Oct. 26, 2005
Q&A with Prof. Michael  E. Porter of the Harvard Business School

Investment in Jerusalem should target emerging or existing industry clusters.

Jacob Ner-David, Jerusalem: What role does available investment capital play in the implementation in Jerusalem of your theories?

Michael Porter: Sustained investment in physical as well as intangible assets — things like employee skills and supplier relationships — is critical for business innovation, upgrading competitive advantages and effective competition in international markets. As in other cities and countries, the profitability in a particular Jerusalem industry cluster will depend on whether the cluster has existing or potential competitive advantages:

• Unusual factor conditions — specialized skills, technology and infrastructure
• Sophisticated and demanding local customers
• A cooperative network of capable local suppliers and related industries
• Vigorous local rivalry among Israeli-based entities

Investment capital in Jerusalem should target opportunities that are connected to existing or emerging industry clusters and should seek to strengthen the business environment conditions that support the success of those clusters. This is where investments are likely to offer the highest return.

Ralph Birnbaum: Modiin: Which specific areas within high-tech, do you see Israel as having a competitive advantage, and should be focusing on to create a world center/cluster of research and supply. How detailed should the area be to qualify as a cluster, e.g. is "software‘ sufficient? Or ’enterprise software‘, or ’enterprise security software", or even more detailed?

Michael Porter: Israel has clear advantages in areas such as agricultural technology, biotech, encryption and data security, medical devices, Internet applications, software, and telecommunications. These enjoy competitive advantage due to distinctive Israeli conditions including the country’s unique circumstances and history. Clusters refer to a specific field such as information technology or medical devices. Manufacturing or services are too broad. Within a cluster, a particular country may concentrate in segments or niches depending on its unique position.

John Metcalfe: San Diego: Are all the divestment campaigns on college campuses that I’ve been reading about been hurting Israel?

Michael Porter: The divestment campaigns have had little effect on business investment and trade. However, they can erode the image of the country among young people. I believe that rather than boycotts aimed at peace, more peaceful relations between Arabs and Jews are better achieved by encouraging business and economic relations. By giving both sides a tangible stake in peace and by creating mutual dependence for prosperity, a climate of co-existence and mutual problem solving arises. It is this belief that was behind the establishment with Dr Yagil Weinberg of the Center for Middle East Competitive Strategy (www.cmecs.org), a US NGO that aims to promote peace through establishing business relations across national boundaries and demographic sectors.

Alon Reinsdorf: Zichron Yaacov: What is the reputation of Israel business owners in America? Is it positive or negative overall? I’m considering relocating to the US and wanted to understand the climate better.

Michael Porter: As business people, Israelis are mostly admired in America. According to the 2004 Global Competitiveness Report (GCR), of which I am co-director, Israel and Israelis score particularly highly on their ’capacity for innovation’ (ranked 8th in the world whereas on all factors together Israel ranks 21st). Israel is well known for its high level of patenting (ranked 4th), high-quality education, and entrepreneurial spirit and ability to improvise. The continued conflict with the Arab side, however, is becoming a bigger and bigger negative in the mind of most Americans.

Hannah Beals: Chicago: How could Israel expect people to invest in their country when there’s so much terrorism?

Michael Porter: Indeed the terrorist threat and the resulting lack of stability is a big negative. However, there are many other factors that investors consider. Israel has a strong record of innovation and R&D, high-quality scientific research institutions, and a business environment that supports start-ups. These unique strengths will attract some investors despite the instability. In the long term, the best way to defeat terror around the world is to encourage investment and economic development that builds an opportunity for prosperity for all people.

Miriam Helfgott: Montreal, Canada: We in the Diaspora are looking for ways to help Israel. I believe that encouraging business development is the best way to go. Do you think that Israel can compete in the outsource business against places like India or the Far East?

Michael Porter: Israel cannot and should not try to compete with India or the Far East in outsourcing on price or for ordinary service areas. Instead, Israel needs to focus on the following areas:

• Israel has a better-educated workforce with native English speakers who have strong cultural affinities to the West and have either lived or worked abroad. There is also a pool of native speakers of many languages.

• Israel can and should also offer high-end services that require greater expertise and which are difficult to match in India — such as consultative selling for complex products like mortgages. Also, Israel is unique in supplying services in multiple languages from a single point.

• Israel can also target different geographic areas since it has a different language mix than in India and the Far East — such as French, Arabic, Russian, Spanish and German

The same is true for IT outsourcing where Israel should focus on application development and software localization. In these fields too quality, languages and cultural affinities are competitive advantages.