ethnic entrepreneurship and embeddedness: the case of lower galilee

Chapter 4

Ethnic Entrepreneurship and Embeddedness: The Case of Lower

Galilee Michael Sofer and Izhak Schnell

Introduction

It has become evident in recent years that the theoretical tools that proved so valuable to economic geographers in their analysis of economic growth may be less suited to analysis of the economic success of small and medium-size enterprises. For a number of scholars a major response was a shift towards the study of entrepreneurs’ and firms’ embeddedness in wider social and political networks. In these studies the intensity and dynamic of inter-firm linkages and business networks are seen as beneficial for market penetration and growth (Grabher 1993; Taylor 1995; Uzzi 1996; 1997; Oinas 1999), and they are thought to have a particularly critical impact on small plants’ growth chances (Kay 1993; Hardill et al. 1995). These ideas were amalgamated into an analysis of the patterns of firms’ and entrepreneurs’ embeddedness in their social and economic milieus, where the markets in which entrepreneurs operate are treated as both fields of power and cultural constructions (Fligstein 1990; Grabher 1993; Sofer & Schnell 2002).

The aim of this chapter is to contribute to the growing efforts to assess small businesses’ mode of embeddedness. To this end, it analyses the case of Arab entrepreneurs in a peripheral region of Israel, namely, the central Lower Galilee, of which Nazareth is the main urban centre. It is a heterogeneous multi-ethnic region, containing a majority of Arabs – a mainly urban population divided between Muslims and Christians – and a number of urban and rural Jewish settlements. Ethnic disparity and ethnic relations are regarded as potential barriers for local and regional integration and cooperation.

The chapter begins with a short description of Arab entrepreneurship in Israel. This is followed by a discussion that sets the theoretical context by emphasizing the form of the underlying networks of ethnic entrepreneurship and its embeddedness in the wider socio-political environment. The third section offers an analysis of the direct business networks in the Arab sector in Israel and the present barriers for plants’ expansion into markets. This leads to the investigation of the role of social networks within the Arab sector in Israel, based on the experience of entrepreneurs

in the Nazareth region, and how these networks affect entrepreneurs’ courses of development. The final discussion links networking, embeddedness, and barriers of entrepreneurial development in the Arab community in Israel.

The chapter is based on a recent in-depth study that was conducted during the second half of 2001 among Arab entrepreneurs. In the fieldwork, 120 Arab entrepreneurs in the Nazareth area (Figure 4.1) were interviewed and their enterprises surveyed. In terms of sectoral distribution, 37 per cent were defined as industrial enterprises, 41 per cent were retailing enterprises, and 22 per cent were part of the services sector. Almost two-thirds (63 per cent) of the enterprises were located in Nazareth, while the rest were in four small urban municipalities within a ten-kilometre radius of Nazareth (Kafar Kanna, Yafi, Iksal and Dabburiya)

Arab Entrepreneurship in the Galilee

The Arab business environment in Israel has developed along 50 years of restructuring phases. Majority–minority relations, polarized core–periphery relations in a capitalist space-economy where core areas attract major capital and human resources, and selective government policies were the main mechanisms underlying the restructuring processes (Sofer & Schnell 2000). Majority–minority relations, supported by the government’s selective policies, have since been overlapped by the relations established between the Jewish dominant core and the Arab subordinate periphery. The integrated operation of these mechanisms has affected the form of Arab entrepreneurship, including branch selection, business formation, and entrepreneurial style (Semyonov & Lewin-Epstein 1993). Enterprises have remained small, relied on safe local markets, and been concentrated mainly in low technology branches. In the late 1960s, conditions for economic development and entrepreneurial initiatives in the Arab sector began to change significantly. A strategy of ‘growth from below’ was adopted (Khamaisi 1984; Falah 1993), expressed by a rapid rate of growth in the number of new enterprises in the food and construction sectors, and later in the textile and clothing sector, and coupled with the adoption of new styles of entrepreneurship. Therefore, it is of no surprise that among the 120 enterprises surveyed in our study, 77 per cent were established after 1981.

