Changing market dynamics and pressure to compete globally have encouraged the growth of ‘creative destruction[1]’trends, leading to worthy innovation. To run parallel to the novel needs and demands of the market, it is essential for every country to scrutinize the scope of innovation, which ultimately affects the economic progress of a nation. The Organization for Economic Co-operation and Development (OECD) defines innovation as, ‘the implementation of a new or significantly improved product or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.’[2]
The impact of innovation on the growth and development of a country is multifold. An innovation economy is one, ‘which experience sustained growth through the creation and implementation of new technologies, product or processes in an ecosystem of inventors, entrepreneurs and investor.’[3] Mainly, four factors are attributed as contributory in shaping an innovation economy. These include economic incentives, to provide value to inventor to motivate them to invest in the innovation; financial stability; skilled human capital; and accessibility and smooth flow of information.[4]In addition to these, the Government is also required to play a role and provide its support in adopting such public policy that can help in leading the innovation driven economy.[5] This article will discuss and analyze the innovation model of Israel that led to its significant recognition throughout the globe.
Israel’s method of investing in innovation led to the creation of sustainable economic prosperity, subsequently leading to tremendous economic productivity and value
Israel is a small country in the Middle East with a population of only 8.5 million people. Despite its history of wars for freedom and continuous conflicts with neighboring countries, Israel has managed to maintain its reputation as an exceptionally prolific country in terms of nurturing an innovation-based ecosystem. Israel has long understood the importance of R&D and innovation, and how these concepts are an essential element for their country’s’ prosperity. Israel’s method of investing in innovation led to the creation of sustainable economic prosperity, subsequently leading to tremendous economic productivity and value.[6] Israel has seen a shift from being a knowledge economy to being recognized worldwide as an innovation economy. It has set an example for getting exceptional results with combined efforts of both their Government and private sector. It has been bestowed with the title of ‘Start-Up Nation’.[7]
The history of specific developments in Israel dates back to the 1960s, when Israel transformed into an emerging economy by transitioning from a country making no significant R&D contributions, to a country whose major focus was directed towards innovation led by novel R&D and technological creation.[8] The current figures may make someone believe that Israel has a rich history of strong industrial innovation, but around the year 1965, Israel saw a GDP growth of less than one percent with the lowest ratio of expenditure on R&D compared to any OECD countries except Italy.[9] The constant threat of war and terrorism that it experienced since its independence in 1948 had limited the prospects of stimulating growth.
Another significant problem faced by the economy was free immigration into Israel, resulting in an exponential rise of population in Israel during the time of its independence, almost doubling during the years of 1950-65.[10] The Government took this as an opportunity and started shaping the knowledge economy by investing heavily in education and training programs, which led to the rise of the skill and education level of the labor pool.[11] The shift was seen during the war phase of the 1970s when the focus was directed towards their defense industry which employed almost half of Israel’s scientists and engineers. Efforts were also made towards restructuring and privatization, to decentralize the economy.
During the mid-1980s, when Israel experienced an inflation rate of 375%, economic growth stunted abruptly. In response, Israel implemented a stabilization program focused towards financial reforms that helped in liberalizing the economy and bringing the inflation rate down to 20% by 1990.[12] From the 1990s onward, Israel shifted its economic model to transform into an innovation-based economy. This shift resulted in the economic growth reflecting a GDP growth of 5.9% on an average per year between the years of 1990 and 2000.[13]This growth also affected change in various domains throughout the country, including employment, inventions, etc.
By the year 2000, the employment rate in the Information and Communication Technology (ICT) sectors and software sectors rose to 87%.[14]Israel also saw a steady rise in the number of patent applications filed by Israeli inventors in the United States.[15] Companies started engaging in expertise likely to attract public offering to extend their link towards foreign capital markets. Interestingly, in a short span of time, Israel started representing the highest percentage of NASDAQ-listed companies in the world outside of the US along with significant recognition for most start-ups per-capita of any country.[16] It also became a country with the second largest Venture Capital industry.[17]
These achievements are the results of careful implementation of certain parameters with long-term planning mechanisms. This article will now discuss such parameters and the methodology of implementation of such factors by Israel in detail.
