Introduction
Michael E. Porter notes that in Israel the main clusters (technological and industrial) are linked with agriculture (harvest, fertilizers, irrigation material and other specialized equipment) and national defense. In fact very few specialists know the characteristics of Israeli high-tech companies and their respective strategies, often established in conflicting circumstances.
With around 1000 start-ups, of which 100 are traded on the NASDAQ, Israel appears as a “Silicon Valley” on its own. The success may be briefly explained by a mix of State financial support and governmental incentive measures with Russian brains. Subsequently, one may say that Israel appears as the second performing and promising incubator of high tech companies after the Californian Silicon valley.
However, in order to get a complete understanding of Israel High tech development, one may also stress the different weaknesses of Israel Silicon Valley Model, such as the relatively small size of start-ups, lack in marketing management, high salaries of Israeli engineers because of a high level of inflation, financial burden for NASDAQ introduction .
One special feature of Israel Silicon Valley Model appears as the “American temptation” , more precisely the acquisition of successful Israeli start-ups by worldwide high tech leading American firms. For instance, in 1998, Cisco acquired the Israeli start-up Class Data System for $ 50 millions; six months later, Sun Gard made a purchase of Oshap group, financial software developer for the $ 210 millions. Similarly, AOL bought Mirabilis in June 1998. This American acquisition wave may be explained by a lack of development strategy and ambition. Besides, Mr. Charles B. Wang thinks that the government should pay much more attention to the successful companies, in order to keep them in Israel. This country has all the technological know-how but needs marketing expertise to develop real multinational, “otherwise to become a minor league system”, developing talent and technology for others.
In this article, we are going to present the key characteristics of the Israel Model and some insights on success stories experienced by companies which have launched and developed high tech-related businesses within Israel, a breeding ground for technology creation
The Israeli Economy
Ranked 49th in the world with a GDP of $99,5 billion in 2000 , Israel is a relatively small player in the world-wide economy. In terms of high technology, it ranks 23rd in the world in total Research and Development expenditure with $2,2 billion, while the United States were spending $206 billion, and Japan $130 billion.
If we take into account the size of the country however – around 6 millions inhabitants, ranking the country 98th in the world -, Israel ranks 8th worldwide as R&D represents 2.2% of its GDP. Its per capita GDP (today some $16,950) places it 21st among 200 countries in the world. Although a small country, Israel’s international position in some areas of industrial and agricultural production capacity and exports is remarkable. As the central bank governor admits , the country economy can in fact be divided into two separate economies: one high tech and booming, and one low tech and dying. In spite of today’s political constraints and uncertainties, the first one makes Israel one of the most dynamic and efficient areas of the new economy.
The country has a technologically advanced market economy, and it has been targeting high-technology niches in international markets such as medical scanning equipment for example.
Within just a few years, Israel’s technological industry has penetrated world markets and has become a research and development center eyed by firms dealing in high-tech products and software for communications, medicine and engineering around the world. The university graduates who immigrated from the former Soviet Union were among the prime catalysts that propelled this industry to today’s level .
Since the 1990s Israel was considered as one of the best hopes in the high-tech industry, allowing the country to get into the circle of the industrialized countries .
Facts are numerous to describe the current situation of the Israeli high tech industry, which has progressively but rapidly become a model with so many similarities with that of the Silicon Valley. With one hundred companies having equities negotiated on US financial markets – NYSE, NASDAQ, and AMEX – Israel comes just after Canada in terms of foreign presence at Wall street. In Israel, around thousand of people work in the High-Tech industry, a 1/3 of them being highly-paid, when in the rest of the economy the wages are stagnant.
In November 1999, some $276 million were invested in venture-capital in Israel, only California and Massachusetts exceeded this amount. In the year 1999 only, around 1500 Start-Ups were created. There are 600 companies on the Tel-Aviv stock exchange .
Israel is also the country which shows the highest rate of scientists and engineers (140 on 10 000 employees). The high tech industry is one of the most important engine of the strong economic growth for 10 years. During the last years, the growth rate of electronic industry has reached 10% per year.
