Despite the hype generated by big tech brands such as Apple (the smartphone maker topped $700bn in value this week but Microsoft has the record of the highest valued public company at an inflation-adjusted $850bn on 31 December 1999) Microsoft, Google and Facebook, high tech is rarely a key sector in an economy while innovation is important in every sector. Nevertheless, Israel has been lauded as the Startup Nation for its unique success in replicating the Silicon Valley model overseas but it has a limited impact as a jobs engine similar to Irish indigenous high tech.
Tel Aviv has been named as second to Silicon Valley in a ranking of the world's top 20 high tech hubs and Israel has built a research base over sixty years developing a semi-arid region and spending significant amounts on military research and development, that has spilt over to the private sector.
It is a location for the R&D centres of several big multinationals and half of Intel Israel's 10,000 staff work in development. See here:
Irish Innovation: Israel as Startup Nation, why not Ireland?
Startups in Israel with a population of 8m, raised a record US$3.4bn in venture capital (VC) in 2014 compared with €7.9bn by startups in Europe.
Israel is facing a similar challenge to that faced by the Irish industry but on a much bigger scale — few firms scale up as the pressure on founders from VC funders is to cash out and with innovation at the big giants falling, acquiring startups is their route to maintaining an edge.
Google's regulatory filings show a total of 238 startup deals costing a combined $23.7bn from 2004 — the year of its IPO (initial public offering) — through September 2013. It has scaled back on acquisition information but the number is likely to exceed 300 in 2015.
The innovation slowdown at the US tech giants
99 Israeli high-tech exits totaled $6.94bn in 2014, up 5% from $6.59 billion in 2013 while 17 IPOs raised $2.1 billion last year.
David Rosenberg in a January blog post on the Haaretz newspaper website said:
Dropbox, the US cloud computing company, paid $150m for the Israeli startup CloudOn last week, which works out to $5m per employee. This week Hadera Paper, an example per excellence of Rest of Nation, sold its half of the paper products company Hogla-Kimberly to its partner Kimberly Clark for about $320m, which comes out to $320,000 per employee. Hogla-Kimberly employs about 1,000 people in three factories while CloudOn employs about 30. [ ] If startup companies are raising bigger amounts of money than in the past it has less to do with a new attitude and more to do with the global balance of supply and demand. Israeli companies are winning higher valuations – last week alone five startups completed fundraising rounds of $15m or more, something that used to be a rarity – because the supply of capital chasing startups is growing.
With interest rates at near zero, where’s a mutual fund or hedge fund supposed to invest? One answer is startup companies. Big corporate investors are looking for action, too, as are Chinese and Russian investors. Breathe in and you begin to detect that acrid smell of irrational exuberance.  In short, what we are witnessing today isn’t the merging of Startup Nation into Rest of Nation by the creation of big companies that acts as big employers and contribute the wider economy. Rather, we’re seeing a merging of Startup Nation Bubble World."
Reuters reports that high-tech goods and services account for 12.5% of Israel's gross domestic product (GDP) and half of its industrial exports, government data show. Israel leads the OECD when it comes to R&D, spending 4.3% of GDP on it, nearly twice the OECD average, according to Ernst & Young. Companies often tap into the skills of workers trained in the military or intelligence sectors and startups benefit from tax breaks and government funding.
However, Karin Mayer Rubinstein, head of the Israel Advanced Technology Industry Association, said that while M&A brought money into Israel, patents were being "vacuumed" out. "In the last few years, most of the companies being bought don't stay here as a separate entity," she said.
Reuters adds that there are 282 R&D centres in Israel, most owned by foreign firms. Eight out of 10 Israeli technology firms bought by multinationals become a foreign R&D centre in Israel, or are integrated in existing foreign R&D centres, said the Israel Venture Capital (IVC) Research Center.
"Patience is not a strong point in Israel's startup culture, where entrepreneurs like to move from one idea to the next.