A. Foundation of Office of the Chief Scientist (OCS)
Israel realized the need for forming a strong base for building science and technology by the late 1960s. Israel started by creating a strong base to strengthen the roots of future prospective innovations. The Government took the decision to start building their ‘science economy’ which subsequently led to the formation of the Office of the Chief Scientist (OCS) in 1969 under the Ministry of Industry, Trade and Labor.[18] The OCS used to provide grants to encourage R&D activity, promoting innovations that carved the way for developments in various sectors. At the same time, Israel was also forced to invest in the military sector which boosted the R&D in the civilian and military domains. This led to a fruitful exchange of skills and technology between military and civilian sectors. The OCS also helped in building relationships with foreign companies by extending their co-operation through bilateral programs which resulted in access to global information.[19]
B. Focusing on Marketing and Business
Towards the end of the 1980s, Israel realized that a funding gap existed between growing startups and the potential market. Lack of financial intermediaries made it difficult for investors to trust startups enough to invest in them. This resulted in the failing of many companies, owing to their inability to sustain in the market. To counter this, the Government came up with a funding initiative called Yozma in 1993 which initially funded around 200 startups in Israel. These links with the foreign capital market came to fruition by pocketing successful IPO and acquisition deals from global companies, giving startups a much-needed financial boost. Furthermore, Israel saw foreign investment banks establishing their offices within the country and the emergence of Israel-specific funds by foreign venture capital firms. This indirectly helped market players to be aware of the global information which helped in better decision-making. Thus, it led to the harmonious development of entrepreneurship and innovation in Israel.
C. Government role in promoting R&D
Israel’s transition from a knowledge economy to a science economy and finally to a globally-recognized high-tech innovation economy reflects careful planning and significant efforts put forth by the Government to guide Israel’s path to global recognition. The need for a ground-breaking R&D is associated with the history of Israel freedom and subsequent wars and terrorism it faced owing to its political instability. To strengthen its military base, it started investing in military-driven technologies such as aviation and securities. It further extended it support for civilian R&D in the late 1960s, to compensate for a lack of natural resources.[20]
To develop a national science-based industry, the Government passed a law for the encouragement of R&D. The law provided incentives such as loans, discounts, tax exemptions, grants, etc. to promote industrial growth and to accelerate the exports. It was the first country to adopt the principle of ‘horizontal and neutral’ policies[21] to observe the market’s best practices that were best suited for commercialization.[22] The tax policies under these laws were framed in a startup-oriented manner to promote R&D initiatives.[23]
Some of the ground-breaking initiatives introduced by the Israeli Government are as listed below:
- The Direct grant program: Under this program, the Government comprises a research team which selects firms based on their proposals and grants them 50% of their stipulated R&D budget. The firms that receive such grants are obliged to conduct all of their manufacturing in Israel itself. Grants are available for firms proposing to instill improvements in existing civilian or military products which are fixed at 30% and 20% respectively. Start-ups may avail 66% of their R&D cost for duration of two years, which should not be more than $250,000 per year. To create a balance in spreading economic benefits throughout the country, additional 10% grants are offered to those start-ups who choose to operate in certain specified geographical locations.
- The MAGNET program: This program was introduced by OCS in 1993 with a vision to bring together companies and academic institutions to engage in practical research on innovative technologies. The Government provides an incentive in terms of 66% fund grants to encourage companies to tie up with research centers.
- The Incubator program: This program is specifically focused towards the immigrants in Israel. By the early 1990s, immigration in Israel was at its peak. Although these immigrants were professionally skilled, they found it troublesome to form their base owing to the language barrier and their unawareness about market demands. To tackle this, the Government launched the incubator program in 1991 to support budding entrepreneurs amongst the immigrants. Incubators are physical locations with basic amenities, along with professional support systems such as lawyers, administrative staff, accountants, etc. The entrepreneurs are provided guidance on their business ideas along with funding for two years.
- Bi-National Industrial R&D Foundation (BIRD): BIRD was launched in the year 1977 with the United States to promote the private industry in both the countries by encouraging harmonious development in marketing, manufacturing and R&D. Companies are eligible for conditional grants of 50% of the total R&D budget or $1.5 million, whichever is lesser. The repayment of such grants is required only if the companies are successful. This partnership helped Israel build a strong connection with the United States.[24]
- MATIMOP: It is a Hebrew acronym for Israeli Industry Centre for R&D, launched to administer both international and bilateral cooperation agreements. It encouraged international companies to open their centers in Israel by providing tax reductions and other related relaxations as incentives.