Looking at some of the main characteristics of the enterprises in the Galilee, we find that it is obvious that most enterprises are small in terms of size of labour force, with an average of five employees per business. In our case study, about 90 per cent have up to ten employees, the majority of which have up to five employees. The formal training of the labour force is limited, with a small number having any formal academic or technical education. Most of the training of professional workers is done on the job. Yet, among the owners, the younger generation tend to have higher education, and about 60 per cent of those that have an academic degree established their business during the last decade.

Household production and informal subcontracting activities exist side by side with an increasing number of formal registered enterprises. It is common for a

single entrepreneur to own the business individually. Partnerships, based mainly on the extended family but also within family, own about one-fifth of the enterprises, and just under a third are registered as companies. The latter group has increased notably over the last decade (Schnell et al. 1995). We did not find one single Arab-Jewish partnership.

Nahariya

Iksal

DabburiyaYafi’

Tiberias

Akko

Haifa

Zefat

Afula

Yokneam

Nazareth

Nazareth area

0 5 10km

1Arab settlement population

KafarKanna

Sea ofGalilee

over 40,000less then 25,000

Jewish town

Figure 4.1 The Nazareth area

Embeddedness and Networks

The notion of embeddedness has been spreading across all social sciences and has more recently been adopted by economic geographers, as shown in a recent collection of case studies (Taylor & Leonard 2002). This notion has a track lineage in economic anthropology and economic sociology (Polanyi 1957; Granovetter 1985). Polanyi’s argument – that economic action is embedded in social ties and institutions as much as in economic institutions – became the cornerstone for the study of embeddedness. This was recently reiterated by Jessop (2001), who suggests that a capital accumulation process depends on a change in the balance between commodity relations and forms of social organization. Granovetter (1985) helps us see that social networks are essential for the success of entrepreneurship. He highlights the role of concrete personal networks in developing the mutual trust necessary for economic success, and the importance of supportive social mechanisms within the environment in which economic activities are embedded.

There has been, and may still be, some ambiguity regarding the usage of the term embeddedness in the geographical literature (Oinas 1997), though a clearer view has been presented in the recent book by Taylor and Leonard (2002). What is clearly accepted is that the use of this term emphasizes those aspects of firms’ survival strategies, which are not covered by traditional economic models and concepts. To most scholars embeddedness seems as a local (intra-regional) phenomenon, yet there is a possibility of embeddedness having a national or international dimension, an issue that according to Oinas (1997) has been mentioned in passing only by small number of researchers.

Our approach to the concept of embeddedness is related to the social basis of firms’ business linkages and entrepreneurs’ economic relations, planted in a range of social relations and structures in particular places and particular economic environments. In accordance, embeddedness can be unraveled via the analysis of the structure of entrepreneurs’ networks, as well as by investigating the entrepreneurs’ broader social relations. It is assumed that the analysis of the more tangible economic networks offer hints at the wider structures and socio-political relations in which those networks are enmeshed.

The literature on embeddedness and embedded networks has concentrated on analysing the social component of economic action, the networks or relations that surround such action, and the nature of markets and institutions. Portes (1995) suggests to focus analysis on networks as major sources for the acquisition of scarce resources because they simultaneously impose effective constraints on the pursuit of personal gain. Such resources may include economic tangibles like labour force, raw material, capital, and price discounts, as well as intangibles like information, general goodwill, or even racist attitudes.

In this respect we may ask how we should study the networks linking individuals, agency and social structures? Common models of embeddedness (such as Uzzi 1996) distinguish, albeit implicitly, four major aspects: at the micro-level, entrepreneurs’ cognitive embeddedness in the economy; at the meso-level, networks that are necessary for the operation of the firms; and two at the macro-

level: entrepreneurs’ embeddedness, both in political institutions, and in cultural institutions. By separating agents from social relations and structures, they ignore the problem of the duality of agency and structure set out so convincingly by Giddens (1984)1. Moreover, detaching agents from social context may seriously distort the understanding of social relations. Although Uzzi (1997) reviews some main issues of existing critiques related to agency and structure, he does not apply these notions in his analysis.

