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World Review of Entrepreneurship, Management and Sust. Development, Vol. 8, No. 1, 2012 53
Copyright © 2012 Inderscience Enterprises Ltd.
The development of the successful high tech sector
in Israel, 1969–2009
Amir Shoham*
The School of Business Administration,
The College of Management,
Rabin Blvd. 7, Rishon Lezion, 75190, Israel
E-mail: amir1s@colman.ac.il
*Corresponding author
Gil Avnimelech
Faculty of Business Administration,
Ono Academic College,
104 Tzahal, Kiryat Ono, 55000, Israel
E-mail: gilavn@gmail.com
Abstract: This article describes the events and processes that led to the
development of the Israeli high tech cluster. Understanding the Israeli cluster is
important because Israel is probably the most successful example of replication
of the Silicon Valley model outside of North America. It explains the
development of multiple factors, including sophisticated human capital,
technological institutions and an open, global environment, that were crucial
for building the Israeli high tech cluster. This is most important for policy
makers who want to learn about the successful structuring of a high-technology
innovative sector in a small, open economy.
Keywords: high-tech; innovation; entrepreneurship; economic development;
policy; Israel.
Reference to this paper should be made as follows: Shoham, A. and
Avnimelech. G. (2012) ‘The development of the successful high tech sector in
Israel, 1969–2009’, World Review of Entrepreneurship, Management and
Sustainable Development, Vol. 8, No. 1, pp.53–69.
Biographical notes: Amir Shoham is a Senior Lector at the School of Business
at the College of Management (Israel). He holds degrees in Economics and
Business Administration from Ben-Gurion University. He is also a faculty
member of the Department of Economics, Sapir Academic College (Israel). He
also teaches in academic institutions in other countries including China and
Singapore. The courses he teaches include managerial economics, introduction
to finance, international finance and international financial strategies. He sits on
the boards of directors of two public firms. Recently, he has published articles
in JIBS, The Global Economy Journal, and Journal of Socio-Economics.
Gil Avnimelech is a Senior Lecturer and Head of the Entrepreneurial Research
Center at Ono Academic College. Previously, he was working with
Prof. Maryann Feldman as a Post-Doctoral Research Associate at the Public
Policy Department, UNC-CH. He also spent a year as a Post-Doc Research
Associate at the Faculty of Management at Tel Aviv University. He conducted
54 A. Shoham and G. Avnimelech
his PhD at the School of Management, Ben Gurion University. His fields of
interest are entrepreneurship, spin-offs, venture capital, innovative cluster
development, and innovation policy. He has published more than 12 articles in
leading academic journals and several chapters in edited books. He has been
involved in research activities in five European framework projects (TSER,
IFISE, ESTER, PRIME and TARGET). He also lectures at the Business
Schools of Tel Aviv University, and Ben Gurion University.
1 Introduction
During the 1990s, Israel’s global high tech cluster grew significantly and became one of
the leading high tech clusters in the world. The number of start-ups rose from
approximately 300 in 1991 to almost 3,000 in 2000; the total capital invested by venture
capital (VC) funds during the 1990s was almost US$6 billion compared with less than
US$50 million during the 1980s and more than 150 Israeli companies were traded on
global capital markets (most of them on NASDAQ) at the end of the decade, compared
with fewer than 20 ten years earlier. Many other indicators associated with the high tech
sector also showed rapid growth, including the number of multi-national enterprise
(MNE) research and development (R&D) centres active in Israel, Information and
communication technologies (ICT) sales and exports of the Israeli companies, patents
issued in the USA, and acquisition of Israeli start-ups by MNE. This dramatic growth has
its roots in background conditions created prior to the 1990s (Avnimelech and Teubal,
2004).
Several factors are necessary for a high tech sector to develop in a given economy,
including sophisticated human capital, access to capital and effective financial markets,
suitable educational and technological institutions, and an open, global environment. In
order to understand the development of these factors in the Israeli economy, it is
necessary to return to several significant points of time. In 1969, a coherent technological
policy emerged in Israel, setting the background for the development of the Israeli high
tech sector (Teubal, 1993). Then, various events starting at 1985 presented a turning point
in the macro-environment and the financial markets of the Israeli economy (Ben-Basset,
2002), which enhanced a gradual change in the business culture. Finally, the period
starting at 1993 saw both a significant change in Israel’s innovation and technology
policy (ITP), which began taking targeted, proactive approach focused on developing a
start-up-intensive high tech cluster, and a significant change in Israeli business culture
that became remarkably entrepreneurial and innovative (Avnimelech, 2008; Avnimelech
and Teubal, 2008).
This paper describes the events and processes that led to the development of the
Israeli high tech cluster. Section 2 presents the macro-economic events and process;
Section 3, depicts the ITP events and their consequences and Section 4 describes the
changes in the high tech sector since 1985 and the policy implications of the Israeli case.