Despite its size and limited natural resources, Israel has gained a worldwide reputation in R&D and academic research (determined by the number of scientific publications per capita, Israel publishes about 1% of the worlds scientific papers ).
The key to Israel’s success in the high-tech sector is its highly trained population; in 1993, some 20% of the employed industrial (manufacturing) workforce had college degrees. The figure is even higher when the software sector is included. In fact, about 9 in every 1000 Israeli workers (all sectors) are engaged in R&D. This rises to 30 per 1,000 within the manufacturing industries. These were among the reasons that triggered the entry of multinational companies to Israel. Other causes included a decline in Israel’s economic risk level and the capital market and foreign currency policy reform . In addition, the government encouraged foreign investors under the investment law (a 34% grant in 1995 and other tax benefits), and there was increasing pressure on the privatization process .
In terms of productivity per employee, Israeli high-tech still has a long way to go, compared to international standards. Although output per employee in the industry is $160,000 per annum, some countries boast an output of upward of $250,000 per employee per annum.
What are the key success factors of the Israeli model ?
For many experts and specialists of Israel, the success of this country in the high-tech field is mainly due to the Israeli Defense Forces, to the country’s military industries, its military intelligence units, its research institutes, its universities, and “for those who insist” on the racial explanation on the “genius of the Jewish people” .
It is considered that the only competitor in terms of entrepreneurship, creativity, hunger for innovation, love for change and danger is America’s Silicon Valley. On the other hand many nations surpass Israel in terms of technology, management, marketing and production.
The entrepreneurial class is highly educated, multilingual and non politicized. The origins are European and North American. They have little contact with Orthodox Jews or Arabs…
How come that Israel, a small country with relatively young population of six millions inhabitants has emerged as a dynamic force of high Technology ?
Israel is a country of deep cultural practices. All along its rich and original history, the country has strengthened until today the roots on which its economical success has been built, and managed to create and develop a model with characteristics and strengths.
We have tried in this article to identify the main components of this model, and to select some of the key success factors which have directly or indirectly enabled the setting up of what is today one of the most dynamic and modern areas in the industrial world.
A culture of Entrepreneurship
The entrepreneurship spirit is without any doubt a crucial characteristic of the Israeli mindset. As illustrated by the number of start-up which are being created every year in the country, the entrepreneurship spirit is indeed a quality one can find in a large number of Israeli people. As stated in the Newsweek magazine , “to be an entrepreneur you have no fear of failure. They have an amazing class of very entrepreneurial minded people who grew up in a war atmosphere… If you look at the people running the leading-edge companies, a lot of them came from the same units in the Army”.
One of the reasons might also be the vital need to make do with a country with very little raw materials, which induced the necessity to create intellectual value to survive in the worldwide competition. The country does not have a choice: a lack of raw materials and a limited domestic market are factors pushing companies to export sophisticated products.
It might be as well due to the constant political turmoil which have characterized Israel all along its history. In particular, many Israeli have the capacity to react very fast and to adapt their lifestyle according to the evolution of their environment. If we take the example of tourism, which at the beginning of 2001 has almost disappeared due to the political events which have raised between Israel and Palestinians, it is amazing to see how people who lived from this sector managed to change their professional and business orientation. These people are now adopting a proactive attitude and are creating new businesses and opportunities.
It is also amazing to see how active youngsters act as regard to start-up creation. Mirabilis ICQ for example, which was created in 1996 by Vardi (aged 28), Visiger (26) and Goldfinger (27) has become a real model which has been followed by so many young Israeli. The ICQ program allows Internet users to know which friends are online and communicate with them directly. Mirabilis was bought by Internet giant American On Line for $286 million, in a deal whose final value could hit $407 million as long as the company keeps growing – likely, since ICQ is hands-down the most popular program on the Net, and is swelling its user base by a million every 22 days.
The entrepreneurship spirit is also demonstrated in the following statistics: of the thousands Israeli companies involved in R&D, 80% are less than 10 years old.
As a result, the Israel economy has lived a revolution. In the 1960’s, 70% of Israeli exports were oranges and agricultural goods. Today, high tech products are two thirds of the exports and agricultural produce is less than 3%.
As one can say the highest export of Israel these last years is not diamond nor oranges but entire companies, usually toward United States .
