Israel as Development Miracle

From a paper by Dr Seth Kaplan

By any measure, Israel’s economy has been transformed since independence. Between 1950, when the first comprehensive data on the new state was published, and 2015, it expanded at one of the fasting rates in history – growing 44 times larger in the intervening years. During this time period, the country’s population grew over 10 times (from 800,000 to 8.5 million) and GDP per capita grew almost seven times (from 19,800 to 132,000 shekels) during this period.[1]

In its early years, Israel developed traditional industries, such as textile and plastics, but most notably agricultural prowess. Israel had also begun to establish itself as a significant player in a range of sectors, such diamond polishing, pharmaceuticals, and agricultural machinery. This spirit of innovation took off in a spectacular way during the 1990s, when Israel came to embody the essence of an innovation-driven economy, with few peers to match is prowess in nurturing technology start-ups around the world. Driven by a huge increase in foreign investment and a number of innovative policies introduced by the government (see below), the country has become known as the “Start-Up Nation” due to its concentration of dynamic small, export-driven companies in a wide range of high-tech areas. There are roughly 200 start-ups created annually, and more than 2500 in all. With the highest number of scientists, technicians, and engineers per capita in the world (140 per 10,000 employees versus 85 in the United States), and one of the largest percentages per GDP spent on research and development, Israel has become a leader in the natural sciences, agricultural sciences, internet & media, communications, genetics, nanotechnology, biotechnology, medicine and medical devices, optics, solar energy, water technology, waste management, and various fields of engineering.

Overcoming many social, economic, and political challenges in its short history has made Israel uniquely resilient, able to respond to and even take advantage of adversity. Despite facing so many diverse and multifaceted challenges, Israel’s population, human development, and economic growth and societal and business vitality have outpaced the great majority of comparable countries throughout its history, including its OECD peers in recent years. Entrepreneurship has brought the launch of new companies, new growth sectors, new NGOs, and new military strategies. Business, social, and governmental innovation has allowed the country to agilely overcome a wide range of shocks and stresses with limited impact on—and sometimes even the broadening of—core strengths.

Israeli business entrepreneurs have been among the most successful worldwide in developing new technologies and responding to opportunity. It consistently ranks among the world’s most innovative, competing with Finland, Japan, South Korea, Sweden, Germany, and the United States for the top few spots;[2] it is, for instance, the world leader in patents, R&D spending, and start-ups per capita.[3] The country has spawned such a high concentration of high-tech industries that the coastal plain around Tel Aviv has been nicknamed Silicon Wadi (after Silicon Valley in California). Among the better well-known products it invented are flash drives, cardiac stents, and instant messaging.[4]

The scale and breadth of innovation is hard to imagine. Its successful and emerging companies include: Elminda (brain imaging), Mobileye (vehicular collision-avoidance), ReWalk (exoskeleton robotic device), Medaware (medical error reduction), WebyClip (targeted web video optimization), MobileOCT (cervical cancer screening), Windward (suspicious ship tracking), Team8 (cybersecuity), OurCrowd (equity crowdfunding platform), NeoTop (water conservation), and Bram (biodegradable plastics), Zerto (business continuity software), and Percepto (computer vision for drones).[5]

CyberArk, “the darling of the cybersecurity industry” with a market capitalization of nearly $2 billion[6], has gained 2,600 customers in 65 countries, including more than two-fifths of the Fortune 100, by developing the best defense from cyber attacks that have penetrated inside networks.[7]

The country is a leading player in fintech, with companies such as FundBox, Payoneer, and eToro addressing emerging sectors such as payments; trading and investing; lending and financing; cryptocurrency; customer engagement; personal financial planning; anti-fraud; and banking and insurance. Israel can uniquely combine strength in the relevant technologies and knowledge, such as expertise in real-time analytics, algorithmics, big data, risk management, anti-fraud, and security, and online consumer-facing marketing knowledge; a legacy of success, which contributes to the ecosystem; strong ties to key financial centers worldwide; the strong presence and willingness to invest of global financial institutions; and the openness of Israeli financial institutions to innovation.[8]

The country’s harsh natural environment—a far greater proportion of its territory (over three-fifths) is made up of desert than any other developed country—has spawned a series of companies that have made it a world leader in hydroponics (growing plants without soil), drip irrigation, dairy production, apiculture (bees), fish farming, de-desertification, desalinization, and water conservation.

Foreign companies and investors have sought to actively take advantage of this innovation machine. Multinationals such as Intel, IBM, Cisco, Microsoft, Google, Hewlett-Packard, Siemens, SAP, and Qualcomm have established major R&D centers in the country and strategically invested in and acquired multiple local companies. Venture capitalists, from home and abroad, have poured resources into the country. There are about 300 active venture capital funds—including those who actively invest but don’t have a local office—operating in Israel, with billions of dollars available.[9] Countries such as China[10], India[11], Japan[12], and Singapore[13] have come to Israel in recent years to learn from its experience and to find out how they can transplant some of its success to their countries.

