r;1wford, 111a11agit1g director \'>ia/P,1cilit
for 3i, the UK-based technology investment company. Even after the dot
com craze of late 1999 and early 2000 crashed into reality ('Now the com-
plete lunatics have be 11 sque z d out'), he says her dcal-flmv was
running at 70 proposals weekly at the end of 2000, two or three times the
lev l of a year ago, though down from 100 a week in the middl of 2000.
'They [the governm nt] have really push ct hard to convince people to
leave the good and safe jobs and start up companies, and they have
succeeded at that,' she says.9
The e entrepreneurs-in-the-making don't speak in terms of making lots

of money but about the r wards in term of satisfaction of building
something from scratch. The five founders of i I E.corn, a start-up cre-
ating B2B hosting services, m t as governm nt scholar hip students
studying at merican univ r itie and stay d in touch aft r they took
jobs at the tate-run Institute for Information Technology and the
ational Computer Board and later moved on to ,vork for various multi-
nationals. 'Our goal i to create something different, to do something
different than just working for someone,' says Chua I-Pin, director of
business development and one of the five. 'We're trying to get everybody
to enjoy the proc ss of grmving from a foundation and njoying each
oth r's ompany, working hard t g ther and njoying the fruits.' 10
With a top corporate tax rate of 25.5% and no capital gains tax,
Singapore's tax regime is busin ss-friendly. Inde d, low taxes arc one of
th major offsetting factors to the othenvis high cost of doing business
in the country. On the th r hand, Singapor 's regulatory regime has
been considerably less gracious towards new enterprises. But as part of
the drive to make the economy more conduciv to start-ups the rules ar
quickly being re ised. Companies now have th opti n of restructuring
their debts without having to resort to bankrupt y. Loss s from apprO\ed
high-tech compani s can be used to offset profits in other ventures and
carried forward indefinit ly. Entrepreneurs can apply to use their homes
as business offic .
Singapore, hovvever, doesn't have enough indigenous entrepreneurs like

hua and his peer , so the gov mment has put out a welcome mat to
overseas entr preneur ju t a it ha to skilled workers. Since September
1999, foreigners with a busine s track-r cord and skills can submit a busi-
ncs plan for a high-tech start-up to the STB and, if appro\'ed, get a
ocial visit pa, s for six months to pull together the plan and tum it into
a company. (The ingapore immigration office promises a turnaround
time for the pass of '>ev n days.) Once the cxpat has a busines going or
8 SINGAPORE. CREATIVITY ON COMMAND 157
is bringing an existing one into Singapore he or she can then qualify for
a spe ial 'technopreur' employment pass lasting for two years. After that,
, ingapore is prepared to give the entrepreneur permanent resident
status. Danny Wilson, a anadian who had been working in Japan for
Hewlett-Packard, wa looking around with his partner for a location to
set up a company to d velop quality-of-service equipment for the digital
broadcasting industry. Wilson knew little of Singapore and was weighing
everything from Barcelona (a supportive environment for his wife, a Oa-
menco dancer) or going back to Canada. 'My partner Ben said, "You
should come to Singapore and check it out". He was there and said
" ome, come. There's lots of money available and engineers are cheap".
In ilicon Valley there's lot of money but nothing, nothing is cheap.
Vancouver is a nice city but doe n't have u h great infra tructure and
the cost of engineering is somewhere in between. Barcelona - I don't
know. Singapore is quite reasonabl . We got a lot of support, we got
funding very quickly,' says Wil on, now the president of Pixelmetrix. 11
Not only did he get an employment pa s but the t TB helped him raise
capital and contributed some it elf.
SOCIETY: ROTE TO RUIN?
Over the past four decades Singapore's educational system acted as if it

were nothing more than a feeding trough for the nation's industry. Like
other A ian nations, and perhaps even more so, parents and schools
alike mak littl pr t nee that an edu ation has any deeper purpose than
to ensure the best possible professional career for children after gradua-
tion. Traditionally that ha meant a strong emphasis on math and
science acquired through rote learning in a disciplined environment,
with the best students tracked into an even more formidable curriculum.
i I E's Ima rememb rs that as a high school tudent in the mid-1980s
his parents were urging him to become a doctor, but students like him
\Veren't looking wistfully at their peers concentrating on literature and
the arts. 'It ·wasn't cool to study in the arts department. It's a matter of
attention and focus. \. e had 10 classes a year and only one took arts sub-
jects,' Chua recalls. 12 Long homs, a fo used curriculum and the fact that
the best students arc attracted to maths and science goes a long way
tcrnards explaining why Singapore routinely occupies one of the top
places in international rankings in the t\vo subjects. In the Third
International Mathematic<, and Science Study the country's eighth-
graders ranked number one in maths and number two in scicnce. 1 l
Singapore, however, is no longer satisfi d \ ith thes achiev ment and i

now busily trying to instil new values of innovation and independence
at a young age. Officials are convinced that creative thinking is not only
the key to tarting up and leading companie but i al o the foundation
of engineering ex ellence in the high-t h world a cli tinct from engi-
neering in the Old Economy. Students themselves, less anxious ahout
financial security than a generation earlier, have easily adopted the new
tandard. hua' teenage cousin is in a class for gifted high school stu-
dents that focuses on maths and science. 'Instead of being the top
biology or chemistry student, her main interest is antonesc opera. It
freaked out my uncle. He' an engineer and he wanted her to be a
doctor,' ay hua. Schools aren't quite yielding ground on the hours
students spend in hard-core subjects, but they arc rounding out the cur-
riculum with broader and less traditional courses. For instance, one
school, the Raffles In titution, allots time for a life science cour e whose
contents will never appear on any tandardized Mini try of Education
exam. Can these changes yield a harvest of Singaporean William
Hewletts and David Packards? It's the nature of the bu ine s that
Singapore won't know for another decade or more, and the T B'
Chong is cautious. 'What we're doing is just providing a tool. lf you
don't have it, you don't have it. ot everybody can be an entrepreneur,
but if you don't try, nothing is going to happen.' 14
On a purely st"atistical level, Singapore's use of the intern t and the other
tools of high-tech culture arc as impressive as those in education. But
beneath the stellar figure the reality i more
,, The government poured
problematic. The government poured $300
$300 million into Singapore
million into Singapore O E and now offers a
ONE and now offers a wide
wide array of services to its citizens to encour-
array of services to its citizens
to encourage usage.
age u age. Virtually every home on the i land
i wired to it. At the end of 2000, Singapore
had just under 438 internet host p r 10,000 inhabitants and boasted
2,987 users per 10,000, levels that are exceeded by few other countries
around the world, according to International Telecommunication Union
15
(ITU) figurcs. More P are found in Singapore on a per capita basi than
nearly anywhere cl e in the world (€48.31 per 100 people), the ITU data
show. Singaporeans use cellphone in large numbers, too. But acces
to hardware ha n't necessarily made them enthusiasti or sophisticat ct
users. /\n EDB survey conducted in 1999 found only 5% spent more than
15 hours p r week on the net and 8nf> said they used it principally for
e-mail and chat. Only about 65,000 household have even opted to
subs ribe to broadband ervices, and even the NSTR only uses its broad-
band connection for demonstration purpose . 16 Small businesses in
, ingaporc make little use of networks. Admittedly broadband access is
expensive and there isn't much content. Uut unlike Finns or Israelis,
Singaporeans don't chase after the latest technology. The absence of
broadband content when the network is there and ready for it demon-
strates a tepid entrepreneurialism. The government is counting on foreign
ompanie to use ingapore O E as a testing ground.
Perhaps the most surprising thing considering the resources that Singapore
put into education and infrastructure is that at the end of the day the
country's private sector spends relatively little on actual re earch and devel-
oprnen t. After 10 years of steady growth egged on by the government,
ingapore's gross expenditure on research and development in 1999
reached $1.54 billion, or 1.83°A1of gross domestic product in 1999, below
the 24'h-391inorm for developed economies.17 The government began con-
centrating its energies into R&D from 1991, boosting the number of
r ·search scientists and engineers and making more money available to aca-
demia and companies. The state accounts for 3791<,of all R&D spending.
The EDB, which after 1999 took over private-sector assistance for research
from the NSTB, offers aid on a case-by-case l>asis through its Research and
Development ssistan e S heme (RDAS) and Research Incentive Scheme
for ompanies (RI ), which is aimed mainly at multinationals. The I STB
runs 13 research labs and en ourage them t spin out companies from
their IP by awarding them and their employee equity stak s and most of
the cash proceeds. Over the past five years some five start-ups annually
have been spun out with lab staff and/or technolO!,')'.
Multinationals still account for the bulk of Singapore private-sector

R&D spending, reflecting a bias on the part of local firms again ·t
research, \Vhi h the government is trying to fight. A iaTech's Jinsi say
the low level of spending is exacerbated by the absence of cutting-edge
research, even at the universities and reset1rch institutes. The U has
perfected the system of cultivating fundamental research and getting
the stuff with commercial potential into the marketplae<.', a perfect
example being the development of optical networking, where
ingapore and the rest of J\siJ have lagged. 'The reason why it's big in
Israel and the US ---and tlley are the only two R&D centres in the world
- is because core cutting-edge innovation exists. We don't ht1vc it here,'
he say . 'In Asia you have to look at sma:t application'> rather than
smart tec'1nology developments.' 18
FINANCE: EASY MONEY
The hape of Singapore's venture capital industry looks very much like
the rest of the city-stat 's e onomy - a major international pre ence and
an outsiz d government role, fo used on weaning the industry away
from its Old Economy orientation and importing the requisite skills. The
government has done an admirable job of turning the industry into an
engine of its start-up sector: in 1999, the industry raised 1.4 billion, or
l6lYc1more than in 1998, to bring total capital under management to
10.2 billion. 19 In 2000, with the government pumping unprecedented
amounts of money into the indu try through it Technopreneurship
Fund, fundraising was on the way to doubling 1999 levels. Singapore is
not only home to a large number of domestic funds but has lured some
of the biggest international players like 3i, Schroders apital Partners, GE
Capital and Draper Fisher Jurvc ton. It even briefly saw a surge of inter-
net incubators, which went into retreat with the collapse of the market
for net shares in 2000.
Venture capital i the principal mean by which Singapore' government

aims to construct the country's high-technology sector. The tate ha put
more money into venture capital than any other country in the world -
certainly on a per capita basi - and has set for itself ambitious goals. More
than simply f(?stering start-up companies, the government ecs a a
conduit for the flow of intellectual property and finance skills from abroad.
The state took on the role of venture capitalist as early as 1985 through
the EDB, whose investments arc made and managed by a ub idiary
called EDB Inve ·tments. The STB Imm hcd its own V , the Technology
Development rune.I, or TDF, with about $90 million under management
in 1995. But the centrepiece of the tate's V effort is the
Tcchnoprcncurship Fund, a 1 billion undertaking set up in 1999 by the
STil and GI , the state-owned company that manages the govern-
ment's foreign reserves. Altogether the Technopreneurship Fund had
formed relation ·hips with more than 40 by the end of 2000, cho ·en
through ubjective criteria su h as their track record and enior manage-
ment. one of this V investing is intended to subsidise anyone either
at the fund level or the portfolio company level.
The Tcchnoprcncmship Fune.I invests only in other V fund') and has

nllocatcd its money in three wnys. The first is a conv ntional kind of
fund that ha\ $250 million to co-invest with Singapore-based V s that
ar putting money into young companies. The $250 million trategic

