Innovation for each New Era – How the Israeli Gov’t turned the desert into the Startup Nation by creating a domestic Innovation Hub

This article was based on interviews with Reuven Ulmanksy, the Managing Partner of Leading Edge Consultants and a pioneer in Israel’s innovation technology ecosystem.

Israel was established by a people’s army. That set the stage for the ongoing integration between civil and military development in the State of Israel.

Creating a sustainable innovation ecosystem requires the active participation of both public and private partners. Both the people and state of Israel honed this partnership through collective historical hardships and ongoing conflict that engendered the necessary resilience to counter adversity and generate strategic shifts in its favor. Contributing to this was the ever-present existential threats posed by its neighbors. However, overcoming adversity was only one of the necessary components of building an innovation powerhouse. Without vision and a malleable policy dictated by the government, Israel would have been unable to make the desert bloom. From the difficult realizations of Zionism’s early founders to the coherent policy of the Jewish State, Israel has taken top-down steps to facilitate high tech innovation. Consequently, the young State of Israel revolutionized the means of agricultural production, established domestic water security, and developed ubiquitous technical solutions to countless global problems. 

Taking an historic look at the role of the Israeli government in promoting domestic innovation reveals the value of a top-down approach as a catalyst in creating a strong tech sector. In turn, the means of improving Israel’s political and geostrategic standing were cultivated through an innovation-based policy. The % of GDP directed towards R&D as well as the programming of the office of the Chief Scientist and the Israeli Innovation Authority were pivotal to the development of a vibrant startup ecosystem. 

Seeding the fields: Innovation, Zionism and Survival
The foundations of Israel’s current technological success were inspired by the visionary words of Theodore Hertzl (pictured below) and strategic thinking of David Ben Gurion. The early Zionist leaders demonstrated that “if you will it, it is no dream,”1 Instilling the ideal that determination and sheer will can diametrically change reality. Hertzl stressed that “Under present conditions the Jews have three roads before them: one is apathetic submission to insult and poverty; another is revolt, outspoken hostility to an unjust social system. Ours is the third road. We want to amount to a higher grade of civilization, to spread well-being abroad, to build new highways for the intercourse of peoples, and to forge an opening for the coming social justice.”

In practice, Hertzl’s views along with the Israeli experience reflected the essential quality of idealism as the singular drive in overcoming the many obstacles faced by the young Jewish State. Hard, physical labor was accompanied by massive GDP investment in domestic R&D. Innovation and optimism would prove a good start to Israel’s rebirth. To facilitate a sustainable economic system, the Israeli government instituted policies, initiatives, and methodologies that categorically altered the Israeli narrative from an underdog story to the definitive global tech success story of the 20th and 21st centuries.

Policy through Pragmatism
Since the early statehood period, Israel attempted to create a climate conducive to creative thinking. (see previous Notes in the Israeli Innovation Story series) Through both institution building and legislative developments, the Jewish State synthesized innovative approaches and practical applications to modern nation-building. In its adaptation, the government “realized that growing exports necessitated a change in Israel’s industrial policy. That realization, coupled with the renewed interest in and success of military R&D, led Prime Minister Levi Eshkol to ask his old friend -one of the key people behind the creation of RAFAEL 2 (Authority for the Development of Armaments)- Professor Ephraim Katchalski Katzir, to head a special committee on governmental founded civilian industrial R&D.”3From adversity, the seeds of innovative development were formed in the Jewish State. The government’s support of RAFAEL is indicative of its active voice in promoting all forms of military and civilian R&D.

