/ world today news/ Little Israel has become one of the world centers of the technological industry and high technology: there is a real technology boom in the country, huge money and investments are going into the industry. What is the reason for Israel’s impressive success in the digital economy, how has this phenomenon helped the country cope with the coronavirus crisis, and can these recipes be applied elsewhere?
The role of the innovation sector in the Israeli economy and the scale of activity of high-tech companies can be judged by just one fact: since the beginning of this year, 20 new so-called “unicorn” companies have appeared in Israel – private startups worth more than billion dollars. In total, there are six dozen such companies in the country – the second indicator in the world after the United States, and several dozen businessmen from the industry are already on the list of the 500 richest people in Israel. In total, more than 6,400 start-ups are registered in Israel – giving it the highest density of innovative businesses in the world per capita.
There is no doubt about the attractiveness of Israeli innovative businesses to foreign investors. 38 of the 61 initial public offerings on the Tel Aviv Stock Exchange have been made by high-tech companies since the beginning of this year. Israeli startups are also sought after on US stock exchanges.
A new population of unicorns
Specifically, the automation company’s market valuation on Monday after its NASDAQ listing on the New York Stock Exchange rose from $6.8 billion to $10 billion, and cybersecurity company Sentinel1 raised more than $1.2 billion on the New York Stock Exchange, the price of its shares on the first day of trading increased by 21%, allowing it to end June with a valuation of 10.77 billion dollars. Investors were even more excited by the merger of IronSource, a platform for game and app developers, with software developer Tom Bravo, which began trading on the New York Stock Exchange at a valuation of $11.1 billion.
In the five months of this year, Israel reported a 137% increase in investments compared to the same period a year earlier, according to the data of the Startup Nation Finder platform Andrey Krekhov, director of special programs at the technology company ICL . For comparison, a growth of 123% was registered in Europe, in the USA – 91%, and in Asia – 69%, while the main flows of investments in Israel are external.
“Investment growth,” says the expert, “reflects growing investor confidence in Israel’s innovation ecosystem, which is able to maintain its competitive edge as a global center for technological innovation. Investments in Israeli high technology and innovation are targeted at more advanced stages, with 64% of capital invested in later rounds of projects. “Cybersecurity, financial technology and enterprise solutions companies attracted the majority of funding – these three main sectors together received $6.2 billion, or 60% of all Israeli high-tech investment.
The boom in the high-tech industry eventually spills over into the Israeli economy as a whole. Thanks to this sector, Israel has dealt with the consequences of the coronavirus pandemic much faster and more effectively than other developed countries, according to Helen Peres, an international business consultant and Middle East expert. Last year, she recalls, the Israeli economy lost only 2.6%, and in terms of GDP per capita, the country entered the top 20 global leaders, while the American economy shrank by 3.5%, the German and Japanese – by 5 %., British – with 10%.
According to the expert, the main direction of Israeli high-tech technologies is cyber security: companies from Israel last year accounted for 31% of global investments in this segment, and the volume of Israeli exports of cyber security products amounted to 6.85 billion dollars.
In this area, Israel is second only to the United States, and a third of the global unicorn companies operating there are of Israeli origin, notes Helen Peres. In addition, one of the fastest growing and most attractive areas of Israeli high technology for global investors is artificial intelligence: now more than a thousand companies, academic and international research centers of the country specialize in it.
There are another 400 or so auto technology start-ups, although Israel has no auto industry of its own, except for the production of buses and equipment for the army and security services. But there is a real boom in this segment, Perez says: many startups are actively introducing their own technologies to the automotive industry in the areas of hardware, sensors, cybersecurity, as well as solutions for cars with an autopilot system.
Synthesis of business, education and special services
Israel’s innovation economy is largely made possible by government policy based on three premises.
First, there is the entrepreneurial spirit of the population of Israel, a classic country of immigrant capitalism with excellent ties to the Jewish diaspora around the world.
“It is known that the Israeli government actively supports entrepreneurship: it helps the citizens of the country to start projects and not only does not prevent them from moving abroad, but, on the contrary, motivates them to do so,” says Yegor Abramov, investment director of the Moscow Fort Ross Company. According to him, the logic of the authorities in this case is as follows: the domestic market of the country is small, so let the companies go global and make money in other markets, but Israel will have jobs for highly professional employees, intellectual property will be created and pay taxes. As a result, the high-tech sector in Israel accounts for over 40% of exports – this, the specialist emphasizes, is a lot, and the role of intelligent and accurate state policy in this result can hardly be overestimated.