Fund, which has invested in such global funds as Doll and Sequoia, puts
money in leading global VCs but makes absolutely no requirements on
their part to invest in Singapore companies. 'We gain a relationship: we
show them deal-flows from ingapore and they show us the US and
European markets,' says the NSTB's hong. 'It's purely relationships, net-
works and connections - we need that.' 20
Another $500 million is going into what is called the Broadbase Fund,
which invests in overseas funds agreeing to set up operations in
Singapore to invest in Singaporean and Singapore-related companies.
The Broadbase Fund, which share these goals but still requires it
partners to invest in Singapore companies, seems to have done the
trick of luring to the city-state foreign VCs that otherwise would have
tried to run their portfolios from their home bases or gone to Hong
Kong. 'Most people believe that you need at least $20 million in
funds to generate enough revenue to cover costs,' says hia Tek Yew,
who runs the PricewaterhouseCoopers incubator. 'lf you need to raise
only $10 million because the government will give $10 million, it's a
big help.' 21
Thus, capital isn't a problem, but the domestic venture industry is still
struggling to acquire the tools to become savvy and sophisticated tech-
nology investors. After the industry got off to a real start in 1985, when
the government began offering special tax
, Capital isn't a problem, incentives, its focus was on buy-outs in Old
but the domestic venture
Economy industries, usually over eas de.ii
industry is still struggling to
given the dearth of non-government or non-
acquire the tools to become
multinational enterpris s in Singapore itself.
savvy and sophisticated
technology investors.
In the mid-1990 ingapore V ~swere inve t-
ing in family-owned companies in Indonesia
and China in pre-lPO situations. The V would give the company the
respectability of an outside investor and in return vwuld be compensated
by the family if the !PO price was not high enough for the fund to make
a return. The Asian financial crisis of 1997 brought an abrupt halt to
these kinds of deals and a gradual move into buy-outs, particularly in
Thailand and Korea. Only in mid-1999, as the internet craze was
enveloping the world, did Singapore funds turn their attention to start-
ups, just about the same time that the international funds 'itartcd setting
up shop in Singapore. But the 1999 figures don't show an avalanche of
start-up inn~sting. About half of total VC funds im ested out of
Singapore went into high-tech and of the 71 Singapore companies show-
erect with VC, 88% w re in high-tech. But red and early- tage comp<1-
nies accounted for only 29 of the 71 companies, unchanged from 1998.
ingapore tart-ups got a relatively mall piece of the pie, winning only
$198 million of the $1.32 billion in venture capital funding in 1999.
The big foreign funds have yet to prove they can make money in the
ingapore environment, but no one doubts their ability to spot young
technology ompanies, help lead them and take them public. The domes-
tic V industry, with its hort tra k-record in tech investment, has yet to
prove it can do any of that. 'It's not pure V where the venture capitalist
roll up his sleeves and doc the work. That's beginning now as more for-
eign venture capitalists come in and help start companies. Foreign
venture capitalists who base themselves here need to train local manage-
ment,' says hristina Lim, senior vice-pre ident at Vertex Management,
on of the f w long-time investors in technology in Singapore. 22 M t
local VC managers arc unsophisti atcd inv stors, and they act slowly -
they aren't in a position to put in adequate capital to fund the high costs
needed for the global expan ion of their portfolio mpanie and tr,ey
haven't adopted yndicated finan ing. Most of the big lo al funds are still
buy-out funds. One entrepreneur, who pent ix months in 1998-99
trying to raise just $1 million for his fir t-round financing, c1ysmost of
the local V s behave more like bank than high-ri k inv tor . 'B cau c
they don't have the experience they don't hav the feel about wh ther
something is ·going to fly, so they spread their risk around. They can't
mell a winner,' he says.
When the tim come to c it, the Stock Exchange of Singapore (SGX) is
one of the region's leading stock exchange . But for ompanie chasing
after global market (that i , virtually all the seriou ones), the exit
options by either IPO or by acquisition aren't ea y. The SGX aw a wave
of high-tech IPOs in 2000 prompted by the dot com boom and by new
rules adopted in ·eptember 1999 that eliminated the paid-up capital
requirement and most other barriers for a listing on its ·esdaq board,
which as its name implies is trying to mimic the asdaq. ompanies
need only show they have a three-year track-record (and even that can
be waved) and adequate managerial 'P rtise. But a lot of the IPO activ-
it ·was the sharp edge of the internet boom and doe n't demonstrate the
value of a Singapore listing for technology companies.
Like other Asian stock markets, ·ingapore's doesn't have the liquidity
and market capitalization to match the big US c1nd European markets,
nor will it give listed companies the exposure they need to oversea
markets, except perhaps in other sian countries. For venture capital

funds it's virtually impossible to exit in one blow simply because the
market can't absorb a largish offering. Richard Wan, chief executive offi-
cer of E-Book ·y terns wants hi company to go public in 2001 and
plans to trade on the asdaq. E-Tiook's oftwarc, which is used to create
easier-to-use websites where the user moves through by turning irtual
pages like a conventional book, is geared principally to the American
market. 'Eighty or ninety per cent of our customers arc from the US,'
says Wan. 23 ot many Singapore tech companie have made the daring
leap over to the Nasdaq; at the end of 2000 only six Singapore compa-
nies were traded on it. But E-Book counts among its angel investors
Kai-Wa Ng, a co-founder of Creative Technologies, which listed on the
US market way back in 1992. 'We're learning quite a lot from him
because he's done it before.'
The alternative to an !PO is being bought out by another company, but

even that seemingly simpler route has its problems for Singapore compa-
nies. If a buy-out is going to advance the company in the global
marketplace - which in nearly every case means the US marketplace - the
buyer himself must have adequate financing and market presence. That
requires Singapore companies aiming to ready themselves for sale to get
noticed by leading US or European companie . It's a long process and one
that may not strike gold until the company has a product or technology
that is suddenly recognized as the next big thing. 'Technology is very
time-sensitive. Technology that is nbsolutely useful to a buyer one year is
a waste of space the next year. The critical issue is how to get those busi-
nesses to look at our technology busincsses ... the people who will buy -
the isms, the Alea tels are going to look locally first, then in either the
US or Europe. The Inst place is in Asia,' says 3i's rawford. 24 Setting up a
US -;ub~idiary or moving the whole business there is one way of doing it,
but it is fraught with risks, not least the high o t of doing busine s and
the extremely competitive market environment.
FOCUS COMPANY: CELESTIX NETWORKS
The unfinished c;tory of clestix etworks captmes a lot of the flavour of

c1 Singapore stnrt-up in the current en ironmcnt as well a~ the challenges
in trying to build a potentially global company \\ ith a mas market far

nway from its main ba~c of cu tomers and c.o.mpetition. Founded in 1999
hy a group ot seven, l elc'>tix has de, eloped a tand-alone internet 'ien·er
for small businesses that is expected to retail for 999 in the US. From a
single unit the size of a stereo amplifier, users can et up a local-area net-
work with wireless capability, build a website and enjoy the ecurity of a
firewall. 'Nowadays it's very difficult to hire
The unfinished story of
experienced IT people, and mall companies
Celestix Networks captures a
don't have the luxury of having a full-time
lot of the flavour of a
person to run their P network,' says hia
Singapore start-up in the
Kok Hua, one of Celestix's two core founders
current environment.
and its president. 25 Aries, as the product is
called, isn't quite simple enough for a computer-illiterate doctor or
lawyer to plug in and play, hia concede , but with a little training he or
she can get it up and running. Arie is not a niche produ t but aimed at a
very broad market of small businesses and consumers, which presents
the company with an especially difficult task.
Chia himself is one of those non-conformist types who never felt comfort-
able in the corporate workplace. or did he have a university degree. After
10 years working as a P motherboard designer, he quit and set out on his
own in the trading and di tribution busine s. It was frustration with his
own Window T network that in pired Loh Kok-Meng, an engineer work-
ing for hia, to de clop a Linux-based system. The business was started up
by the founders with their own money.' lot of us are engineers and we're
not very good at things like writing business plans. We decided to just do
it,' hia recalls .. 'We didn't approach any V s, they came to us. t the time
there wa a dot com craze and a lot of V funds were saying, "Call your-
selves a dot com company".' By earl 2000 the prototype was ready and in
April that year they rai ed S 1 million from Joseph Au, a founder of
Flextech Holdings and a well-known angel investor. That's about the time
the government machinery got into gear for elestix. At a government-
organized pavilion at the erman ebit show, people from the EDB and
N TB got to know the company and made introductions for it to various
venture capital funds. That led in October 2000 to 3i putting in S$8 mil-
lion in a joint move with the government's Technopreneurship Fund.
hipment began in June 2000, and by the end of the year the company
wa selling through di tributors and re-sell rs, and to a lesser extent with
internet ervice providers; it wa also investigating the prospects for retail-
ing through computer superstore . But elestix's marketing effort ha been
a little chaotic, hia easily con ecte . 'We didn't actually test-market in
Singapore. We pretty mu h tarted almost everywhere at once. The
response at the Cebit show was very good and we got inquiries from all
over. We didn't have the luxury of backtracking - "Let's tart with this area
and te t market". Maybe for our future products we'll try to do that. When
you're a start-up you don't have that many rule , you just go out and ee
what happens. In fact there were a lot of mistakes we mauc that have come
back to haunt us; channel conflicts. One person will offer to help you ell in
hina but then we find out we're stepping on someone else's territory.'
Chia ha the short-term goal of establishing Cele tix in America and the
long-term goal of getting bought out. The company will have to estab-
lish a major presence in AmeriGi because that's where the customers are
and that's where the marketing talcn t is, too. 'There's not a lot of market-
ing talent in Asia. The Americans arc simply great marketers. They can
sell air,' he says. In any case, managing the global rollout of a consumer
product like Aries simply can't be done from Singapore because it is too
far away from the customers. At the end of 2000, the company was
embarking on the first step of its S trategy by opening an offi c in
Fremont, California. Chia himself is there three or four times a year, and
eventually the weight of the management will be there, including per-
haps hia himself. Even if elestix plants itself firmly in the US, the
company will almost certainly not he able to remain independent and be
a serious competitor in such a broad markets gment. It prime competi-
tor, obalt etwork , ,vas acquired by Sun Microsystems. Chia i aiming
for an American company to buy him out in the next two years.
'Everybody knows market window are very hart today,' he rea on . 'We
have a time-to-market advantage right now. If you pretend you can
create the channels by yourself, it's not likely to happen.'
AHEAD: UNTESTED WATERS
The inten ity, professionalism and sy tematic approach with which the
Singapore authorities arc trying to rcfa hion their country makes it hard
to believe they won't succeed. Long-time observers of the Singapore
scene not only express few doubts that Singapore will make the transi-
tion but will make it on its mvn terms - even when it comes to
long-shots like tile biotechnology industry where the country doesn't
quite haw th<.'industrial base to work from. Given the ,may of financial,
infrastrmture and technology re ourCl'S th<.' government <.an mar hal,
there is reason for optimi~m. ~1orcover, the strategy of turning Singapore
into the nerve centre for an Asian Silicon Valley rather than mimicking
the geographiu1lly unitary environment of California makes good cnsc
in light of Singapore's limited population.
Converting its Old Economy industries into mor advan ed ones seems
well within the capabilities of Singapore policy-makers. ,reating an
environment where start-ups can grow and thrive is much harder, and it
is too early to say whether Singapore has found the way. The first que -
tion is whether the top-down approach of government directives and
incentives can be successfully melded to the more existentially free-
wheeling culture of conventional high-tech clu ter . ingaporean
typically brush this ritique off hy saying they and other Asians are
more responsive to initiatives coming from their leadership than are
westerners, but the fact is it's never been done. The second question is
whether Singapore can buck the rules that say physical proximity is the
foundation of a success( ul technology cluster. Even overlooking the
matter of distance, culture, language and business practices vary widely
from country to country in Asia. The region resembles Europe far more
than it doe the single national business environment Ameri an compa-
nies work in.
NOTES
1 Interview with Desmond 1 g, Vivid Technologies, 5 December 2000.

