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Israel Shakes Off Nokia-envy

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"People in Israel always say that we will never create an 'Israeli Nokia'. Personally, I believe that in five to 10 years those people will be proven wrong." -- Daniel Cohen, venture capitalist, 2007.

"If all the water industry companies in the Kibbutz Industry Association consolidated, we could be the Nokia of the water industry." -- KIA Chairman Jonathan Melamed , 2007.

"If Israel will ever produce a Nokia, it will be this.” –- Idan Ofer, referring to Better Place, 2008

"We can permit ourselves to be ambitious and declare that we want to see the establishment of an Israeli Nokia in the not-too-distant future." -- Yuval Steinitz, 2010.

"We used to say it would be nice to have a Nokia. Now, things are changing. When you are very dependent on one company, it can also be a problem. So I think diversity is the key." -- Karnit Flug, 2013.

As this highly unscientific selection of quotes from over the years demonstrates, Israel has gradually learned that it's wise to be careful what you wish for.

Nokia's core cellphone business collapsed as Apple and Samsung captured the smartphone marketץ. It was bought last week by Microsoft for a mere $5.4 billion. Nokia now becomes an arm of the U.S. company, which is also struggling itself to stay ahead of a rapidly changing tech market.

The once mighty maker of mobile phones was not exactly a startup that made extraordinarily good. Nokia was a company whose antecedents go back well over a century, but it managed the improbable transition from making paper and galoshes to high tech. For Israel, however, it was an example of how even a small country could become the home base for a giant multinational, a source of jobs, wealth, prestige and startups to be spun off.

Okay, Finland isn't quite a small country because it is part of the European Union. Also, it's in a politically quiet corner of the world and has a tradition of big industry.

The Nokia economy

In any case, it's not hard to understand the basis of Israel's Nokia-envy. The Research Institute of the Finnish Economy found that in Nokia's glory days from 1998 to 2007, the company contributed about a quarter of the Finnish economic growth, its spending on research and development made up 30% of the country’s total, it generated nearly a fifth of Finland’s exports and was sometimes paying as much as 23% of all Finnish corporate tax. The Economist estimated that in 2011, Nokia's revenues equaled 20% of Finnish gross domestic product.

Israel has corporate Godzillas too, albeit not quite as towering. For comparison's sake, Teva Pharmaceuticals' net sales amounted to about 8.5% of Israeli GDP. Intel Israel in a good year accounts for 10% of Israeli exports.

When Nokia was thriving, all of Finland thrived. But when it fatally stumbled in the market move to smartphones, Finland suffered, too.

Arguably, whoever was heading Nokia over the last two decades had a greater influence over the Finnish economy than the finance minister or the governor of the central bank. That's not something to envy - and not just because the chairman and CEO of a big company aren't answerable to the public.

Big companies rise and fall. They are the beneficiaries and victims of changing markets, technology and leadership. In the Internet era the dynamics are very rapid and companies rise and fall faster than ever. An old-economy company like General Motors was the dominant automaker in the United States for more than half a century; it took some 25 years of mismanagement to bring it to bankruptcy. Even today it employs more than 200,000 people and turns out more than 9 million vehicles annually.

The trajectory of a new-economy company like Nokia is more turbulent; it took roughly 15 years for the company to ascend to the top of the mobile phone world, and its fall took less than five years. Others that once looked like impregnable fortresses, like Yahoo and AOL in their heydays, are also struggling.

But if we Israelis have to give up on our Nokia dream, what is there to take its place?

A bubble of startups?

That's not an easy question to answer. In Finland, they are talking about an efflorescence of startup companies, presumably formed by Nokia refugees. There's no reason to be skeptical. Finland already is a startup nation in its own right, with a handful of hugely successful enterprises such as the games makers Supercell (Clash of Titans) and Rovio (Angry Birds).

But startup nation math won't work any better in Finland than it does in Israel. Startups are cool, they are fonts of creativity and innovation and they can enrich their backers and sometimes their employees, but they don't create the same number of jobs or generate the same knock-on effects for the broader economy than stodgy big companies.

Rovio is a giant by startup standards. It's raised millions of dollars in venture capital and posted 150 million euros in revenues last year, but it has a total payroll of 650.

Supercell is another startup giant, with revenues of more than $2.5 million a day and it's fresh from a dizzying $130 million fundraising round. But it has around 100 employees, no more. And their success is noteworthy, but it's very much of the moment; both companies operate in incredibly volatile markets. Today's hit games quickly cede their place.

Nokia laid off 14,000 people in Finland alone in the three years before Microsoft stepped in. With a typical startup employing maybe 15 or 20 people, Finnish investors and entrepreneurs will have to generate hundreds of them just to make up the loss. And given the failure rate of startups, the hundreds would have to be generated again and again over the years.

Israel has a few Rovios and Supercells – startups that have largish payrolls and significant revenues – and many, many more nascent enterprises aspiring to become like them. But if having a Nokia presents risks for a small economy like Finland or Israel, being startup nation offers no solution to the problem of creating jobs or to that of creating sustainable economic growth.

The solution perhaps lies in creating the silicon equivalent of Germany's Mittlesand, the thousands of small and medium-sized companies you've never heard of, in industries like machine tools. They're boring, yes, but they have been a major factor in the country's long record of growth and its export prowess. As dreams go, it's less exciting than fantasizing about an Israeli Nokia, but it's far less dangerous and far more promising.

Steve Ballmer of Microsoft (r) and Stephen Elop of Nokia. Credit: Bloomberg

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