Does size matter? Just ask Israel. Israel is a tiny country both in terms of its physical size, being just over 800 square miles in size, and its population (weighing in at just over 7.8 million). Yet despite its small size Israel consistently punches high above its weight economically. After America and China, Israel has the highest number of companies listed on the NASDAQ. Last year, Israeli exports totalled $89 billion USD, not including the exports of start-up companies and acquisitions of Israeli start-ups by foreign companies. And despite the slow growth currently experienced by many Western economies, Israel is firmly bucking the trend, closing the fourth quarter of 2011 with a healthy growth rate of 3.8%.
This success begs the question - why? Why is Israel punching so far above its weight in the world and what lessons can be learnt from this "start-up nation"? At the offices of BDO LLP on Tuesday 7 February, in an event organised by UK ISRAEL BUSINESS and the Trade Economic Office of the Embassy of Israel, Saul Singer, co-author of the book "Start-up Nation: The Story of Israel's Economic Miracle" led a panel discussion on this very question.
Singer made the point that when people think of "innovation" they think of "ideas", that searching "innovation" on Google images will bring up pictures of light bulbs. But he also noted that a plethora of good ideas is just one of the essential ingredients needed for innovation - the other key ingredient is drive. Mr Singer believes that one of the reasons for Israel's success that that it is "driven to overcome adversity through innovation".
Albert Einstein famously stated that "necessity is the mother of all invention" - this is a statement which certainly rings true when one considers how many innovations and developments Israel has made a result of the challenges it has faced. Israel has taken the numerous dilemmas it has faced and has leveraged the innovative solutions produced as assets in other areas of business.
One of the most obvious examples of this is Israel's lack of natural water. Unlike many of its resource wealthy neighbours, Israel is low in natural resources. By necessity water technology has been placed at the forefront of the Israeli economy ever since the State's inception and as a result Israel is a visionary, well ahead of its peers when it comes to water preservation and recycling - typically recycling 75% of its waste water. Israel's innovative solutions to its water shortages are now highly sought after by foreign companies.
Another example of how Israel's dilemmas have actually helped rather than hinder the country's development comes from the threats Israel faces from its neighbours. Again due to necessity, Israel has both the highest ratio of defence spending to GDP, and the highest spending as a percentage of the budget of any developed country, and has as a result made extraordinary strides in the development of its defence technologies. As a result of these developments, Israel's defensive solutions are highly sought after and Israel is one of the top defence exporters in the world, making over $7 billion from defence exports in 2010. Defence initiatives have also provided technological breakthroughs which can and have been used in civilian telecommunications and ICT.
Defence exports are not the only advantage that Israel has harnessed as a result of the threats that it faces. Israel's isolated position has provided the perfect testing laboratory for Better Place's electric cars, as detailed in Dan Senor and Saul Singer's aforementioned book Start-Up Nation. The number of battery swap stations that would have to be built by Better Place in the early phases of development was limited by the fact that Israelis could not drive beyond their national borders - making Israel a perfect testing site for electric cars.
It is easy to see how the adversity Israel has faced has driven innovation - but to say Israel's success as a nation is purely down to its drive to overcome adversity would be to do Israel an injustice. Israel's strong commitment to research and development has also been of paramount importance in its success and development.
As a nation, Israel spends about 5% of its GDP on research and development, one of the highest amongst OECD countries, and double the UK's GDP commitment to research and development. Israel has eight universities which feed directly into businesses. Israel also has a "Technological Incubators Program" which was first established in 1991 by the Office of the Chief Scientist and provides scientists with potential ideas, appropriate research and development facilities; financial support, exposure to investors, management assistance and professional guidance as well as central administrative services.
Israel's dedication to training a highly skilled populace is a further reason for its success. Israel has overcome the limitations of a small population by accepting that countries with small populations are unable to compete with countries like the United States, China and India in mass production of low- and medium-tech goods. Israel has instead focused its funding and training on highly skilled workers who develop and export extremely valuable high-tech and high-end goods, technology and services.
Israel's research and development expertise is not limited to state funded projects. It is now home to the research and development facilities of over 60 major multinational companies, including such heavyweights as Microsoft, Google and Motorola. Success begets success and in December 2011, Apple acquired Herzliya-based flash memory developer Anobit Ltd, in the west of Israel's Tel Aviv district. Anobit will be the new Apple Research and Development centre, as flash memory technology is critical to Apple's main line of consumer products, including the popular iPhone, iPad and Macbook Air to name but a few.
Israel also engenders an entrepreneurial culture as a result of its highly skilled workforce. Even its mandatory military service has helped facilitate economic success. Singer pointed out that military service in Israel provides a third phase of life, in-between school and work where Israelis are taught the importance of personal sacrifice for something larger than one's self. They learn military discipline, mission focus and leadership skills which are key skills in any business, and many meet future start-up business partners during their military service.
In 2011 Israel had over 3,500 start-ups - the highest number outside of the United States. The success of Israeli start-ups is evidenced by the number of Israeli companies that are acquired by multi-national companies. Most recently IBM Corporation acquired smartphone and tablet application developer Worklight Ltd. This is IBM's 11th acquisition in Israel.
Israel has the drive and the ideas for innovation - but it also has the funding. This is essential - what is the use of filling people's heads to the brim with ideas, ability and drive without having the means of financing innovation? Israel's excellent track record in sourcing funding for ventures which has driven Israeli success. It has received 2.5 times more venture capital investments than the United States and more than 30 times the number of those in Europe. Comparing absolute numbers, Israel, with a population of 7.8 million people, attracted close to $2 billion in venture capital, as much as the UK's 61 million population received.
The triple cocktail of having the necessity and the drive to overcome the challenges it has and continues to face, cultivating new ideas through well supported research and development and its strong track record in sourcing funding for innovative ideas and projects has enabled Israel to become a global centre for innovation.