2 Interview with hong Lit heong, managing director, ational Science and
Technology Board, 7 December 2000.
3 Int rview with 1 ikunj Jinsi, managing director, AsiaTe h Ventures (Pte) Ltd.,
8 December 2000.
4 Inte1view with Chia Tek Yew, chief exe utiv officer, Venture Accelerator,
PricewaterhouseCoopers, 5 December 2000.
5 Paul D. Reynolds and others, Global Entreprmeurship Mm1itor, 2000 Kauffman
enter for Entrepreneurial Leadership, 2000.
6 Interview with Jeffrey Goh, chief exe utive officer, Lightspeed Technologies,
7 December 2000.
7 Interview with Bill hang, managing director, isco Systems, Singapore,
7 December 2000.
8 Interview with D smond Ng.
9 Interview with Jane Crawford, managing director Asia pacific, 3i, 5 December
2000.
lO Interview with Chua I-Pin, director of business development, i I, 'E.com,
6 Dec mber 2000.
II Interview with Danny Wilson, president, Pixelmetrix, 4 December 2000.
8 SINGAPORE; CREATIVITY ON COMMAND 167
12 Interview with Chua I-Pin.
13 Third International Math and Science Study-Repeat, 1999,

v\'W\V/times. be. edu.
14 Interview with Chong Lit Cheong.
IS l11clicators,International
ITU Teleco1111111111ic11tion Telecommunications Union,
2001.
16 Fourth Information Technology Household Survey, Economic Development

Board, undated.
17 'Singapore's &T development is progressing steadily,' National Science and
Technology Board, 25 August 2000.
18 Interview with rikunj Jinsi.
19 Economic Development Roard/ ational ~cience and Technology Board joint

press release, 7 April 2000.
20 Interview with Chong Lit Cheong.

21 Interview with Chia Tek Yew.
22 Interview with Christina Um, senior vice-president, Vertex Management,
7 December 2000.
23 Interview \Vith Richard Wan, chief executive officer, E-Book Systems, 8
December 2000.
24 Interview \-VithJane Crawford.
25 Interview with hia Kok l lua, president, elestLx etworks, 8 December
2000.
Taiwan
cor_ridor
Hsinchu
Science Park •
Chunan Park •
• Tunglou Park
Hsinchu
to Taipei (70 km)
/ ____ • - ITRI
,sing- H ua • /
-r. • campuses
._
University • '•
Chiao-Tung • Hsinchu
University Science Park
Taipei
Nanking •
National Science Park
Science Council
•
•
National Taiwan
University
HSINCHU-TAIPEl,TAIWAN:
arms for the revolution
SITTING AT THE HEART OF TAIWAN'S HIGH-TECHNOLOGY CLUSTER, the

Hsinchu Science Park is in a class by itself for sheer ize and importance
to the world of computer chips and microprocessor-based electronics. A
city of undifferentiated steel and gla office buildings broken only by
outsized corporate logos, broad lawns, ponds and parking lots, it looks
like any of a hundred other technology parks around the world. But
Hsinchu operates on an entirely different scale to its peers. Companies
based in the Hsinchu park, make some 90'¾, of the world's computer
canners, half its notebook computers and local area network (LA ) sys-
tems, half of its PC monitors, 73% of its modems and nearly one tenth
of its integrated circuits. When an earthquake struck Taiwan in
ptember 1999, the entire high-tech world panicked until it became
clear that produ tion would not be knocked out. The science park' 300-
odd companies had more than $20 billion in sale in 1999. Some
I 00,000 people report for work in the science park every day.
A visitor to a Hsinchu company could find himself in the relaxed and

intimate atmosphere of a start-up - a stop in the kitchen where the EO
off rs to put the sugar in your cappuccino and then to the conference
room for a Pov-:erPoint presentation. nut that's not typical Hsinchu style.
rhere are only about 20 start-ups in the science park, and soft,vare and
internet companies don't command nwGh attention and respect.
Taiwanese companies don't strive to b hip. Th big compani that ar

the mainstay of Taiwan's technology industry are more likely to employ
uniformed hostesses to greet you; suits, preferably dark, are de rig11e11r
for
visitor and employee alike; meeting aren't in conference rooms but in
the chairman's auditorium-size office.
These two observations - th first about the size and cale of Taiwan's
industry and the second about its bu ine style - are used to illustrate
the fact that Taiwan has n t so much evolved from Old to ew Economy
as it has taken the business models of its Old Economy, tweaked them
and put them to work making the stuff of the I ew Economy. If 30 y ars
ago Taiwanese companies were turning out the commodity products of
th industrial economy like simple electronics and plastic goods, t day
they arc making the commodity products of th information economy
in the form of PCs and peripherals. This requires more re earch and
development and the manufacturing proce se are more ophi tica ted,
but in the final analysis Taiwan technology i co t-driven, not technol-
ogy-driven. Entrepreneurs and investors don't speak about cool
technology but about business opportunities they can exploit. Their
companies aren't in the forefront of any revolutions, rather they are pro-
visioning the troops. 'The trend is created in the US. They find out what
the customers want and need, and they design things for them. We man-
ufacture it for them,' ays one venture capital fund manager.
HISTORY: AN ISLAND APART
Taiwan's modern history begins in 1949 when some two million Chinese
ationalists took refuge on the island after losing control of the main-
land in the civil war to Mao Zedong's ommunists. The I ationalists, or
Kuomintang (KMT), never admitted to losing the war and, for the record
at least, planned to fight another day. Thus the KMT government estab-
lished on Taiwan claimed to rule all of hina, not ju t the island.
Ironically the ommunists in Beijing were in full agreement on thi ,
since th alternative would have been for the world to recognize Taiwan
as an independent state and they had every intention of taking the
island back. Both sides maintain this 'One hina' policy today, which
has done much to complicate the life of Taiwan. Most of the world does-
n't re ognize Taiwan as an independent country although it is pleased to
do business with it. Economic tics between the two Chinas are fraught
with diplomatic and legal complications under the hadow of pos ible
9 HSINCHU-TAIPEI, TAIWAN: ARMS FOR THE REVOLUTION 171
war. If anything, many Taiwane c arc now inclined to abandon the pre-
tension of 'One hina' and it's Reijing that won't let them.
The 1 ationalists never scored high point for honest or enlightened rnle
when they governed mainland hina in the 30 years before 1949. Once
they arrived on Taiwan, however, they acted quickly and efficiently to
develop the impoverished island's predominantly agricultural e onomy as
part of an overall effort to strengthen the
Most of the world doesn't country against a possible offensive from the
recognize Taiwan as an mainland. The result was a mix of pointed
independent country although government intervention combined with free-
it is pleased to do business
market incentives designed to take the small
with it.,,
industrial base of tee! and cement plants left
by the Japanese who had ruled the i land in previous decades and turn
them into a base for import substitution and exports. As part of a pro-
gramme of land reform, land was distributed to mall farmers and large,
feudal landowners were compen ated in part with shares in state-owned
industries. Together with refugee entrepreneurs from the mainland, they
became Taiwan's pioneer indu trialists in the 1960s. This first generation of
manufacturers focused on simple plastic products, textiles, shoes and the
like, but over the next decade they grew more sophisticated with the help
of foreign investment and the introduction of export-proce sing zones to
begin producing item like con umer electroni s.
By the late 1970s, the policy had succeeded so well that it was in jeop-
ardy: Taiwan had reach d full employment and its costs were ri ing to
such an extent it could not expect to remain competitive in the low
value-added products in which it specialized. Determined to build a more
sophisticated indu trial base, the government embarked on four initia-
tives. The first, and in retrospect most important, was to give priority to
science and engineering education, which resulted in many students
going abroad to further their studies and quite a few remaining there
until opportunities arose at home to put them to good use. The ccond
was to organize a government programme for the development and
licensing from abroad of technology for use by private-sector ind us try.
The third wa to ow the seeds of a home-grown venture apital industry.
finally, there was the H inchu Science Park, which the government set up
in 1980 in a city then best known for its glass industry and noodles.
Overseeing this effort was an official, K.T. Li, \Vho has since attained leg-
endary status as the founder of Taiwan's high-:tcclrnology industry.
It was from these origins that nited Micro lectronics orp ( M ) got
started to eventually become the world' econd-largest emiconductor
foundry, fabricating integrated circuit (I ) made to the design and
order of its client companies. UM was e tablished in 1980 as a spin-off
from the quasi-government Industrial Technology Re carch Institute
(lTRl). A team from an lTRI unit called ERSO was sent to R A in the US
in the late 1970 to learn CMOS technology and bring it home with
them. 'They went for one and a half years' of training. After the technol-
ogy transfer they built up a small demonstration factory in Taiwan at
ERSO. The technology transfer included the experience of running a
small IC factory and product upport for the future,' ay John Hsuan,
who joined the company a little later and i now chairman. 'It wa 7 .5-
micron metal gate CMOS technology, a very consumer-oriented type of
chip.' 1 Armed with the licences and a whiff of manufacturing experi-
ence, a company was spun off, with the government and the KMT's
inve tmcnt arm as the main shareholder and investor. Three Taiwanese
electronics companies took the rest of th equity. Robert H. . Tsao, an
ERSO employee, became pre ident in 1982. The government didn't tay
around long a an active inve tor and it holding wa gradually diluted.
'After we showed management leader hip and our capability in running
the company, they delegated all the power and authority to the manage-
ment team. That took about three year ,' H uan says. The company was
listed on the. Taiwan Stock Exchange in 1985 but employee arc toda
the single biggest group of shareholders.
Like other Taiwanese companie with American antecedent , UM could