In 1999, Israel was ranked 6th worldwide as regards to entrepreneurship, and was ranked 5th worldwide as regards to creation of firms .
Education and Science
One of Israel’s biggest advantages has been the high level of education: 60% of the active population is educated up to High School level, a phenomenon that has been boosted by the arrival of an impressive number of researchers from the ex-Soviet Union. While Israel do not possess any natural resources (no petrol, no gas, problem with water resources), this country is featured by very good human resources with very high level of education and qualification.
Education in Israel is indeed a precious legacy. Following the tradition of past generations, it continues to be a fundamental value in Israel’s society and is recognized as the key to its future. Education is notably considered as a key component of the Jewish religion, which becomes important when we consider that 80% of the Israeli population is Jewish.
In Israel, more than 60% of the working population has an educational level equal or superior to high school, out of which more than 25% are graduates and more than 12% hold post graduate degrees. The percentage of Israel’s population engaged in scientific and technological inquiry as well as the amount spent on research and development, in relation to the size of its Gross Domestic Product, are among the highest in the world. Israel is at the first rank for the proportion of scientists, engineers, technicians with a rate of 145 on 10000 (in comparison with 85 in the US and 70 in Japan and 60 in Germany). Besides, Israel is also located at the first rank considering the amount of scientific publications per inhabitants. And relative to the size of the labor force, Israel has by far the largest number of publishing authors in the natural sciences, engineering, agriculture and medicine.
Several factors may be considered to explain this high qualified work force :
- Its universities and research institutions such as the Technion (Israel Institute of Technology) and the Weizmann Institute.
- The compulsory military service in National Defence Forces, that provides young people with a technical and practical experience insisting on group work in fields such as technology. One may outline that most of new start-ups are created by young men who became friends and used to work together during their military service in R&D laboratories and elite army units.
In 1999, Israel was ranked n°6 worldwide as regards to Science and Education, and n°4 in terms of availability of skills . It was also ranked n°4 in terms of basic research.
Already in 1990, Israeli companies deposited 299 patents in the United States and Israel is ranked as the 15th most important country from this point of view. The number of patents deposited by Israeli universities is one of the signs of the strong synergies between industry and academia in Israel. A recent survey has shown that universities are the most significant technology patent holders in Israel as well as abroad and their participation on this level exceeds most higher education systems in other countries. Due to high R&D spending, Israeli universities deposit double the number of patents than their American counterparts and nine times more than Canadian universities. Even though Israeli companies have a limited potential on an international level, their impact on peace in the Middle East could become a determining factor for the future of this region.
A study on global scientific production shows the following results: The EEC produces 27% of the world’s publications, representing some 3/4ths of American publications. After adding other Western European countries – Nordic countries, Switzerland, Sweden, Austria – Western Europe produces in all 31% of world publications, close to 90% of American production. These figures have been stable since 1982.
Japan produces 7.7% of world publications, and this proportion has doubled since 1976 (+16% since 1982): there has been a clearly noticeable increase since. Japan now accounts for nearly 30% of all EEC publications and some 20% of US publications.
More than half of the publications outside of these three regions, Eastern Europe and the USSR are generated from other developed countries like Canada, Australia, New Zealand and Israel.
Israel’s contribution in the world production covering all disciplines mainly consists of scientific publications and represents some 1%, which is about as much as those produced in the Middle East and North Africa (Source OST – 1994).
Israel is rated amongst the top 20 countries for technology publications in the world.
The fostering and facilitating role of the Israeli Government
The Office of the Chief Scientist (OCS)
Israel is also characterized by a strong State support to the R&D sector in general, and to start-up creation. A unique Israeli phenomenon is the office of the Chief Scientist at the Ministry of Industry and Trade, which distributes grants totaling nearly $400 million to various R&D projects. The projects that succeed are expected to pay royalties to the Chief Scientist’s office for a number of years.