Other students of networking, such as Zukin and DiMaggio (1990), emphasize the salient role of agents, their embeddedness in local knowledge and information fields, as well as their ability to evaluate the milieu. They seek to isolate four forms of embeddedness: cognitive, cultural, structural and political. Schnell and Sofer (2003) incorporate these four forms in a structurationalist model in which the political and the cultural are treated as aspects of the agent-structure dialectics. Callon (1998) emphasizes the importance of a shared business culture in binding together supportive networks for entrepreneurship. Amin and Thrift (1994; 1997), Taylor (1995, 1999), and Talmud and Mesch (1997) emphasize the role of political institutions in shaping networks that may be crucial for the development and success of entrepreneurship, stating that market power is linked to the access to political power elite (Talmud 1992).

From an overall perspective, and in line with Campbell and Lindberg (1991), it might not be enough to assert that all economic action is embedded in networks, and that these networks dictate and account for any observable order that appears in the economic space. Relying solely on this notion means neglecting the specific form of embeddedness, as well as failing to differentiate kinds of networks, explain their emergence and further development, and examine how they control various types of exchange.

This chapter follows the idea that the essence of the embeddedness approach is the structure and quality of exchange ties (factors that shape expectations and opportunities), which identify the manner in which an enterprise’s relationships are incorporated into a network. Grabher (1993) has outlined four essential characteristics of the network which in our view should be understood as part of a wider set of complementary dimensions that characterize the agency-structure dialectic: reciprocity, interdependence, loose coupling, and power relations. We argue that the basic aspect of structuration is a set of direct business linkages such as sales, purchasing, and employee recruitment, in which agents seek to enter into reciprocal exchange relationships that do not require symmetry in every act of exchange, but rather an approximate balance as long as an exchange relationship lasts. Socio-economic institutions necessarily regulate such sets of reciprocal linkages, both in terms of power relations and in producing a common business culture. In the analysis that follows, direct business linkages are seen as enveloped in social networks, which in turn influence agents’ horizons of awareness of

1 The duality is incorporated in the recognition that agent has no meaning separately from social structure, and social structure has no meaning separately from agent, despite the fact that none of them can be reduced to each other.

opportunities and risks in the business milieu. They also define the agents’ role and standing in the networks. In addition, supportive organizations and elites may regulate the availability of necessary business information. Therefore access to business organizations and political and economic elites is considered crucial to the ability of agents to develop their own evaluation capabilities and to avoid being locked into a closed one-sided information network.

Direct business linkages and social networks operate within the cultural context, in which meanings and norms of operation are structured and restructured, and within power relations, in which degrees of freedom in manoeuvring actors’ goals are structured and restructured. Cultural norms and power relations are aspects of the processes of structuring and restructuring entrepreneur communities associated by intensive networks, as well as aspects of the wider political economy arena in which they operate. As an aspect of entrepreneur networking, business culture relates to deeper aspects of social relations, such as reputation, trust, friendship, mutual orientation, and mutual adaptation. At the level of the agent, it is associated with the entrepreneur’s ability to relate and to adjust to cultural codes of the different milieus in which he or she wishes to operate. It also includes the deepening of information exchange, facilitating preconditions for network learning, and innovative capacities. In the social structural aspect it relates to the establishment of communities of trust and mutual support that may provide entrepreneurs with some advantages in the markets. In this context, ethnic entrepreneurs may be likened to the double-faced god Janus, as they operate in more than one cultural and political milieu (Sofer & Schnell 2000). Regarding the political milieu the position of a specific industry can be embedded in the political-economy of state activities. Access to the major political core of the state may enable industry to mobilize resources for its benefit (Talmud 1992). Ethnic entrepreneurs’ access to these cores is limited thus their access to state support such as subsidies and supportive infrastructure is curtailed.

