The Evolution of a New Industry: A Genealogical Approach (Innovation and Technology in the World Economy) - Hardcover

Drori, Israel; Ellis, Shmuel; Shapira, Zur

Hardcover

ISBN 10: 0804772703 ISBN 13: 9780804772709

Publisher: Stanford Business Books, 2013

Synopsis

The Evolution of a New Industry traces the emergence and growth of the Israeli hi-tech sector to provide a new understanding of industry evolution.

In the case of Israel, the authors reveal how the hi-tech sector built an entrepreneurial culture with a capacity to disseminate intergenerational knowledge of how to found new ventures, as well as an intricate network of support for new firms. Following the evolution of this industry from embryonic to mature, Israel Drori, Shmuel Ellis, and Zur Shapira develop a genealogical approach that relies on looking at the sector in the way that one might consider a family tree. The principles of this genealogical analysis enable them to draw attention to the dynamics of industry evolution, while relating the effects of the parent companies' initial conditions to their respective corporate genealogies and imprinting potential. The text suggests that genealogical evolution is a key mechanism for understanding the rate and extent of founding new organizations, comparable to factors such as opportunity structures, capabilities, and geographic clusters.

About this title

About the Author

Israel Drori is Professor of Management at the College of Management, Academic Studies in Israel.

Shumuel Ellis is Professor of Management and Organizational Behavior in the Leon Recanati Graduate School of Business Administration, Tel Aviv University.

Zur Shapira is the William Berkley Professor of Entrepreneurship and Management and Chair of the Department of Management and Organizations at the Stern School of Business, New York University.

Excerpt. © Reprinted by permission. All rights reserved.

The Evolution of a New Industry

A Genealogical ApproachBy Israel Drori Shmuel Ellis Zur Shapira

Stanford University Press

Copyright © 2013 Board of Trustees of the Leland Stanford Junior University
All right reserved.
ISBN: 978-0-8047-7270-9

Contents

List of Illustrations.........................................................................................viiPreface and Acknowledgments...................................................................................ix1 Introduction................................................................................................12 A Framework for Genealogical Evolution......................................................................113 Economic Conditions at the Time of Founding and the Founding Parents of the Genealogies.....................354 Genealogies in the Making: The Process and Structure of Their Evolution.....................................815 Founding and Genealogical Evolution.........................................................................1146 Concluding Remarks..........................................................................................134Appendix: History of the Israeli High-Tech Industry...........................................................145Notes.........................................................................................................165References....................................................................................................169Index.........................................................................................................181

Chapter One

Introduction

... The secret, then, of Israel's success is the combination of classic elements of technology clusters with some unique Israeli elements that enhance the skills and experience of individuals, make them together more effective as teams, and provide tight and readily available connections within an established and growing community. For outside observers, this raises a question: If the Israeli "secret sauce" is so unique to Israel, what can other countries learn from it? Dan Senor and Saul Singer, Start-Up Nation: The Story of Israel's Economic Miracle

Since the late 1980s, the Israeli high-tech industry has witnessed unprecedented growth. The information technology and communication (ITC) sector in particular has exhibited innovative qualities and gained a leadership position worldwide—in spite of its small size, Israel is considered a global leader in this industry. Various studies have attempted to analyze the story of the Israeli high-tech industry and its trajectory to success. Most of them have focused on the processes and conditions that led to an agglomeration of resources and infrastructure and the formation of a unique high-tech sector (see, e.g., Avnimelech 2008; Breznitz 2007; de Fontenay and Carmel 2001; Saxenian 2002). However, the history and dynamics leading to the emergence of this sector have received little attention.

This book aims to reveal the environmental and organizational processes, as well as the critical paths, that underlie the evolution, structure, and comparative advantage of Israel's high-tech industry. We do not analyze its growth as a unified process stemming from the creation of a cluster. Instead, we present a complementary view in which we argue that Israel's ITC sector evolved out of diverse organizational models of founding that were embedded in two different institutional environments: an institutional-cooperative period that was followed by a competitive economic period.

We develop an evolutionary perspective on the development of the Israeli high-tech industry in general and on the ITC sector in particular. We do so by examining the context of inheritance and transmission of the sector's organizational characteristics while analyzing the prevailing institutional environments that represent the bedrock of its emergence and founding. Our theoretical conceptualization attends to both initial conditions and change, and uses a processoriented mechanism to account for each. Furthermore, we predicate the evolution of the high-tech industry on its historical foundation.

As Stinchcombe (1965) asserts, initial conditions, including "the groups, institutions, laws, population characteristics and set of social relations that form the environment, have an enduring impact on industry evolution" (p. 142). This assertion implies a major challenge in explaining how the genesis of the institutional environment and the initial conditions under which key organizations were founded intertwined to create a particular momentum of growth for an entire industry.

We assert that initial conditions, socioeconomic processes, and geopolitical considerations, and the policy environment in particular, together influence the evolution of an industrial sector. They do so through the multilevel processes of inheritance and the intergenerational transmission of organizational forms, practices, routines, skills, and blueprints (see Phillips 2002, 2005). Furthermore, the evolutionary path of any industrial sector is shaped in response to the forces of competition, which affect an organization's mix and rate of change (Carroll 1984) and its corresponding entrepreneurial norms and opportunities.