Through the Scientific Office in the Industry and Trade Ministry, The Israeli Government fosters high tech development by granting substantial financial support to high tech companies. Companies may obtain a financial support of 30-60% of their gross expenses, that maybe refund through royalties. During the last few years, this Scientific Office has financed more than thousand projects per year with a budget of 400 millions US $, and subsidized more than 200 seeds companies located in 26 technological incubators spread all over the country. Therefore, thanks to this incentive government policy, Israel is at the worldwide first rank for R&D investment (during the last few years, an average of 2,5% of GDP).
Technology Incubators
In the belief that the country’s economic future is largely dependent on the success of its technological industry, the government launched a technological-incubator program in 1991. This program enables any entrepreneur with an innovative technological idea to turn the idea into a product.
Technological-entrepreneurship incubators are supportive frameworks that enable beginning entrepreneurs – whether they are residents, returning residents, or immigrants – to take innovative technological ideas in the preliminary stages of development, turn them into commercial products for export, and establish factories for this purpose in Israel.
Through the technological incubators, the government provides entrepreneurs with physical premises, financial resources, tools, professional guidance, and administrative assistance, so that during their stay in the incubator they may turn their abstract ideas into products of proven feasibility, novelty, advantage, and necessity on the international marketplace.
The incubator program is applied in all parts of the country, under the guidance and with the support of the Office of the Chief Scientist of the Ministry of Industry and Trade.
Because the State provides most of the budget during a project’s incubator phase, it holds the management of the incubator responsible for the sound and efficient professional operation of each project in the incubator, including budget management and commercialisation of the product being developed.
This is a very risky stage of business development, and commercial money does not take this kind of risk. Therefore, in order to keep good ideas from coming to naught, the State, practically speaking, assumes the risks in the incubator program that commercial investors are loathe to take, by funding this the riskiest stage of their development.
The overpowering Tsahal culture
Another key success factor is the Israeli army – Tsahal, which has indeed a real power in the whole country and directly impacts on its economical environment. One of the main reasons for this is the many wars Israel had lived during its history, which makes the army an entire part of its culture. As a direct result, a culture of risk and of constant competitive intelligence has been developed within the Israeli companies.
The Israeli Army has contributed to Israeli innovation in more ways than one: team spirit inherited from work pools in the army, and technology transfer to the civilian sector. According to John Sculley, former manager of Apple, “these technology transfers take up to seven years in the U.S. ; there is therefore a risk of obsolescence”. In Israel, the transfers are usually fast.
Israeli army, which has strongly influenced Israeli managers’ mentalities, is organized in small units which are flexible and quick to react. Israeli industry largely reflects this mentality: corporate cultures are usually informal and professional relationships not very hierarchical.
Tsahal acts as a R&D catalyst, as the compulsory military service in National Defense Forces (three years of attendance of men and two years for women) provides young people with a technical and practical experience which focuses on work groups in fields often related to technology. One may outline that most of new start-ups are created by young men who became friends and used to work together during their military service in R&D laboratories and elite army units. Moreover, as Professor Ilan Marek outlines, in the framework of partnership between the Technion and new start-ups, managers are very often retired soldiers, since they get retired at 42 years old. Belonging to the scientific and technological elite of the nation, they usually accept to raise the challenge of managing a new start-up with a low income, for they still receive their military wage. Thus, the Israeli military service and the very prominent role of the military defense in the Israeli society is a crucial catalyst for high tech development.
The roots of Israeli hi-tech industry can be found in the creation of the military industry in the 1950’s and its permanent race to better its arms .
In Israel, soldier-peasants from kibbutz have been replaced by cyber – entrepreneurs from high tech incubators . The Israeli high tech elite has been raised in the famous and ultra-modern research centre of Tsahal, called MAMRAM. Indeed, many of the creators of successful start-up such as MAGIC, Sapiens, New Dimension, Memco which are quoted in the NASDAQ have achieved their formation in that important body of Israeli defence system.
The army training gives Israelis a kind of commando mentality, it means moving fast, improvise…which is perfect in the net economy.
Transferring Technology from the military market to the civil market
Advanced technologies that were originally developed and utilized for military purposes are now being used for developing commercial products for civilian use. With the downsizing of Israel’s defense industry, thousands of skilled personnel have left the defense industry since 1988. Many of them were absorbed into the civilian marketplace, while others formed start-up companies which later became successful high-tech firms.