Power relations, as an aspect of any social interaction, affect the ability of agents to influence decisions and exchange relationships in the network for their own benefit. Moreover, they are politically institutionalized in a form that may lead to practices of dominance and exploitation among unequal exchange partners. Power relations are frequently treated as the most essential aspect of the network in successfully supporting entrepreneurship (Dicken & Thrift 1992; Taylor 2002). We went even further (Sofer & Schnell 2002) by showing that imbalances between the location and relative power of firms within networks may result in situations of ‘under-embeddedness’ or ‘over-embeddedness’, bearing on entrepreneurs’ economic activities, thus resulting in low rewards.

The view that agency and structure are dialectically related may offer some useful methodological devices. First, it may be assumed that each aspect of a system involved in a process of structuration leaves imprints on other aspects of the system. Second, following Sayer (1984), we argue that the main purpose of any investigation is to expose major mechanisms that are institutionalized within a structuration processes. These mechanisms are situated in practices of everyday life and performed in everyday life spatial-temporal frames (Giddens 1984; Jessop

2001). Therefore, we argue that a retrospective investigation of patterns of tangible linkages and networks, on the one hand, and basic structural aspects, on the other hand, may expose the working of mechanisms that regulate the development of networks for economic operation, as well as major barriers for further development.

Direct Business Linkages

Our first step is to assess the structure and quality of direct business linkages developed by entrepreneurs. The application of our proposed methodology for analysis of the structure of concrete direct linkages requires preliminary hypotheses concerning the structural context of the network development. In considering the special case of Israeli Arab entrepreneurs, operating in two separate business cultures and in a situation of uneven power relations, it is important to recognize the deep cultural, economic, and political gap between the Jewish and the Arab milieus. This is shown by Khalidi (1988), who emphasizes problems of marginalization faced by the Arab society, alongside Smooha’s (1984) and Semyonov and Lewin-Epstein’s (1993), analyses of Arab–Jewish relations within the framework of pluralistic societies, which reveal the uneven competition over resources. Lustik (1980) narrowed his critique to the discriminating characteristics of government policies.

In exploring the reasons for the marginalization of the Arab economy, Schnell et al. (1999) suggest that Arab networks should be divided along three dimensions. This is further elaborated in our discussion of the three dimensions (Sofer & Schnell 2003): ethnic (intra- versus inter-ethnic), political-economic (core–periphery relations), and regional (geographical) scale. The ethnic dimension concerns discrimination against minorities and cultural differences that may force ethnic minorities to operate within their own enclave or to operate, with required adjustments, in the majority’s alien business culture (Camagni 1991; Ratti 1992). The second dimension stems from theories of spatial and economic core–periphery relations, which emphasize both the subordination and dependency of peripheral regions on core areas (Friedmann 1972). The third dimension, the tendency to expand business linkages and networks from the local scale to wider ones, through the process of development, stems from a variety of theoretical frameworks. Two examples are the ethnic enclave (Aldrich & Waldinger 1990), and the application of the mimicking strategy in early stages of development as a response to scarcity of risk-reducing mechanisms (Czamanski & Taylor 1986). In line with these theoretical approaches, Arab entrepreneurs’ socio-spatial milieu, where their networks are formed, may potentially be divided into nine relevant markets (see Figure 4.2., Legend box)

Figure 4.2 The distribution of major direct and concrete business linkages in the socially and politically structured milieus in which Arab entrepreneurs operate.

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General Socio-Spatial categoriesApplication to Arab space

Figure 4.2 (continued)

Figure 4.2 illustrates the distribution of the major direct and concrete business linkages in the socially and politically structured milieus that Arab entrepreneurs operate in. The analysis leads to the conclusion that most of their direct linkages regarding sales and labour recruitment are performed in either local, home regional, or adjacent Jewish regions. Only purchasing of inputs is largely based on links with core regions. By comparison, labour is recruited solely from local intra-ethnic sources, and the majority of workers are from the home settlement. Only a small number of employees are recruited from other regions. The pattern of labour recruitment is influenced by the cultural preference for kinship relations in Arab culture. This tendency is enforced by the fact the family is the major support group for entrepreneurs. On the other hand, the recruitment of workers from the family makes it possible to pay low salaries, which epitomizes the limited resources of the businesses.