grow quickly because it was o tightly me hed to the S indu try. It u ed
US manufach1ring systems and therefore could communicate ea ily with
U I design houses and quickly digest new technologies. To put UM 's
marketing operations into motion, Hsuan was re ruited from ERSO
because he wa one of the few Taiwanese that understood the semiconduc-
tor industry. 'l had been in the semiconductor business sine 1975 before l
joined ERSO. 1 worked at a trading firm and di tribution firm for an over-
seas semiconductor house, so I knew the bu ine practice ,' he recall . At
this stage the company was not operating a a foundry, except when it had
excess capacity it could offer other companies. UMC designed and pro-
duced ba ic chip for ale to on umer product manufactmer in Taiwan,
Hong Kong and later Singapore, Korea and Japan. With the proceeds of the
initial public offering, UM moved into Europe and Japan in the late
1980s. The move to becoming a pure foundry busines only occurred in
1995. 'The technology competition became more and more intense.
Bet\veen design and manufacturing we had to choose one. We couldn't be

ompetitive in both areas,' says Hsuan. For UMC it was clear: its compara-
tive advantage lay in efficient production and less in design and
marketing. Having reached that conclusion, UMC and a handful of other
Taiwanese companies today dominate the worldwide foundry industry.
GEOGRAPHY: TWO CHINAS
The label 'Silicon Island' that is ometimes affixed to Taiwan's high-

technology cluster is something of a misnomer. Virtually the entire industry
is on entrated in a 60-rnile corridor in the north-west corner of the island
between Hsinchu and Taipei, the country's capital and commercial centre.
Lying in the swathe between the two cities are many of the lower-tech com-
ponents-makers that give the high-tech industry much of the competitive
advantage it has in costs and deli cry times over other countries.
Hsinchu city is by Taiwanese standards a glittery place that displays more

wealth than the rest of the island, which hasn't shared equally in the
ri he ac ruing from te hnology. Hsinchu Science Park, a 1,600-acre
campus just a 15-minute ride outside the
Hsinchu city is by central city, is home to some 300 companies,
Taiwanese standards a glittery
including most of the industry's leading
place that displays more
players. The park is anchored by Tsing Hua
wealth than the rest of the
and hiao Tung Universities and a bevy of
island, whkh hasn't shared
equally in the riches accruing government research institutes. ITRI is the
from technology. , biggest and the most important to industry,
but the government's ational Science
Council has also established a Precision Instrument Research Centre, a
hip Implementation entre, the ational Centre for High Performance
Computing and the ational Nano Device Laboratories, to name a few.
High-te h companies, the universities and resear h institutes play a key
role in the local economy. omc 60% of the 100,000 people working in
the science park live in the surrounding country, whos<' population
numhers just 440,000. 2
At the other pole i Taipei, a ~prawling and chziotic city of 2.5 million
people that is more dedicated to the Old Economy an<l the business of
governing the countr) than it is to the technology ector. Still, the city
ht1s it<;fair share of tech no log compzinies a1~d sen e as headquarters for
others thzit have operations in Hsinchu or ehewhere around the islctnd.
An hour from central Taipei is the t ankang cicn c Park, who e 100
companies are the heart of Taiwan's comparatively small software indus-
try. Taiwan University is in the city itself and entral University is about
half way between Taipei and H inchu. Taipei's key role is as the financial
centre of the technology industry - the home of most of the country's
venture capital funds, its inve tment banks and the Taiwan Stock
Exchange, where most listed companies are traded. Using the presence of
English as a standard, which is fair enough in the tech world, neither
Taipei nor Hsinchu displays the cosmopolitan atmosphere of mo t high-
technology clusters. Ordinary people rarely speak the language and even
senior executives who pend a fair amount of their time with over eas
clicn ts have a poor written and oral command of it. In H inchu the
street signs are exclusively in Chinese characters.
Hsinchu it elf ha reached the limit of its growth. Environmental pres-

sures are growing as the country become richer and more consciou of
quality-of-life issues. Wcn-Hsuing Huang, the director-general of the
Hsinchu Science Park, has already banned the construction of more
emiconductor fabrication plants becau e there i n't enough space, elec-
tricity or water and environmental opposition makes it hard to expand
ources. Roads are clogged with traffic at the start and end of every busi-
ne day, but employee are loath to make use of public tran port like
bu cs and cmplo ers discourage car sharing because they don't want
workers gossiping with each other about pay and conditions. Thus the
science park administration is developing two satellite centres just south
of H inchu in Chunan and Tungluo, and has a second fully-fledged park
in Tainan in the outh-wcst corner of the i land. In Kao hing, Tahvan'
econd city at the southern end of the island, the state is investing $-10
million in a software technology park designed to employ 5,000 people
and make use of local universities. 1 o matter, most companies don't get
excited about locating in the cience parks outside Hsinchu. It's hard to
match the ynergie of H inchu, and at the end of 2000 70 firms were
waiting to get in. 'We've asked them to go to Chunan and Tungluo or
Tainan ...but they want to go to H in hu be au e here we have a cluster,'
Huang say . 'There's the university and the environment is good. But in
Tainan the environment isn't mature enough for them - there's no ITRI
and the university may not be as good for them.'
A big part of Taiwan's technology cluster isn't on the island at all but
across the East China Sea in mainland China vvhere many companies
have et up plants. But physical proximity and a common culture can't
entirely offset the political and lcgzli thicket Taiwanese companie must
9 HSINCHU-TAIPEI, TAIWAN ARMS FOR THE REVOLUTION 175
pass through to do business in China. Taiwan's government doesn't ban

trade and investment, but it place severe restrictions on the kind of
industries companies can set up in China and how much they can in\'cst
in them. There are no direct flights between the two countries, so
Taiwanese executives have to go through Hong Kong, turning what
should be a 90-minute dash into a 12-hour marathon. 'If\\ e have direct
flight chances are it will open the door for spies and maybe even bring
troops. Taiwanese bu inessmen are bringing all these resources - the cap-
ital, the engineers - to China, and Taiwan \\ill be left with nothing,' sa)S
Paul hang, president of Taipei-based Primus Capital Group, explaining
the government's line on China ties. But Chang thinks Taiwan has no
choice but to widen tics ,vith the mainland. 'China is untapped virgin
land. If l don't go there now, everybody else will go there.' 3 The restric-
tions in fact arc gradually being cased under pressure from the business
community and as both Taiwan and China enter the World Trade
Organization they vvill be further liberalized. ln the meantime, compa-
nies can skirt the law by forming paper companies in Hong Kong or the
Cayman islands to oversee their mainland operations. That shields them
from the snooping eyes of the authorities ,, hose overseas investigative
powers arc limited by the paucity of Taiwan's formal diplomatic relations
and the structure of its tax regime.
Restrictions or not, components are increasingly sourced from China, a

third or more of all Taiwan's high-tech goods are produced on the main-
land and companies have invested heavily there. The lion's hare of
manufacturing being transferred to the mainland is of the lower value-
added kind that takes advantage of the seemingly endless supply of
labour and personnel that can cost anywhere between one tenth to one
sixth of Taiwan's level. Advanced Semiconductor Engineering (,\SL) has a
subsidiary manufacturing PCs on the mainland for IBt\-1but, if the com-
pany wants to continue growing, its core busi11ess in the relath ely
sophisticated field of testing and a'>sembly work for the IC industry \\'ill
eventually have to migrate to China, too. 'Taiwan alone couldn't give me
enough of the right kind of peoµIe,' says chairman Ja on C.S. hang.
'The attractivene\s of China is that they ha\·c so many people and the
education is good. We need to establish a pre ence there, eYen though
today they are not up to our standard ... China also has a huge market,
too. !or those two rea ons it's \'cry important for a Tai\\an company to
tap into that.' 4 The altcrnati\·e to hen ing ( hina d'>a partner is ha\'ing it
as a competitor or ,,·orking for competitor..,_ The Chinese are doing" hat
Taiwan did J0-40 years ago by '>tarting with assembly work, liceming
technology, and striking up deals with overseas companies. Huge

numbers of Chinese students are now studying in the U , many of them
taying on until they cc an opportunity opening up back in China. 'Five
or 1O years down the road, this will be a very strong for e that can't be
overlooked,' warns Tzu-Hwa Hsu, managing director of Walden
International Investment Group's Taiwan office. 5 The hinese train is
barrelling full steam ahead without any Taiwane abroad.
PEOPLE: CALIFORNIA, HERE l'M FROM
Taiwan's entrepreneurs are more thoroughly integrated with business in

