Innovation: Israel, world's Startup Nation but productivity problems in other sectors
By Michael Hennigan, Finfacts founder and editor
Oct 24, 2013 - 9:15 AM

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On August 26, 2013, President Shimon Peres (born 1923) paid a special visit to Google’s offices in Tel-Aviv. During his visit, he stopped at Campus TLV, met local startups and launched a Code-Lab - a brainstorming session involving Israel’s leading gaming developers and Google’s Android Gaming team.

Israel has become known as the world's Startup Nation but it's not all sunshine as productivity problems exist in other sectors including the use of technology.

At a global level, the two most successful high-technology clusters in the past sixty years, Silicon Valley in North California and Israel, have some key unique features.

Israel developed in a semi-arid region from the 1950s and coupled with work in the development of military technology, the country developed a strong research base.

So when the Soviet Union collapsed in 1991, and Israel became the home for 1m new migrants, including the greatest short-term movement of intellectual capital in history, the country took advantage of a significant opportunity. Israel's overall population increased by 20%. Nearly 40% of the immigrants held academic degrees, many of whom were scientists, engineers and specialised technicians.

Dan Shechtman of the Technion Institute of Technology, won the Nobel Prize in Chemistry in 2011 and he was the fourth Israeli science laureate in the past decade.

The government established the Yozma (Initiative in Hebrew) fund in the early 1990s to promote venture capital funding with investments from US firms.

A thriving independent local VC industry began as growth of the US high-tech sector was accelerating.

Israel has created indigenous companies that are world leaders in their fields and that has attracted multinationals such as Microsoft, Intel, Apple and Google to open significant R&D centres there.  A recent acquisition by Google include crowdsourced traffic app Waze for a reported $1.1bn.

Up to 220 R&D centres of multinational corporations employ over 50,000 Israelis.

In the book 'Startup Nation' (2009), authors Dan Senor and Saul Singer wrote that each year as Europe created 700 to 800 high-tech startups, Israel added 500. After the United States, Israel is by far the second largest generator of startups.

The Economist said last year that Israel attracts far more venture capital per person than any other country—$170 in 2010 to America's $75. Yet there does not seem to be enough early-stage money to go around. One reason is that there are simply an awful lot of young companies fighting for a share of the pot.

Ernst & Young said in  a report this year that the US and Europe accounted for almost 85% of global VC investment, although overall market sentiment was inevitably affected by the continuing slow pace of global economic growth. The slowdown in China’s GDP growth rate led to a decline in VC investment of more than 40% in both the number of deals and total value. However, recent improvements in forward looking indicators of Chinese economic activity point to a more optimistic outlook for 2013.

Israeli venture capital investment fell from $1.9bn in 2010 to $1bn in 2012.

US VC investment activity declined by 15% to US$29.7b in 2012 compared to 2011. Reflecting the global trend, European VC investments declined by 16% year-on-year to US$5.7bn.

Small countries always have a problem with seeking to have companies scale to a significant size rather than be acquired too early by a bigger foreign company.

However, Israel has 66 companies listed on the Nasdaq stock exchange in New York.

The Wall Street Journal said that according to Chemi Peres, managing general partner and co-founder of the Herzliya-based Pitango Venture Capital Ltd., things are changing. "There is [now] a notion of, 'Let's build bigger companies,' and not to sell them at $200m. This is a cultural change. Look at companies like Waze or Trusteer." Trusteer, a security firm, was acquired in August by IBM in a deal that was worth between $700m and $1bn.

Israel vs Singapore

A Google Israel-commissioned study by Deloitte and Trigger Foresight, a consultancy, and published last summer said that while Israel leads the way in innovation, its stagnant productivity over the years has left it lagging. Among the OECD’s 34 member countries, Israel has 24th place in terms of productivity.

The study says this partly reflects Israel’s failure to utilize the very Information and Communications Technology (ICT) that its startups are so good at producing.

During the 1980s, while the GDP per capita in Israel and Singapore was similar, Singapore began implementing multiyear ICT plans. As a result, Singapore has become one of the richest countries in the world, with a GDP per capita twice that of Israel’s (with no significant natural resources).

The report says the State of Israel is facing many social and economic challenges; these challenges have become greater as a result of demographic and economic trends, leading to deeper inequalities and weakening Israel’s capability to compete in the global arena. The G-7 industrialised countries displayed consistent growth in productivity from the 1970s until the economic crisis of 2008.

Even though Israel, in its early years, narrowed the productivity gap between itself and the OECD countries, it stagnated on par with the OECD average from the 1970s until today.

The report says the strong connection between economic growth and increased productivity and innovation has been proven many times, even awarding Prof. Robert Solow with the Nobel Prize in Economics. However, innovation also necessitates creatively providing useful, efficient and effective solutions to non-economic problems. This is the only way to increase productivity and create growth in advanced economies.

Successfully coping with the challenges and trends the State of Israel is faced with can only be achieved through innovation, the only factor that can guarantee the strength and competitiveness of the Israeli market

In Israel only half of the Small and Medium Businesses use computers; of the jobs created between 2006 and 2009, 80% came from businesses with online activities (McKinsey & Company, 2009).

Despite its high broadband coverage, Israel is ranked below the OECD's average for internet accessibility. This is mainly due to available international bandwidth, and the report says it is important to note that between 2010 and 2011 the bandwidth grew by 41%. Still, a gap remains between the average bandwidth in Israel and average bandwidth among the developed countries.

Ernst & Young Global Venture Capital 2013

Intel in talks with Israel on $10bn investment

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