David's Harp / Israel, the Startup Nation With ADD

A recent EU reports lauds Israel for its innovations, but what it fails to mention is how little the country benefits from it.

There was a time, before ADD gummed up everything, that no Jewish child born of a Jewish mother was of ordinary intelligence, much less just plain dumb. If he wasn't succeeding in school, it was because he wasn't applying himself. Or, the teacher didn't like him, or he wasn't focused enough. But that he wasn't supremely intelligent, that he might be destined to life of C-pluses and the waiting list at the state university - well, that simply couldn't be.

Last month, the Europe Union gave Israel what could be called the Jewish Mother report.

Measured in terms of strict economic intelligence, meaning how much of the country's resources are put into research, development and innovations, Israel is way ahead of Europe and a handful of other countries surveyed in the EU's State of the Innovation Union report for 2012 released in April.

In research and development intensity, which R&D spending as a percentage of gross domestic product, Israel was in a class by itself – 4.4% in 2010, versus 2.03% on average for the EU and 2.75% for the United States. Only Finland (3.78%) came close.

The number of business researchers was 14.8 per 1,000 people in the labor force, four times the EU average. Israel had three times the number of patent applications per billion dollars of GDP compared with the EU average.

"Israel is a very knowledge-intensive country," the EU concluded. "Israel's overall level of innovation performance places it among the group of European 'innovation leaders.' Only Sweden, Switzerland and Finland show higher level of innovation performance."

So proud of one of the family, even if Israel is only an "associated country," the EU could well have been talking at a coffee klatsch with the other trade unions.

In other words, the Jewish state – like any Jewish child – has a superb brain. But where are the results? The EU report deals mainly with knowledge production, as it calls it. It has a little to say about where this leads to.

Put down that comic book

In Israel's case much of these knowledge resources have been frittered away in the national equivalent of using your smarts to play Sudoku rather than doing your math homework.

Thus nearly two-thirds of all business R&D in Israel is done by multinational firms, which enjoy most of the value added from the products and services created by all this innovation. Israel has a positive trade balance in high- and medium-technology goods, but those goods aren't made by Startup Nation. Most of it comes from Teva Pharmaceuticals and Israel Chemicals (drugs and chemicals are classified high- and medium-tech under international definitions) and by an American company, Intel.

Under the circumstances, it's no surprise that all this brainpower has yet to give Israel an economy that spawns globally competitive industries, creates well-paying, rewarding and productive work for the great majority, a foundation for ensuring an acceptable level of income equality or an infrastructure of health, education and welfare for everyone. In economic performance and social indicators, Israel is at the bottom of the EU.

Israel is losing its Waze

In effect, Israel displays the symptoms of a national attention deficit disorder – an inability to apply the enormous intellectual capital that we have. Our problem was nicely illustrated this past week by the latest developments with two important companies in the local high–tech scene, Waze and Intel.

Waze, of course, is one of our own, a navigation apps company that is a case study in Israeli innovation. You could even argue for a nascent ability to build serious, long-term business enterprise. Waze has been around since 2008, which makes it a grizzled industry veteran by startup nation standards and a real business that has a commercial product. It mobile app boasts 47.5 million users and is expecting to grow to 70 million by the end of the year.

Except, of course, that Waze is selling itself to Google. Even if this time we are talking about a monster $1 billion-plus deal, Waze is adhering to the standard procedure for startups being swallowed up by a larger multination: The R&D operation will stay in Israel while the business moves to California.

Waze will continue to employ a couple of hundred of people in Tel Aviv, but that is where the story will end. No more growth, no real business.

Meanwhile, Intel is eyeing construction of another semiconductor fabrication facility next to its existing one in Kiryat Gat. As it has in the past when it wants to build or expand a plant, the company will go to the government seeking financial assistance. And again, officials will have to weigh whether there's enough benefit to the economy in terms of new jobs and tax revenue to justify the outlay.

Whether or not the cost-benefit calculations add up, the numbers themselves speak about a scale of business that even startup nation's biggest stars have never built.

A new Intel plant could easily employ 3,000 people – easily the equivalent of 100 startups and if its output is anything like the existing Fab 28 plant, it will exporting literally billions of dollars of goods each year. It not only creates jobs for a software writers and engineers but for a wide range of skills and talents from engineering and physics to gardening and cafeteria cook. And they are jobs that don't disappear when the startup fails or is bought out.

There's not a little bit of irony here.

Intel, of course, is an American company but unlike most foreign companies with R&D centers in Israel, Intel manufactures as well conducts research. Indeed, it is often making chips in Kiryat Gat that were designed in Haifa. That means at least a good portion of Intel's added value stays here. It is just an example of what could be repeated many times over if Israel's ADD problem could be overcome.

Reuters