The development of the successful high tech sector in Israel, 1969–2009 55
2 Macro economic changes since 1985
2.1 Background
The Israeli economy before 1985 bears no resemblance to the Israeli economy after that
date. Throughout the first half of the 1980s, Israel suffered from hyperinflation that was
brought under control only when the most comprehensive economic reform in the history
of the State was initiated in July 1985 (Fischer, 1987; Patinkin, 1993). No doubt this
reform, called the ‘Economic Stabilisation Plan’, was the life raft that saved the Israeli
economy from the damage done during the period of hyperinflation, including:1
1 a tremendous public debt, approximately 250% of the product
2 external public and private debt of approximately 80% of the product
3 inflationary trauma that left residue behind for many years to come.
2.2 The reforms2
One of the principal components of the stabilisation plan was a broad fiscal cut. In the
early 1980s, the government deficit reached 15% of GDP. As a result, the stabilisation
plan caused significant changes in the structure of the economy and the way that it
functioned. These changes encompassed all sectors of economic policy and included
transformations in the capital market, foreign currency market, labour market and the
industrial structure3.
The stabilisation plan and broad fiscal cuts were accompanied by the introduction
fiscal discipline, which began then and continues to this day, and followed by
wide-ranging reforms. The most significant reforms were:
2.2.1 Reform of budgetary policy
The expansion of the public sector in Israel until 1985, left few resources available for the
business sector and stunted its growth. Growth in public spending was accompanied by a
mounting tax burden and reduction of the inventories of capital and human capital that
were available for the business sector. For the same reasons, the reduction in government
spending led to accelerated growth of the business product and increased its weight in the
economy.
The stabilisation plan was a turning point for the economy. The government deficit
was eliminated in a single stroke and the gradual process of reducing the weight of
government spending in the product began and continued until 1994. The average weight
of public spending in 19941998 was approximately 21% of the product less than it had
been in 1980–1984. The newly freed resources were redirected into two channels:
reducing the Israeli government’s dependence on unilateral foreign guarantees, and
reducing the budgetary deficit.
The government’s foreign expenditures were concentrated on military imports and a
decisive part of the reduction in government spending came from lowered defence
expenditures, particularly imports. Simultaneously, the foreign aid that was intended
primarily to finance new defence acquisitions was reduced, as were payments on
previous loans that had been taken in order to finance the import of weaponry. Reducing
the government’s dependence on external sources increased the certainty that the reduced
56 A. Shoham and G. Avnimelech
weight of government spending would be sustainable and lowered the risk of a crisis in
the balance of payments.
Reduction of the budgetary deficit in the public sector in the period after the
stabilisation plan amounted to 10.5% of GDP. In the same period (1985–1989), the
overall budget of the public sector was nearly balanced but following the absorption of
large wave of immigration from the former Soviet Union in the 1990s, there was a
temporary increase in the deficit. Despite fluctuations in the size of the deficit, there was
a significant improvement in the government’s overall fiscal discipline.
In addition, the composition of the public budget changed in a way that helped the
business sector expand, by beginning to outsource increasingly large portions of the
public expenses. This process was also evident in larger public-sector purchases from the
business sector. Furthermore, the government’s investment in infrastructure increased.
This was extremely important for the expansion of the public sector, and helped improve
productivity.
2.2.2 Financial reforms
Government intervention in all markets (capital, money and foreign currency) meant that
until the mid-1980s, the financial system in Israel was very far from maintaining the
conditions of a competitive market. Government intervention in financial markets
distorted the allocation of resources in Israel and had a negative impact on the rate of
growth. The government’s intervention damaged the effectiveness and efficiency of
monetary policies: granting free credit to certain goals narrowed the foundation on which
monetary policy could function. Following the stabilisation plan, the government
gradually reduced its intervention in the local monetary and capital markets, remove
limitations on the international movement of capital and increase competition between
financial mediators.
The purpose of the reform in the monetary market was to improve the functioning of
monetary policy, and eliminate the limitations that distorted the composition of portfolios
of the assets and obligations held by both households and the business sector. It consisted
of several steps including:
1 The Bank of Israel decided to cease using the liquidity rate as a tool for managing
monetary policy. Therefore, degree of liquidity was gradually reduced to a level
corresponding to the level of business liquidity, so the gap between them reduced
significantly.
2 Ending of government intervention in the linked assets’ market. Deposits linked to
the exchange rate, which were government obligations, became unilateral after the
stabilisation plan was implemented. This meant that it was possible to redeem them
but new deposits could not be made. In their place, the banks were permitted to
accept deposits linked to the exchange rate and offer them to the public against
credit.
3 All limitations on the duration of assets’ and obligations’ link to the CPI or foreign
exchange rate were discontinued.