Silicon Valley in the U than their counterparts anywhere else in the
world. A huge proportion of the country's entrepreneurial class did their
graduate training and worked there before
Taiwanese companies don't taking their skills and connections back
start as local players before
home. Others remain as part of a network
expanding into global
feeding back information and establishing
markets; they begin as cogs in
contacts. Their business models arc inti-
a global high-tech machine
whose motor is the US.
mately linked with overseas companies -
and that usually means American companies
- as licen ee and ub ontractors. Taiwan companies don't start as
local players before expanding into global mnrkets; they begin as cogs in
a global high-tech machine whose motor is the U .
The US connection traces its origins to the tens of thousands of Taiwanese

who went to graduate school in America in the 1960s, '70s and '80s
because of the paucity of good educational opportunities at home as well
as the existence of government programme to help pay their way.
Although the number ha probably fallen as local standards have
improved, the 'ational Science Council estimates that more than 15% of
all Taiwanese university graduates have done advanced work in the US over
the past few decade .6 Jn the 1960s and J970s, a great many of them stayed
on to work in America becau e Taiwan simply didn't offer the work or busi-
ness opp011unities that could put their education to good use. If it hadn't
been for the government's strategic decision to move its industry into high-
tech goods, it might well have stayed that way. 'Thirty years ago most
college graduate would go to America for advanced training and the vast
majority would stay there. Rut eventually some of them would hit middle
age crisis, and we said to them, "come back and start your own company
and be your mvn boss",' says Steve Hsieh, vice-chairman of the 'ational
cicncc ouncil and previously head of the Hsinclrn Science Park. 'The
connection between Silicon Valley and Taiwan provided a very good and
fast mechanism for technology transfer.' 7
Over the past two decades some 3,600 Taiwanese have come back from
America to start up or play key role in high-tech companie , including
Patrick Wang, who founded Microelectronics Technology (:vITI), and
Morri hang, who founded Taiwan cmiconductor Manufacturing Corp
(TSM ). Close to half of all the companies in Hsinchu Science Park were
founded by returnee or had returnees in top management or key tech-
nology positions. ASE's Chang fits the mould, with the notable exception
that he bootstrapped the company with family money rather than gov-
ernment capital. 'I went to the United States for graduate school in 1967.
I fini hed my masters degree at the Illinois Institute of Technology and
worked for Bechtel in the nuclear power plant side,' he rccounts. 8 Chang
returned to Taiwan in 1971 and joined the family con truction bu ines ,
but he kept up the US connection. 'l saw Taiwan was getting into indus-
trialization o 1 thought I would get into industry. Electronics was a field
that had a future. I started re earching and hired ome people in ilicon
Valley - omc American , omc Chinese who had been in the US for
many years - to sec what type of industry could be established. We found
the l industry looked like it should be outsourcing rather than totally
integrated.' He hired Taiwanese working at Motorola and Intel and
brought them to Taiwan to get it started. The American links arc as strong
today as ever. All of A E' customers for it te ting and a sembly ervi e -
the final tage in the multifaceted process of making emiconductors - arc
US and European companies, the company itself employs 500 people in
the U to provide pre-engineering services, and it depends on the US capi-
tal markets for it substantial financing needs.
As critical as the US connection is, it belongs to a small elite. But then

again it's only relevant to that small minority, as the great majority of
people in Taiwanese high-tech arc engaged in production and those in
R&D arc rarely at the cutting-edge of their field .. ASE employs 24,000
people, of which 800 arc in R&D. In Hsinchu Science Park, a third of
the workforce has no more than a high school education and only 11¾>
holds a doctorate. 9 But the payrolls of these companies are enormous
by high-tech standards, and further growth will put an enormou
strain on the labour market. At ASE, for in tance, the computers test-
ing chips cost S2.5 rnillion-$3 million apiece and the people
operating them ha\·e to be university gr~duates. 'Our company in
I~1iwan has something like 15,000 people and our grmvth rate is quite
high - we're still growing at 40%-S0fJlci a year. Every year l ne d to hir

thousands more people, but Taiwan has only 22 million people and
cannot produce that many engin ers to support u and everybody
else,' says Chang. The Information T chnology Industry Association
estimates Taiwan suffers a shortfall of about 10,000 skilled engineers
annually, most seriously in the critical areas of telecommunications
and micrmvavc communications.
Start-ups face an even more serious personnel problem. Taiwanese compa-

nies don't provide a training ground for the cadre of busine s
development and marketing professionals that start-ups with proprietary
technology need. In any case, Taiwane e prefer to work for large estab-
lished companies. 'Even three years ago, nobody would come to a small
company. It was difficult to find good engineers,' ays Hsaio-Ping Lin, the
president of Faraday Technology, which was spun out of UM in 1992 to
provide IC de ign service . 'You needed to pend a lot of time recruiting
good engineers in the first five years of the company. Stock options arc an
import item but l would tell them about the future of the company, that
de ign service will become the most important factor in the s miconduc-
tor industry.' 10 The situation is easier now, but not a lot better. T.W. Tsai,
who helps manage a portfolio of software and internet companies for
Hong Kong-based AsiaTcch Ventures, says Taiwanese arc showing more
inclination to accept more challenging and professionally rewarding work
over secure jobs. 11 oftware professionals arc especially inclined to move
over to start-ups because Taiwan's older manufacturing companies tend to
give short shrift to the software business. Still, Lin says at least 30% of his
personnel intake has to have five or more years of experience, y t he esti-
mates that 70% of hi recruits are fresh out of school.
SOCIETY: DON'T INNOVATE, DO SOMETHING
Like most of Asia, Taiwan invests heavily in education and families

accord it high priority, but teaching tends towards th kind of rote-learn-
ing that yields students excellent scores on standardized tests but fails to
prepare them for the kind of creative thinking widely seen as a founda-
tion for building a successful technology industry. The entrepreneurial
pirit of the Tahvancse isn't geared towards innovation but, unlike their
neighbours in Singapore, the Taiwan sc have few aspiration towards
fundamentally changing that.
9 HSINCHU-TAIPEI, TAIWAN. ARMS FOR THE REVOLUTION 179
The 1999 Third International Mathematics and cience )tudy sur\'ey of

38 ountries ranked Tahvan's eighth-graders as number one in the
world in science achievement and number three in maths, putting
them at the top of a league table that is dominated by Asian students to
begin with. 12 Taiv,'an spends a hefty 16f!.11of its government budget on
education. But it is hard to find people who
Taiwan spends a hefty
have been through the system that will
16% of its government
defend it from the point of view of content,
budget on education.
teaching style or the number of hours
demanded of students. 'We emphasize education. I think we over-
emphasize it in place of other things,' says Tawei Sun, a vice-presi<ient
at China Development Industrial Bank, where l1e is responsible for
overseas high-tech in vesting. 13 Recalling his own experience in the
school system 30-odd years ago, he says: 'Children were told to do their
horn work and to ignore other parts of their lives so they could focus
on education only. Students put a lot of hour into their tudies - the
most diligent students you could find anywhere in the vvorl<l. They
would get up and study from six in the morning until they went to bed
at one in the morning.'
Taiwan is now taking measures to introduce a more free-wheeling atmos-

phere in its primary education and is providing a more varied curriculum
to meet the differing needs of tudents with varying abilities. teve Hsieh
of the National Science Council isn't convinced that Tahvan has to inject
much more creativity into the system or broaden students' educational
exposure until they reach the post-graduate level. Taiwan has devoted con-
siderable resourc s to improving the science and technology departments
in the country's 100 institutes of higher education since the late l 970s, so
that fewer students now feel a need to go abroad. But the government still
thinks that at the upper reaches of education, international exposure is
critical and it helps send students abroad for post-doctoral training.
It's ironic that the country that probably make'> more PCs per capita thc1n
anywher else in the world had only just over 22.5 in use per 100 people
in 2000, less than a thircl of Singapore's rate, according to International
Telecommunications Union (I'l U) figures. 14 On the other hand, the
Taiwanese arc more inclined to use the internet, with 11U data showing
2,8 U users per I 0,000 population, less than Singapore or Hong Kong hut
higher than much of Western Europe. At 492, the number of internet
hosts per 10,000 inhabitants wa-, similar to We~tcm l:uropcan level-; in
2000. Being tech savvy, however, doesn't colrnt for much in the industry
where companies arc focused on production and squeezing out cost

rather than pursuing technological innovation. hina Development
Bank's Sun goes as far as to suggest that Taiwanese entrepreneurs are
re istant to inv sting heavily in R&D and taking on the attendant risks
when their old models of licensing technology and subcontracting has
served them so well. 'For your entire lifetime you've been working in the
garage [repairing] and then all of a sudden you have to design your own
car. It's a different profession,' he says. 15 In fact, China Development
Bank, like many Taiwanese venture capital funds, goes to the US and
elsewhere overseas if it wants to invest in proprietary IP).
In that context, Procomp Informatics Ltd, ba cd in Taipei, off rs a good

illustration of where most Taiwanese companies sit on the IP value
chain. The company started in 1991 trading in computer peripherals and
five years later began manufacturing computer motherboards, which
wa n't high-tech enough to get its plant admitted into the Hsinclrn
Science Park. But Procomp also entered a more technologically sophisti-
cated business of making gallium arsenide wafers, which are used to
make semiconductors for such specialized applications as wireless om-
munications and fibre-optics. Procomp didn't come to the market with a
new technology but with a co t proposition. 'The control of overhead i
the issue,' explains Karen Yeh, a project manager at Procomp. 'If you
break down th overhead, you probably have depre iation, labour, etc.
Talking about ·depreciation, everyone uses the same equipm nt, so there
won't be a big diff rence. So, it's a question of how you control indir t
osts.' 16 The gallium arsenide division employs 170 people, only about
lOlX,of whom are researchers.
Procomp occupies one link in a chain of specialist companies producing

th chips, some of which arc located in Taiwan and omc overseas. The
process very much mimics the bigger silicon I industry in both its
structure and its evolution away from integrated manufacturers to dis-
integration. In the gallium arsenide chain, a Taiwane e ornpany
produces the sub trate, or base, of the chip. Procomp's role is to lay r the
substrate with gallium arsenide and related materials at its Hsinchu facil-
ities. From there, the wafer are nt to integrated device manufacturers
(IDMs) located in the US and Japan that de ign and fabricate the final
chip. The chips are then sent to end-u er , such as cellphone rnak rs, all
over the world. Dis-integration is making the chain more complicated.
IDMs arc gradually giving up some of their design role to speciali ts and
more recently some of the fabrication work to foundric . For instance,
9 HSINCHU-TAIPEI, TAIWAN: ARMS FOR THE REVO UTION 181
Procomp convinced Japan's Sumitomo Electric, an IDM, to give it the

