Venture capital funds, financial foreign direct investment and the generation of local comparative advantage in the technology sector in Israel

The rapid development of a new comparative advantage in the hi-tech sector in Israel in the period 1995-2005 provides an example of a new form of foreign direct investment (FDI). Unlike traditional FDI, this new form of international investment, that we dubbed financial foreign direct investment (FFDI), involves capital flows from developed countries to small countries and to the emerging markets. The providers of this capital, defined in our study as "sector-specific capital", are financial and risk intermediaries like venture capital funds and private equity funds. Like multinational enterprises they transfer factors of production across borders seeking to maximize their value. In doing so, they are a part of a process of generating new comparative advantages. We focus on the case of Israel and show that, due to the inherent asymmetry, it takes government action to trigger the process of importing sector-specific capital to Israel primarily from the US capital market, but once the process has begun, it has led to economic growth via reducing tangible and intangible trade costs, creating trust and thus generating competitive advantage for innovative technology firms from Israel in the global markets.