4 All quantitative limitations on the amount of foreign-currency credit and bank
guarantees were eliminated.
The development of the successful high tech sector in Israel, 1969–2009 57
5 New tools were developed for managing monetary policy: monetary loans and
short-term Bank of Israel’s bond issues. In the period preceding the reform, there had
been large gaps between the prevailing interest rates for short-term convertible assets
and convertible obligations. Furthermore, there were gaps between rates for different
users. Within the framework of the reform, many of the discriminatory taxes and
subsidies were discontinued, and many limitations were eliminated, reducing interest
discrepancies in all cross-sections.
Reform of the foreign currency market in Israel occurred on two levels: development of
an exchange rate regime and the realisation of capital movement. The process of making
the currency exchange rate regime more flexible began in 1989 when the gap between the
rate of inflation in Israel and the rate in its trading partners created the expectation that
the shekel would be devalued frequently. This, in turn, led to waves of foreign currency
market speculation. The interest rate was the primary means for protecting the exchange
rate. Therefore, it suffered from severe fluctuations. In order to reduce the speculative
waves, there was a gradual transition to an exchange rate that was variable, initially
within a horizontal range and later in a diagonal range. The band of variability was
expanded as more and more limitations on the international movement of capital were
removed.
The transition to a diagonal exchange rate band was intended to reduce uncertainty in
the business sector and decrease the speculative attacks. However, the main goal of the
exchange rate policy was controlling inflation.
The process of liberalising the international movement of capital began in 1987 and
was completed in 1998. Following the failed attempt to institute a variable rate of
exchange in 1977, it was decided to implement the liberalisation gradually while
constantly re-examining the steps that had already been taken.
The institution of free market lending lowered the interest on foreign currency loans
from local banks to the prevailing rate in foreign markets (LIBOR). This reduced the gap
in interest rates between these two sources of credit from 8% in 1987–1988 to only 0.4%
in 1997–1998.
When the reform was completed, the supervisory concept also changed from a regime
in which all foreign currency transactions were forbidden, unless explicitly permitted, to
one in which there is no limitation on either long-term or short-term movements of
capital.
The liberalisation of financial markets and foreign trade helped the people who left
the defence industries, and founded the first high tech start-ups to establish overseas
marketing apparatuses, create international partnerships and take advantage of low cost
sources of financing. For example, the amount of money invested in VC funds grew from
approximately US$100 million in the early 1990s to approximately US$90 billion in
1999.
2.2.3 Reforms in the labour market
Since the early 1990s, there have been many changes in characteristics of the Israeli
labour market. First, it has become more flexible, mainly due to external changes:
immigration from the former Soviet Union, and opening the gates to foreign workers.
Other changes resulted from the weakening of the Histadrut labour union, which was
even more evident after the stabilisation plan because of the economy’s continuing
58 A. Shoham and G. Avnimelech
movement towards a free market economy. Finally, a substantial decrease in the rate of
employers’ contributions to national insurance led to increased employment since
employment taxes had previously damaged manufacturer’s profitability, reduced the
demand for workers and made the labour market less flexible.
The peace processes with Jordan and the Palestinians were geopolitical developments
that occurred concurrently with the massive economic growth of the 1990s. The peace
negotiations that began after the First Gulf War in 1991 climaxed with the signing of
peace agreements with Jordan and the Palestinians. These agreements reduced the
security risk attributed to Israel, thereby increasing the motivation for doing business. A
wave of terrorist attacks in 1996, and the resultant uncertainty regarding the peace
process highlighted the agreements’ fragility. Despite this, the peace agreements made
several significant contributions to the economic development: increased number of
tourists, noticeable expansion of foreign investment, and upgrading of Israel’s economic
rating in the world following the reduction of risk premiums. Following the full range of
economic reforms implemented beginning in 1985, principally the reduction of the public
debt and decrease in the deficit, Israel's credit rating continued to improve in following
years.
2.3 Israel’s credit rating
A country’s credit rating expresses its ability to pay its debts, and improvement in the
credit rating is likely to attract continuing investments and loans on a larger scale and at a
lower interest rate, which helps ensure faster economic growth. The international rating
companies have reviewed the State of Israel’s government bonds since 1988. Currently,
three international rating companies review the Israeli economy: Moody’s, Standard &
Poors and Fitch. Their ratings are depicted in the following graph:
Figure 1 The development of Israel’s credit rating since 1992
Source: The Government Debt Management Unit (GDMU),
Ministry of Finance (2010), Israel
The development of the successful high tech sector in Israel, 1969–2009 59
2.4 Human capital
Human resources in the business sector in Israel grew dramatically in the years leading
up to 1995, both in terms of quality and quantity, for a number of reasons.