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More than any other aspect, sales represent the ability of entrepreneurs to break market barriers. Therefore we focus our analysis on this aspect. Table 4.1 compares the socio-spatial pattern of actual sales with aspirations and expectations concerning market development. The results demonstrate the local character of Arab entrepreneurship; two-thirds of the sales are made within the home settlement, followed in importance by the regional markets. In comparison, Arab entrepreneurs aspire to target 60 per cent of their sales to regional markets, both Arab and Jewish, instead of their limited local markets. They also aspire to make some significant breakthroughs in expanding into core markets. The differences between the aspired markets and the expected ones give us some hints about which markets the Arab entrepreneurs perceive as important for their business growth, and their estimation of their chances to realize them. It seems that many of the entrepreneurs have doubts concerning their ability to expand into Jewish neighbouring markets and Jewish core markets with the expected sales 13 and 14 per cent lower, respectively, to the aspired ones. The major difficulties Arab entrepreneurs’ have to face are in establishing sales linkages with large corporations whether they are located in the core or the periphery. Many entrepreneurs lost confidence in their power to break this barrier and they prefer to concentrate their effort to attract Jewish consumers. Moreover, it seems that to a large extent they perceive themselves as being locked in local and Arab regional markets, despite their aspiration to expand beyond their local home markets.

Table 4.1 The share of Arab entrepreneurs’s aspired, expected and actual sales to different markets, 2001 (in percentage)

Market area Aspired sales Expected Sales Actual sales Home settlement 16 38 66 Arab home region 31 35 23 Arab periphery 6 6 1 Jewish home region 29 16 8 Jewish periphery 1 2 1 National core 17 3 1 Total 100 100 100

Source: Fieldwork carried out in 2001.

Comparison between the distribution of sales among Arab industrialists in the early 1990s and the industrial enterprises’ sales in the current research may demonstrate the relatively high expectations for market expansion and the impact of decline in mutual trust and reciprocity (Table 4.2). The figures show the decline of sales on the national scale from 29 per cent to only two per cent of the total sales. This may be explained by the impact of globalization processes and the peace agreement with the kingdom of Jordan. Prior to the mid-1990s, most of the sales to the national

core were performed by subcontractors in the textile and sewing workshops experiencing under-embedded conditions (Sofer & Schnell 2002). Since then, most of the textile sub-contraction has moved from Arab towns and villages in Israel to Jordan and Egypt, in search of cheaper labour resources. In addition, sales to neighbouring Jewish regions declined by a third. These results may represent an outcome of the October 2000 riots in the Galilee, when fragile lines of trust between the Arab and the Jewish sectors broke down. Despite these events, the formation of Arab separatist (including Arab ex-regional) markets on a national scale remains unpopular among Arab entrepreneurs, as almost all of them still seek economic integration within the larger Israeli economy. Refusal by Jews to enter into business relations with Arab entrepreneurs forces them to revert to home markets, which significantly expanded from 24 to 57 per cent of the total sales.

Table 4.2 The distribution of sales by industrial enterprises in 1992 and in 2001 (in percentage)

Industrial enterprises’ market share per year Market area 1992 2001

Home settlement 24 57 Arab home area 26 28 Jewish home area 18 12 Arab national level 2 1 Jewish national level 29 2 World 1 0 Total 100 100

Source: Schnell et al. (1995); fieldwork carried out in 2001.

In contrast to the socio-spatial pattern of sales, Arab entrepreneurs seem to show high dependency on Jewish suppliers of raw materials and information (see Figure 4.2, above) . In sum, Arab entrepreneurs are highly dependent on purchasing raw materials from the core economy and they produce mainly for Arab home regional markets in the Arab periphery, and to some extent also for their Jewish neighbouring regions. With respect to other resources, such as labour and capital, they draw on local intra-ethnic sources. Only few entrepreneurs demonstrate an exception to this situation. They broke down the barrier of ethnic marginality that generally characterizes reciprocal relations of trust with Jewish companies. Some of them used their professional reputation as outstanding workers in such corporations and others succeeded in using windows of opportunity that opened for them for a short time. An example is the success of some Arab entrepreneurs to use the heavy demand for housing – due to the intensive immigration from the former Soviet Union during the early 1990s – to establish themselves as powerful corporations. However, with few exceptions, it seems that peripherality and competition, both

from the corporate enterprises and from similar Arab enterprises, may be more severe barriers to growth than ethnic barriers.

