“The word ‘impossible’ has ceased to exist in the vocabulary of technical science …We ourselves will use and carry on every new attempt in our Jewish land… making of the new land a land of experiments and a model state.” These words were written more than a 135 years ago by Theodor Herzl about his vision for the Jewish state’s future.
Israel achieved a lot since Herzl wrote these words, but the journey is far from over.
In the past two decades, the mainstream Israeli economy has not caught up with the extraordinary “Start-Up Nation.” Israeli engineers and entrepreneurs are behind some of our most revolutionary smart transportation innovations (e.g., Via, Waze, Mobileye and Moovit), yet Israel has been dragging its feet for decades to adopt the century-old subway technology. Israeli Fintech innovators, such as Lemonade, Hypo, Fundbox, and Payoneer are disrupting financial businesses all over the world, yet 2020 was the first time in 40 years that a new bank was registered in Israel. Three hundred seventy R&D centers of the top tech companies from around the world attest to the Israeli high-tech sector’s unique global attractiveness, yet the productivity level in almost every other sector is significantly lower than the corresponding OECD average.
Such dualities are not uncommon in Israeli society. Though Israel is the only democracy in the Middle East, its political dysfunction dragged citizens through four elections in two years. Israel has a buzzing LGBTQ scene, but no civil marriage. It mishandled many aspects of the battle with coronavirus, yet it led the world’s most successful vaccination campaign, (hopefully) putting the pandemic behind it. Its education system produces Nobel Prize winning scientists and incredible technical minds, but in 2018 it trailed in 41st place in the standardized math test among 79 countries.
Accelerating the Innovation Economy
The gap between the innovation and mainstream economy is becoming one of the most fundamental challenges Israel will face in the next decades. This gap is widening even faster in the post-coronavirus era as the Israeli tech industry is heating up faster than the Negev desert in mid-summer. Despite – or perhaps because of – the pandemic, 2020 was a record-breaking year for the tech industry, with $10B of equity investments in Israeli startups, up 25% from 2019. Don’t expect this frenzy to calm down in 2021. Investments already reached the $10B mark in the first five months, as dozens of startups in Fintech, cybersecurity, and enterprise software are raising increasingly bigger rounds (median deal size rose from $6.8B to $14B). Assuming this pace continues, it is likely we will surpass $20B, an unthinkable figure pre-corona (average figure for 2017-2019 was $6.5B).
True, this isn’t just an Israeli phenomenon. The pandemic has ushered the world into “The New Digital Age” in which digital interaction is the standard. Working and studying remotely, shopping, banking, and checking in with a physician online, and streaming most of entertainment to our living rooms – all became second nature in 2020. Many of these trends are irreversible. And so, we see tech companies all over the world racing forward, disrupting one industry after another while creating an unprecedented amount of wealth.
This hyper-digital disruption changes not just economies, but also geopolitics. A country’s clout no longer depends solely on size and military might. The ability to form a powerful ecosystem that produces cutting-edge technologies and innovative companies is quickly becoming a key trait in the global balance of power. The innovation race has replaced last century’s nuclear arms race, with aspiring global leaders like China choosing to base their growth strategy on technological innovation, and specifically on artificial intelligence (AI).
Israel’s recent diplomatic breakthroughs illustrate this phenomenon. Its new “popularity” in the region is largely due to its technological prowess. The Abraham Accords, normalizing the relationship between Israel and the Gulf countries, represent the shift from oil to data as the sine-qua-non of our era. The United Arab Emirates (UAE) and other countries in the region understand that there is much to be gained from forming close ties with the Israeli tech ecosystem. Indeed, these newly formed ties are likely to benefit both sides – from Gulf based companies being first clients of Israeli technologies, through Gulf individuals and funds investing in Israeli start-ups, to Israeli experts helping UAE and other countries in the region strengthen their own innovation ecosystem.
Yet in order to transform from an ecosystem leader to a leading economy, Israel’s innovation capability must transition to its next phase. Forty years into this unprecedented journey, the outcomes of the Israeli model are clear. The entrepreneurial culture and the level of technology are unmatched anywhere in the world outside Silicon Valley – Israel leads the world in R&D investments, in GDP terms, as well as in VC investments and startups per capita. Yet at the same time, the spillovers from this innovation to the mainstream Israeli economy are rather scarce, leading to many of the aforementioned dualities.
Three major goals must be on Israel’s innovation agenda.
