Israel Start Up Nation: Path to Becoming an Innovation Hub

Israel began its path to becoming a world renowned innovation hub in the 1960s with the formation of companies such as ECI Telecom, Tadiran and Elron Electronic Industries, which came to be known as the “Fairchild of Israel”.  Growth over the next two decades was slow but sure and was accelerated by the contracts with foreign multinationals that set up R&D units in Israel, efforts to develop a technologically-based advantage over the country’s military foes and the dispersion of dozens of serial entrepreneurs throughout the Israeli economy from proving grounds such as the RAD Group.  While military-related R&D provided the basis for an array of new products, including a mini-computer that was developed in the 1970s by Elbit, digital printing systems and medical imaging devices, Israeli companies had difficulties with successfully commercializing those products due to shortcomings in the marketing area.  Israel’s ability to design hardware products had become evident; however, it had no particular comparative advantage in that area and the technology industry struggled until the 1980s and early 1990s when Israel began to tap into its deep reservoir of human capital to become one of the serious players in what was become a global software market.  A number of software companies were established and many of them were able to identify and exploit niches that had not yet been discovered and dominated by US firms.  Further development of Silicon Wadi during the 1990s was facilitated by the arrival of scientists and engineers who had emigrated from Russia after the Soviet Union dissolved and the beginning of a period of relative peace that improved the overall environment for investment.  Like other parts of the world, Israel also participated in the dot-com boom of the late 1990s and saw thousands of startups emerge between 1998 and 2001, over 50 of which completed initial public offerings in the US and on other international stock markets.

The evolution of the Israeli technology industry has been accelerated by growing global demand for products using the technologies in which the Israelis excel including software, electronics and sophisticated industrial equipment and the country has created a fertile environment for innovation through support of high education, R&D, openness to immigration and the availability of low interest loans for startup businesses.  In addition, many Israeli university graduates are highly likely to seek positions in the IT industry or join startups, thereby gaining experience in the pursuit and development of technology products.  On the downside, however, is the reality that Israel is heavily dependent on outside sources for raw materials and energy and the small size of its local market means that entrepreneurs must move quickly to find international markets for their products in order to survive and grow.

The emergence of the high technology sector and globalization has had a number of positive influences on Israel; however, it has also created new challenges, notably in the area of human resources management.  In the workplace, managers have needed to transition from their traditional narrow focus on productivity and efficiency toward development and utilization of the talents of their workers and incorporating new motivational strategies and processes into their day-to-day interactions with their workers.  At a societal level, Israel has been changing rapidly and most citizens are being introduced to influences, opportunities and challenges that could not have been dreamed of forty years ago.  Multinational companies injected unprecedented levels of competition into the Israel domestic market, including new consumer expectations that needed to be understood and respected by Israeli firms.  For example, competition brought decreases in prices accompanied by improvements in product quality and this led to consume demands for improved quality services.  The construction of large shopping malls all around Israel changed buying habits of Israeli consumers and set new standards for Israeli manufacturers and retailers. 

At the same time, Israeli society had to grapple with new social issues such as an expanding income gap between the rich and poor.  The erosion of collectivist values and institutions within Israel society has undermined the sense of collective social responsibility that was so important during the early decades immediately following independence and the shift toward more open markets and abandonment of socialist ideologies has widened gaps in Israeli society even as per capita incomes and standards of living have continued to rise.  Workers can no longer rely on Israel’s once powerful trade unions to protect their interests in negotiations with employers and employers are now free to adopt differential wage systems that create clear winners and losers among their workers.

Israel has been a somewhat remarkable success story in the pantheon of innovation clusters given the many apparent challenges that must be overcome by growth-oriented entrepreneurs in the country including a small local market, geographic isolation that separates Israel’s emerging companies from inputs and customers, language barriers, cultural and religious differences and, of course, several and continuous political conflicts internally and externally.  In spite of these difficulties, Israel has a long record of developing large globally-active companies—Senor and Singer reported that as of 2009 Israel was second, behind the US, with regard to the number of companies listed on NASDAQ, exceeding the combined total of China, Europe and India—and launching and nurturing technology firms that eventually became desirable acquisition targets for multi-national corporations.  Several reasons have been offered for Israel’s entrepreneurial success including, in the words of Grotsky, “. . . its strong technology-oriented military, its emphasis on education and research and development, a few visionary government policies that went a long way . . .  a tradition of flat organizational structures and informality in the workplace . . . [and] . . . its existence as a melting pot of international cultures within an isolated society”.  Another factor perhaps is the experiences that Israeli entrepreneurs gain during mandatory military service that have arguably served them well in developing and maintaining the energy and focus required to successfully launch and manage a startup.

Israel has enjoyed an astounding, and in many ways quite surprising, transformation from a semi-socialist state continuously focused on defense and security issues to a global technology leader in a variety of fields.  A number of books and articles have chronicled this journey including “Start-Up Nation: The Story of Israel’s Economic Miracle”, written by Senor and Singer.  However, a 2011 article in The Economist described several key issues that Israeli policymakers, investors and entrepreneurs must address in order for the country to move “beyond the start-up nation” including expanding the role of high-tech firms as employers, building global technology players and successfully transferring know-how and talents to new emerging areas such as Internet content, water management, agricultural science and alternative energy.  Another concern, which will not go away regardless how the intensely volatile political issues in the region are resolved, is how Israel ultimately integrates Arab-Israelis and ultra-orthodox Jews, who will together be about one-third of the population by 2025, into its business culture.

As of 2013 Israel had more engineers, scientists and PhDs per capita—135 per 10,000 in the workforce—than any other place in the world and half of the country's exports came from the technology industry.  Best known for defense- and military-inspired technologies, Israeli entrepreneurs have recently turned their attention to creating and developing healthcare products and applications using artificial intelligence and digital technology.  R&D expenditures in Israel, even excluding spending on defense-related R&D, are an impressive 5% of GDP as of 2013, a level that is higher than any other Western country, and the government's office of the chief scientist has a substantial budget that includes funds that have been used for co-investment alongside the private sector, particularly in risky projects.  R&D in Israel is also supported through the activities of a large number of multinationals including Amazon, Apple, Google, Intel, General Motors, Microsoft and GE, and each of the companies have recruited local talent to assist in uncovering innovations for use in Israel and around the world.  Multinationals have found Israel to be particular attractive because of the audacity and confidence of the country's young scientists and engineers who have been trained not to follow instructions and to focus on leadership and solving problems.  Multinationals provide space and other resources for Israeli startups and have been eager to acquire the most successful local companies as they matured.

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