Social Networks

Our initial argument was that social networks envelop direct business linkages. A deeper understanding of the social networks may be relevant to the analysis of barriers to entrepreneurial development, and hence assessment of the form of embeddedness. For this purpose we consider two complementary issues. First, we analyse entrepreneurs’ access to supportive organizations as an indication of the nature and capacity of participation in social networks. Second, we analyse power relations and the role and status of entrepreneurs in the networking environment.

Assessment of the potential support for entrepreneurship and improved evaluation capabilities sought by entrepreneurs from organizations and elites demonstrates their isolation. Table 4.3 shows that kinship and communal networks are the only support systems that entrepreneurs can rely upon continuously. Arab entrepreneurs rely neither on Arab local and national political elites, nor on Jewish political elites. The same applies to government and professional organizations like the industrialist and commercial associations. Table 4.3 demonstrates the distanciation or even marginalization of Arab entrepreneurs and politicians from the core of Jewish managers and economic elite. Moreover, members of the Arab community haven’t been able to gain access to leading positions in the national economy.

Table 4.3 Experienced level of support from various support systems

Support system Level of support 1= very low; 5= very high

Municipality 1.1 Arab political leadership 1.0

Jewish political leadership 1.0

Business organizations 1.1 Governmental agencies 1.0 Kinship and communal support groups 3.9


In fact, most municipalities ascribe only marginal importance to the task of developing better infrastructures for entrepreneurship. During the 1990s, many municipalities pursued the designation of industrial areas within their master plans, but only rarely was this supplemented by a serious attempt to develop proper

infrastructures (Sofer et al. 1996). The same can be said of the Arab national political elite, which largely ignored these issues, concentrating on ethnic-national issues or macroeconomic demands. The institutionalized discrimination against Arab demands for land for economic development and the lack of a focused campaign by political elites toward these goals, left the Arab entrepreneurs with no effective support. Nevertheless, municipal leaders support entrepreneurs by allowing them to open businesses in residential areas, and by giving them tax cuts, a form of support extended mainly on the basis of kinship relations.

On the regional level, the debate concerning the regional master plan may highlight Arab entrepreneurs’ lack of effective networks. In an effort to generate economic development, Arab entrepreneurs demonstrated a sincere will to develop employment centres in the region. It was decided that joint centres would be established for groups of towns, but it raised the issue of how the profits from the economic activities produced in these centres would be distributed. In the course of the decision-making process, the regional office of the Ministry of the Interior and the Jewish leadership in the region put a pressure to locate these centres in Jewish towns. Instead of organizing a political lobby to influence the decision, the Arab leadership expressed its lack of confidence in the planning process, even though the planners supported their case (Schnell & Sofer 2001). As a result, the decision was to locate the employment centres in a Jewish town, again blocking opportunities for economic expansion of Arab enterprise into Jewish regional markets.

On the government level, initiatives or programs specifically for the Arab sector have rarely been practiced. Consequently, Arab entrepreneurs keep operating in inferior conditions relative to the neighbouring Jewish new towns. These new towns enjoy subsidized infrastructure and the government complements private sector investments there. As a result, manufacturing plants and other businesses have evolved in the new towns, and while they pay taxes to the Jewish local municipalities, they may recruit Arab manual labourers from neighbouring municipalities (Bar-El 1993). A programme initiated by the Ministry of Industry and Trade during the 1980s to support small businesses failed to attract Arab enterprise; nothing was done to adjust the plans for their specific requirements. Under these circumstances, the extended family and the community remain the Arab entrepreneur’s major support group (see Schnell et al. 1995).