Maintaining Tech Leadership
The first and most basic one is to maintain and fortify Israel’s tech leadership in the next decades. This is becoming increasingly difficult as more countries and regions enter the global innovation race. And as artificial intelligence (AI) turns out to be the general-purpose technology of this century, economies with access to big data – AI’s “fuel” – have an inherent advantage. This means that Israel, with its nine million people, must be much more innovative, inventive, and agile than big countries whose citizens produce several orders of magnitude more data.
To achieve this, Israel’s tech industry, academia, and government must work together to focus and enhance its competitive advantage. Indeed, Israel’s biggest achievements in the innovation sphere emerged from such public-private partnerships that paved the way to what became the “Start-Up Nation.” Government and academia are especially important in the beginning of an innovation cycle when infrastructure and regulation play a crucial role. We are currently in such a moment, as economic and social gains from the internet, social networks, and smartphones begin to subside, giving way to the age of smart, and increasingly independent machines.
One of the major obstacles to sustaining Israel’s tech leadership is the now-chronic shortage of engineers. A May 2021 report, by Start-Up Nation Central, showed that even amidst a once-in-a-century pandemic, the overall appetite for tech talent – estimated at more than ten thousand people – still significantly exceeds the human capital Israel produces on a regular basis – roughly 6,500 high-tech graduates every year.
Expanding and Diversifying the Talent Pool
The solution to this shortage lies not in middle of Tel Aviv nor in discharged soldiers from the elite intelligence Unit 8200. Those talent pools are already exhausted. To pump more fuel into its innovation engine, Israel must overcome the second challenge in the innovation agenda – integrating untapped wells of talent to the tech scene. This includes women – who currently represent less than 30% of tech employees and only 5% of CTOs – as well as the ultra-Orthodox and Israeli Arab populations. The latter two are growing more rapidly than the rest of the Israeli population, so integrating them into high-productivity industries is absolutely essential to Israel’s economic sustainability.
Israeli high-tech is quite homogenous. The typical tech worker is usually male, secular, from the middle to upper-middle class, and lives in the center of the country or in large metropolitan areas. For many Israelis, high-tech is a closed club reserved for the privileged few. Remote work is an opportunity to overcome that – cultural, religious, geographical, and work-life issues are much easier to overcome when part of the work can be done from a distance.
Incorporating more people into innovative industries is important for most countries, but it is absolutely essential for Israel. Its size and distance from any substantial market make the innovation economy the only globally competitive industry in which Israel can hold a leadership position. Not surprisingly, it is much more rewarding relative to other industries – Israeli high-tech employees earn on average three times the amount their non-high-tech counterparts do.
What’s in it For Me?
The third challenge goes back to the dualities presented in the beginning of this article. It is not socially sustainable to have a thriving tech industry when the majority of Israelis do not benefit from it. Israeli innovation leadership should not be just about making a small group of people rich and helping global companies develop their tech products. It can and should also be used to improve Israel’s public and municipal services.
This is not just wishful thinking. Israeli startups excel in reinventing products, services, and work processes for the entire world. Yet those capabilities are by and large not being directed to address Israel’s societal and economic needs. Linking these together will create opportunities for start-ups to pilot their technologies and solutions, while benefitting wider parts of Israel’s society. Edtech start-ups can help the education system pioneer a hybrid learning model, combining human teachers and software-based tutoring; healthtech companies can use the data in health organizations’ electric medical records to offer Israeli citizens the most advanced precision-medicine treatments; and fintech companies can help improve and simplify the tax regime while minimizing the black economy.
In the midst of social tensions and erosion of solidarity, we must not lose sight of the goal. The path toward economic and social prosperity is clear: it is only by embracing science and technology can Israel thrive; it is only by ensuring equal opportunities for all can it do so justly.
It is not an easy path. It takes navigating in the most competitive global landscape through the ever-changing tech environment. To help in that journey, we are establishing an innovation policy institute, Start-Up Nation Policy Institute (SNPI) – co-chaired by Mr. Paul Singer and Prof. Eugene Kandel – which I am privileged to lead. Our goal is to help Israeli policy makers navigate the rough waters of this innovation journey, raising tough questions and offering practical solutions. We plan to partner with all those who have the same goals in mind, and we invite those who share our vision to take part in this journey with us.
And remember Herzl.
Uri Gabai is CEO of the new Start-Up Nation economic and research policy institute, a think tank that will focus on sustaining Israel’s long-term economic health by helping the country keep its competitive edge in high tech innovation.