Israel Start Up Nation: High Technology Sector

The significant impact that the growth and development of the high technology sector has had on Israel warrants further examination in light of the influence on the attitudes and skill requirements of managers and workers and the required shift in national economic and political priorities.  The foundation for the emergence of an Israeli high technology sector was already in place during the 1950s when the country was heavily involved in development of advanced defense systems.  During that period, Israel was able to develop the technological and human infrastructure that would eventually be deployed to first establish an electronic industry and then was expanded, in both the public and private sectors, to include new areas such as communications, medical products and printing.  Interestingly, while many Israeli private firms were developing an international reputation for technological excellence and innovation, the government paid relatively little attention to the potential of the high technology sector until the 1970s when Israeli companies first achieved listing status on the US stock exchanges and many well-known multinational companies began investing in the research and development activities of Israeli companies.  A shift in governmental policies to encourage free market activities, which began in earnest after the stranglehold on political power held by the Labor Party was ended in 1977, included support for research and development, removal of currency controls, encouragement of foreign investment and removal of protectionist barriers that injected competition into domestic markets for the first time.  This quickly led to establishment of production facilities by large multinational technology companies, some of which also launched their own Israeli research and development labs that were well capitalized.  An Israeli venture capital community emerged, government investment in research and development increased substantially and high technology sales grew from $1 billion in 1980 to over $7 billion in 1997, of which about 75% was exports.  Harpaz and Meshoulam reported “Israeli hi-tech companies are taking the lead in some fields worldwide and actually defining new markets, for example, in the medical equipment field . . . Israel was rated by ‘Wired Magazine’ as number four in advanced technology centers in the world”.

Globalization is an external environmental factor that has had a substantial impact on Israeli society in general and on the country’s economy in particular.  Israel’s early history after independence was defined by isolation, protectionism and a strong focus on absorbing immigrants from the turmoil of World War II and defense of the country’s borders from continued attacks by Arab neighbors.  Characteristics of the Israel economy through the 1950s and 1960s included shortages of foreign currency, a massive allocation of public funds to defense, high unemployment, limited activities in the industrial sector and high customs duties.  However, changes in Israeli political conditions coupled by security-related developments that helped reduce the barriers between Israel and the international community ultimately led to a dramatic opening of the Israeli economy which included substantial foreign investment and the emergence of a small, but influential, group of Israeli multinationals that became world leaders in areas such as textiles and pharmaceuticals.  Harpaz and Meshoulam mention several reasons for “Israel’s globalization shift”, including the slow and steady progress of the peace process, which while not bring a final solution to borders in the region has at least improved overall security conditions; the growing reputation of Israel human capital, which is now routinely viewed as rich resource for high trained and innovative talent; the development of an advanced scientific infrastructure; large amounts of government support for research and development relating to technology and products with commercial, as opposed to strictly military, applications; international treaties, including numerous free trade agreements; and a general opening of the economy both inwardly and outwardly with explosive growth in the export sector and the introduction of large foreign multinational operators in Israel (e.g., McDonalds, Benetton, Toys R Us, etc.).

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