wafer side of the business on an OEM basis. Two foundries have been set
up in Taiwan and at the end of 2000 were in pilot-production phase.
From a competitive point of view this supply chain lets Taiwan exploit
its competitive advantage as a manufacturer and steer clear of its disad-
vantages. Companies like Procomp don't have to compete on design nor
do they have to invest time, talent or money in marl eting because they
work with a very limited number of customers in relationships based on
experience and trust. But to enhance manufacturing efficiencies and
reduce costs, as much of the manufacturing egment of the chain as pos-
sible must be in Taiwan. That is why Procomp invested in Suntek, one of
the country's two foundries.
FINANCE: LIFE AFTER THE PC
Over the past two decades Taiwan has built a huge and successful, if some-
what idiosyncratic, venture capital industry. Taiwanese VC traces its
origins to 1983, when the government created the fir t laws governing the
industry and rode the crest first of Taiwan's growing PC and later its IC
sector. At the end of 2000, the country's 169 active VCs had accumulated
capital of $3. 73 billion. Most of the funds were formed and most of the
capital raised in the last four years of the 1990s when money under man-
agement tripled.17 In 1999, Taiwan's funds invested $970.2 million, more
than 80% of it in high-tech sectors ranging from semiconductors to opto-
electronics. The unregistered industry, which has forsworn tax benefits in
exchange for less regulation, is con iderably bigger. 1early a third of all
the VC transactions in the 16 years to 2000 went to seed and start-up com-
panies, equal to ome $ 1. 1 billion. That is the regi tered industry. The
number of unregistered funds could be 300 or
,The government early on more and they are estimated to have invested
recognized the role VC would $10 billion in 2000 alone.
play in fostering high-
technology and designed
The government early on recognized the
industry regulations to steer it role VC would play in fostering high-
in that direction. technology and de igned industry regula-
tion to steer it in that direction. Funds were
required to inv st no more than 30% of the paid-in capital outside high-
tech, and to compensate for the higher risk, fund backers were offered
generous tax credit equal to $2 for every $10 inve ted. The funds com-
plained bitterly when the tax credit was finally eliminated in 1999 (a
whole class of inv.estors motivated by tax considerations effectively
dropped out), but the size of the unregistered industry would suggest
there is no longer a need for the incentive . The unusual character of
Taiwan venture capital begins with its insularity. Few foreign funds oper-
ate in the Taiwan environment, and overseas investors account for just
about 4% of domestic VCs' total capital. The funds generally push their
portfolio companies to float on the Taiwan tock Exchange rather than
the asdaq or other foreign markets. In addition, pension funds and
insurance companies, two major sources of backing for VCs elsewhere in
the world, play minor roles in Taiwan. Because there are severe caps on
financial in titution ' exposure to private equity, some 83% of VC fund-
ing comes from individuals and companies. Under the law, VCs must be
organized as corporations rather than as general partnerships as is
common el ewhere in the world.
PCs and ICs no longer present the same opportunities they once did for
Taiwanese VC because the industries have matured. 'We prospered
because the PC prospered. ow we're meeting a huge challenge because
the PC growth has become slower,' says James how, chairman of
oncord Financial, a leading Taipei-based V . 'We have the notebook,
we have wireless, broadband - they arc replacing the P . W arc at a
crossroads. Th whole high-tech industry is tryin to adapt to the
change. People are saying, ''Where will we turn to, what is the next prod-
uct?" obody knows what the next product will be.' 18 Like many other
funds, Concord's answer has been to hedge it bet . At home in Taiwan it
i looking for what Chow call 'transitional technology' by acting as
matchmaker between efficient Taiwanese manufacturer and foreign
companies with advanced technology. Concord, for in tancc, invested in
a liquid crystal display (LCD) joint venture between Taiwan's Win bond
and Japan's Toshiba. 'In LCD, as long as you can achieve a certain cost,
you succeed,' he says.
Because there is a paucity of original IP in T'tiwan and managerial ability

to bring it to global markets, Concord has had no choice but to make the
trek to Silicon Valley if it is going to expand its portfolio out of technol-
ogy manufacturing. The company has taken on US staff and in 2000 put
15% of its new in estments in America. At first glance, it would seem to
be a futile effort: Concord is a small fund by US standards with just $240
million under manag ment and no special ilicon Valley connections.
But it docs bring American ompanies the prospect of an entree into
Taiwan's manufacturing se tor. In its efforts to win a place a~ an investor
in a US fabless-chip company, for instance, oncord used a semiconduc-

tor foundry in its portfolio as bait. 'Because we invested in a foundry
before, we had a relationship. We knew whether the [fabless] design \-Vas
good and the US company wanted us because we could give them the
foundry capacity,' says Chow. 'Maybe later they'll want the market in
Asia and so they'll let us invest in them. We're talking about synergy.'
The typical Taiwanese tech firm doesn't have the credentials to float
share in the US. Only a handful of companies have done initial public
offerings there, although many more ha, e listed American depositary
receipts. s manufacturers, Taiwanese companies don't command the
kind of 50%-60% gross profit margins US underwriters and investors
expect from a high-tech play. or do they have a presence in the US
product market that might attract investors' attention as a slew of
Taiwane e dot com catering to domestic users discovered when they
tried 1 asdaq lPOs. Concord's LCD venture, for instance, sells exclusively
to other Taiwanese manufacturers and has gross margins in the low
double digits. 'An investment banker won't even look at you. They'll
regard you as a distributor,' how says. Jg Likewise, the merger and acqui-
sition route for companies is con trained by lav"'s that discourage tender
offer for publicly-traded companies and by a business culture that does-
n't like to disclo e financial information to outsiders.
Fortunately, the Taiwc1n Stock Exchange is a liquid market and receptive

to the charms of companies that Nasdaq would ignore. The market
enjoys th backing of a big population of small investors and some 80%
of the market's turnover is in technology shares, much of it in the two
big chip-makers TSMC and UMC. ln 2000 the exchange renamed its
over-the-counter market the Taidaq to give it a more contemporary
growth-market aura. The problem i that the market has been in the dol-
drums since 1995, after Taiwan's then-president upset relations with
China by making a highly-publicized visit to his U alma mater Cornell
University. Stock market valuations in Taipei used to approach those on
the 1asdaq, but since then investors have been cared off.
GOVERNMENT: CHINESE HANDCUFFS
Unlike Singapore, where government policy is supremely focmed on

economic development, Taipei's officials arc preoccupied with relations
with llina and the larger <liplom.itic ganw of firn. ,sing relations ,-vith
11
the great majority of the world that doesn't formall~ recognize raiwan.
Taiwan has to maintain a str ng defence posture and build internal

mechanisms to protect itself from the impact of world and regional
financial crises, since it doesn't belong to the international finan ial
organizations that might come to its aid. But when and where it chooses
to operate, the government has played a critical r le. Th re is little qu -
tion that the transition to high-Lechnology in the 1980 almost certainly
couldn't have happened if the state hadn't provicl d the mechanism for
technology transfer, the incentives for venture capital and the cluster
environment of the Hsinchu Science Park.
The government's role in Hsinchu works on two levels. It was th

government that had the ability to create the park by expropriating
from reluctant farmer a big block of land in an area devoted to tea-
growing and creating a comprehensive environment of research
institutes, universities and government agencies for high-tech compa-
nies. 'It was very difficull to buy land at the time and it's more
difficult to buy now. Traditionally people in China don't like to sell
their land. For the grandchild to ell th grandfather's land isn't con-
sidered good,' says Huang, the scicn c park's administrator. 20 Space in
the park was rented rather than sold so as not to tic up the capital of
young companies in real estate. Tax breaks and a bilingual hinesc-
Engli h school lured Taiwane expatriates back home. The other
great contribution to the park was desig-
Tax breaks and a bilingual nating it as a pecial export-proce ing
Chinese-English school
zone with the power to grant appro als for
lured Taiwanese expatriates
a wide range of government programme
back home.
and incentive . That saves tart-ups the
usually two-month wait to get all the nece sary clearances and gives
them a single address to turn to.
The econd major area in whi h the government play a rol is in

r search and development. Taiwan spent a fairly generous 2.02% of gross
domestic product on R&D in 1999, of which 34%, or $1. 7 billion, came
directly from the government. 21 There was a time •..vhen state spending
amounted to 60°A>but private- cctor R&D i growing faster than govern-
ment spending. The ational Science Council gets n arly half of the
government's R&D budget to di tribute to universitie and re earch in ti-
tutcs and for co-operative R&D between the univ rsities and companies.
The Economic Affairs Ministry uses the money to help corporat R&D
activities but mainly to fund the ITRI. !TIU engages in both original
research for new products and industrial processe , often under contract
from companies. Perhaps more importantly it's a conduit for technology

transfer of the kind that got UMC started in the early 1980s. Some 13
companies have heen spun out of ITRI over the year .
Taiwan revi ed its intellectual property law in 1999, \Vhich should

further facilitate the transfer of innovations developed in government
labs into the private sector and boost the amount of money available for
the future. Under the new rules, government R&D labs get to keep 40%
of the revenues generated from the IP they develop, the researcher him-
self another 40% and 20% is kicked back to the government. The
government is using its take to bolster the budget of its Science and
Technology Fund both to conduct research on ne\\' technologies and to
enable it to make venture capital investments in young companies still
in their R&D stage.
The Taiwan Venture apital Association estimates government money

accounted for only 1.7% of VC backing in 1999, but the state had a
major presence in technology finance in the industry's early days hath in
fostering the private sector and in providing direct aid to companies. In
addition to tax breaks which were eliminated only recently, the state
itself was a major investor in technology companies in the 1980s and
early 1990s. The development fund of the government's Executive Yuan
together vvith Chiao Tung Bank in 1985 put together a pool \Vorth $25
million in today's money and increased it to $ 75 million in 1991 to
create 16 seed funds. That kind of money went a long way in absolute
terms back then and more importantly served as a model for Taiwan's
nascent venture capital industry. The government was a major investor
in first-generation tech companies such as UMC and TSMC, although
over the years this has been diluted.
Like those of other Asian governments, Taiwan's tax regime is modest.

Ille corporate tax rate is 25%; the per anal tax rate reaches JS high a
40% but it's a progressive system and mo t people pay between 15% and
20<¾\.There is no capital gains tax at all. for high-tech companies on a
designated list of trategic areas, Taiwan offers investment credits for the
company's backers or a five-year tax holiday for the compa11y itself when
it st<1rtsmaking profits. PC manufacturing doesn't qualify and at the end
of 2000 the government was weighing whether to drop semiconductor
manufacturing from the list as well since it, too, is now firmly e,;tab-
lished and profitable. The one .ispect of financial and tax rL'gulations
th<1t isn't unhelpful nre the rules governing stock options. Since the law
doesn't allow companies to hold trc,isur) stock, they can either set up
special-purpose vehicles to hold the share or, as most companies opt to

do, make a special offering to employees at below-market prices and
attach restrictions on when they can sell. If a company is already making
profits, it can issue bonus shares. 22
FOCUS COMPANY: FARADAY TECHNOLOGY
In its efforts to chart the course for its IC design services business,
Hsinchu-bascd Faraday Technology faces a set of challenges common to
much of Taiwan's technology sector. It benefits from being in the centre
of one of the world's biggest IC industries and has an advantage over
many other Taiwanese concerns by virtue of the fact that it has devel-
oped and controls a fairly substantial body of proprietary technology
rather than simply being an efficient manufacturer. But that is no longer
enough: Faraday ha to manage a gradual move to more sophisticated
designs in order to avoid the trap of falling into competition with main-
land China at the lower end of the market. To do that, it must carefully
pick the IP brains of American and other foreign companies.
The company was formed in 1993 as a spin-out from UMC where Hsaio-
Ping Lin, now Faraday's president, was in charge of computer-aided
design (CAD). He went out with 12 people and with UM as the main
shareholder. Faraday's business was to provide ASI design services for
IDMs and design houses making chips for computers, communications
and consumer electronics. The company over time came to pu h out for-
eign competition and dominate the domestic ASIC egment. The
problem now is that Faraday has Jittle room to expand at home. It is
already by far the biggest of the dozen or so I design s rviccs firms on
the island. If it wants to continue growing the company has two routes it
can take: go up-market to America and Japan or go down-market to
China. Lin is determined to pursue both. 23
First, the U and Japan. Their markets are huge but al o considerably
more sophisticated than Taiwan's. 'Right now in Taiwan, companies
are still one generation behind the US and Japan. For example they
arc using 0.35-micron technology while in the US they arc using 0.25
or 0.18 te hnology. Taiwan has a lot of design houses, but U design
houses really advance projects; in Taiwan they just look to sec how to
advance existing feature , ' say Lin. He is working to deepen the tech-
nological capabilities of his staff in part by encouraging Taiwanese
ustomers to upgrade their own chips to 0.25-micron and add fea-