The government has played a crucial role nurturing key industries in the country from early on. It established the Office of the Chief Scientist in 1969 within the Ministry of Industry, Trade and Labor in order to guide technological progress; it would eventually play a key role catalyzing the innovation boom of recent years. The state provided financial support for commercial R&D when the investment climate in Israel was poor due to market failures and heightened risks of operating in a geographically isolated country. The technological incubator program, established in 1991, played a crucial role jumpstarting the immense innovation ecosystem that now exists; it helped empower the skilled immigrants that moved to the country in the early 1990s by providing the funding and know-how such that they could become successful entrepreneurs. Yozma (Hebrew for Initiative), which one recent OECD report called “the most successful and original program in Israel’s relatively long history of innovation policy,” used $100 million of government money to establish 10 venture capital funds in partnership with foreign investors, leading to the creation of the country’s now vibrant venture capital industry.[14]

Innovation has thrived in businesses, social institutions, the military, and parts of the government because of the large proportion of the population who have the abilities common in entrepreneurs—creativity, agility, focus, resourceful, and the ability to learn a broad range of advanced skills, reflect on failures, invest for the long-term, develop people, build dynamic social networks, and nurture self-reliance.[15] Its preponderance across institutions and society explain the country’s great resilience.

In contrast, most countries—whether rich or poor—struggle to innovate and thus have a harder time responding to the growing number of stresses and shocks that globalization and technological change brings. Adversity for these countries poses a much greater threat to their political stability, social cohesion, and economic wellbeing. In recent years, Europe has stagnated economically, at least partly because of its myriad problems innovating and adapting to a changing world.[16] In many countries, the population is actually beginning to decline. Africa, the Middle East, and Latin America have struggled to turn commodities-led growth into broad based economic transformation because of failures with innovation. As Andres Oppenheimer, a columnist on Latin American affairs, writes, “the biggest threat for the region’s future will be many countries’ failure to innovate and produce newer and more value-added products.” Combined, the 32 countries in Latin America and the Caribbean, with a population of 588 million, registered less than one-quarter the number of patents of those registered by Israel.[17] Even Asia, which has outshined other regions economically, worries about innovation, explaining why so many countries in the region have visited Israel to learn from it.

Of course, Israel is not perfect. It has a number of severe challenges that it has failed to tackle, including: peace with the Palestinians remains elusive; inequality and poverty have grown; excessive red tape holds back companies and NGOs and reduces competition and productivity gains in traditional industrial and service sectors[18]; too small a share of the population is sufficiently trained to participate in hi-tech sectors; and the Haredi (closed orthodox) and Arab parts of its population are underemployed and not well integrated in the economy.

 

Notes:

[1] http://www.haaretz.com/opinion/.premium-1.719220

[2] See, for instance, http://www.citylab.com/tech/2011/10/worlds-leading-nations-innovation-and-technology/224/; http://www.bloomberg.com/graphics/2015-innovative-countries/

[3] http://technode.com/2013/05/26/israel-the-amazing-startup-nation/

[4] http://www.oecdobserver.org/news/fullstory.php/aid/3546/Start-up_nation:_An_innovation_story.html

[5] http://www.fastcompany.com/3041653/most-innovative-companies-2015/the-worlds-top-10-most-innovative-companies-of-2015-in-israel ; http://www.israel21c.org/fast-company-picks-top-10-israeli-companies/

[6] https://hbr.org/2015/09/how-israeli-startups-can-scale

[7] http://www.cyberark.com/press/cyberark-named-leader-privileged-identity-management-independent-research-firm/

[8] http://venturebeat.com/2015/10/03/why-israel-is-leading-fintech-innovation/

[9] https://en.wikipedia.org/wiki/Silicon_Wadi#cite_note-VC-26

[10] http://in.bgu.ac.il/en/Pages/news/china_conference.aspx; http://mfa.gov.il/MFA/PressRoom/Pages/Chinese-business-leaders-visit-Israel-2-Dec-2015.aspx

[11] http://articles.economictimes.indiatimes.com/2015-08-30/news/66032957_1_negev-desert-israel-smart-phones

[12] http://www.israelnationalnews.com/News/News.aspx/211583

[13] http://www.dealstreetasia.com/stories/is-singapores-government-adapting-israeli-innovation-policy-4836/

[14] http://www.oecdobserver.org/news/fullstory.php/aid/3546/Start-up_nation:_An_innovation_story.html

[15] http://www.forbes.com/sites/aileron/2013/11/26/the-top-skills-every-entrepreneur-needs/#636e18915669

[16] See, for instance, http://www.politico.eu/article/why-europe-lags-global-innovation-modern-science-enlightenment/; http://www.the-american-interest.com/2015/04/15/europes-innovation-problem/

[17] http://www.desertsun.com/story/opinion/columnists/2015/06/29/oppenheimer-latin-america-lacks-innovation/29467259/; see also http://www.npr.org/sections/parallels/2014/11/26/366793598/a-warning-for-latin-americas-faltering-economies-innovate-or-die

[18] http://www.oecdobserver.org/news/fullstory.php/aid/3546/Start-up_nation:_An_innovation_story.html