The Israeli Innovation Economy

Economic performance and technological innovation are two sides of the same coin. In today's information economy, technological innovation commands a considerable share of domestic products. Successful innovation hinges, amongst other factors, on a country's investment in research and development infrastructure, fostering qualified human resources, advancing financial and venture capital ecosystems, and more. 

In this symbiotic relationship, technological innovation exerts considerable influence on macroeconomics, a fact supported by global intellectual property data which show a clear correlation between economic growth and the increasing numbers of patents registered in a particular country, and vice versa. 

In this regard, intellectual property data serve as a first indicator of economic performance in the various countries.

The Situation in Israel

In Israel, the interconnectedness of the economy and the technological sector holds special significance as the Israeli economy is both technology-oriented and export-oriented, with about half of total export consisting of technological products and services.

Perhaps more than anywhere else in the world except China, there is a direct correlation between economic growth and technological innovation. 

General Background: Continuous Growth Over Three Decades

Over the past three decades, Israel has experienced an economic turnaround unprecedented in character and scope. The change began in the early 80's as a closed, concentrated economy with a large public sector and burdensome tax regime, to an open and competitive economy that attracts foreign investments and participates in global financial markets. Simultaneously, Israel shifted its economic center of gravity from labor-intensive industrial production to a knowledge-based economy focused on the development of technological innovation, the precursor to the now-booming high-tech industry in the fields of life sciences, communications, software, the Internet and cyber.

The combination of tireless entrepreneurship, groundbreaking inventiveness, an impressive ability to raise capital, and a powerful drive to succeed—all these have made Israel a desirable business destination for multinational corporations, which have established development centers that play a vital role in the perpetuation of an Israeli culture of innovation.

Dramatic Economic Uptake

A review of the long-term economic trends in 2015 reveals that Israel dramatically improved its performance during the years 1984 -2014 in a series of important economic indices and business parameters.  For example, Israel doubled its population in that period (from 4.1 million to 8.2 million), increased product by 920%, product per capita by 414%, foreign currency reserves by 2,866%, while at the same time reducing government debt (as a percentage of product) by 76%. The government deficit as a percentage of product also decreased in this period, from 17% in 1984 to 3% in 2014. Security expenditure as a percentage of product also fell by 75%, government deficit by 82%, the tax burden by 30%, and American aid (as a percentage of product) by 90%. These are unprecedented achievements when compared with other western countries and with Israel's fellow OECD members.

The dramatic changes presented in the birds-eye view above find other corroborating statistics from the government sector. The weight of the government sector in the national economy decreased over the past three decades by 42% (from 75% in 1984 to 43% in 2014), inflation plummeted from 450% to 1% (a decrease of 99%), the annual banking interest rate also went down by 99% (from 770% to 5%), and government control of the capital market lessened by 68%. All these are the fruits of the 1985 economic stabilization plan, which put Israel on track for growth, low inflation and declining deficit.

The jump in Israeli national product since the beginning of the century has been nothing less than astounding—from 500 billion shekels to more than one trillion. In 2000, Bank of Israel projections for 2015 were only 750 billion shekels. Israel owes this impressive growth at least in part to the achievements of the technology industry which saw a long line of successful exits and invited a stream of foreign investments.

Furthermore, total export increased in the past thirty years by 860%, with high-tech export rising by a fantastical 3,700%. During this time, Israel also succeeded in developing energy from independent sources and attaining 38% of its total energy within Israel's borders (compared with 0% in 1984), thereby moving the country closer to energy independence. Israel's achievements in water technology were also impressive, with desalination after three decades reaching 41% of the country's total water resources.

Israel made notable headway in the educational sphere as well—and these achievements, too, are closely aligned with the progress of technological development. The number of university and college students increased by 378%, and national expenditure for R&D, as a percentage of product, rose by 225%.

Given this situation, the British weekly, The Economist, determined in 2015 that "Since joining the OECD in 2010, Israel is demonstrating better performance in many areas than this wealthy nations club". Warren Buffet, the legendary investor, noted that "Israel has an exceptional quantity of sharp brains and energy". These flattering words from preeminent sources correspond to an important data point: Israel is ranked 19th in the world on the UN's human development index (HDI), ahead of countries such as Belgium, Austria, France and Finland. The HDI is an aggregate of life expectancy, education and income and is a widely accepted standard for measuring the general well-being of a country's inhabitants. Little wonder, then, that Israel is one of the world's happiest populations overall. The happiness index survey found that Israelis are happier than most of the western world: 6th place in the OECD and 11th out of 156 countries.

Israel: Strength in the Wake of the 2008 Crisis

Analysis of the economic data indicates that in the past five years, Israel's cumulative growth reached 21% – the second highest in all 34 OECD countries. While not wholly unscathed, Israel emerged better from the crisis of 2008 than every other country in the OECD in all quantifiable parameters: debt-product ratio, budget deficit, deficit in the balance of payments, per capita product growth, and others.

Furthermore, the flexibility of Israeli export—consisting mostly of thousands of companies that specialize in niche areas— and the sectorial and sub-sectorial distribution, mean that the economy is better able to cope with global slowdown. The export-product ratio is one of the highest in the Western world (more than 30% of product), and in contrast to many other countries, is not based on commodities that may wax and wane to a country's economic peril. Here, as in other areas of the Israeli economy, high-tech and entrepreneurship are central assets.

Israeli High-Tech: Technological Innovation and Global Breakthrough

All these factors influence the high-tech industry, and to the same extent, reflect it.  To point to just one such instance, in 2015 there were 86 Israeli companies trading on NASDAQ, more than any other country except the U.S. and China. For more than 300 leading multinationals companies, Israel is the destination of choice for R&D centers, and the Wall Street Journal—arguably the most important financial newspaper in the world—determined in 2015 that Tel Aviv-Yafo is in third place out of the 12 most important international cities in the high-tech world, after Austin and San Francisco and before New York, Stockholm, London, Singapore and others. The Wall Street Journal also reports another stand-out fact declaring Israel to be the second most highly educated nation in the world (Canada and Japan are first and third, respectively).

All this led Deloitte audit and consulting firm, one of the big four CPA firms, to rank Israel fourth in its ability to attract foreign investors.  In a global evaluation, Israel comes in fifth for the number of patents per capita, and proportionally, leads the world in the number of employees in research and development—140 per 10,000 (the U.S. comes in second with 85 per 10,000). Israel also produces more scientific papers per capita than any other country, and is one of only eight countries capable of launching satellites into space.

According to data from IMD (for 2015), which takes the temperature in various markets around the world, Israel leads in all the essential parameters required to maintain a strong innovation economy: technological and scientific infrastructure, a sophisticated capital market, flexibility, openness to globalization, a developed venture capital eco-system, skilled workforce, a robust business sector, and extensive scientific research.

The same research ranks Israel first out of 148 countries in innovative ability, second in entrepreneurship and third in global innovation.

The most significant common denominator shared by successful innovation economies is the way they develop their competitiveness on their route to sustainable growth. Today, the extent of that competitiveness is perhaps one of the more important components in an age of global competition for foreign investment.