Some important civil societies such as ECI Telecom, Elisra and RAFAEL have marketed with success high technologies, that were first developed for military applications.
The Russian Immigration
Due to the political events following the collapse of the former USSR, a large number of Russian have migrated to Israel at the beginning of the 90’s. The influx of these Jewish immigrants, many of whom have technical professions, topped 750,000 during the period 1989-97, bringing the population of Israel from the former Soviet Union to one million, or one-sixth of the total population.
Immigrants from the ex-Soviet Union represent a major advantage for the country’s future. Initially this great influx increased unemployment, intensified housing problems, and strained the government budget. At the same time however, the immigrants bring to the economy scientific and professional expertise of substantial value for the future. Many skilled and experienced people, including 60 to 70 international level scientists, have indeed joined Israeli economical world without representing any cost for the country. Specific actions are being taken to welcome renowned scientists of above 60 years of age back to the country. The Ministry of Science and Technology has also allocated a special budget for subsidies to research centers situated in the peripheral areas of the country. However, it is the Ministry of Commerce and Industry’s initiative to create technology incubators which is the most remarkable of all Israeli efforts in this area. In 1993, with a budget of FF 300 million the ministry approved 148 projects (out of which 79 were proposed by immigrants) to be carried out in 24 technopoles for creating and developing tomorrow’s products. These 24 centers already employ 650 researchers out of which 513 are new immigrants. These incubators have largely added to the integration efforts made in the past few years to develop the Israeli economy through innovation.
The “American Link”
There has been a US presence in Israel for three decades. Two high-tech giants – IBM and Motorola – established local subsidiaries for sales and technical support in the 1960s; over time the local plants evolved into full research and development facilities. Motorola took the process one step further and established one of its largest manufacturing facilities in Arad, near the Dead Sea. During the late 1970s Intel Corporation began operations in Israel. Today, Intel’s activities range from R&D (in Haifa) to wafer manufacturing (Fab 8 in Jerusalem); and a plant designated Fab 18 under construction in Kiryat Gat.
A very close relationship exists between American companies and Jewish American industrialists investing in Israel.
America is also present in Israel via its government. Roughly half of Israel government’s external debt is owed to the US, which is its major source of economic and military aid. 3 billion of US dollars have been given to Israel after the Yom Kippour War, and other substantial helps and funds have been regularly provided to the country. These funds have been particularly useful for the building and developing of the whole Israeli industry.
Foreign investment in Israel
Israeli high-tech companies also benefit from international know-how and professional experience from the Europe, as many engineers and managers are coming back to settle in Israel.
Foreign industrialists and companies like Volkswagen, Hoescht, Henkel, Samsung, Daewoo, Fujitsu, Nestlé, Volvo, Nokia and Carlsberg have started understanding the potential of the country. The net amount of foreign investments in Israel in 1995 reached a record 2 billion USD – although the decrease in investments was strong in 1997 and 1998. More than 150 foreign companies have invested in R&D in Israel. Israel has signed binational industrial cooperation agreements in R&D with countries such as the United States, Canada, France, the Netherlands, Spain and Hungary. Israel also has free trade agreements with Europe and the United States.
Development of the venture-capital sector
A dynamic venture-capital sector has emerged in Israel in the mid-nineties. The country is now the third largest venture capital recipient in the world: in November 1999, some $276 million were invested there in venture-capital, only California and Massachusetts exceeded this amount.
The Israeli venture-capital industry has grown very fast: from 1994 until now, this sector has increased from only one company (with 34 millions US $ of investment funds) to 70 investment companies with more than 50 funds relevant to high tech industry. Moreover, since the beginning of the nineties, Israeli venture-capital industry has invested around US$ 2 billions, of which US$ 800 millions have been oriented to high tech companies.
Many of the investors include major companies from North America, Western Europe and the Far East looking to profit from Israel’s unique capabilities in communications, computer software, medical equipment and biotechnology. The list of foreign investors ranges from leading investment banks like Hambrecht & Quist and Goldman Sachs in the US and George Soros’ Quantum and Converse Technologies as well as major worldwide business corporations like France Telecom, Germany’s Siemens and Daimler Benz and Japan’s Kyocera. The US aircraft manufacturer Boeing recently invested in an Israeli venture capital fund – its first such investment anywhere in the world .
