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Lessons from Israel

Jonathan Ortmans, President, Public Forum Institute

Jonathan OrtmansIsrael is one of the most innovative nations on earth. Israelis (approximately 7.6 million in number) are well-educated, have a global outlook, ties around the world, and most importantly, a positive view of entrepreneurship. Most Israeli entrepreneurs understand ways of moving innovations into the marketplace and how to establish themselves as global companies from the get go. It is only natural that there is so much interest around the world in Israel’s entrepreneurship path.

Israel has focused a lot of its efforts on finding and nurturing high-growth entrepreneurial firms, including universities. Granted, many start-ups have failed, but a number have succeeded and grown quickly. The result: Israeli high-growth start-ups have been creating jobs and generating sustainable wealth for the country, and innovations for the world (e.g., the USB memory stick, new generation cardiac stents, and camera pills that transmit pictures from inside the human body). Israel is often referred to as "startup nation" and a high-tech superpower.

What developments lead to this phenomenon in Israel? The economic picture was far from entrepreneurial before the 1980s. In a recent blog post on The Economist, Daniel Isenberg presented a timeline of events, many dating back four decades, that led to Israel’s entrepreneurship boom. The blog complements the analysis on the book Start-Up Nation: The Story of Israel’s Economic Miracle by Dan Senor and Saul Singer. I thought it might be useful to recap some here:

  • 1950s: Israel’s first and fourth presidents were scientists. Both believed strongly in the role of science in national defense and societal prosperity.
  • 1960s: R&D got a significant boost in the 1960s when military self-reliance became defense policy. In 1968, the government established the Office of the Chief Scientist (OCS) not a Secretary of Commerce or Treasury to help fix market failures in commercializing R&D.
  • 1970s: Israel’s first NASDAQ IPO took place in 1972; Intel opened in Israel its first international R&D center in 1974; and the BIRD foundation was created to fund technology-based product development between Israeli and US companies in 1977.
  • 1980s: top-tier VC investments flourished. In 1984, the NASDAQ value of the first wave of a dozen Israeli tech ventures was $780 million. In 1984, the government passed the Law for the Encouragement of R&D. And in 1987, when the cancellation of a fighter-plane mega-project flooded the market with engineers there was not union discontent, but a new wave of start-up entrepreneurs.
  • 1990s: by 1997 there had been 68 NASDAQ IPOs. However, Israel’s culture and institutions were still very much anti-entrepreneurial until the mid-1990s (e.g, labor and the government owned large portions of the economy, and marginal tax rates discouraged extra work). Notable in this is decade was the great wave of immigrants from the former Soviet Union, largely with…yes, engineering talent.
  • 2000s: Despite the breakdown in the peace process, Israel garnered an increasing larger market share of global venture capital.
  • 2010s: Israel was one of the last countries to enter recession and among the earliest to exit. There are more Israeli NASDAQ IPOs than from any other country outside of the U.S. and Canada. On a per capita basis, Israel leads the world in the number of high-tech start-ups and the size of the venture-capital industry. And, the army continues to act as an incubator for high-tech talent and is part of a problem-solving culture. Finally, a brunt of the R&D investment has been channeled toward a now burgeoning clean tech sector in Israel.

Apparently, what is often referred to as a high-tech entrepreneurship miracle is the result of a chain of events intersecting public policy, education, culture, links with foreign source of support, and leadership. Aware of this, policymakers should continue to build the capacity of the country to innovate by strengthening or activating the many building blocks of the entrepreneurship ecosystem. As some commentators are remarking about China, building infrastructure will not sustain growth rates, but fuelling an organically created ecosystem can.

Israel cannot rest on its laurels. There are concerns, for example, that the country’s business culture focuses more on deal-making than on company-growth, resulting in a low number of grown companies of the likes of Google. In response to this, the government has been implementing new late-stage financing initiatives. But, as the rest of the world tries to reboot economies, there are insightful lessons to be learned from Israel's path to entrepreneurship-based economic growth.

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Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

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