• The year most frequently identified with the start of the growth trend in human
capital in the private sector is 1987. In that year, the Israeli Government decided to
cancel the Lavi aircraft project, leading to the layoff of thousands of engineers –
most of them highly skilled, experienced workers.
• After the collapse of the Soviet Union, regional arm races decelerated. As a result,
the activity of Israeli defence industries shrank substantially and thousands of
workers were laid off, increasing the human capital available to the business sector.
Benoit (1968) examined the connection between defence burden and economic growth,
and found that the former has both positive and negative effects on the latter. The main
positive effect is the training of skilled personnel in the military framework, which later
benefits the civilian sector. In addition, Cohen at el. (1996) argue that funds cut from the
defence sector are often invested in the business sector and thus enhance economic
growth. In Israel, the workers who were laid off from the military industries sought new
places of employment. A considerable number of start-up companies were established by
people who had previously served in various units of the Israeli military (Breznitz, 2005).
Former defence sector employees had broad knowledge and experience, in part because
of the large sums that are invested in defence R&D, without the concern for the profit
that commercial companies must consider. In an interview in Business Data Israel (BDI)
report from 2000, a former commander of the Israel Air Force said:
“History shows that in years when there is a high security threat, the attraction
of being a pilot increases, and many pilots keep serving in the Israel Air Force.
For example, after the Six Day War many pilots left the air force… In
1993–1994, when the peace process began, along with it the economic
prosperity, pilots started withdrawing and shifting to the business sector.”
(see http://www.bdi.co.il)
The Israeli military establishment claims that many high tech companies offer incentives
to pilots, and it seem that the Air Force is losing its best pilots to high tech. A similar
phenomenon characterises the elite technology units in the IDF (Breznitz, 2005). A
further direct result of the collapse of the eastern bloc was the large wave of immigration
to Israel from the Soviet Union and eastern bloc countries in the early 1990s, numbering
several hundred thousands of immigrants (see Table 1). The new immigration increased
the nation’s population in 12% between 1990 and 1994 and in 20% between 1990 and
1999 (Friedberg, 2001). Of the immigrant workforce, 60% had academic diplomas, many
in the exact sciences. As a result of immigration, the total number of doctors and
engineers in Israel doubled between 1989 and 1998 (Ekstein and Gotlibovski, 1996).
From the standpoint of high tech, the timing could not have been better, despite the
difficulties of absorption and adjustment to a new society, and the fact that western
industry was more advanced than most industries had been in the eastern bloc. To solve
this problem, high tech companies, with the backing of the Ministry of Labour and the
Manufacturers’ Association of Israel, introduced re-education and training programmes.
In addition to courses sponsored by the Ministry of Labour, the companies themselves
began to invest in independent courses for employee training.
60 A. Shoham and G. Avnimelech
Table 1 Immigrants in the Israeli workforce
Year Total
immigrants
% of total
population
Immigrants
15–65 years old
Immigrants with
degrees in the
exact sciences
1990 199,516 4.4% 129,474 37,575
1991 176,100 3.7% 112,083 28,318
1992 77,057 1.5% 50,067 11,420
1993 76,805 1.5% 50,397 9,406
1994 79,844 1.5% 52,827 10,831
1995 76,361 1.4% 51,147 10,307
Notes: *91% of the immigrants in between 1990 and 1995 are from the former Soviet
Union.
**According to Gandal et al. (2000), in 1996, 24.5% of the Russian immigrant
had an academic degree while the percentage of academic degree in the rest of the
population was 18.6%.
3 Innovation and technology policy (ITP)
3.1 The emergence of a coherent ITP in 1969
In 1968, an Israeli government commission headed by Prof. Kachalsky, recommended
the creation of the Office of the Chief Scientist (OCS) in the Ministry of Industry and
Commerce. The aim of the OCS was to promote commercial R&D projects undertaken
by companies in the business sector. Previously, support had been available only to
national R&D labs, academic R&D, agricultural research and defence-related R&D
(Trajtenberg, 2002).
The establishment of the OCS in 1969 represents the beginning of a coherent ITP in
Israel. The first OCS programme (the regular R&D programme) was and continues to be
the backbone of the country’s ITP (Teubal, 1997), providing conditionally repayable
loans for 50% of the cost for any approved industrial R&D project aimed at developing a
new export-oriented product. Until 1984, almost 100% of OCS disbursements to civilian
R&D came from this programme, and even in the early 1990s more than 95% of OCS
disbursements to civilian R&D came from this programme (Avnimelech, 2008;
Avnimelech and Teubal, 2008). Following the establishment of the OCS and creation of
the regular R&D programme, industrial R&D increased rapidly.