Access to sources of knowledge about innovations is an aspect of entrepreneurs’ embeddedness. Knowledge is a key resource in economic competition and contributes to further growth (Park 1999). The ability to evaluate the value of knowledge independently of the interests of the suppliers of knowledge is an especially important resource. The lack of networks with local and national elites and organizations controlling information about innovations, opportunities and market tendencies results in limited access to independent sources of such information. Most entrepreneurs in the Nazareth area choose sources that are less likely to give them comparative advantages on the market (Table 4.4). About 40 per cent of the entrepreneurs adopted innovations offered to them by suppliers and customers. They have their own interests that do not necessarily coincide with those of the entrepreneurs. Only the ability to acquire independent or alternative

opinions, and evaluations concerning the potential future adoption of innovations by competitors would enable entrepreneurs to develop independent and more critical attitudes toward innovations offered to them by suppliers. Together with competitors they provide almost two-thirds of the sources of related information. Therefore it is important for entrepreneurs to develop a capability to evaluate market developments independently, such as those developed by about a quarter of the interviewees, who who adopted innovations in response to similar measures taken by competitors.

Table 4.4 Arab entrepreneurs’ sources of innovation

Source of innovation Distribution (%) Suppliers 24 Competitors 23 Customers 17 Mass media 9 Employees 5 Other 13 No innovations adopted 8

Total 100


A major aspect in social networks is power. Relative power positions can be evaluated by investigating the ability of entrepreneurs to dictate prices and to maintain profitability under fierce competition. Interviews with entrepreneurs in the Lower Galilee in 2001 highlight the vicious circle that blocks any opportunity for economic growth (Table 4.5). Arab entrepreneurs are struggling to remain competitive by cutting costs, either by employing local cheap labour (including family members), or by cutting down on location costs. They may be regarded as price takers, who sell at lower prices than their competitors on the national markets. They do not dare to ask more than what are perceived as acceptable market prices. They lack the power to dictate relatively high prices for their products and services, and therefore maintain only marginal levels of profit for their business.

One may argue that Arab entrepreneurs’ access to the political core of the state is practically non-existent. Moreover, as no state ownership is linked to the firms owned and managed by Arabs , their access to subsidies and other forms of state support is virtually unavailable. In a society where the market power of large corporations is largely linked to political power, the smaller economic agents, such as Arab entrepreneurs, cannot access such power – or they get a limited access at best. This presents an uneven competitive situation, requiring the ability to mobilize political resources. Possibilities to extract state support are almost

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Table 4.5 Cost-cutting and pricing strategies

A. Cost-cutting Share of all respondents (%)

B. Pricing Share of all respondents (%)

Low salary to workers 21 Especially cheap 27 Low rent payment 31 Below average 61 Location in home basement 22 Average 21

Accepting low profits 42 More expensive 0


unavailable for the Arab-owned businesses. Uneven competition provides market leverage for the larger industries and enables them to squeeze larger profits from their transactions with their smaller competitors.

The list of obstacles to business development and growth listed in Table 4.6 offers some more insight into the vicious circle that Arab entrepreneurs experience. Their tendency to operate outside the core networks of the national economy leaves them with only a niche in their peripheral local and home regional markets. Competitive situation is tight due to the presence of large firms with considerable market shares on the one hand and a large number of swiftly imitating Arab competitiors on the other (Sofer & Schnell 2002; Czamanski & Taylor 1986; Schnell et al. 1995). This has been amplified by the shrinking of the Jewish markets after the September 2000 riots.

Scarcity of capital and low profitability are the consequences of the Arab entrepreneurs’ economic marginality and closure in regional home markets. The competitive pressure that forces them to sell at prices below the general market price leaves them with such low profitability that they cannot afford the interest charged on investment loans. In addition, the lack of adequate infrastructures and quality standards hinder industrial development and expansion. Finally, the responses support our former conclusion that ethnic discrimination in the market is only of secondary importance, while peripherality provides a more salient explanation of the inferior position of Arab entrepreneurs in markets.

Conclusions

The three structural dimensions outlined in the conceptual discussion, namely, small geographical scale, ethnicity, and peripherality, reveal that as enterprises try to expand their market linkages from the local to the regional level, ethnicity and coincident peripherality bar their economic growth and further expansion of social networks.

