from the June 2016 issue

Recent high-tech data clouds current needs

Israel must form policy to maintain its advantage as the Startup Nation - or risk falling behind, says Dr. Esther Luzzatto.

Reports of the demise of the Startup Nation are exaggerated. The scientific and technological infrastructure of Israel remains sound, and there are thousands of startups based here, but without a careful consideration of several spoilers for the industry, the status of Israel as an innovation powerhouse might be hurt.

Recently, the public became aware of some depressing figures regarding Israeli high-tech. The Chief Economist at the Ministry of Finance, Yoel Naveh, published a survey which claimed Israel's position as a leader of global innovation is under threat and determined the high-tech sector was no longer the growth engine of the economy as it had been for the past few years. Furthermore, because of a shortage in high-tech employees, Prime Minister Benjamin Netanyahu was considering importing software engineers. Dire straits, indeed.

At a press conference, Minister of Finance Moshe Kahlon said he was considering relief measures to allow high-tech firms interested in merging to solve their shortage in qualified personnel. At the same time, the minister asked the Israel Tax Authority to explore a loosening of the requirements in the "Encouragement of Capital Investments Law" to expand its benefits to more high-tech companies.

With the bad news rolling in, another bombshell was dropped by the Samuel Neaman Institute for the first time, South Korea was outspending Israel in national expenditures on R&D per GDP. And the study was backed up by a new report from the OECD.

On the very day we received these worrying reports, the Mobile World Congress opened in Barcelona with dozens of Israeli startups participating. The Israeli presence was prominent at the conference, drawing the attention of serious operators, manufacturers, and integrators (the section which coordinates the integration of products into various systems) from across the world.

Israel's national pavilion emphasized the capability of Israeli companies in future tech sectors: cybersecurity, Big Data, the Internet of Things, virtualization solutions, mobile network optimization, and financial institutions.

And to top it off: a new survey by research center KPMG-IVC showed Israeli startups raised a record $4.4 billion in 2015 a 30% rise from 2014, which was also a record year.

So what is happening? Is the negativity just background noise or a dreaded reality? Is there cause for concern for the future of the tech industry, which accounts for 40% of Israeli exports?

Understanding the strengths and weaknesses of Israeli high-tech requires a deep fundamental analysis and a cold, sober look at reality without giving in to hysteria while undertaking a systemic approach throughout. It appears the authors of the aforementioned reports ignore several fundamental figures which reflect the tech scene. For example, the close coordination between military technology and the defense industry (think: Rafael, Israel Aerospace Industries, and Elbit) and the academy.

The complicated security existence is responsible for the continuity and the connection between the education system and the military. The military sorts at an early stage the most qualified candidates from the system, invests a fortune in their training, and places them at the forefront of technology.

No official knows exactly the cost of this investment in human capital, which later serves as a high-tech reserve, but it is clear that we must take into account. The flow of human capital, ideas, and budgets from the military to the civilian market is one of the notable multipliers of the unique ecosystem established here.

For example, the new high-tech park in Beersheva, which could easily compete with any advanced technology park in the world, shows the strengths of the foundations on which the Israeli ecosystem rests. Figures from research center IMD, which studies market conditions in countries around the world, show Israel is leading in all the essential and important parameters for the building and maintaining of a innovation-driven tech sector: tech and science infrastructure, an advanced capital market, flexibility, accessibility to the world, developed VC scene, qualified workforce, and wide-ranging scientific research.

According to the same research, Israel ranks first in its capacity for innovation, second in entrepreneurship, and third in global innovation.

Which means the country is blessed with an entrepreneurial spirit, human capital, and exceptional innovation; and the advantages of the Israeli engineer a complicated understanding of systemic vision, efficient teamwork which disregards tank, and the aspiration to achieve the impossible are prominent.

An analysis of long term trends shows Israel is home to an immense number of startups alongside numerous R&D centers for multinational corporations. Foreign investments in Israel are on a consistent rise, as are the number of new startups established each year.

Their exits provide an evergreen source of revenue for the state, as successful entrepreneurs which sold their companies become private investors and mentor startups helping to further drive innovation. The Israeli companies mature and create added value and new business operations; and they require rounds of funding which reflect their high valuations.

For Israel to maintain its leading position, the government must formulate a long term policy to deal with the core issues facing the sector encouraging technological education, encouraging institutional investors to back high-tech ventures, designing an attractive tax policy, easing the transfer of information between local high-tech firms and international companies, and expanding the opportunities to receive the support of the Chief Scientist.

"The startup nation is resting on its laurels"
To that end, investment in R&D is critical; the contribution of the government has been a negative trend, consistently decreasing over the years down to 20% today. The drop has been balanced - fortunately - by increasing investments from businesses and multinational conglomerates; but currently less than 5% of the public investment in R&D is in the private sector, which puts Israel in a relatively weak place compared to other Western states.

Another problem is the recruitment and training of workers for the tech sector. The outstanding workforce, who arrived from the former Soviet republics, is getting older. Israel is trailing other Asian states - with which it competes - in the training of its tech workforce. The failing state of the Israeli education system makes the issue ever more critical.

The country must prepare an emergency plan for the internal import of employees including the haredi and Arab public instead of talking about importing foreign engineers. This could be achieved by an accelerated effort to educate these sectors and by encouraging teens to study science and technology by offering scholarships and new programs as early as primary school.

Israel requires a long term tech outlook, and the government needs to play a central role in its formulation. This vision must place STEM development in Israel as a top priority and be implemented using consistent budgets and relaxed regulation, relying on inter-ministerial cooperation.

The best thing to happen in the wake of the avalanche of data is the reminder that high-tech is one of the most important drivers of the Israeli economy. Sure, Israel should develop other growth engines, including manufacturing and tourism, instead of relying on high-risk sectors like real estate and finance. But given the current situation, in which Israel's real relative advantage in the global arena is its human capital we must make every effort to utilize it.

Reprinted from the Israel High-Tech & Investment Report June 2016

Click HERE to request further information.
Click HERE to go BACK.