3.1.1 Horizontal technology policy
According to Teubal (1997), Israeli ITP since 1969 can be characterised as a horizontal
technology policy (HTP). HTP is defined as a category of industrial technology policies
whose objective is to promote technological development per se and is neutral in terms of
sector, industry and technology (Teubal, 1997)4. Their goals are to enhance technological
development and create the conditions for a technologically based structural change.
Horizontal programmes are market-friendly support programmes, which give primacy to
the bottom-up identification of strengths (Avnimelech, 2008; Avnimelech and Teubal,
2008).
The development of the successful high tech sector in Israel, 1969–2009 61
The expression of the HTP in Israel is the regular R&D programme. The
programme’s major objectives, during early implementation, included promoting
collective learning about innovation within the high tech sector and identify the areas in
which Israel had a competitive advantage. While during the 1970s most of the learning
was directly concerned with technology, during 1980s a significant part also focused on
organisational, strategic, marketing and managerial factors related to working within the
high tech sectors. Parallel to these business sector developments, there were significant
developments in the R&D activities within the defence industries.
3.1.2 The contribution of the defence industries
The French embargo on arms after 1967, led Israel to increase defence R&D expenditures
significantly. Thus, simultaneous with the implementation of the regular R&D grants,
there was a significant extension of defence R&D activities,5 which generated a critical
mass of R&D experience within the defence industries. This also had a significant impact
on the business sector through knowledge transfer (because of labour mobility, formal
cooperation, and personal networks), international networks and reputation spillovers, the
creation of a large pool of high quality and experienced employees and managers, direct
spin-offs, and potential entrepreneurs.
Moreover, the military R&D units played a significant role in the Israeli national
system of innovation, and became a platform for continuous collective learning and the
creation of standards. The defence R&D units create dense networks of contacts within
the Israeli high tech sectors and between the Israeli and US high tech sectors (Breznitz,
2005).
3.2 Significant changes in the ITP since 1985
Another significant development in the ITP was The Encouragement of Industrial R&D
Law of 1984. This law defined the parameters of government policy towards industrial
R&D; its primary goal was to develop science-based, export-oriented industries, which
would promote employment and improve the balance of payments. In order to
accomplish this, the OCS was assigned to provide the means to expand and exploit the
country’s science and technology infrastructure, and human resources. This legislation
also recognised software as an industrial branch that is entitled to R&D grants and the
need to increase support to start-ups, by offering an extended grant of 66%. The outcome
of this legislation was a significant increase in R&D grants and enhanced growth of the
high tech sector.
Table 2 OCS grants 1970–2008
1970 1980 1990 1995 2000 2002 2004 2006 2008
Total grants (MUSD) 3 98 136 346 440 383 284 272 349
Regular fund
(MUSD)
3 98 133 294 337 291 201 189 246
Incubators (MUSD) 0 0 0 31 32 27 30 31 47
Magnet (MUSD) 0 0 0 16 67 58 44 43 48
Other grants (MUSD) 0 0 3 13 8 2 9 9 8
Source: OCS Annual Reports from OCS (2010) website
62 A. Shoham and G. Avnimelech
3.3 The targeted ITPs of the 1990s
In the wake of the structural changes that occurred in the Israeli economy beginning in
1985 (particularly the economic stabilisation programme and the reforms described in
Section 2), a new set of national priorities for innovation and technology emerged in the
late 1980s and early 1990s. These new priorities were influenced by several factors,
including
1 the significantly reduced defence industry laid off several thousand highly trained
engineers, many of whom dedicated their time and money toward entrepreneurial
activities
2 massive immigration from the former Soviet Union during early 1990s spurred the
government to search for means to employ the thousands of immigrant engineers
3 the regular R&D grant programme was increasingly perceived as being ineffective6.
The government concluded that the problem was not only the lack of resources for the
post-R&D phases of the innovation process in companies but also a shortage of
management and marketing capabilities. The problem-solving process it initiated led to
identifying VC and support of start-ups’ development as the new national innovation and
technology priorities (Avnimelech and Teubal, 2006). The outcome was a series of novel
programmes, set up in the early 1990s. The most important being the Yozma,
technological incubators and magnet programmes. Parallel to these new programmes, the
regular grant programme continued to operate and was significantly expanded (see
Table 2, above).
3.3.1 Yozma programme – triggering the VC industry
The Israeli capital markets and private equity (PE) markets were undeveloped during the
1980s and early 1990s. Most firms in the Israeli high tech sector could not rely on either
local or foreign sources of financing. Therefore, in addition to serving their primary
purpose, the R&D subsidies provided by the OCS also met an additional, financial need
for R&D-based firms. However, they were inadequate to be the exclusive source of
funding for R&D expenditures and certainly not sufficient to cover post-R&D activities.
Moreover, Israeli high tech firms were traditionally strong in technology but lacked in
managerial expertise and marketing competencies (Trajtenberg, 2000).
