Innovation and Israel: Lessons for Australia

When Israel’s Chief Scientist, Avi Hasson, touches down in Australia tomorrow for a week of meetings and events, he will find a ready audience.

Avi, as well as his title as Chief Scientist, is also the head of Israel’s National Innovation Authority, and it is this title which more aptly describes his role in Israel. Avi is like the chief executive of Israel’s innovation system, an official appointed by statute but  who enjoys powers more closely resembling those of a Minister. His job is to ensure the Israeli economy, the ‘Start Up Nation’, remains one of the most innovative in the world.

Avi will find an Australian economy at a turning point. Though still strong, our economy is coming off the highs of an historic mining and commodities boom. We are searching for the next engine of growth – one that makes us of our highly-educated workforce, is export-oriented, pays sufficiently well to maintain our living standards, and harnesses our natural advantages as a nation. For this, we need a more innovative, creative and entrepreneurial economy. Innovation has become the new buzzword in Australia, with the Prime Minister due to deliver a major Innovation Statement next month.

This is why the experience of Israel is so relevant to our current economic debate.

Israel is indeed an innovation powerhouse, on any metric. 50% of Israel’s exports are in high-tech. Israel spends an OECD-high of 4.2% of GDP on research and development (R&D). Last year Israel attracted almost $2 billion in venture capital, more than any other country (including the US) on a per capita basis. Over 275 big multinationals have established R&D facilities in Israel, from Apple to Alcatel, Google to Philips. Israel has the highest density of start-ups in the world, with 1 for every 2000 people, and more NASDAQ listings than any country bar the US and China. For a small country, Israel punches way above its weight on innovation.

But – and this is where it gets interesting – Israel did not become like this overnight. Israel was not always destined to be an innovative, high-tech economy; quite the opposite, in fact. In the early 1990s, Israel’s economy was sclerotic, inefficient, and overly centralised.

Only as a result of conscious national decisions, taken from the early 1990s onwards, when staring down the barrel of a crisis, did Israel’s economy begin to change. Today, Israel has one of the most competitive and productive innovation ecosystems in the world. But this system has been built and engineered every step of the way. A start-up scene did not just emerge organically. National policy and national leadership brought about this transformation, harnessing strengths but within a coherent and consistent framework, where the incentives were all aligned and the obstacles and disincentives removed.

What are the secrets to Israel’s innovation system? It is a question I have spent the better part of two years in Israel thinking about. I think the answer can be broken down into four C’s: culture, capital, coherence and clusters.

Firstly, culture. It is true that Israel has some unique national circumstances which – though we would not wish them upon any country – nonetheless have contributed to Israel’s risk-taking culture. A small nation, lacking natural resources and surrounded by hostility, can only survive by dint of ingenuity, cleverness, and a degree of ‘chutzpah’. In Israel, ideas are prized, experimentation and creativity are encouraged. Failure is seen as valuable experience, not a character blemish. Social hierarchy is almost non-existent, so good ideas can come from anywhere within an organisation. Compulsory military service in a high-technology army, and the large degree of autonomy given to young soldiers in the field, further contribute. The small size of the Israeli market gives rise to a ‘global from day one’ perspective.

Secondly, capital. The ready availability of early-stage, high-risk venture capital drives a vibrant and thriving innovation ecosystem – without this, risky but disruptive ideas (the possible ‘unicorns’) never emerge from someone’s sketch on the back of a napkin. Israel is not naturally endowed with capital – it’s a small economy in a geopolitically risky environment. But it has managed to create a thriving venture capital sector through two major government initiatives. The first was the Yozma program in the early 1990s, which created Israel’s VC industry from scratch.

The second is the series of programs and funds now run by the Office of the Chief Scientist, which provides financial support to early stage start-ups without taking equity. This helps drive a sizeable pipeline of deals to feed the VC industry at the next stage of development. The Office of the Chief Scientist manages a budget in the order of $450 million per year (this equates to about $1.5 billion in Australian terms, given the relative size of our economy) to support industrial R&D and early-stage start-ups. This might look at first blush like generous corporate welfare. But in fact this spending delivers a very high return on investment when viewed across the economy. The Chief Scientist calculates that every dollar it spends to support R&D generates an additional $1.50 in private sector R&D expenditure and translates into an additional $5 – $10 of GDP generated. It is seen as a good use of public money.

Competitive tax policies and settings, which encourage and privilege venture capital over other forms of investment – in recognition of the outsized multiplier effect such investment has on the rest of the economy – also play a part. Getting the optimal policy settings in areas such as crowd-sourced equity funding, tax treatment of angel investors, and employee share ownership (ESOP) schemes has been critical to Israel’s success.

Thirdly, coherence. Creating an innovative ecosystem requires getting the incentives right and removing roadblocks across the policy sphere. Taxation, industry policy, science, education, financial regulation, immigration – all these policy areas need to be aligned. In Israel, Avi Hasson and his office provide the single point of accountability and responsibility within Israel for supporting innovation. He has a single mandate – to create the best environment for innovation in the world – and he has the authority to address the obstacles to making this a reality, and prevent new measures which would set it back. He is guardian and gatekeeper.

Fourthly, clusters. Israel is a small country, in size and population, with often no more than three degrees of separation. So clusters tend to form almost naturally. The military is a big part of life, and you often find people who served in the same military units then founding a start-up together. Beyond this, there is the connection between the academy and industry. Universities play a huge part in the innovation ecosystem, and do so enthusiastically. Researchers see potential commercial application as a vital partner in their work, not a distraction. Universities have in-house structures and specialists to help develop products and applications from research breakthroughs: they seek to value-add to their research before selling the IP out the door. Taken together, the close interaction between the military and industry and between the universities and the commercial world, and the characteristics of a small society, make for a high degree of collision and interaction. This is how ideas are formed, refined, improved and eventually commercialised. It’s like the whole country is a version of Silicon Valley. The government has taken steps to promote this – building a cyber hub in Beersheva, for instance.

What does all this mean for Australia? For me, the take-out is positive. Israel created a more innovative economy, and so can we.

Our baseline strengths to be a more innovative nation are good. We have strong research credentials and a highly-educated workforce. We have a sizeable and sophisticated capital market, supported by our large super funds. We embrace technology. Our population is still small enough to be manageable. We run a big migration program, meaning our country is also importing new talent and ideas. We too are a nation known for innovation and a healthy disregard for the usual way of doing things – disruption comes naturally to us. We are plugged into the growth markets of Asia, including through our network of recently-concluded FTAs and regional trade agreements.

Importantly, we have a high degree of political commitment and buy-in to now take the policy steps needed to realise our potential. Innovation has become a national priority, which means resources and political will can be mobilised behind it.

As we go about building a more innovative Australian economy, we need to ensure it remains uniquely Australian, and plays to our own natural strengths and advantages. We should not be seeking to replicate Israel or Silicon Valley or, indeed, anywhere else. ‘Cut and paste’ will not work. We will need to come up with our own policies and initiatives to foster more innovation.

But we can and should learn from the experiences of countries such as Israel, and adapt them to our own national circumstances.

Israel’s Chief Scientist, Avi Hasson, embarks on a one-week visit to Australia starting today (23 November 2015). He is visiting as a guest of the Department of Foreign Affairs and Trade, under the Special Visits Program.

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