Start-up Nation Is Being Starved by the State

Over the last two decades, high-tech development has been left to market forces, but the situation is no longer tenable. What's needed is a technology czar to coordinate policy.

Inbal Orpaz
Inbal Orpaz
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Inbal Orpaz
Inbal Orpaz

Israel has earned the title "start-up nation" and draws delegations from around the world hoping to learn the secrets of the country's success in spawning innovation and new enterprises. But while Israeli high tech became the success that it is in large part thanks to the government - through investment in the educational system, the role of the army in training engineers and entrepreneurs, and the Yozma program of the 1990s, which helped create a venture capital industry - successive Israeli governments over the last two decades have effectively abandoned investment in high tech, one area where the country has a significant advantage and which enables its companies to compete in the world economy.

The budget of the Office of the Chief Scientist, the main arm through which the government provides financial support for industrial research and development, has eroded from a peak of NIS 2.2 billion at the beginning of the 2000s to just NIS 1.45 billion last year. This year saw a small increase, up to NIS 1.54 billion, but not enough to change the trend.

The high-tech industry relies on two fundamental resources - one, its human capital, and the other, financial capital to finance companies at all stages of their evolution. In neither case has the government invested enough. As a result, high tech is no longer the engine of economic growth it once was and, in fact, is expanding at a slower pace than the overall economy. It no longer serves as a significant force for increasing the standard of living.

In 2011, the information, communications and technology sector saw growth of just 1.5%, while overall business sector gross domestic product expanded 5%. At the same time, the industry's position as one of the world leaders in technology has been diminished.

Industry sources estimate that high tech suffers a shortage of between 8,000 and 10,000 engineers - a number they expect to double within a few years - because institutes of higher education are simply not adding to the number of new graduates in the field. The number has remained stuck at about 8,000 annually since 2005.

At the same time, Israeli students, the future of the industry, routinely score at the bottom of international exams measuring math and science learning, even if the most recent tests have pointed to an improvement in their performance.

Companies such as Intel Israel have contributed to programs aimed at improving schools, but long-term investment in education is a national project that only the government can undertake. It's not a task for multinational companies.

High tech has also failed to serve as an engine for social growth. While the industry has increased its combined payroll by 2.15-fold over the past 15 years, its percentage of total employment across the economy has been unchanged at 9%. Fewer than one out of every 10 Israelis are directly employed by the industry.

Israel has also failed in using its high-tech sector to increase productivity among its weaker classes and reduce income inequality. Whole populations, first and foremost the ultra-Orthodox and Israeli-Arabs, don't have the tools needed to join the industry, which demands high standards of training in math and science. With the market for initial public offerings in the United States effectively closed and alternative methods of finance unavailable, Israeli start-ups have little choice but to sell themselves at an early stage to big multinational companies.

As a result, over the last decade no big home-growth high-tech companies have emerged, the kind that employ large numbers of people and create business for other companies. The last decade has also seen the decline of financing for Israeli high tech, so that even companies with competitive edges in the global market often fail to secure critical funding.

Even one of Israel's sources of pride - the high rate of civilian R&D relative GDP - isn't quite as impressive as it seems. In 2011, it was 4.4% after several years of decline. But this data point doesn't take into account the small size of the economy relative to others in the Organization for Economic Cooperation and Development. Moreover, this figure doesn't reflect the low rate of government investment in research.

Israeli start-ups are feeling the pinch of growing global competition not just for developing new products and services but also for venture capital, as emerging markets such as China and India develop their own start-up nations. Israel has never created a post for a high-tech czar, a single person and agency responsible for advancing the industry. Such jobs exist in other countries, but it doesn't seem the next government has anything like this on its agenda. The policy of official abandonment of the industry to market forces weakens Israel's competitive abilities globally.

The industry has to expand from its homeland in the Tel Aviv area into the Israeli periphery, both geographically (the Negev and the Galil ) and demographically (the Haredi and Arab populations, as well as older workers ages 45 and above ). That will require investment in education, technology training and bigger budgets for R&D.

To the credit of the last government, it undertook the "Relative Advantage" program for encouraging the high-tech industry. But that was the work of Haim Shani, who was Finance Ministry director general but also an industry veteran. Because elements of the program were a failure, the government and the treasury have both learned that the process of change is a slow one that demands high levels of continuous coordination.

So, for example, the Angel Law, which is aimed at encouraging investment in high tech by private individuals, and the program to encourage institutional investors, another player that has been absent to date from the high tech scene, also appear to have been flops.

High tech "suffers" from its positive image. To outsiders, it seems to be a competitive industry that leads the economy and needs no government assistance. That means it loses budgetary support to supposedly needier and more brewing issues of the day. But this represents short-term thinking which doesn't take into account the fact that long-term competitiveness demands investment in education, infrastructure and R&D.

Other countries such as Finland and South Korea have set a goal for themselves to advance their high-tech sectors and invest significant resources to get there. They are likely to leave Israel behind.

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