Recognising these needs, two VC-oriented programmes were implemented by the
government in the early 1990s in Israel, a failed precursor programme (Inbal) and
the successful Yozma programme (implemented during 1993–1998). Yozma’s
design (see Avnimelech and Teubal, 2008) played a crucial role in its success since the
two programmes had very similar goals, were founded only one year apart and there
were five years in which both operated. The Yozma programme successfully targeted
the VC industry in Israel by sparking a cumulative process that facilitated the
industry’s emergence. Government money (US$100 million) seeded 10 public-private
partnership funds (known as ‘Yozma funds’). The government’s contribution leveraged
an additional US$150 million from reputable financial institutions, in Israel and
abroad, which brought not only their financial resources but also their expertise and
networks. This initial infusion of funds was invested in approximately 200 start-up
The development of the successful high tech sector in Israel, 1969–2009 63
companies during 1993–1996. The creation of Yozma funds and their initial success
attracted many other VC investors into the market. This momentum and the supportive
external environment during the 1990s enable the process of VC industry emergence in
Israel.
Table 3 VC investments, high tech start-ups founded and capital raised
Year VC raised
(Total PE)
VC
investments
(% foreign)
Start-ups founded
(VC-backed)
Capital raised
in IPOs
(MUSD)
Capital raised
in M&As
(MUSD)
1991 49 (58) NA 51 (5) 65 1
1992 81 (160) NA 94 (12) 320 1
1993 204 (372) NA 124 (73) 689 5
1994 122 (384) NA 140 (85) 317 77
1995 108 (133) NA 175 (87) 455 660
1996 317 (937) NA 231 (117) 862 488
1997 643 (777) 440 (43%) 263 (119) 901 817
1998 653 (686) 589 (44%) 332 (152) 966 1,301
1999 1,160 (1,418) 1,011 (57%) 587 (208) 1,939 4,214
2000 2,712 (2,778) 3,233 (59%) 665 (372) 6,031 16,889
2001 1,319 (2,007) 1,985 (59%) 371 (159) 398 512
2002 497 (519) 1,138 (58%) 355 (204) 527 2,040
2003 6 (117) 1,011 (58%) 410 (113) 1,383 1,094
2004 589 (1,654) 1,465 (55%) 580 (141) 2,528 1,941
2005 1,644 (2,674) 1,337 (51%) 511 (117) 1,446 2,713
2006 903 (1,444) 1,620 (60%) 521 (121) 210 10,005
2007 1,096 (1,271) 1,759 (61%) 596 (118) 1218 3,218
2008 967 (1,203) 2,076 (62%) 580 (93) 0 2,640
2009 229 (315) 1,122 (63%) 550 (33) 0 2,540
Notes: *Numbers of start-ups founded at the years 2008 and 2009 are estimations. In
addition, the figures for start-up founded during the years 2005–2007 can also
grow.
Source: IVC (2010) and adopted from Avnimelech (2008) and updated
3.3.2 The technology incubators
The OCS established 28 technology incubators in the early 1990s, when immigration
from the former Soviet Union peaked. Although many of these immigrants were
scientists who brought highly valuable human capital, they lacked many of the other
dimensions required to develop new businesses. Therefore, the goal of the incubators was
to support inexperienced entrepreneurs at the earliest stage of technological development,
help them implement their ideas and form new businesses7. The programme had a
64 A. Shoham and G. Avnimelech
significant impact on the cultural change toward an extremely entrepreneurial culture,
and helped participants acquire relevant business experience. However, the financial
success of the incubators’ graduates is moderate. Although it was not a formal goal of
this programme, it had some impact on decreasing the regional gaps in high tech activity
(Avnimelech et al., 2007; Schwartz, 2006; Schwartz and Bar-El, 2007).
3.3.3 Magnet programme
In 1993, the OCS established the magnet programme to support the formation of
consortia of industrial firms and academic institutions that would develop generic,
pre-competitive technologies. These consortia receive support for three to five years,
consisting of grants of 66% of the total approved R&D budget, with no recumbent
requirement8. The goals of the programme are to
1 enhance cooperation between the academic and business sectors in general
2 develop generic, pre-competitive technologies that might lead to the development of
successful sub-sectors
3 enhance technological diffusion throughout the country.
3.4 After the bubble
After 2000, OCS policymakers began to look at new mechanisms to support the high tech
sector and for new strategic priorities within the high tech sector. On one hand, this
process was triggered by the significant growth in requests for R&D grants by the
business sector, which led to budgetary distress. This budgetary distress was enhanced by
the global high tech crisis starting in late 2000. On the other hand, after the successful
emergence of the sophisticated ICT sector in the 1990s, the Israeli high tech sector was
looking for the new triggers of growth. The quest for new strategic priorities produced
several new ITP programmes, including: Magneton (founded in 2001) to provide grants
for industrial-academic cooperation; users’ associations (2002) to facilitate the diffusion
of new technologies; long-term R&D support for large firms (2002); Heznek fund (2003)
to provide seed financing; Nofar (2004) to support industrial-academic projects in the
field of biotechnology; Tamir (2004) to support knowledge transfer from MNEs; Nataf
(2005) to support R&D projects in nanotechnology, and increased support for R&D in
tradition industries (2006). It is still too early to determine the outcome of these
processes.