tures. But that' a low process and it's hard to recruit engineer ir
Taiwan with the necessary experience, especially since Faraday does-
n't enjoy the glamour of being a manufacturing company. To tart
building it IP ba e qui kly, Faraday acquired a S company, ASIC
emiconductor orp, in 1995 and now services all its American
clients from there. In Japan, a harder market to penetrate, faraday ha
a Tokyo office although the work for Japane e client i till done in
Taiwan. Competing against S design-service companies, Faraday
holds an important asset in being based in Taiwan and close to the IC
industrial cluster. ' ustomers need a vendor to deliver the goods on
chedule and a very efficient way to deliver the good . We can up-
port this kind of service very well. We know the foundry, we know
the testing house. We know everyone very well and the efficien y i
o high,' Lin says.
hina presents a diff rent problem that requires a more defensive strat-
egy because a cluster very much like Taiwan' is gradually being
developed on the mainland. Although Lin thinks China is five or more
years away from being able to match Taiwan's capabilities, he wants
Faraday properly positioned for when the
China presents a different day ome : he has set up a Shanghai office
problem that requires a more and visits China se eral times a year with
defensive strategy because a
the aim of building relationship and a
cluster very much like Taiwan's
market. It's a long march. 'If we could hire
is gradually being developed
on the mainland. engineers from Shanghai and bring them to
Taiwan, they would be easier to manage. If
they're working in Shanghai it's very hard to manage them and the
turnover rate is very high,' Lin says. Many people in Taiwan's IC industry
think the way to meet the hina challenge is to move operations there
and join the competitor rather than try to heat them. I.in, however,
believes the industry should v,rork to establish a technology lead over
hina and let the mainland take over the low end of the business. To
harpcn his edge, Lin wants to acquire the IP rather thaP struggle with
his limited personnel re ources to develop it all in-hou c. He is readying
for a buying spree of small US and Europ an micro-firms that will be
converted into I{&!) entr<.''.-1
for the company. 'That' the only way to
incrcac;c your IP fost,' he says.
AHEAD: BEYOND CHINA
Taiwan ha carved out for itself a nearly unique role as the factory floor
of the global technology indu try. Only Singapore comes close to having
the same abilities and aspirations, and it's only a fraction of the size of
Taiwan in population. Other, lower-cost manufacturing centres exist, but
Taiwan is different in that it is based on indigenous entrepreneurs and
companies who may have learned the skills and manufacturing efficien-
cies from overseas. But they have long since internalized them and ha e
developed an industry that has evolved on its own to meet the changing
needs of the market. hina is embarking on a similar path, but the
Taiwanese underestimate hmv difficult it will be for the mainland to
follow their model. The Taiwanese industry exists not only due to low
costs and technological skills but to entrepreneurial and managerial abil-
itie of \Vhich the hinese have yet to prove capable.
Still, China and others \·Viiigradually take over the business of mass-
producing P and the commodity product of the information technol-
ogy univer e. The tran ition for Taiwane e companies to manufacture
more sophisticated products shouldn't be difficult. They are u ed to evolv-
ing and the fundamental business of producing faster, cheaper and better
doesn't change much from one generation to another. But there is one big
caveat. The sta,ndardized manufacturing at \·Vhichthe Taiwane e excel may
be giving way to customized, made-to-order production as Dell had devel-
oped in P s. As it is, shorter and shorter product cycles make it harder for
companies -Taiwanese or otherwise - gradually to develop manufacturing
efficiencies for a given product by learning from earlier mistakes. It may be
not China that's the threat but the character of global industry.
NOTES
Interview with John Hsuan, chairman, UMC, 18 December 2000.

2 Interview with Wen-Hsiung Huang, director-general, Science Park.
Administration, 18 December 2000.
3 Interview with Paul Chang, president, Primus apital Group, 13 Decemher

2000.
4 Int rview with Jason .S. hang, chairman, ASE Group, 15 December 2000.
5 lnter\'iew with Tzu-Hwa Hsu, managing director, \Vaiden International
Investment Group, 12 Oeccrnher 2000.
6 National Science Council White Paper, undated, www.nsc.gov.tw.

7 Interview with Ste\·e Hsieh, vice-chairman, National Science ouncil,
12 December 2000.
8 Interview with Jason Chang.

9 Science-Basedll1d11strialParks, Science Park Admini tration, May 2000.
10 Interview with Hsaio-Ping Lin, president, Faraday Technology, 15 December
2000.
11 Attitude of software engineers, interview with T.W. Tsai, vice-president,
AsiaTech Ventures, 19 December 2000.
12 Third International Maths and Science Study-Repeat, 1999,
www/times.bc.edu.
13 Interview with Tawei Sun, vice-president, technology department, China
Development Bank, 11 December 2000.
14 lndicaton, International
ITU Teleco1111111111icatio11 Telecommunications Union,
2001.
15 Interview with Tawci Sun.

16 Interview with Karen Yeh, project manager, Procomp Informatics, 18
December 2000.
17 Taivvan Venture apital Association, www.tvca.org.tw.
18 Interview with James Chow, hairman, Concord Financial, 9 D cemb r 2000.
19 Interview with James Chow.
20 Interview with Wen-Hsuing Huang.
21 Interview with Steve Hsieh.
22 Interview with James Chen, Lee & Li Attorneys-at-Law, 12 December 2000.
23 Interview with H aio-Ping Lin.
SILICON VALLEY:
where next?
THE 19905 SAW THE RAPID EMERGENCE AROUND THE GLOBE of technology
clusters that took the Silicon Valley model and adapted it to local rules
and regulations, cultures and economics. Clusters not only emerged in
the ix centr s surveyed in this book but all over the US as well as in
Europe and Asia, in cities such a Munich, Stockholm, Dublin and Hong
Kong. Whether the Silicon Valley way of doing business spreads further
afield, indeed whether these existing clusters will urvive into the next
decade and beyond, hinges on three elemental questions. The first ask if
the phenomenal growth of high-tech a an industry itself is over. The
second asks whether the wave of high-tech start-ups of the last decade was
a passing phenomenon that ,.viii succumb to the kind of industry consoli-
dation Id Economy industries inevitably experience. The third que tion
is whether the telecoms and information revolution that is at the heart of
high-tech will ultimately kill the industry clu ter that gave birth to it.
The collapse of technology share prices over the course of 2000 began a
process of di illu ionmcnt with the bright (or at least radically different)
future high-tech had been promi ing. Rut it wasn't just the world's stock
markets that traded on over-optimistic expectations. The equipment
makers and network operators themselve~ had abo become overextended
and had been forced to pare back plans for the development of the net-
works and accompanying technologies at the heart of the information
revolution. omc of the most highly touted technologies failed to be
delivered in time, to perform to expe tations or relate to the needs and

interests of consumers and business. The dot com world, the most visible
manifestation of high-tech to the great majority of people, ha yet to
create a feasible bu iness model for providing content and ervice . The
companies whose market valuations once towered over those of their Old
Economy peers found themselves undertaking mass firings, elling and
closing businesses and staving off creditor . A year after the asdaq began
its ignominious slide in March 2000, the information revolution was deep
into a Thermidorian reaction - or so it is widely perceived.
The perception that high-tech, both a an industry and a a cataly t for

broader social change, is a pent force i almo t certainly wrong. The
stock market overbought in the very short run the long-term promise of
the telecommunication revolution, but even in their early history these
technologie have already had a pronounced impact on the economy
and society. Realizing their full potential both in the kind of ervices
they can deliver and in bringing them to a large portion of the world's
population will take decades. The current downturn for telecoms equip-
ment is a cyclical phenomenon, not a permanent one, and the
unraveling of dot com hopes is a function of too much capital too early
in the process. To believe otherwise is to assume that the technology and
market potential of the key innovation of th telecoms revolution have
been fully developed and exploited to their long-term limit.
The only real issue for the world's technology clusters in this context is
whether the telecom revolution will continue to be pac d by a continu-
ous outpouring of tart-up companie , or whether the indu try will
consolidate like other before from the Old E onomy into a small
number of larger concerns. That's a crucial question for clusters in coun-
trie out ide the U , which stand a very small chance of surviving such a
shake-out. luster could be formed and could grm in such unlikely
pla es as Israel and India be ause the dynamic of entr preneurialism has
the effect of levelling - though by no means flattening - the playing field
between economics with greatly varying acce to capital, human
re ource and major markets. A okia can arise in a pla e like Finland
but it' far les likely to because of the resource limitations of it home
base. A consolidation can only favour the U first and then some of the
bigger European and Asian economies.
The fate of the start-up as a permanent fixture depends on whether the

telecoms industry continues to be led principally by innovation rather
than ost and whether there arc the people and mechanisms ready to
SILICON VALLEY: WHERE NEXT? 193
e)..ploit that phenomenon. Size and scale arc important in high-tech, like
any other industry, but new solutions creating faster, more efficient
products arc what drives the business - and hy that standard small,
young companies have had the advantage over their larger, older rivals.
That holds true - and even proves the rule - when start-ups are acquired
by bigger, older firm . The networking structure of clusters gives small
ompanics some of the bulk to compete effectively with bigger rivals
with their technology advantage. But without the presence of entrepre-
neurs and the people willing to risk working for and financing them, the
innovative potential for start-up will never come to fruition.
Judging by the situation in the industry at the end of 2001 there is no

