Par IsraelVallay Desk
Rubrique: Universités, sciences et r&d
Publié le 11 octobre 2007 à 01:53

IsraelValley will publish each week a part of the thesis “Israel the new ‘Silicon Valley’” wrote by Karen Vainunska and Yael Rosenberg. You can download the whole thesis here

CONTEXT AND ECONOMIC MODEL OF ISRAEL

For a long time Israel has been on the cutting edge of research and development in advanced technologies. Despite the limited natural and financial resources of the country living in never-ending conflict with some of its neighbors, Israel’s scientists and engineers have been constantly confronted with the challenge of quickly devising new and innovative solutions, such as drip irrigation (in response to the country’s poor water resources) or the Merkava tank (as part of a wider effort to develop a home-grown defense industry). History and geography have made Israelis adepts at identifying problems, finding solutions, and shortening the development process to turn them into commercial products.

Over the last decade, Israel’s research and development (R&D) prowess has rapidly expanded out of the military sphere, the universities and research institutes, where it was originally concentrated, to create what is widely acknowledged as a model high technology economy. Israel comes at the second place after the United States on a per capita basis in its ability to generate new, technology-based companies with innovative, market-focused products.

A. Brief History

Amid the kibbutzim and factories of the early 20th century, the seeds of Israel’s future technological institutions were planted. The Technion-Israel Institute of Technology, the Hebrew University and the Weizmann Institute of Science were all established prior to the founding of the State in 1948, and the arrival of highly educated refugees fleeing Nazi Europe contributed significantly to create an inexhaustible source of scientific knowledge. The young new State enjoyed early success in its efforts to make the desert bloom, and created a large farm-export industry. These agricultural achievements were made possible by R&D in areas such as plant and animal propagation, and soil and water technology, conducted at the Volcani Center’s Agricultural Research Organization and the Hebrew University’s Faculty of Agriculture in Rehovot.

Having fought three major wars in the first two decades of its existence, the government reached the conclusion in the late 1960s that it would have to develop as much of its own defense capabilities as possible. The resulting burst of R&D activity was aimed principally at military communications and electronics, but day-to-day achievements stemming from military technology laid the basis for Israel’s first generation of high-tech enterprises. By the early 1970s, the government-owned Israel Aircraft Industries (IAI) had successfully built its own fighter jet, the Kfir. In 1988, Israel became the eighth country to have independently launched its own satellite (Ofek on the 19th of September 1988 and Amos in April 1996) into space. More recently, with U.S. funding, IAI successfully developed the Arrow missile, the world’s first missile-to-missile defense system.

B. Characteristics of Israel

Young country: Creation in 1948
Small country: 21,643 sq. km
Total population: 6,990,700
Geography: Located in the Middle East, along the eastern coastline of the Mediterranean Sea, boarded by Lebanon, Syria, Jordan, and Egypt, at the junction of three continents: Europe, Asia and Africa.
Government: parliamentary democracy
Religion: 76% Jewish, 20% Muslim and Christian Arabs
Geopolitics situation: uncertainty – not in peace with its neighbors
Immigration: diversity of the population
Warm weather: favorable to the agriculture
International Aids: U.S. aid to Israel is $3 billion per year ($1.2 billion in economic aid and $1.8 billion in military aid).
Education: 20% of the country’s workforce are university graduates
Economy: advanced industrialized market economy. Dynamic and flexible country
Gross Domestic Product (2006): 5.1%, $140 billion
Per-capita GDP: $20,000, places it 7th after USA, Ireland, UK, Japan, France and Spain
R&D contribution to GDP: 3.7% from over 1,000 R&D-based companies
High-tech industry: 100,000 employees in 2,000 high-tech firms and 3,000 start-ups.
Number of engineers: 135 per 10,000 people (85 to 10,000 in US)
Growth rate of electronics industries: 8% per year
Entrepreneurship: 2nd position of the largest companies in Europe behind GB and at the same place as France.
PC Penetration: 24% in 2004 and personal computer nearly one out of 2.

C. From protectionist economy to market economy

The Israeli economy was initially subject to extensive government controls. Only gradually was the economy converted into a fairly free (though still not completely so) market economy. Israel embarked upon a very gradual process of economic liberalization. This appeared first in foreign trade: quantitative restrictions on imports were replaced by tariff protection, which was slowly reduced, and both import-substitution and exports were encouraged by more realistic exchange rates rather than by protection and subsidies. Several partial trade agreements with the European Economic Community (EEC), starting in 1964, culminated in a free trade area agreement (FTA) in industrial goods in 1975, and an FTA agreement with the U.S. came into force in 1985.