The evolutionary mechanisms of competition and institutionalization dovetail with the persistent structures of organizational inheritance composed of certain practices and activities. In this perspective, both organizational and external forces are drivers of the Israeli high-tech industry's evolution. Such a comprehensive view allows us to assert the continuity between those who laid the foundation of the industry and their progenies who followed in their evolutionary path through direct inheritance structures. In the same vein, we can trace the changes in inheritance structures and processes that fostered a variety of organizational forms (Baum and Rao 2004; Stinchcombe 1968).

We first identify the origin of the founding firms in Israel's high-tech industry and their respective institutional environments; then we propose a genealogical framework for describing and analyzing the evolution of this industry. In organizational terms, a genealogy is a system of affiliation among organizations that originate from the same founding parents. Because we focus on the founding process, we claim that the influence of founding parents is enduring and shapes the evolutionary trajectory of the entire genealogy. Thus, understanding the historical conditions at the founding of each genealogy is critical to our story. According to Stinchcombe (1965), the external environment at the time of founding is highly influential in shaping organizational characteristics that are imprinted with the "social resources available" (p. 168). Stinchcombe, a proponent of the imprinting perspective, explicitly contended that "organizations which are founded at a particular time must construct their social systems with social resources available" (p. 168). Once such social systems are built (in terms of structure, processes, and culture), they are maintained and further imprinted because "traditionalized forces, the vesting of interests, and the working out of ideologies may tend to preserve the structure" (p. 169).

Furthermore, founding parents of genealogies may not only constitute the potential bearers of new organizations through the spawning process (Klepper 2001)1 but also be carriers of knowledge, values, and characteristics that encourage the spawning of new organizations. The assertion that progenies who found organizations rely on and learn from their parents has been widely discussed in recent literature (Klepper 2009; Baron and Hannan 2005; Burton 2001; Phillips 2002, 2005).

Our analysis of the evolutionary processes in the Israeli high-tech industry and our exploration of the industry's historical origins provide an understanding of how specific organizational genealogies are established and evolve. The genealogies presented in this book reflect the diverse structural characteristics, values, and routines associated with founding processes. We examine the different evolutionary patterns of the genealogies and their subsequent interrelationships, which characterized the maturity of this industry. These interrelationships stem from affinities between different genealogies and increase along generations with a genealogy's expansion. However, the different initial conditions that mark the founding of a genealogy's ancestors reflect different patterns of inheritance—namely, the spawning process and the transfer of capabilities and knowledge from generation to generation. For successful founding and survival, a new organization can rely on a number of sources for acquiring necessary resources: its management blueprints, norms, or values (Baron and Hannan 2005; Burton, Sorensen, and Beckman 2002; Hannan and Freeman 1989, 21; Baum and Singh 1994). However, the genealogical affiliation is its primary foundation. As we argued earlier, the relevance of genealogical evolution is twofold: in the founding of new firms and in the evolution of Israel's new high-tech communication and IT sector.

Founding parents and their incumbents carry entrepreneurial knowledge while spawning new firms through varied selection processes that tend to expand and diversify (Aldrich and Ruef 2006). A case in point is the small group of technology companies in the Silicon Valley, most notably Fairchild Semiconductor, which not only spun off numerous firms but also attracted other businesses in related technological fields and businesses (e.g., Castilla et al. 2000; Kenney 2000). The process of founding new firms is not only an issue of resource acquisition or agglomeration and clustering; it is also a genealogical progression, which relates to how founders develop entrepreneurial tendencies and acquire certain capabilities and skills that enable them to successfully launch new ventures. Consequently, our genealogical approach stresses the importance of both prenatal affiliation and heredity, both of which shape genealogical evolution through processes of selection. However, as we will demonstrate, parental affiliation does not necessarily imply that progenies are conditioned by their organizational "DNA" and indiscriminately mirror their parents. Environmental changes or selective adoption of managerial blueprints may introduce different models of founding, including different values and norms, that greatly influence the pattern of genealogical reproduction (e.g., Baum and Singh 1994; Hannan and Freeman 1989). Similar to the story of Silicon Valley, where, as mentioned, a number of genealogies descended from Fairchild Semiconductor (Rogers and Larsen 1984; Saxenian 1994), our case demonstrates that each ancestor of a genealogy spins off a "family tree" that exhibits its distinct characteristics in term of structure and reproduction pattern. The varied lines of heredity formed the entire ITC sector in Israel, which during the 1990s became a well-developed cluster with all the necessary complementary services.

This book explores a fundamental organizational process—the evolution of a new industry—that is due, to a large extent, to spawning. Spawning is the process by which employees of an incumbent firm found their own new venture, usually in the same industry. The value of this process is not unlike the influence of parents on their progeny because the experience, values, knowledge, and capabilities acquired during employment at an incumbent firm (parent) provide a basis for identifying and exploiting entrepreneurial opportunities. Furthermore, the strategic course—the managerial blueprints for routines and practices—and the culture and technology of newly minted firms in a genealogy are influenced by the characteristics of the parent company. This is the conceptual foundation of our work, which aims to provide a comprehensive account of the evolutionary process of a modern communication-technology sector.

