Researching Start Ups

By ANDREA CHIPMAN Special to The Wall Street Journal

Entrepreneurship has always been a challenging topic to research. French business school Insead hopes to glean better knowledge by going to the source and observing entrepreneurs in their own backyards.

In May, the Versailles-based business school set up the first of three planned entrepreneurship-research centers in Israel. A second center is expected to open in India by January, and a third is planned for China in the middle of next year. The three centers aim to serve both academics and the global business community alike, says Phil Anderson, director of Insead's Singapore-based Rudolf and Valeria Maag International Centre for Entrepreneurship, which will oversee the three centers.

"Usually, entrepreneurs are around three to four years before they hit your radar screen," Mr. Anderson says. "So you are only studying success cases. The best way to study how people build successful companies is to observe entrepreneurs in real time from as close to the point that they start a company as possible."

Although all three centers will emphasize lessons that can be applied across borders, many findings are expected to be specific to the economy being studied, he adds. The choice of locations reflects the difficulties monitoring businesses in their earliest stages.

"It's expensive to do," Mr. Anderson says. "You need two things: a country with a pool of lots and lots of start-ups and a place with relatively low-cost labor."

The Israel center, located in Caesarea on the Mediterranean coast, clearly fits the first set of criteria. Despite an explosive political backdrop that remains a seemingly immutable part of the business climate, the country -- which has more than 2,000 start-up companies, many of which are listed on Nasdaq and other global exchanges -- provides a compact environment in which to study entrepreneurs, Mr. Anderson says.

Launched with $2 million of seed money from the Caesarea Edmond Benjamin de Rothschild Foundation, the center aims to build on Insead's network of contacts to provide local entrepreneurs with global information about management techniques, says Avraham Bigger, deputy chairman of the Rothschild Foundation. The center's researchers also will compile case histories documenting the experience of Israeli start-ups.

The center will have a wealth of recent examples to choose from. In July, SanDisk Corp. of the U.S. acquired Israeli flash-memory manufacturer msystems Ltd. for $1.6 billion, while Berkshire Hathaway Inc. paid $4 billion in May for an 80% stake in Iscar Metalworking Cos., a producer of industrial metal blades. Communications software for security applications and medical devices have been two major growth areas.

After a lull in 2002 and 2003 that followed the dot-com implosion, high-technology-capital raising is growing rapidly in Israel and is expected to reach $1.5 billion in 2006, according to the Israel Venture Capital Research Center.

One key to the success of the country's high-tech sector that is likely to get close scrutiny is Israel's incubator system, which provides grants from government or private sources for small companies working on prototypes, says Doron Nahmias, managing director of the Insead Caesarea center. Set up in the 1990s largely to absorb immigration from the former Soviet Union, there are now 23 such entities across the country.

But several other elements have helped make the country a powerhouse for start-ups, according to Miri Lerner, associate professor of the School of Management and Economics at the Academic College of Tel-Aviv Jaffa.

One specifically local factor is Israel's mandatory military service, which helps foster strong social networks. Meanwhile, established Israeli hi-tech firms, such as Elron Electronic Industries Ltd., a company with businesses ranging from medical imaging to defense electronics, and data-and-telecommunications company RAD Data Communications Ltd., have become "greenhouses" for developing new entrepreneurs who have spun off their own businesses, Ms. Lerner says.

"What's interesting is that you can find many global companies that establish themselves in many places, but here they decided to establish centers of research and development," Ms. Lerner says. "The competitive advantage here is not low-cost. That you can find in the East, in Asia. Here, they are looking at the high-tech sector."

While Israel's small size gives it one kind of appeal as a research center, India and China offer the advantage of large entrepreneur populations that can be studied at lower cost, Mr. Anderson says.

"With India and China, the trade-off is they are huge and they are cheap," he says. "There are so many companies that could grow big."

The Mumbai-based India center is slated to open by the first quarter of 2007. Mr. Anderson says it was founded with "less than $2 million" of seed money from Victor Menezes, a retired senior vice chairman of Citigroup Inc.

The China center, which Insead hopes to launch by summer 2007, is still looking for a home, as local experts tend to advise research organizations to partner with local universities. The third center is currently funded with about €50,000, or about $64,000, from the Maag center.