The startup economy in Israel

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Israel is known for its innovation these days. GPS navigation software Waze, a virtual colonoscopy camera, and the Babysense monitor are just some of the many inventions developed in Israel that have spread to the rest of the world. 

So what is the secret behind Israeli people being so innovative and creative? The answers are necessity and ability.

The seeds for the startup nation were planted in the late 1980s. In 1984, roughly 55-60% of the highly trained technology labour force was employed by the military sector, while only 10% worked in research and development (R&D) for the private sector. This hampered the ability of private industry to develop its own R&D infrastructure, which is much more profitable than that of the military. 

From 1987, Israel changed its military strategy, and gave up the quest for self-sufficiency in weaponry development. The country’s defence budget decreased significantly in the following years, from about 20-25% of gross national product (GNP) in the early 1980s to less than 10% of GNP in the mid-1990s. Gradually, some of the technological activity for military purposes was privatised. 

In a period of just a few years, many highly skilled people lost stable jobs in the Israeli military industry and had to risk founding startups to make a living. This led to the national budget shift from funding military R&D to offering incentives for the private sector to invest in commercial R&D. A law introduced in 1984 allowed the Office of the Chief Scientist (OCS) at the Ministry of Industry and Commerce to fund private technology initiatives. By the end of the millennium, the OCS had sponsored more than 6,500 startups. 

The main breakthrough in this field came from the research teams of Intel in Israel, which developed most of the company’s chip processors. Israel established a reputation as a development centre for digital software, and the timing of this breakthrough was perfect for its economy. 

Another boost was given to Israel at the beginning of the 1990s, as 800,000 immigrants arrived from the former Soviet Union. This brought a wave of educated workers to Israel; about 154,000 immigrants were educated to degree level, with engineering the main specialism. 

More than 21,000 immigrants had a Master’s degree in engineering, compared with 2,500 Israelis who held the same qualification at that time. 

The OCS soon launched a programme of supporting governmental, private and third-sector initiatives through technological incubators (TIC), which offered guidance and professional support. 

Each TIC employed around eight workers and received financial support from the government for its operational activity. Projects supported by a TIC received money for its R&D expenses, including working space, networking, administrative services, professional guidance and fundraising support. These services were intended to help the developers establish their own private company, rather than to keep them as a government initiative. 

Without any stable alternative, the immigrants had to take part in the new wave of startups.

The growth in its highly educated labour force raised the standard level needed for a professional post in Israel, and, today, a Bachelor’s degree is not enough. A high percentage of youngsters in Israel start their career only after finishing a Master’s degree. 

This necessity was stimulated by the Ministry of Education extending to 60 the number of academic institutes that were allowed to grant their graduates degrees. Until 1994, this privilege was mainly limited to the eight official Israeli universities. As a result, the number of students rose from 56,000 in 1991 to more than 300,000 today. 

Like many other countries in the western world, Israel has focused its efforts on increasing national cyber security in the past 20 years. Once again, its decision-makers led a policy of building a system that encourages the private sector to invest in R&D and highly trained human capital. 

More than 30 international companies accepted the challenge and, already, IBM, Deutsche Telecom and others have established research centres in Beer Sheva Park, making it one of the main cyber centres of the world. 

This is the latest example of the government establishing policy to nurture the technology industry in Israel. 

Michael Kislev is a political analyst and Rani Chetrit is an economist.