The “network fun culture”
The Israeli culture is by many aspects very close to the Silicon Valley culture. These past few years have been characterized by the development of many “serial creators” who have become the new “messiahs of Israel”, such as those who created Mirabilis and Checkpoint.
The originality is that these creators are not only animated by the New Economy spirit, they also have developed a strong capacity to evolve within network organizations, which form the basis of the Israeli model. These networks, which include business partners and competitors, but also the family, the school, the Diaspora, and Israel’s American links, is omnipresent in the daily life of those managers. It is maintained and strengthened everyday through any and exchange and communication opportunity which might appear. Not surprisingly, Israel is one of the countries with the largest number of mobile phones per inhabitant.
Some governmental efforts have been made in the construction of formal networking, mainly initiated by the Ministry of Industry and Trade. In particular, the Magnet program that resembled an R&D network was initiated to convert military technology into civilian applications . Some Scientists from the Institutes take part in few Magnet programs. Today the magnet program is not limited to the conversion of the military technology.
Domestic Technological Advancement
Israel has firmly established itself as the most computerized country in the Middle East; it even surpasses some Western European nations. In 1997, more than 250,000 personal computers were sold in Israel, compared to 102,000 sold in Egypt (with a population of some 60 million) and just under 300,000 in Turkey (with a population of some 65 million).
Israel also leads the Middle East with the highest penetration rate of PCs in private homes. There is a personal computer in nearly one out of two households, a ratio similar to that of the United States, Canada and a very few European and Far Eastern countries. In recent years, the education system has purchased tens of thousands of computers for use by students, from kindergarten through university age.
Compared to other so-called high-tech ‘tigers’, such as Korea, Malaysia and Taiwan, Israel is unique in that it is a “true” high-tech country, with a highly developed domestic market for computing and telecommunications. Israel is also a “quick adopter” of advanced technologies. Local expenditure on information technology is estimated at $2.4 billion in 1997, with a steady growth of 12-15% annually. Worldwide, expenditure on information technology reaches about $700 billion, with a 5-year compound annual growth rate of about 10%.
Consequences of the High Tech evolutions on the Israeli society and economy
According to Joel Maryles “It has become clear to the leading technology companies in the world that Israel is one of the top centers for technological innovation”. But there have been some consequences on the current evolution of Israeli society.
The values of Israeli traditional economy (collectives, hierarchy, social security, political support) have been turned down, for the obedience to the forces of the market in more precisely to the American market . A new elite of people appeared in Israel, made of entrepreneurs, employees, investors and executives, which brought a social revolution.
It is said that all those changes have influenced Israeli culture, but the population concerned is situated at 30 Km around Tel-Aviv and in a small area of Haifa; however “it is possible to speak of another country – situated inside Israel: Kiriat Atidim. This area has one of the highest GNP per capita in the world and its population is fully Americanized : “it is the Land where America is the yardstick for everything”. Every next day one can be sent to USA to continue the same activity.
For many Israelis these changes are reshaping not only the economic landscape but also the whole Israeli society. Producing an economic schisms in a society that was once proudly egalitarian . “The scale and speed of what is going on here has, I think, shocked everybody” says Jonathan Medved of Israel Seed Partner, a venture capital firm.
Even the leaders of the High-Tech huge development fear the transformation of Israel that it causes. According to Mr. Alexander, the chairman of Comverse , most of the wealth is going only to 35% of the population.
Around a 100.000 people work in high-tech in Israel and a 1/3 of them are highly-paid, when in the rest of the economy the wages are stagnant.
Conclusion
To sum up, Israel benefits from a leadership position in high tech thanks to initiatives and governmental incentive measures inspired by both values of voluntarism and pragmatism: a high proportion of GDP percentage dedicated to civil R&D (2,8% in 1998), creation of numerous start-ups by young scientists, very tight relationship of synergy between universities, research institutes and start-ups, the establishment of an investment funds ($ 100 million) in order to attract foreign investment, the establishment of technological incubators and lastly emphasis on technological niches.