reason to assume the start-up dynamic is under threat. The global wave
of entrepreneurialism that took hold in the late 1990 was certainly
purred by the promise of tock market-generated fortunes. The e kinds
of returns no longer exist even for the best start-ups, and no doubt a lot
of the entrepreneurial urge of the 1990s has dissipated. But entrepreneur-
ial culture remains because in all the clusters surveyed in this book, the
boom created the machinery for high-tech entrepreneurship to continue
- the venture capital funds, the attorneys and accountants, the dedicated
office space and the dozen other ingredients of a start-up culture.
Entrepreneurship as a career i attracting among the best and brighte t.
'There was a time when it would have taken ten or twcnt} years to build
major value in a husine s. 1 ow you can do it in five years or less and go
out and do it again,' says David Wilkinson, a partner specializing in
entrepreneurial services at Ernst & Young in London. 'The type of entre-
preneur has changed, too, from a more traditional model of an
immigrant coming in with no money who did it hecau c he had to, to a
whole generation of people who choose it, who arc well qualified, who
come from other companies.' 1
The current downturn in the industry i causing all these actor in the
start-up drama a lot of pain, but they arc still operating and making the
early life of a start-up easier and opening the possibility of entrepreneur-
ship to people who would in another time never have cr"1sidered the
pos ibility. The company offices of a typical start-up .iren't in the family
garage but in an incubator or a high-te h park. Financing i n't insufficient
and/or inexperienced capital from the founder's family and friends but
comes from a venture capital fund or multinational company. Clusters
around the world arc still seeing the emergence of serial entrepreneurs.
Fven in such favournbl<: circumstances companies can fail, but they are
less likely to. If the reward for tart-up are le s tellar today than they
were at the end of the 1990s, the risks remain low and the rewards still
considerable. The industry is, so far at least, retreating from the hyper-
intensive levels of activity seen in late 1999 and early 2000 to omething
more approaching a steady state. A good barometer for that i how much
capital start-up continues to attract. In lsra 1, high-tech companies raised
$1.15 billion in the first half of 2001, well under the $1.65 billion they
rai ed in the econd half of 2000 but about the same level as in the first
half of 2000 and nearly three times the level of the first-half 1999. 2
The clusters that stand to suffer the most from the technology downturn
are likely to be tho e in the earlie t tage of coalescing which hadn't gone
far enough in building up the institution of Silicon Valley. The six clus-
ters surveyed in this book had completed, or at least done most of the
groundwork to develop, the institutions of innovation and entrepreneur-
ship in the greenhouse of conditions of the late 1990s. ln the drier,
harsher conditions since 2000 the opportunities for clusters in the making
to mobilize global capital and expatriate talent are severely reduced. The
number and scale of untapped business opportunities for tart-up has
shrunk. The countrie and regions that didn't catch the train will have to
walk it for now or wait for the train to come in again in the form of a
high-tech recovery. For those clusters already on board, the entrepreneur-
ial culture and the industrial environment won't be easy to destroy.
The final question relates to the tug-of-war that is pulling the world'
technology clusters in opposite directions. On the one side is the
trength of proximity - the networks of ideas, people, business and
finance that are at the heart of ilicon Valley and all its imitators. They
require the intimacy and spontaneity of personal contact. On the other
side is the power of the internet and all the technology of the informa-
tion revolution that makes the issue of phy ical di tance increasingly
irrelevant. 1 etworks of knowledge- haring ar the core of high-technol-
ogy, but which will win out as the preferred arrier - the trendy bar/cafe
downstairs from the company's offices or a packet-switched network?
ertainly for the foreseeable future it i hard to ee how the communica-

tions technology now available can overcome the advantages of
face-to-face networks of people and knowledge in a distinct geographical
area. 'In principal, information communications technologies hould
make it possible to choo e the pla e and time of your work freely. But we
tend to see that clusters me getting more not less important,' says Erkko
utio, who studies university tech no logy transfer and pin-offs.
SILICON VALLEY: WHERE NEXT? 19S
'Learning has become so important for value creation, you can't really
di tance-lcarn efficiently because learning is driven mostly by informal
mechanisms. You can't benefit from the knowledge of spillover or
manage informal learning through video-conference links. You have
Finnish software firms setting up in Palo Alto because they need a direct
link to resources and co-evolution.' 3
ln Singapore, which enjoys some of the world's best broadband conne -

tions, the internet and trade publications are the first line of
communication for keeping up with developments in ilicon Valley. But
managers who need to know trudge off to California on a regular basis
anyhow to meet with customers, partners and others in the industry.
With its speed and informality as a medium, th net comes close to
mimicking the critical element of face-to-face contact, but not close
enough. 'There' a difference between first-hand information and search-
ing the web,' says one.
Those trips to Silicon Valley, in fact, would suggest the \Vorld's technol-
ogy clusters face a more complicated array of forces than the two
opposing directions of a implc tug-of-war. The internet, for instance,
isn't wholly a threat to the world's emerging technol gy clu ters.
·without the case and low cost of modern communications many of
these cluster could not exist in the first place. The Bangalore cluster,
who e broadband links are its main conduit for erving cu tomer in
America and Europe, would have been a marginal phenomenon if its
companies had been forced to continue using the faxes and dial-up con-
nections of the early days. For technology clusters outside of America,
the internet is an important element of the global knowledge network
they need to overcome the ad antages their American competitors have
by being based in America in the fir t place.
Ironically, the deeper threat to global clusters may just be due to the
importance of face-to-face networks. Already, America' unchallenged
role as the arbiter of nearly all that is important in high-tech ha had the
effect of luring many of the companies started up in the world's technol-
ogy clu tcr to direct their efforts to the American market. The logic of
the global high-technology market often demands that they pick up and
move to America altogether. That tendency is almost certain to grow.
As the most advanced of the six technology clusters surveyed in this

book in terms of its globalization, Israel is a warning for the others of
what might be ahead. In the first stage, over most of the 1990s, Israeli
high-tech built up a reputation for inno ation that attracted, in the first
in tance, global venture capital and, in the second instance, multina-
tional companie looking for acquisitions. The second stage, tarting in
1999, has seen two disturbing phenomena. The fir t is that Israeli com-
panies, recognizing the handicaps th y face competing again t American
firms in the latter's home market and the massiv valuations they can
achieve simply based on their store of intellectual property (IP), have
opted in large numbers to sell out to big multinationals, usually from
America. They become R&D arms for U companies, thereby keeping the
country' technologi ally competent peopl at home but depriving
Israelis of learning the skills of marketing, finance and organization
entailed in managing large multinational companies.
The second and more serious cau e for con ern is that I raeli tart-ups
themselves move operations abroad, prodded by their oversea in estors.
R&D is kept in Tel Aviv, but the other functions are shipp ct to Am rica,
including more often than not the EO's job. Israelis are naturally
tempted to fill thes job in alifornia or 1ew Jersey, th oretically con-
tributing to the country's skill set if they don't become permanent
expatriates. But over time they will naturally surrender the e jobs to
American who are readily available and have a better under tanding of
their home-country market.
1ot all Israeli corn panics have taken one of these two routes, but cer-
tainly enough of them have so that it i unclear whether Israel can over
the long term sustain the critical mass of a technolog, clu ter. The
Silicon Valley style of indu trial organization i n't all start-ups and fledg-
ling entrepreneurs but companie in various stages of d velopm nt that
make differing contributions to its knowledge base. Israeli industry fig-
ures trying to addre s this problem have focused on the tax incentive
for ompanies registering abroad and mo ing their operations there. An
improved Israeli tax regime would be an important !em nt in stemming
the exodu of companies, but it has yet to be seen whether this can serve
as a complet counterweight to the disadvantages of trying to operate a
global business from a place so distant from the entre of action.
For Taiwan and India, each of which has built their high-tech industry
principally on the cost and efficien y of lo al labour and management,
the magnetic attra tion of America is weaker because their advantages
are tied to place (although Taiwan faces a challenge from hina). But for
the other clusters in ambridge, Helsinki and ingapore, which have
developed and grown on the ba i of their more-portable strengths in IP,
the hall nge posted by Ameri an dominance is immense.
SILICON VALLEY: WHERE NEXT? 197
NOTES
Interview with David Wilkinson, partner, Ernst & Young, 12 June 2000.
2 IVC Research enter (in association with the Israel Venture Association),
5 August 2001.
3 Interview with Erkko Autio, professor of technology-based managing,

Helsinki University of Technology, 22 June 2000.

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CLONING

David Rosenberg was born in the U . He completed degrees at Columbia

CHAPTER 1 ■ Technology clusters: network architecture / 1

CHAPTER 2 ■ Cluster culture: innovation and entrepreneurship/ 21

CHAPTER 3 ■ The global tech company: distance learning / 39

Markets: looking out for Number One / 41

CHAPTER 4 Cambridge, England: has brains, seeks brawn / 57

History: £al e tart I 58

CHAPTER 5 Helsinki, Finland: on the shoulders of giants/ 81

History: post-Soviet shock/ 83

CHAPTER 6 Tel Aviv, Israel: martial arts/ 101

Hi tory: ~word to plough hare / 102

CHAPTER 7 Bangalore, India: silicon island, third world sea/ 123

History: blissfully ignored/ 124

Society: a tudy in contrasts/ 134

CHAPTER 8 Singapore: creativity on command / 147

CHAPTER 9 Hsinchu-Taipei, Taiwan: arms for the revolution/ 169

History: an i land apart/ 170

AFTERWORD Silicon Valley: where next?/ 191

IT'S THE NATURE OF HIGH-TECHNOLOGY that anything that takes long

A number of pe ple helped me at the variou tage f re earching and

IN THE 20 YEARS THAT I HAVE BEEN INVOLVED in building and financing

In one lifetime, the way in which we a ce s, store and onvey informa-

The development of a community, or clu t r, of bu ines e in one area of

ln the late 1970s, European entrepreneurship was an oxymoron, at least

Silicon Valley has taught us many things: the importanc in t chnology

reated and packaged in America as a way of doing business very much at

help you in bu iness, manufacturing sub ontracting, exe utive search as

TABLE 1.1 Comparing the 'Silicon Valleys'

Start-up Human Venture Global Universities/ Taxes and Composite

TABLE 1.2 Who's switched on? Who's not?

Web hosts/ Web users/ PCs/

Britain 280.75 2576.72 33.78

Finland 1022.53 3722.95 39.61

Israel 287.52 1754.70 25.36

India 0.35 49.39 0.45

Singapore 437.56 2986.78 48.31

Taiwan 492.30 2812.60 22.46

us 2928.32 3465.78 58.52

Germany 248.30 2920.57 33.64

Source: International Telecommunicat,ons Union

oped its conomy at an unusually rapid pace only to disco er a it has

Like any cultural export, Silicon Valley undergoes a transformation as it

1 TECHNOLOGY CLUSTERS· NETWORK ARCHITECTURE 7

local environment. No ountry can provide its technology sector with

GEOGRAPHY: PROXIMATE CAUSES

California's Silicon Valley is a relatively compact area. Th distance

Taipci-Hsinchu, the two anchors of Taiwan's technology dust r, contain

provide it. All si clusters have had to amend California's tiNo-hour-drive

COMPANIES: LEARNING TO RELAX

ilicon Valley firms are characterized by flat, non-hierarchical manage-

VENTURE CAPITAL: MAKING DO WITH LESS

In Ameri a the irnportan e of venture capital can't he underestimated.

TABLE 1.3 Where the money is (relatively)

North America Asia

us 0.0106 India 0.0008

Canada 0.0028 Israel 0.0099

Europe Singapore 0.0047

UK 0.0088 Taiwan 0.0027

Finland 0.0021 Hong Kong 0.0082

France 0.0021 Japan 0.0002

Germany 0.0016 Korea 00012

Sweden 00059 Australia 0.0007

Private equity capital invested in 1999 as a percentage of g'oss domestic product