D. Tackling Immigration to create a skilled human capital
Israel’s skilled human capital has helped tremendously in shaping its innovation economy. Its one-of-a-kind liberal immigration policy has helped Israel turn its disadvantage, i.e. a heavy influx of immigrants, into a profitable opportunity. This policy has contributed extensively in ameliorating Israel’s economic development. The Ministry of Immigrant Absorption was given the task to organize immigrants. Israel’s Government paid living expenses for immigrants in addition to teaching them regional languages, connecting them with professionals in their industrial domains, setting up incubators for immigrants and funding their startup ventures.[25]
E. Carving out human capital from Military base
Young people from the ages of 18 to 21 are required to serve the Israel Defense Force (IDF). There exist army units with different levels that admit people based on their score on a standardized test. Soldiers with the highest scores are placed with a unit specializing in military R&D. One such popular unit is unit 8200 which is known for its advancements in technology and intelligence. The culture of the IDF has shaped a lot of soldiers into entrepreneurs. Abilities such as taking impromptu decisions, shouldering responsibility, making quick decisions, analytical thinking, and loyalty have also contributed in shaping a business culture within the IDF.[26]
F. Promoting Intellectual Property Rights
Innovations, when shielded by private rights, encourage the nation as well as creators to indulge more in creativity and development. Israel recognized the importance of protecting intellectual property rights very early on. It revised its Patent Act in 1967 and increased the term of patent protection to 20 years including the application date. To enforce its patent rights in foreign countries, Israel became a signatory of all major treaties and conventions supported by the World Intellectual Property Organization[27](WIPO) and World Trade Organization[28] (WTO). Israel began including software under copyright protection in 1988, extending the protection period to 70 years. Creating ties with developed countries like the U.S. helped Israel to create an inexhaustive IP regime. This helped in fostering its innovation and creating a high-tech economy.[29]
Conclusion
Israel has earned a commendable name around the globe for its innovations. The R&D support provided to investors has credited Israel with plenty of profitable inventions. Around 250 companies with a global presence have R&D labs in Israel today, which includes Fortune 500 companies and tech giants like Facebook and Apple. Between a span of 1999 to 2014, Israel has started more than 10,000 companies, and is hence justified in claiming the title of Start-Up nation.[30]Israel is remarkable in that their relatively small population of approximately 9 million people is now competing with highly populated countries like the U.S. and China[31].As discussed above, the innovation sector flourishing in Israel is a result of its ability of converting its liabilities into assets.
For example, Israel tackled the lack of freshwater by developing world-class technology in drip irrigation, thereby focusing on desert agriculture. Israel also carefully planned its development in high-tech innovation to attract market leaders from developed countries. This led to only minor setbacks when their Arab neighbors decided to boycott Israeli products. Further, Israel has always focused on global customers to study the global market unlike other developing countries that helped its indigenous companies penetrate global market. Following the principle of ‘open innovation’, Israel helped startups to be guided by flourishing high-tech companies, thereby encouraging and mentoring entrepreneurs to contribute further to Israel’s economic development. This has also resulted in an exchange of ideas between enterprises, benefiting innovation on a whole and further contributing to Israel’s innovation index. By strengthening its intellectual property protection, Israel has aggrandized the value and utilization of innovations. Lastly, Israel’s history with innovation that resulted from an interplay between academic, industrial and Government sector reflects a strong foundation for Triple Helix Model of Innovation.[32]
List of 10 breakthrough innovations by Israel
| S.No. | Product Name | Product Details | Developing company | Product Image |
| 01. | MyEye | A visual assistance device wearable by a person that includes a camera and a processor. The processor captures multi-image frames from the camera. A candidate image of an object is searched in the image frame. The person wearing the device is notified of an attribute related to the object. For more details click here. | OrCam Technologies Ltd. [Jointly founded in 2010 by Prof. Amnon Shashua & Mr.Ziv Aviram] | |
| 02. | Watergen | This device absorbs moisture from the atmosphere to provide drinking water. It works as an Atmospheric Water Generator (AWG) with a defrost system. For more details click here. | Watergen Ltd. Inventors: Sharon Dulberg & Moshe Goldberg. | |
| 03. | Mobileye | A software that enables Advances Driver Assist Systems (ADAS) and is designed in a way to support the three pillars of Autonomous Driving- Sensing, Mapping, and Driving Policy. For more details click here. | Mobileye Vision Technologies Ltd. | |
| 04. | PulseNMore | A device used to facilitate at-home ultrasound, which docks with a patient’s mobile phone to deliver high quality images, which are stored on a remote drive and forwarded for clinical review or online consultation. For more details click here. | Pulseenmore Ltd.; Tel-Aviv-Jaffa | |
| 05. | Pillcam | Deals with capsule endoscopy. A device with a camera inside a capsule that captures images inside the body. For more details click here. | Given Imaging Ltd., Invented by: Gavriel J.Iddan | |
| 06. | SniffPhone | A compact handheld device that measures exhaled breath for early diagnosis of cancer. It won 2018 Innovation Award by the European Commission for Most Innovative project. For more details click here. | Technion Research & Development Foundation Limited. Invented by: Prof. Hossam Haick. | |
| 07. | ELuNIRTM | A tube-shaped device that opens up arteries to treat coronary heart disease and blockages without requiring open-heart surgery. For more details click here. | Medinol Ltd. Inventor: Kobi Richter | |
| 08. | Epilady’s Epilator | Epilady introduced the first epilator to the market in 1986, revolutionizing hair removal for ladies all over the world by providing a cost-effective, mess-free alternative to shaving and waxing. For more details click here. | Epilady 2000 L.L.C Inventor: Yehuda Poran | |
| 09. | Netafim | A company that introduced drip irrigation to the world. For more details click here. | Netafim Ltd. | |
| 10. | TytoHomeTM | A device equipped with a handheld examination kit and app that allows an individual to perform guided medical exams anytime and anywhere. For more details click here. | Tyto Care Ltd. Invented By: GILAD-GILOR David, Even Yehuda. | |
By:
Himani Jaruhar
National Law University Odishas
[1]Joseph Schumpter, ‘Capitalism, Socialism, and Democracy, New York’, (1950) NY: Harper & Row.