Israeli venture capital-backed companies take an average of 3.95 years from the first round of funding to acquisition, compared with 6.41 years in Britain and 6.66 in France, according to third-quarter 2014 figures from Dow Jones VentureSource."
The OECD's Israel Economic Survey, published in December 2013, said: "average living standards remain well below those of top-ranking OECD countries, the rate of relative poverty is the highest in the OECD area, and there are ongoing environmental challenges."
THe Organisation for Economic Cooperation and Development has 34 member countries including all countries in the developed world.
Israel has low PISA education scores alongside a high R&D-to-GDP ratio.
Although the public programmes to support high tech have benefited Israel’s export-led growth and offered a model for other OECD countries, their legacy is mixed, Mario Cervantes, OECD senior economist, said in 2011. “The returns in terms of longer-term job creation and income growth have not kept up, despite continued investment in high-tech,” he said. “Many Israeli startups are sold to the US market and get absorbed into global firms, never really expanding in Israel. This is expected given the small size of the internal market, but it does raise questions about how much of the returns from innovation end up back in the economy in terms of jobs created.” According to OECD data, Israel’s information and communication technology sector accounts for about 20% of total industrial output and 9% of business sector employment.
While government policy has actively promoted high-tech industries, other sectors seem to have been left out. “With the exception of the information and communications technology services sector — which is very R&D intensive — innovation in other service sectors has received less attention, as illustrated by the weaker labour productivity performance of the business service sector compared to the US, Korea or the UK,” said Cervantes. “Perhaps this is because of — or despite — the competition as well as regulatory barriers that limit incentives for innovation.”
Israel’s economy remains heavily reliant on its high-tech sector, which provides a narrow base for growth, the OECD argues. Innovation policy will have to reach out to Israel’s traditional industrial and service sectors as well. Indeed, the OECD’s landmark Innovation Strategy stresses a broader view of innovation, beyond R&D, that encompasses both technological and non-technological forms of innovation such as design, organisational change and marketing.
Israel does have over 60 listings on the US Nasdaq stockmarket. Ireland has 20 but only 7 are real-world Irish companies.
In 2013, total high-tech jobs numbers in Israel dropped 2%. Some 190,000 people worked in the sector, compared to 194,000 in 2012 and 192,000 in 2011.
Employees in the field of information technology, a subset of high-tech, accounted for 5% of all employees in Israel in 2013, a similar figure to that from 2012. Most of these jobs were in companies providing services.
These numbers include both indigenous and foreign-owned firms.
There was a total of 72,000 employed in the Irish 'Information and communication' sector in Q1 2008 and 79,000 in Q3 2014 — 3.6% of the total Irish workforce.
Indigenous tech firms employ about 10,000 and data from the Irish Software Association in 2014 show that of 806 firms, 316 had 1-10 employees; 400 had 11-50 employees; 67 had 51-200 and 20 had 201-500; 2 had 501-1000 and 1 had 1001-5000.
We do not know if this data includes firms like Accenture, of American origin but Irish because it has an Irish headquarters for tax avoidance purposes.
Last month Enterprise Ireland said in its end of year statement: "In 2014 we transferred a total of 29 clients employing over 700 people to IDA Ireland as a result of mergers and acquisitions that resulted in the Irish entity becoming majority foreign owned. These leading Irish technology players are expected to continue to grow substantially in the future and help embed MNCs even deeper in Ireland. It is a testament to the quality of their products and services that they have attracted the interest of the world’s best companies."
We did request the names of the 29 firms but it wasn't provided.
There is no evidence that the acquired firms will scale-up in Ireland.
Remember Elan, Parthus, IONA and many more?
Established industries often beat new technology investment returns
Dublin's Silicon Docks: Separating hype and reality
Dublin Web Summit 2014: Separating hype and reality — Paddy Cosgrave, Web Summit founder: Separating hype and reality Phenomenal level of research + info in this post about Irish tech policy & startups in general
Imbalance in focus on tech and non-tech entrepreneurship in Ireland & elsewhere