In this book, we present the evolutionary process of a new industry by taking an innovative historical-genealogical approach based on the mechanism of spawning. This approach enables us to trace the initial conditions under which the founding parent firm is the first in what later becomes a genealogy. We show how those conditions affect the spawning of new ventures and shape the genealogy's evolutionary trajectory and structure. In this way, we offer a new lens for looking at intergenerational dynamics and shed further light on the evolutionary dynamics of the emergence of industries. Furthermore, by focusing on genealogical evolution, we can empirically trace the specific features associated with the founding processes of new ventures in terms of their birth origin and along multiple generations. These features, in turn, influence the potency, or the reproductive capacity, of the entire genealogy.

In his new book, The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup, Noam Wasserman notes, "Stinchcombe (1965) argued that the liability of newness was due to three internal factors—the need for the team to develop working relationships, to find their newer roles, and to split financial rewards among themselves—and one external factor, the lack of relationships with potential suppliers, customers, and other external parties. The last factor has received vast amount of attention, the first three very little" (2012, p. 1). We agree with Wasserman, and the approach we pursue in this book emphasizes the effect of the external environment at the time of founding on several processes internal to a firm and to its genealogy. Thus, we hope to pursue a more comprehensive approach that follows Stinchcombe's framework in a more balanced manner. In this vein, the environment in which the Israeli high-tech industry has evolved features unique historical conditions marked by the government's active intervention in directing and regulating the industrial industry growth of the young nation. Objectives such as nation building, defense considerations, employment creation, and immigration absorption were the state's priorities, often irrespective of economic considerations. For example, from the state's early days, its defense policy emphasized resource mobilization and self-sufficiency. Consequently, the government established R&D facilities that focused on innovation in applied technology and that supported applied research in higher-education institutions (e.g., Drori and Landau 2011).

Theoretical Roots

The theoretical roots of our genealogical approach are grounded in institutional and ecological theories. These theories point, respectively, to the role of institutions in providing regulative, cognitive, and normative support to newly founded firms, and to the environmental determinants of organizational diversity, which influences their survival. Specifically, environmental conditions at the time of founding, as well as an organization's age, newness, and size, affect its structure and operations following the evolutionary processes of variation, selection, and retention. However, these theories do not explain how particular events generate a selection process that results in heterogeneous evolution patterns; nor do they illuminate the process by which organizational inheritance fosters a firm's persistence and transformation over time.

Other theories explore the origins of capabilities and core features of organizations. Imprinting approaches assume that an organization's core features imprint on its progenies and thus influence the entire evolution of an industry. Consequently, founders of new firms may introduce innovations that are based on knowledge gained while working at a parent firm. Such factors influence the number and size of firms in a genealogy. A new firm's strategies are influenced by pre-entry experience inherited from the parent company, such as human resource and employment blueprints and technological and market knowledge. Imprinting theories underscore exogenous forces and initial conditions, but they underplay the role of interactions among industry players and so offer limited insight into the forces that drive the emergence of industries and the competitive positions of firms. In contrast, our approach embodies a more comprehensive perspective that increases our understanding of the mechanisms and processes behind an industry's evolution.

Another approach to studying the evolution of industries emphasizes co-evolution processes. It identifies technological advancement as a driver of industry evolution and focuses on the interplay among innovation, industrial structure, and economic growth. Unlike aforementioned approaches, co-evolution takes into account the role of national institutions, among various other stakeholders, and emphasizes the interactions and causal linkages among organizations. Technological progress and industry evolution are considered both outcomes and drivers of change. However, aside from the general notion that evolving entities are interdependent, the co-evolution perspective prescribes no systematic patterns of evolution and pays no particular attention to the development stages of emerging industries.

Where new industries come from and what determines the early success of innovators in them are questions that have not been fully addressed in extant research. Some studies emphasize exogenous factors that drive corporate change; others consider endogenous processes and interdependencies across organizations. However, most ignore the founding stage of industry evolution and its influence on the prospects for industrial growth. These issues are critical in light of the largely risky investments that such industries make.

The significance of this book stems from pursuing a genealogical approach, which (1) advances research on industry evolution from its early founding to maturity; (2) uncovers the principles of genealogy construction and its potential for explaining the emergence and growth of a new industry; (3) analyzes the history of the Israeli ITC sector as an example of industrial development within an emerging economy; and (4) identifies key success factors in the telecommunications industry that can help policy makers and innovators in their investment decisions.

(Continues...)

Excerpted from The Evolution of a New Industryby Israel Drori Shmuel Ellis Zur Shapira Copyright © 2013 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Stanford University Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Edition details

• Publisher: Stanford Business Books
• Publication date: 2013
• Language: English
• ISBN 10: 0804772703
• ISBN 13: 9780804772709
• Binding: Hardcover
• Edition number: 1
• Number of pages: 208