The Israeli government’s ability to remain aware of changes on the ground and its flexibility to adjust policy accordingly facilitated a new era in industrial (civilian) R&D. Starting in 1968 a government commission recommended the creation of the Office of the Chief Scientist (OCS) through the Ministry of Industry and Commerce. The OCS became Israel’s innovation clearing house, acting as the government facilitator in high tech advancements and investment. The OCS enabled government subsidies to be provided to commercial R&D projects undertaken by private firms. Before this creation of the OCS, support was directed via the National R&D Labs, and to academic R&D, in consort with significant defense-related and agricultural R&D. As a result of pragmatic shifts in legislative policy, industrial R&D rose rapidly. “Between 1969 and 1987 industrial R&D expenditures grew at 14% per year, and High-Tech exports grew from a mere $422 million in 1969 (in 1987 dollars) to $3,316 million in 1987.” 4

Stages of Innovation and Development in the Israeli Ecosystem
The State of Israel’s R&D policy which led to the formation of an innovative strategy for high-tech development can be divided into four distinct periods. Each of these eras contributed significantly to the establishment of Israel’s innovation economy:•“1947 – 1963 Vision, ethos and a war of survival. The industry played a key role during the establishment of the state and in its security strategy The Ministry of Defense under David Ben Gurion, played a central role in foreign relations and in the local industry.

1963 – 1967 An economic pragmatist outlook The Industries were also assigned a role to play in the Israeli economy

1967 – 1985 The Six-Day War embargo put an end to autarchy. The industry grew in an unprecedented manner. It gained importance within the economy. Establishment of the double rationale – security and economy. Huge growth of the industry would force a reliance on exports. IDF prestige grows as a result of the war, followed by global demand for Israeli products. The meeting of rationale, necessity, potential and organizational capability. SIBAT is established within the MOD to promote defense exports Concurrently – privatization

1985 – Present At first, a deep economic crisis led to the development of commercial behavior patterns in the industry, and a heavier reliance on exports. Relinquishing autarchy freed resources for innovation and a competitive approach in world markets, thus, augmenting export potential. The recovery of global armaments market, from the beginning of the 1990’s led to a flourishing of defense exports. The economic success of the industry became a goal unto itself, and exports the only means to achieve growth. The double justification is retained: a profitable defense industry is good for the market, as well as guaranteeing the IDF’s superiority. Privatization continues.” 5

Israeli Government policies facilitating innovation
The Israeli spirt is known for its ability to adapt to meet the evolving needs of a complex and often harsh combination of circumstances. This is seen in the Israeli government’s approach to the four stages of Innovation and Development of the Israeli ecosystem. Israeli policy portrayed flexibility and awareness of the current needs by adopting a different realist approach to promoting domestic R&D and the value of Israeli produced science and technology. 

The period from 1947-63 was defined by institution building and the instillation in the national ethos of science as a cornerstone of long-term stability. The early state period was marked by the creation of the national water carrier, passage of the Higher education law of 1958, and establishment of Israel’s first desalinization plant in the mid-1960. The actions taken by government leaders, during this period definitively facilitated Israel’s later rise in technological and scientific advancements. (To read more on this topic, please see SIGNAL Note 34- Ben Gurion’s Vision on Innovation and Scientific development in the Jewish State: Philosophy and Policy)

The second and third periods in Israel’s development (from 1963-1985) illustrate a series of massive societal shifts across the nation. From addressing changes in national geography6 to the environmental and agricultural risks posed by hostile regional players, the Israeli government adeptly managed these transitions through policies and programs promoting domestic innovation. As Israel catered its domestic output to global markets, the state formed critical international partnerships with the US (via BIRD) as well as the European Union to promote R&D and technological cooperation in academia, science, and military technology.

The fourth section of Israeli technological development from 1985 to the present, has realized a diverse and multifaceted policy- one which is constantly adapting to the changing global economic order. Spurring this important period in Israeli’s innovative development was the Law for the Encouragement of Industrial R&D (LEIRD) in 1985. The LEIRD was the central piece of domestic legislation defining the parameters of government policy towards industrial R&D ever since. LEIRD explicitly aims to develop science-based, export-oriented industries, which will promote employment and improve the balance of payments. To achieve the aspirations of LEIRD, legislation was created to provide the means to expand and exploit the country’s technological and scientific infrastructure, as well as leverage its highly-skilled human resources. In a time ranging from before the fall of the Iron curtain to the rise of smart cars and big data, the Israeli government created numerous pragmatic vehicles to ensure the growth of the Israeli innovation ecosystem.

