By Cristina Pombo, Office of External Relations at the Inter-American Development Bank (IDB)
With a small territory, located in one of the most historic and troubled regions of the planet, and almost 8 million inhabitants, Israel is one of the largest centers of technological and scientific innovation in the world and a real factory of technology and entrepreneurship.
In 40 years, Israel went from an agriculture-based economy to selling high-tech goods to the world which now represent 75% of their exports. Israel invests more in innovation than any other country in the world as a share of GDP (it invests 2.5 times more venture capital than the United States and allocates almost 4% of its GDP to R&D). It also ranks 11th in the world in protecting minority investors according to the World Bank’s “Doing Business 2015” Report. It has the largest number of technology companies per capita in the world (one startup per every 1,844 inhabitants). It also has more technology companies listed on NASDAQ than all of the European countries combined and a high number of Nobel prizes. The urge to reinvent and innovate is in the DNA of Israelis and is undoubtedly part of their culture.
In this blogpost I’ll present four main decisions that helped Israel launch its ecosystem of entrepreneurship and innovation, and that could also support Latin America in becoming a more innovative and developed region.
Involve the private sector when developing an innovation program
Israel decided to take the path of innovation and entrepreneurship in an explicit and planned way and chose a strategy that combined both public and private investment.
In 1992 Israel launched the Yozma program (which means “Initiative” in Hebrew), widely recognized as the catalyst for the local entrepreneurial capital industry and the startup ecosystem. The government sought to create jobs for nearly one million immigrants, mostly scientists and engineers. This program complemented 24 incubators that were created to provide capital, infrastructure and management support for developing innovative technology products.
The Yozma program, based on “matching funds”, was established with an initial investment of US$100M. The government invested $80 million in 10 funds with private partners and another $20 million aimed at startups through its own fund. This triggered the development of the local entrepreneurial capital industry: today the country has one of the largest entrepreneurial capital ecosystems in the world with more than US$10 billion under management and more than 5,000 startups operating. Once the program achieved its goal of boosting the venture capital industry, it was fully privatized in 1998.
Thus, the government’s role is to shape the innovation ecosystem and create better conditions to promote the participation of the private sector. In this sense, the Yozma program gave the option to private actors to buy government’s participation at convenient prices. Therefore, the government assumed the risk but the private participants reaped the benefits.
Increase investment in research and development
Israel is aware that innovation doesn’t follow a linear path and that it depends on multiple factors. This is why the country has continued to bet on, and believe in, economic growth.
As shown in the graphic below, Israel spends more money on research and development (R&D) than any other country, allocating nearly 4% of its GDP to R&D. This is well above the second in the ranking, Finland, which allocates 3.5%, and the paltry 0.8% average in Latin America. Research and development are pillars of the Israeli economy and educational system.
Bet on the internationalization of the economy
The market is the world, not a single country or region. Israel only has 7.9 million inhabitants and its trade relations with other countries in the neighborhood are virtually non-existent. Therefore, an Israeli entrepreneur cannot create a great company by focusing only on the local market. As such, Israeli companies are born with an international vision and with the intention of developing technologies that have a global impact.
This is demonstrated by the fact that between 1993 and 2000 entrepreneurial capital funds financed 65 startups that trade on the NASDAQ stock exchange (compared to just 4 before 1993). Israel currently has almost 150 startups listed on the NASDAQ (surpassed only by the United States, Canada and China).
Support projects that come from Universities
Another successful initiative is the MAGNET Program which supports scientific and technological research cooperation among companies and universities. In Israel, the world of research and the private sector are fully connected. In some countries an entrepreneur has an idea, approaches the government and asks for funds to develop their enterprise. If the money is provided, he/she then looks for experts to help develop the business. Then, he/she needs to find an investor to be able to go to the market. The process can work, but is usually complicated.
In Israel, an entrepreneur has an idea, and presents the initiative to a local university, which has direct contact with business leaders that help to analyze the proposal. When these three actors reach an agreement they approach the government to present the project. If approved, the business quickly gets to scale the business to the market.
This way, there is seamless coordination between those who innovate, believe and sell.
The big lesson is that the role of government is key, not in creating or modifying elements of the ecosystem, but in acting as a catalyst for open innovation that promotes collaboration between the public sector and entrepreneurs. Achieving this kind of environment is the challenge for Latin America, and Israel can teach us how to overcome the fear to innovate and take risks.
¿What other open innovation ecosystems do you know about that can inspire our region? Include your comments below!
BID en la estrategia de economía digital, que aprovecha las tecnologías digitales para dar servicios sociales más eficientes a la región.
Ha asesorado a la gerencia de la Oficina de Relaciones Externas y a la Vicepresidencia
para Países, y fue Especialista de la Oficina de
Planificación Estratégica y Efectividad. Antes de unirse al Banco, fue asesora en proyectos de innovación juvenil de la Federación Colombiana de Cafeteros y asesora académica del Departamento de Economía de la Universidad del Rosario.