[2]Data, InterpretingInnovation. “Oslo manual.” Paris and Luxembourg: OECD/Euro-stat (2005).
[3]JonathanAvidor, ‘Building an innovation economy: Public policy lessons from Israel’ (2011) North-western Law & Econ Research Paper 11-18.
[4]ibid.
[5]HarryYuklea, ‘An Integrated Approach to VC Financing Policy: ‘The Plumber’s Model of Entrepreneurial Finance’ (2009) ERPN.
[6]MK Eli Cohen, ‘Innovation in Israel 2017 Overview, Israel Innovation Authority’, innovationisrael.org.il.
[7]Dan Senor & Saul Singer. ‘Start-up nation: The story of Israel’s economic miracle’ (Random House Digital, Inc., 2011).
[8]DanBreznitz, ‘Innovation-based industrial policy in emerging economies? The case of Israel’s IT industry’ (2006) Business and Politics 8.3.
[9]Daphne Getz &Vered Segal, ‘The Israeli innovation system: An overview of national policy and cultural aspects’ (2008) SamuelNeaman Institute for Advanced Studies in Science and Technology.
[10]MeirPugatch, Morris Teubal, &OdedaZlotnick, ‘Israel’s High-Tech Catch-Up Process: The Role of IPR and Other Policies’(2009) in Odagiri et at Intellectual Property Rights, Development, and Catch Up: An International Comparative Study: An International Comparative Study (2010), Oxford University Press, Oxford, England.
[11]ibid.
[12]World Bank, ‘Inflation Rate, Israel 1961-2009’ World Development Indicators.
[13]GDP Growth: Israel & OCED, 1990-2010, World Bank WDI Data; See above, supra note 7.
[14]GilAvnimelech&Morris Teubal, ‘Creating venture capital industries that co-evolve with high tech: Insights from an extended industry life cycle perspective of the Israeli experience’ (2006) Research Policy 35.10, 1477-1498.
[15]Senor, supra n 7.
[16]Senor,supra n 7.
[17]StefanoBonini&SenemAlkan, ‘The political and legal determinants of venture capital investments around the world’ (2014) Perspectives on Financing Innovation, Routledge, 161-192.
[18] Senor,supra n 7.
[19]Senor,supra n 7.
[20]Manuel Trajtenberg, ‘Innovation policy for development: an overview1’ (2009) The New Economics of Technology Policy, 367.
[21]Meir,supra n 10.
[22]Dapne,supra n 9.
[23]AssafRazin& Efraim Sadka, ‘The economy of modern Israel: Malaise and promise’(1993) University of Chicago Press.
[24]GilAvnimelech, Martin Kenney & Morris Teubal, ‘The life cycle model for the creation of national venture capital industries: the US and Israeli experiences’, in Dr. Elisa Giuliani et al, Clusters Facing Competition: The Importance of External Linkages (Ashgate Publishing Limited2005).
[25]Senor, supra n 7.
[26]Senor, supra n 7.
[27]Berne Convention for the Protection of Literary and Artistic Works: Texts. Geneva: World Intellectual Property Organization, 1982; Paris Convention for the protection of Industrial Property, Mar. 20, 1883; Patent Cooperation Treaty, June 19, 1970.
[28] Agreements on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994.
[29]Meir, supra n 10.
[30]D Nordfors and B. Berger, ‘Technology Transfer Between Industry, Academia and Defense in Israel’ (2000) Swedish Academy of Engineering Sciences.
[31]David Yin, What Makes Israel’s Innovation Ecosystem So Successful, (Forbes, 9 Jan. 2017), <https://www.forbes.com/sites/davidyin/2017/01/09/what-makes-israels-innovation-ecosystem-so-successful/?sh=4322a5c370e4> accessed 21 May 2021.
[32]Drori, G., et al, ‘The helix model of innovation in Israel: The Institutional and Relational Landscape of Israel’s Innovation Economy’ (2013) Department of Sociology and Anthropology, The Hebrew University of Jerusalem.