By late 1977, a considerable degree of trade liberalization had taken place. In October of that year, Israel moved from a fixed exchange rate system to a floating rate system, and restrictions on capital movements were considerably liberalized.

Throughout the 1980s and the 1990s additional liberalization measures took place: in monetary policy, in domestic capital markets, and in various instruments of governmental interference in economic activity. The role of government in the economy was considerably decreased.

Beginning in 2003, the Ministry of Finance embarked upon a major effort to decrease welfare payments, induce greater participation in the labor force, privatize enterprises still owned by government, and reduce both the relative size of the government deficit and the government sector itself. These activities are the result of an ideological acceptance by the present policy makers of the concept that a truly free market economy is needed to fit into and compete in the modern world of globalization.

Israel has few natural resources. The aspiration of its population for a Western standard of living can only be satisfied through integration into the global market. Israel’s transition from a State-dominated, centralized, protectionist economy to a free market means that traditional industries such as textiles are disappearing, losing out to low-cost overseas competition. How far and how fast this transition should go is a matter of debate, but there is no doubt that high-tech, where Israel enjoys a relative advantage, will be a mainstay of Israel’s economic future. As Israel’s economy restructures from traditional industries for the local market to export-oriented high-tech, high-tech exports as a percentage of total exports has been steadily increasing, rising from 30% in 1996 to 48.3% in 2006.

Exports of electronics communications components, electronic components, medical equipment and software and IT products soared to over $13 billion 2000. Although the onset of the high-tech crisis in late 2000 caused a sharp contraction in exports and production, electronics, communications, monitoring and control equipment, and avionics are still key exports. Pharmaceuticals and medical devices and equipment are also becoming increasingly important. High-tech is still the key growth engine for the Israeli economy and a mark of its integration into the global economy.

D. High-Tech Model

With the exception of the United States, no other country in the world has managed to build a technology sector based on start-up companies rather than on older, established businesses. Israeli engineers have shown a remarkable readiness to risk leaving secure jobs in big companies to form businesses of their own. Just as remarkably, the country has rapidly spawned a financial community that is prepared to invest in them, through venture-capital funds which already have been, or still are in the process of raising as much as $1.5 billion, nearly all of it destined for technology companies.

Israel benefits from a leadership position in high-tech, thanks to initiatives and governmental incentive and pragmatic measures: a high proportion of GDP (Gross Domestic Product) dedicated to civil R&D; creation of numerous start-ups; the establishment of investment funds in order to attract foreign investment the establishment of technological incubators; and, lastly, emphasis on technological niches such as database protection systems, management of computer networks, Internet traffic management, biotechnology, and ophthalmology.

At the turn of the new millennium, Israel boasts many thousands of high technology companies in a wide range of fields such as telecommunications equipment, software, semiconductors, biotechnology and medical electronics. The majority of these companies are start-ups, with the most successful becoming world leaders in their respective fields. High technology and technology-rich products account for some 70% of exports. Multinational corporations have come to recognize Israel’s technology abilities: leading global companies like Intel, Motorola, IBM, Microsoft, Alcatel and 3Com all have research and development facilities in Israel. Intel and Motorola also manufacture advanced products in Israel, and many other multinationals have purchased local companies, buying their patents and acquiring their professional skills.

The number of start-ups being created every year in the country illustrates the high entrepreneurial spirit of Israeli people:

Therefore, with some 3,000 start-ups, the Global Competitiveness Report 2000 ranked Israel second behind the US in the number of start-ups and first relative to population. The weight of start-ups of GDP was 3% in 2000, compared with 0.4% in 1997. The comparable figures for the US were 0.3% and 0.1%, respectively. Israel was highly ranked in terms of the number of engineers and education, but poorly in terms of physical infrastructure, a situation the government is trying to remedy.

Modern economies rely on research and technology, including advanced technology for communications and dissemination of information. The value of investment in research and development in Israel as a percentage of the Gross Domestic Product (GDP) is the highest in the world. State expenditure on civilian R&D has been rising faster than GDP through the last decade mostly being invested in high-tech, but also agriculture, manufacturing and biotechnology.