Table 4.6 Obstacles to businesses growth

Type of obstacle % affected

Examples mentioned by interviewees

Tight competition 66 Number of competitors, large corporations, target

customers’ preference for Jewish suppliers. Socio-political distance

64 Deprivation, lack of government support, low self-esteem.

Scarcity of capital 45 High interest on capital, difficulties providing sufficient collateral to banks.

Low profitability 40 High cost of capital, taxes, and rent; inability to finance advertising.

Lack of infrastructure 23 Location in overcrowded residential areas. Poor quality 20 Lack of standardization or quality controls. Physical distance 18 Denied access to information and evaluation

capabilities in the national core. Ethnic discrimination 6 No barriers 10


Ethnicity seems to remain a secondary barrier; many entrepreneurs report that they are required to invest time and effort in removing ethnic suspicions and in gaining trust, but once they succeed, the door for networking opens up. However, when interethnic trust is broken (as happened in the wake of the September 2000 riots in Israel), most Arab entrepreneurs are forced to revert to local markets. Besides, many entrepreneurs in professional services, such as lawyers and accountants, who rely heavily on customers’ trust, have lost the prospect of regaining Jewish markets.

Peripherality seems to bear the most significant impact on maintaining low development capacity in the Arab sector in Israel. The inability to break the monopoly of large corporations, to gain independence from suppliers and buyers in the sewing industry, and to overcome the physical and social distance from the national core, left Arab entrepreneurs under-equipped in their search for even the slightest opportunity. The major mechanisms that maintain Arab entrepreneurs’ peripheral status are: state selective policies that grant Jewish new towns special privileges relative to their neighbouring Arab towns; state support given to state owned industries and large corporations; the use of ruthless power by monopolies against any entrepreneur that jeopardises their reign; and the vicious circle of tight competition among a large number of small Arab competitors, and low prices paid for their output by large customers, both phenomena contributing to continuously low profitability. Moreover, such enterprises are regarded as a high-risk group for

banks, which, in turn, refuse them credit, inhibiting growth and increased profitability.

The research opens a key question concerning the relations between entrepreneurs’ direct business linkages and their embedment in indirect social networks. Arab entrepreneurs succeeded in expanding into Jewish markets during the 1990s, but have experienced retreat since September 2000. This may be due to their tendency to sell to occasional household clients rather than to corporation on long-range contracts and to establish reciprocal relations and mutual trust with them. The expansion of direct sale links into Jewish regional markets preceded the establishment of social networks of trust and reciprocity at the regional level, that were not developed in a way that could have blocked the deterioration in sales to Jewish clients. This means also that the September 2000 riots raised again ethnic barriers that started to fall down prior to the riots. In fact, Arab entrepreneurs did not generate the power to wrap their activities in a supportive tissue of social networks. This case raises the possibility that each sub-market may require a different set of networks, so that embeddedness in one institutionalized market does not mean necessarily embeddedness in alternative markets. The case of the region of Nazareth exposes Arab entrepreneurs to at least five meaningful milieus – local, Arab regional, Jewish regional and Arab and Jewish national – and embeddedness in any one of them does not necessarily mean embeddedness in all others.

This chapter demonstrates that even the tremendous effort made by Arab entrepreneurs to embed themselves in business networks on a regional and national scale has not enabled them to break barriers stemming from their peripheral status. They lack the power to transform these networks to economic success – a phenomenon that we observed as under-embeddedness in a previous study (Sofer and Schnell, 2002). Isolation from power centres in the regional and national political economy also leaves them vulnerable to crises, thus leading to a situation in which kinship relations are perceived to be the major and most common supportive system.

Acknowledgement

We would like to thank Marwan Gnahim for allowing us to use and interpret some data compiled by him in a 2001 field survey as part of his Master’s thesis in Geography supervised by the authors. We would like to thank both referees, Daniel Hallencreutz and Michael Taylor for their very useful comments which enabled us to improve the chapter.

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ethnic entrepreneurship and embeddedness: the case of lower galilee

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