Office of the Chief Scientist
The Office of the Chief Scientist has an ever-present role in facilitating investment, R&D and bringing startups to market in Israel. Since its inception in 1974, the OCS has served as a key interchange between the Israeli government and the startup ecosystem. It funds upwards of “50% of R&D expenses in established companies, and up to 66 percent for start-ups.”7 The OCS operates programs, such as ‘Magnet,’ to “encourage pre-competitive generic research conducted by a collection of technological incubators and bilateral and multilateral international R&D collaboration”.8 Further emphasizing the value government support can play in diversifying economic drivers, recent studies support the concept that “government funded R&D appears to be significantly more productive than privately- financed R&D, by a surprisingly large margin.”9 In Israel, the OCS and the capital behind the office have created a unique environment which decreases investment risk, while promoting a range of innovative solutions to global problems. 

International cooperation: BIRD & prospects for global markets
The Israel-U.S. Binational Industrial Research and Development (BIRD) Foundation was established in 1977. BIRD was designed to “promote and support joint, non-defense, industrial research and development activities of mutual benefit to the (private sectors of the) two countries.”10 BIRD was approved in 1975 under the auspices of the OCS, to foster financing cooperation between Israeli and the US. “BIRD only fund[s] projects in which the R&D was done in Israel and the marketing in the US. BIRD had also become crucial throughout the 1980s and 1990s in the enticement of American MNCs to open R&D subsidiaries in Israel.” 11

Results of Government support for innovation
“The State of Israel spends $11 billion (U.S) on research and development each year, with over 90 percent of that money going to high-tech industries through joint venture capital funds. Israel not only competes but also cooperates with many other nations in tech research, having jointly funded projects with 16 countries.”12 The Israeli government has provided consistent funding and policy adaptation that fosters lower risk for innovation while increasing domestic market viability across numerous high-tech focused industries.

The realization that “Government funded R&D appears to be significantly more productive than privately- financed R&D, by a surprisingly large margin” illustrated the effectiveness of the hard-fought policies which formed the Jewish State. “The reason may be rooted in the ability of the OCS to “pick winners,” and/or in the fact that the very process of applying for grants may compel firms to self-select projects, use more structured pre-assessment and planning techniques.” 13

The 19th Party Congress and the Comprehensive Innovation Partnership
During the 19th Party Congress, China announced its development towards a new era. This new era will include ongoing progress in innovation fueled by civil-military cooperation. This cooperation in Israel has been central to Israel’s innovation development. Israel has become a global high-tech powerhouse through the confluence of government policy and the sheer will to overcome adversity from many sources. In creating an international center of innovative technological vision, the Jewish State has cultivated broad international acclaim resulting in the export of innovative solutions to many a global crisis. According to recent data from the Global Innovation Index “Israel is the only economy in [Northern Africa & West Asia] to rank in the top 10 for any pillar (5th, Business sophistication, up one spot; and 9th, Knowledge and technology outputs, up three).14 Israel is; 1st in researchers, 1st in venture capital deals, 1st in ICT services exports and 2nd in research and development (R&D).15 With a clear comparative advantage above almost all other innovation hubs it is of no surprise that the PRC recently declared its relationship with Israel as a Comprehensive Innovation Partnership. Considering Israel’s expertise in science and R&D, it is logical that all nations, especially those seeking to achieve a moderately prosperous society, should promote bilateral cooperation and the integration of Israeli technological solutions in resolving domestic issues from agricultural management to security assessments and big data analytics.

Additional Resources:

  1. Theodore Hertlz 
  2. Hebrew acronym of “Authority for the Development of Armaments” – רשות לפיתוח אמצעי לחימה) is an Israeli defense technology company. It was founded as Israel’s National R&D Defense Laboratory for the development of weapons and military technology within the Ministry of Defense in 1948. 
  6. As an outcome of Israel’s victory in the 1967 war 
  8. Ibid 
  9. Ibid 
  10. Ibid