Startup Nation Losing Its Competitive Edge, Israeli Economy Ministry's Chief Scientist Warns

In long run, sector will lack up to 10,000 workers if women, ultra-Orthodox Jews and Arabs are not integrated.

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An illustrative photo shows Solarin, a mobile device with unprecedented levels of technology and security by British-Israeli start-up, Sirin Labs AG, at their offices in Tel Aviv, May 16, 2016.
FILE: Solarin, a mobile device with unprecedented levels of technology and security by British-Israeli start-up, Sirin Labs AG, at their offices in Tel Aviv, May 16, 2016. Credit: Amir Cohen, Reuters
Inbal Orpaz
Ora Coren

Israel’s high-tech industry faces critical challenges as it copes with a severe manpower shortage and rising competition from other countries, the Economy and Industry Ministry’s chief scientist said in a report released Wednesday.

The study, “Israeli Innovation – the Situation in 2016,” was crafted by the Israel Innovation Authority headed by the chief scientist, Avi Hasson. He said the industry faced a shortfall of about 10,000 people in the coming years, which he termed the most critical of the long-term challenges.

The report also said Israel was suffering eroding competitiveness compared to other countries that have declared innovation a national goal and are investing in it. Investment by the government in research and development has not grown, it noted.

Avi Hasson, Economy and Industry Ministry’s chief scientist.Credit: Eyal Toueg

“The high-tech industry is at a critical crossroads. On one side stand big opportunities: The industry in Israel has made great strides and does considerable business, has accumulated expertise, experience and a worldwide reputation, and has matured,” the report said.

“On the other side, it faces threats: Israel’s long-term declining competitiveness, which constitutes a real obstacle for the industry’s medium- and long-term success.”

The report warned that the loss of Israeli competitiveness would have ramifications for the entire economy and even Israel’s political standing internationally. “Over time, in a world that is becoming more and more technology-based, the consequences of missed opportunity could seriously harm Israelis' quality of life as well as national security and Israel’s ability to independently conduct its foreign relations,” it said.

Prime Minister Benjamin Netanyahu, who received a copy of the report, supported some of its recommendations. He said Israeli high-tech was at a very high level but needed to improve.

“To ascend further, there are some very good proposals [in the report], and some of which are already in the budget . Some of them require a new, much broader vision concerning the main resource that drives innovation: human capital. About this we have much to talk about,” he said in a statement.

The report urged the government to launch a multiyear program to cope with the obstacles the high-tech industry is contending with. To overcome the manpower shortage, it said resources had to be put into training women, ultra-Orthodox Jews and Arabs, all of whom are underrepresented in the industry at the moment.

It also proposed regulatory reforms and financing for older startups that have developed a product or technology and are now enjoying rapidly growing sales. The changes are designed to give them an alternative to the traditional “exit” of selling themselves to an overseas buyer and allow them to remain independent.

The report also discussed Israel’s lower-tech industries, suggesting ways for them to invest more in R&D and more-advanced manufacturing. Another section of the study detailed barriers Israel must remove to ensure it remains a center for the newest disruptive technologies such as self-driving cars and blockchain databases.

Ultra-Orthodox Jewish men work at a high tech start-up in an office in Tel Aviv. March 15, 2016Credit: AP

“It’s impossible to grow and stay competitive if we don’t remove the barriers in a systematic, multiyear way,” Hasson told TheMarker. “No one believes there’s a better investment than high-tech, and in high-tech there’s no better investment than in human capital. That’s barrier No. 1.”

Hasson said he hoped the money needed to fund these programs would be included in the 2017-18 budget. The Innovation Authority, which was created last year, now receives about 1.25 billion shekels ($320 million) a year.

“In the end, we’re talking about hundreds of shekels more for the budget. I don’t think we need to double the chief scientist’s budget, but something like 5 billion shekels over 10 years,” Hasson said. “That would be an important signal to the world from the government that Israel is serious about this.”

He said spending by the chief scientist right now amounted to 0.5% of gross domestic product, a figure Hasson said he would like to see rise to 0.8%. For countries belonging to the Organization for Economic Cooperation and Development, the average is 0.75%, he added.