Israel May Be Lauded as 'Startup Nation,' but Its Innovation Ends at Tel Aviv's Limits

Israeli innovation doesn’t reach most Israelis as a product or service – or as a job, report finds

File photo: 'High-tech park' in Ra'anana, Israel.
Tomer Appelbaum

Israelis spend long hours in traffic jams. When they need to communicate with the credit card companies they resort to faxes, If they forget their card at home, they don’t have the option of paying for a coffee at the local café with their smartphone.

Yet Israelis regularly read in the media about how they belong to Startup Nation – home to thousands of innovative high-tech companies and the highest level of venture capital investing in the world per capita.

Yet on a day-to-day basis, they don’t feel like they belong to a technology-rich economy. Large swathes of the economy, like transportation, retail, construction, education and public services, are lagging behind the most of the West when it comes to deploying technology.

The tale of two nations is the gist of a report released on Monday by the government’s Innovation Authority. The annual report, summing up Israel’s achievements and challenges, not only cites the failure of technology to reach ordinary Israelis, it even questions whether Israel is Startup Nation at all. The fact is 77% of the country’s startups are based in the greater Tel Aviv area.

“Most people in Israel do not feel that they are living in a ‘technological’ country when they are on their way to work, when dealing with bureaucracy, or when shopping at chain stores. This is more than just a feeling – substantial sectors in Israel, such as transportation, commerce, construction, education, and public services, are still lagging behind other Western countries,” it says.

Israel's relative standing in selected measures of innovation versus other developed economies, 2017-18

The authority says Israel continues to perform well in innovation, but its fruit are more often than not used by others. Israel’s digital infrastructure is less advanced than the most advanced economies as are the average Israeli’s digital skills. The tech industry is an elite club that employs just 8% of the workforce and is overwhelmingly male, non-Haredi Jewish and come from families with strong educational and social backgrounds.

How did the second Israeli nation develop side by side with Startup Nation? The Innovation Authority ascribes it to the fact the Israeli a small “island economy” distant from global supply chains. Its businesses don’t face competition from the most innovative global companies that don’t have strong incentives to enter the Israeli market either by way of imports or by establishing a local presence.

Without that competition, Israeli companies outside of the high-tech industry have little incentive to invest in machinery and training to boost productivity. Consumers, as a result, don’t get the best products and services.

To solve this problem the authority says Israeli high-tech companies have to strengthen their links with local non-tech businesses. And that is what it is doing – by creating a channel to support startups that conduct pilot tests with private and public sector companies of innovative products and services close to home. The new channel is being run in cooperation with government ministries backing the idea with financial aid and regulatory approval.

As to whether Israel can justifiably call itself Startup Nation when so much of the tech industry is in the center of the country, the authority notes that globally tech tends to concentrate in a few urban areas, like San Francisco, London, Beijing and Berlin. More than 50% of world venture capital goes to just 10 cities. The concentration enables tech companies to share human capital, attract investors and bounce ideas off of one another. The fact that rents are high in these areas isn’t nearly as important as having access to the best people.

In Israel, the concentration has led to a significant disparity in labor productivity reflected in salaries that are on average more than a third lower in peripheral areas. The authority wants to coax tech firms to open offices in the periphery where it plans to fund high-tech incubators, the of which, dedicated to developing food technologies, was launched last year in Safed.