4 Summary
The high tech sector in Israel would not be able to flourish if it were not for the major
reforms implemented in the Israeli economy in the mid-eighties that enabled the country
to allocate resources to the high tech sector. A private high tech sector can grow only if it
has sufficient human capital and capital. Big government often strangles the high tech
sector because the government utilises the same human capital that the private sector
requires.
The development of the successful high tech sector in Israel, 1969–2009 65
Table 4 Policy factors enabling the development of the high tech sector
The stabilisation plan (1985) – The government deficit was eliminated in a single stroke and the
gradual process of reducing the weight of government spending in the product began and
continued until 1994.
Decreases in military expenditures (1985–1989) – As part of the stabilisation plan, the
government reduced the military expenditure and laid-out thousand of experienced scientist and
engineers.
Liberalisation of the economy (since 1985) – Following the stabilisation plan, the government
gradually reduced its intervention in the local monetary and capital markets, remove limitations
on the international movement of capital and increase competition between financial mediators.
Reform in the labour market – Since the early 1990s, the Israeli labour market becomes more
flexible, mostly as a result of immigration from the former Soviet Union. Other changes resulted
from the weakening of the Histadrut labour union and a substantial decrease in the rate of
employers’ contributions to National Insurance.
Table 5 Key ITP in the early 1990s
The creation of the OCS (1969) – The beginning of the Israeli Government’s
innovation/technology policy towards the business sector coincided with the creation of the
‘R&D industrial fund’ at the recently created OCS. This programme was the backbone of the
country’s R&D/innovation/technology strategy as far as the business sector is concerned.
The new R&D law (1984) – The objective was to support knowledge intensive industries,
through expansion of the science and technology infrastructure and exploitation of existing
human resources; creation of employment, including absorption of immigrant scientists and
engineers; etc. The outcome was significant increases in R&D grants to industry.
Inbal (1992) – A government owned insurance company, which provided a (70%) guarantee to
publicly traded VC funds. Four VC companies were established under Inbal regulations. This
programme had only a limited impact and has been discontinued.
Yozma (1993-97) – A US$100 million government owned VC company, which invested in ten
privately owned funds, which operated in Israel (US$8 million per fund). Nine of these were
limited partnerships. Yozma triggered emergence of Israel’s VC industry.
Magnet programme (1992) – A horizontal programme supporting cooperative, generic R&D
involving two or more firms and at least one university. This programme still operates today and
is widely regarded as being successful.
Technological incubator’ programme (1992) – A programme supporting entrepreneurial firms
during their seed phase, for a period of two years. The incubators are privately owned and
managed (until recently they received support from the government). The projects operating
within the incubators receive financial support from the government.
After the economic reforms during the mid-late 1980s, the Israeli high tech sector began
to develop. The emergence of VC industry and start-up intensive high tech cluster in
Israel is probably one of the most successful examples of how the Silicon Valley model
spread outside of North America (Bresnahan et al., 2001; Carmell and de Fontaenet,
2004; Trajtenberg, 2000, 2002). The Israeli high tech cluster resulted from a process of
structural change that began in the 1970s (Teubal, 1993; Trajtenberg, 2000) and
accelerated during the 1990s (Avnimelech and Teubal, 2006; Breznitz, 2007;
Fiegenbaum, 2007; Vinig, 2002). Its development can be divided into at least two distinct
periods. The first background phase (1969–1984) was characterised by intensive
spending on defence R&D9 and the process of introducing and diffusing R&D throughout
the business sector (Teubal, 1993). The two main events facilitating these processes were
the significant expansion of the defence R&D industries and the creation of the OCS. The
66 A. Shoham and G. Avnimelech
second period is characterised by the transformation of Israel’s formerly defence-oriented
electronics sectors into a sophisticated entrepreneurial high tech cluster (Avnimelech and
Teubal, 2004, 2006). The two main triggers for this process were structural changes
within the high tech sector during the late 1980s and the successful emergence of the VC
industry in 1993–2000. Pursuant to this transformation, Israel became one of the most
intensive entrepreneurial high tech clusters in the world. The number of start-ups created
in the 1990s surpassed 2,500, in comparison to fewer than 300 in the 1980s. The number
of VC funds increased from only one in 1989 to more than 50 active VC management
companies in December 1999; total capital invested by VCs during the 1990s was almost
US$6 billion in comparison to less than US$50 million during the 1980s (IVC, 2008). In
addition, during the 1990s, more than 100 Israeli high tech companies had IPOs in global
capital markets (mostly NASDAQ) and there were 91 significant acquisitions of Israeli
start-ups by leading MNEs (see Table 7). Israel’s ICT exports rose from US$2.4 billion in
1990 to US$13.8 billion in 2000. US patents for Israeli developments rose from 325 in
1990 to 969 in 2000 (see Table 6).