Second, innovation is facilitated by an education system initially focused on repatriating the best personnel from other countries. In Israel, notes Helen Peres, it is customary to develop independent thinking skills in children and to encourage the formation and expression of their own opinions starting in preschool, and in high school such skills as critical thinking, the ability to ask questions and seeking the truth becomes necessary for success… In addition, both schools and universities pay special attention to the possibility of practical application of acquired skills.
Relying on youth is one of the most important factors in Israel’s innovation support model, adds Andrey Krehov: “Israel is systematically looking for the best talent in schools, followed by a commitment to take charge as early as possible. For a country where almost 45% of the population is under 24, this is significant. “
Third, the constant demand for high-tech products is guaranteed by the national security objectives that have been significant throughout Israel’s history. The relationship with the military-industrial complex is a unique element of Israel’s high-tech industry, according to Russian historian and orientalist Artyom Kirpichenok. According to him, many soldiers and special forces officers engaged in cyberespionage after their service go to work in high-tech companies, often serving the interests of the state.
“The Israeli army is constantly in need of modern and innovative high-tech developments to protect its citizens, and since the country has a universal set of military service, during the service, young people exchange their knowledge and ideas and together create new effective solutions. After leaving military service, many graduates of computer and telecommunications military units join forces and continue to apply their knowledge and experience in the development of military technologies to the development of start-up companies, “says Helen Perez.
The strength and weakness of a unique experience
Plans to make the innovation sector the engine of their national economies have been announced by many countries over the past few decades, but not all have been able to put them into practice. Therefore, Israel’s experience is also interesting from the point of view of how far the system for supporting high-tech business built there can be copied, at least partially, in other territories.
Israel’s experience can be replicated to one degree or another, but there will be many “buts” along the way, believes Yegor Abramov. According to him, a country that wants to build the same innovation system should be small enough, not have a large domestic market, but at the same time have a high level of education and quality of life. Also, there shouldn’t be many natural resources or alternative ways to generate “simple” income, because business first goes where it’s easier to make money, and high-tech is definitely not the place. Finally, the country must be deeply integrated into the international business environment. If these conditions are not met, it will be difficult to copy the Israeli experience, the expert summarizes.
At the heart of Israel’s success in building a “startup nation” or “Silicon Desert” is the so-called reverse innovation model, explains Andrey Krekhov: corporations are encouraged to transfer their expertise to startups, and this encourages the creation of joint ventures, sometimes between competing are companies. One of these examples, continues the expert, is the Fintech platform founded by the largest international banks HSBC, Deutsche Bank, RBS and Santander. This platform uses a reverse innovation model to find problems from banks and then search the market for relevant startups, incubate and support those working on potential solutions.
Another characteristic of this pattern is persistence, as exemplified by Israel’s moon landing project. “After nine years of work and millions of dollars of investment, the company failed to complete the mission: the unmanned spacecraft successfully entered orbit, but crashed upon landing,” says Krehov. “But the program, with the support of its investors and the Israeli government, immediately announced a second attempt to become a fourth state on the moon, stressing that understanding the reason for the failure meant there was no reason not to try again.”
At the same time, the Israeli innovation development strategy can hardly be called ideal – it itself contains many “buts”. Anyone who has ever been to Israel is well aware of the very high prices in this country for almost everything from food to real estate (an average apartment in a new building in Tel Aviv can easily command a million dollars). To a large extent, this high price is a direct consequence of overheated wages in the high-tech sector, which, of course, cannot provide employment and excellent incomes for the majority of the country’s inhabitants. It is enough to simply move from wealthy Tel Aviv to industrial Haifa to be sure that a significant number of Israelis live very modestly.
In Israel, the high-tech sector is an analogue of the Russian oil and gas complex: a highly profitable industry that drags the entire economy with it, in a number of areas it is very backward, notes Artyom Kirpichenok. According to him, the current interest of investors in the Israeli high-tech industry is justified, because thanks to it, the country’s economy overcame the crisis caused by the coronavirus with the smallest losses.
The expert recalls, however, that Israeli high technology is largely connected to large American corporations, whose orders are served by this sector, and most Israeli start-up companies are sooner or later bought or taken over by foreign companies. This is the well-known weakness of the Israeli high-tech industry – in fact, it is in many ways an appendage of Western companies, mostly American.
Finally, Artyom Kirpichenok is convinced that other countries can not only repeat Israel’s successes, but also surpass them: “One of these examples is Ireland, which has several advantages. It has a more favorable geographical position: Ireland is a bridge between Europe and the USA, as well as a large territory – you can not only write software, but also create manufacturing enterprises. Finally, Ireland has a better security situation, this country is more comfortable in terms of emigration – they speak English and have a high quality of life. “
Translation: V. Sergeev
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