Innovation Ecosystem

Israel benefits from an “innovation ecosystem” that has turned entrepreneurship and technology into engines of economic growth, and in which the government, private sector, and academia actively participate. Taking advantage of government incentives and the availability of venture capital, this environment promotes the creation of new companies (“start-ups”) capable of transforming the latest scientific advances into practical solutions with added value.

The performance of the Israeli ecosystem has been recognized by large multinational companies (Intel, General Motors, Microsoft, Cisco, among others) through acquisitions (“exits”) and the establishment of research and development (R&D) centers, a trend that has consolidated Israeli leadership in multiple sectors. According to PwC Israel's report on tech company acquisitions, in 2020 while there were fewer bids - only 60 compared to 80 in 2019 - their cumulative value increased 55% to $ 15.4 billion, from $ 9.9 billion last year. The average transaction size increased 207% to $ 257 million. Furthermore, 2020 was a record year for initial public offerings, with 19 Israeli companies going public, up from 13 in 2019. Additionally, IPO's share of the total value of transactions rose to $ 9.3 billion (or 60 % of the total value of the transaction), compared to $ 2.2 billion in 2019 (or 22% of the total value of the transaction). The average value per IPO also rose sharply from $ 169 million in 2019 to $ 489 million in 2020, primarily led by

Lemonade, JFrog, and Nanox in the US, and Ecoppia and Aquarius Engines in Israel. In addition, of the more than 60 companies founded by Israeli entrepreneurs that have achieved “unicorn” status (private companies valued at more than $ 1 billion), 16 have joined the list in 2020 and another 10 in the first four months. of 2021.

2020 was characterized by the development of the sector of digital medicine, financial technology (“fintech”), cryptocurrencies, and digital commerce. The cybersecurity, autonomous driving, and food technology sectors continued to rise this year, hand in hand with the inauguration of incubators and research and development (“R&D”) centers, and large investments by foreign multinationals.

Israel's achievements in the areas of science, technology, and innovation are recognized globally, including the highest expenditure on research and development (R&D) and the highest level of venture capital as a percentage of GDP, as well as the highest number of NASDAQ-listed companies outside the United States. Although multiple elements are necessary to create a successful business technology sector, including knowledge, human, social, entrepreneurial, and financial capital, the set of public policies that have played a key role in promoting technological innovation in research and development stands out. industrial development.

Numerous diagnoses, including Laws encouraging technological innovation in Israel, have identified among the main factors of success in the Israeli innovation ecosystem: the number of highly trained engineers and scientists; the existence of academic institutions of international level; compulsory military service and risk-taking culture; which have a direct impact on the formation of human, social and entrepreneurial capital. On the other hand, the Israeli government has encouraged and improved free market participation in the availability of financial capital through legislation. From the 1980s to the present day, the Israeli government has made strategic decisions intending to make capital available to entrepreneurs and make the economic return on investment more attractive, thus compensating for market failures. and market risks, promoting the accelerated development of science and technology-related industries in the country.

The Israeli legal framework is made up of three main instruments: (1) the Law for the Promotion of Industrial Research, Development and Technological Innovation(1984); (2) the Office of the Chief Scientist of the Ministry of Industry, Trade, and Labor (OCJ) established in 1969; and (3) the law reform that established the Israel Innovation Authority (AII) in 2016. Other relevant instruments include the 2005 reforms to the Tel Aviv Stock Exchange (TASE) rules that facilitate small and medium-sized companies such as R&D companies access to capital through initial public offerings.

Numerous analyzes explain the success of the Israeli “innovation ecosystem” based on the significant presence of highly trained human capital; the existence of academic institutions of the international level; and the discipline, technology, and culture of risk management fostered by the IDF´s conscription. However, it is necessary to underline that, through the current regulatory framework, the Israeli government has managed to identify and resolve obstacles and market failures through legislation and state intervention to promote innovation and technological development.

Working together with academia and the private sector (both local and international), Israel has developed several institutions and incentives that promote a collaborative environment, facilitate a better distribution of risks and the reduction of coordination barriers, to consolidate the potential of investment in R&D. Thanks to these measures, the Israeli innovation ecosystem offers the private sector the confidence necessary to stimulate free market participation in the development of industrial and commercial R&D, as well as investment in goods and services with high added value.

In conclusion, through the establishment of a framework law, the creation of specialized agencies, as well as the implementation of tax and regulatory reforms, Israel has managed to reduce information asymmetries, encourage collaboration and manage the risks inherent in the development of technological solutions for a global market, as well as generating a context in which the availability of financing opportunities and public subsidies has a great impact and a multiplier effect on business activity and economic growth.

Sources:

PwC Israel, Exit Report 2020.

_______. 1984. Encouragement of Industrial, Research and Development Law (Unofficial translation): shorturl.at/hrzCQ.

_______. 2011. “Start-up nation: An innovation story” (2011), OECD Observer: shorturl.at/mvEW5.

_______. 2019. “The State of Innovation Operating model frameworks, findings and resources for multinationals innovating in Israel”, PwC Startup Nation Central: shorturl.at/kwQSZ.

Baratz, Y. 2019. “The Israel Innovation Authority to facilitate collaboration between industry and research institutions”, Pearl Cohen: shorturl.at/akCS4.

Getz, D. and I. Goldberg. 2016. “Best Practices and Lessons Learned in ICT Sector Innovation: A Case Study of Israel”, The World Development Report 2016, The World Bank: shorturl.at/htBHZ.

Lach, S., S. Parizat and D. Wasserteil. 2008.  “The impact of government support to industrial R&D on the Israeli economy”, E.G.P Applied Economics Ltd. Research and Consulting in Economics, Marketing and Social Sciences: shorturl.at/hjot0.

Stone, H. A. 2017. “Laws Encouraging Technological Innovation in Israel”: shorturl.at/pwJVX.