Table 6 Growth of Israeli high tech indicators 1980–2006
1980 1985 1990 1995 2000 2002 2004 2006 2008
ICT exports
(BUSD)
0.32 0.98 2.1 3.8 13.5 10.3 12.1 15.8 17.6
ICT exports as
% of total
exports
NA NA 10.8% 13.1% 27.2% 23.9% 22.0% 25.9% 25.2%
ICT
manufacturing
employees
(CBS)
30,000 37,500 35,000 36,900 55,400 51,100 52,200 57,900 61,800
Patents 140 184 325 613 969 1266 1278 1527 1539
Civilian R&D %
of GDP
1.8% 2.3% 2.8% 3% 4.5% 4.6% 4.6% 4.5% 4.6%
Source: CBS (2010), IAEI (2010), USPTO (2010) and
adopted from Avnimelech (2008) and updated
Table 7 Israel’s high tech cluster (1969–2007)
Accumulated figure
for a period 1969–1976 1977–1984 1985–1992 1993–2000 2001–2008
Number of high tech
start-up creation 56 80 349 2,436 4,004
Israeli VC fund raised
(MUSD) 0 0 ~85 7,480 6,857
VC investment in Israeli
companies (MUSD) 0 0 ~50 ~5,600 12,391
Number of IPOs at US 1 13 19 101 20
Number of IPOs at EU
and TASE 1 6 15 75 61
Source: IVC (2010), USPTO (2010) and author calculations and
adopted from Avnimelech (2008)
The development of the successful high tech sector in Israel, 1969–2009 67
Table 7 Israel’s high tech cluster (1969–2007) (continued)
Accumulated figures
for a period 1969–1976 1977–1984 1985–1992 1993–2000 2001–2008
Number of significant
M&As 0 0 2 91 127
Amount raised – public
markets (BUSD) 0.1 0.2 0.8 12.2 7.7
Amount raised – M&As
(BUSD) 0 0 0 24.5 24.2
Number of Israeli patents
in the USA 589 897 2,114 5,729 10,730
Source: IVC (2010), USPTO (2010) and author calculations and
adopted from Avnimelech (2008)
Moreover, the pace of start-up creation during 2001–2009 suggests that approximately
5,000 start-ups will be created during the current decade. Simultaneously, we observe
continuing growth of Israeli ICT (including software) exports from less than
US$15 billion in 2001 to almost US$19 billion in 2007 (CBS, 2008; IAEI, 2008) while
Israeli patents issued in the USA rose from 1,190 in 2001 to 1,527 in 2006 (USPTO,
2008).
The current major challenges facing the Israeli high tech cluster are:
1 sustaining and strengthening the cluster in the future in the context of extensive
global competition
2 increasing the wide economic impact of the high tech cluster on other sectors of the
economy through technology diffusion and knowledge transfer
3 developing a leading technology sector within the cluster and on-going renewal of
the cluster.
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Notes
1 For a more detailed description see Ben-Basset (2002).
2 Only a small portion of the reforms will be surveyed, primarily those that created an
environment favourable to the development of a thriving high tech sector.
3 The markets became more open as government involvement continued to decrease.
Furthermore, the mix of industries changed significantly as the weight of sophisticated,
civilian industries that are rich in human capital increased steadily while the military industries
and other traditional industries decreased in weight.
4 In contrast to HTPs, targeted policies apply to a specific industry, technology, or sector.
5 Between 1967 and 1975, the number of employees in the defence industries tripled, and
between 1975 and 1985 it increased by a further 50% (Dvir and Tishler, 2000).
6 The regular OCS programme was initially very successful in overcoming the cultural market
failure in entrepreneurship activity and creating a critical mass of R&D experience in the
business sector. However, when industry entered a new phase with new systems failures and
new strategic priorities, the regular OCS programme became less effective and new or
complementary programs were required.
7 Even though they targeted new immigrants, the incubators were open to all entrepreneurs.
8 Consortia members were required to make the products or services resulting from the joint
project available to any interested, local party, at competitive prices.
9 The defence industries became a significant source of spin-offs of new technologies and
entrepreneurs during the 1980s and 1990s (Azulay et al., 2002; Breznitz, 2007; Dvir and
Tishler, 2000).
