Israel: An Unlikely Innovation Capital

The image that most people in America have of Israel is that of a small, beleaguered country surrounded by enemies. However, as the Jerusalem Post recently noted, the Jewish State has become a hotbed of innovation and high technology, rivaling even Silicon Valley. Israel ranks fifth on the Bloomberg Innovation Index, behind South Korea, Japan, Germany, and Finland, and just ahead of the United States.

The index was comprised based on rankings in six sub-fields: Research and development, in which Israel ranked No. 2, manufacturing (21), hi-tech companies (11), post-secondary education (4), research personnel (4) and patents (31). Israel was also second, behind South Korea, in the percentage of its GDP devoted to research and development.

Israel has become a hotbed of innovation and high technology, rivaling even Silicon Valley.

Phil McKinney

Israel also ranked 11th in the number of high-tech companies, an impressive number considering the fact that the country numbers only just over 8 million people. A separate index, the 2015 World Bank “Doing Business” report, ranked Israel poorly for the level of regulation, excessive bureaucracy, and red tape at 40. This rating suggests that Israel would do even better in innovation if the country loosened certain government policies.

So how is it that a small country, with fewer than 9 million people, with a huge national security problem, got to be so innovative? An article in Forbes offers some clues. It seems that Israel’s innovative culture stems from “a combination of intelligence, creativity, productivity and independence as well as their staunch determination to press on in the face of daunting opposition.” In other words, living in the tough neighborhood of the Middle East has forced Israel to innovate to become strong.

Israel's First-Class Education System

The United with Israel website notes that Israel was ranked as the second most educated country in the world, according to the Organization for Economic Co-operation and Development (OECD), second only to Canada. Its secondary school graduation rate is 92 percent. Moreover, 45 percent of Israel’s population has a university or college degree.

Not only does Israel spend lavishly on education, but its people have a cultural inclination toward becoming more educated as a means of upward socioeconomic mobility. This inclination predates the founding of the Jewish state, running through Jewish history dating back to ancient times.

A Strong Military (Which Benefits the Private Sector)

Because of the country’s persistent external threats, military service is mandatory for most Israelis upon reaching the age of 18. Just about everybody in Israel is a veteran of some sort, which means that they have been inculcated with the qualities of self-reliance and risk-taking inherent in being effective soldiers. The risk of starting a new company seems trivial compared to the risks taken on the battlefield.

Additionally, because of its relatively small size and the multiple threats it faces, Israel has traditionally relied on technology to give it an edge over its enemies. Israel’s military forces cannot hope to match its enemies numerically. So it strives to have the best equipment, superior tactics, and the best-trained soldiers, not only in the Middle East but rivaling many outside the region.

Naturally, military technology often finds its way into the commercial sector. A synergy has developed between the military and commercial worlds in which research and development have both benefited.

Multiethnic and Multicultural Society

The very reason for the existence of Israel has been to provide a homeland for Jews from any place on the planet. Israel has thus become a nation of immigrants from diverse countries, with people from Europe mingling with Russians and both interacting with immigrants from elsewhere in the Middle East.

This fact results in a great deal of diversity and multiple viewpoints. Add to that the free flow of ideas and creativity, with people holding different perspectives collaborating together, and a culture of innovation naturally arises. The situation parallels that of the United States, which is also multiethnic and multicultural, with an entrepreneurial culture developed among many recent immigrants.

Early Government Investment in Innovation

The Atlantic notes that while Israel had “the key ingredients for a high-tech boom by the early 1990s,” it lacked investors to fund that boom. The government stepped in with the Yozma program, which both directly invested in startups and encouraged foreign venture capitalists to create funds in Israel. Eventually, the government privatized the program once it was clear that the “financial ecosystem” was self-sustaining. Now, Israel attracts more venture capital and is home to more technology startups per capita than anywhere else in the world.

Challenges: Regulation and Discrimination

A recent study by the Kohelet Policy Forum suggests that government regulation in Israel has inhibited innovation and economic growth in Israel to some extent. The study noted that Israel’s government is one of the most intrusive in the developing world. Partly, this quality is a holdover from Israel’s socialist era. Israel’s government culture, which encourages red tape, bureaucracy, and paperwork, is increasingly at odds with the entrepreneurial and innovative culture of Israel’s private sector.

Additionally, there is plenty of untapped potential in Israel’s Arab population. Arabs don’t serve in Israel’s military, meaning they are cut off from the professional and social networks that help fund most Israeli startups. There are numerous Arab startups, particularly in the city of Nazareth, but few can secure outside funding, and therefore struggle to obtain the kind of success experienced by other Israeli startups like Waze and OrCam.

A Bright Future

Israel has become something of a paradox: a national security state that has become, partly because of its security concerns, a powerhouse for technological innovation. The Jewish state began its existence heavily influenced by socialism, with the Labor Party dominating its politics for the first 30 years. However, by necessity, Israel has embraced capitalism and innovation, making its economy larger and more powerful as a result. If Israel’s government can catch up with these developments and encourage innovation instead of placing obstacles in its way, the small state on the edge of the Middle East could achieve even more prosperity than it has already, impressively, created under the most trying of circumstances.

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