Start-up Nation: The Story of Israel's Economic Miracle by Dan Senor, Saul Singer
Last annotated on February 15, 2015
what if you didn’t have to pay for the battery when you bought the car and—as with any other fuel—spread the cost of the battery over the life of the car? Electric cars could become at least as cheap as gasoline cars, and the cost of the battery with the electricity to charge it would be significantly cheaper than what people were used to paying at the pump. Suddenly, the economics of the electric car would turn upside down.
solution was infrastructure: wire thousands of parking spots, build battery swap stations, and coordinate it all over a new “smart grid.” In most cases, charging the car at home and the office would easily be enough to get you through the day. On longer drives, you could pull into a swap station and be off with a fully charged battery in the time it takes to fill a tank of gas.
“Think cell phones. You go to a cell provider. If you want, you can pay full price for a phone and make no commitment. But most people commit for two or three years and get a subsidized or free phone. They end up paying for the phone as they pay for their minutes of air time.”
Israel, the country with the highest concentration of engineers and research and development spending in the world,
In 2008, per capita venture capital investments in Israel were 2.5 times greater than in the United States, more than 30 times greater than in Europe, 80 times greater than in China, and 350 times greater than in India.
After the United States, Israel has more companies listed on the NASDAQ than any other country in the world, including India, Korea, Singapore, and Ireland,
Israel is the world leader in the percentage of the economy that is spent on research and development.
Israel’s economy has also grown faster than the average for the developed economies of the world in most years since 1995,
Why Israel and not elsewhere?
One explanation is that adversity, like necessity, breeds inventiveness.
Israel’s tiny population is made up of some seventy different nationalities. A Jewish refugee from Iraq and one from Poland or Ethiopia did not share a language, education, culture, or history
According to the pioneering work of Nobel Prize winner Robert Solow, technological innovation is the ultimate source of productivity and growth.
Israelis are immune from the universally high failure rate of start-ups. But Israeli culture and regulations reflect a unique attitude to failure, one that has managed to repeatedly bring failed entrepreneurs back into the system to constructively use their experience to try again, rather than leave them permanently stigmatized and marginalized.
Somewhere along the way—either at home, in school, or in the army—Israelis learn that assertiveness is the norm, reticence something that risks your being left behind.
Israeli attitude and informality flow also from a cultural tolerance for what some Israelis call “constructive failures” or “intelligent failures.” Most local investors believe that without tolerating a large number of these failures, it is impossible to achieve true innovation.
So long as the risk was taken intelligently, and not recklessly, there is something to be learned.
What is said about Jews—two Jews, three opinions—is certainly true of Israelis.
“The goal of a leader,” he said, “should be to maximize resistance—in the sense of encouraging disagreement and dissent. When an organization is in crisis, lack of resistance can itself be a big problem. It can mean that the change you are trying to create isn’t radical enough… or that the opposition has gone underground. If you aren’t even aware that the people in the organization disagree with you, then you are in trouble.”
They cared about the future of the whole company; the fight wasn’t about winning a battle within Intel, it was about winning the war with the competition.
A good idea alone could not have carried the day against a seemingly intransigent management team. There had to be willingness to take on higher authorities, rather than simply following directives from the top.
You rarely see people talk behind anybody’s back in Israeli companies. You always know where you stand with everyone. It does cut back on the time wasted on bullshit.”
“it’s more complicated to manage five Israelis than fifty Americans because [the Israelis] will challenge you all the time—starting with ‘Why are you my manager; why am I not your manager?’
Israeli army has very few colonels and an abundance of lieutenants. The ratio of senior officers to combat troops in the U.S. Army is 1 to 5; in the IDF, it’s 1 to 9.
This scarcity of manpower is also responsible for what is perhaps the IDF’s most unusual characteristic: the role of its reserve forces. Unlike in other countries, reserve forces are the backbone of Israel’s military.
Israel’s reserve system is not just an example of the country’s innovation; it is also a catalyst for it. Because hierarchy is naturally diminished when taxi drivers can command millionaires and twenty-three-year-olds can train their uncles, the reserve system helps to reinforce that chaotic, antihierarchical ethos that can be found in every aspect of Israeli society, from war room to classroom to boardroom.
“Israeli soldiers are not defined by rank; they are defined by what they are good at.”
“The key for leadership is the soldiers’ confidence in their commander. If you don’t trust him, if you’re not confident in him, you can’t follow him.
Assertiveness versus insolence; critical, independent thinking versus insubordination; ambition and vision versus arrogance—the words you choose depend on your perspective, but collectively they describe the typical Israeli entrepreneur.
The People of the Book
“More than any other nationality,” says Outside, “[Israelis] have absorbed the ethic of global tramping with ferocity: Go far, stay long, see deep.”
Israeli wanderlust is not only about seeing the world; its sources are deeper. One is simply the need for release after years of confining army service.
There is another psychological factor at work—a reaction to physical and diplomatic isolation. “There is a sense of a mental prison living here, surrounded by enemies,”
“The more you try to lock me in, the more I will show you I can get out.” For the same reason, it was natural for Israelis to embrace the Internet, software, computer, and telecommunications arenas. In these industries, borders, distances, and shipping costs are practically irrelevant.
This was a matter of necessity, rather than mere preference or convenience.
Because Israel was forced to export to faraway markets, Israeli entrepreneurs developed an aversion to large, readily identifiable manufactured goods with high shipping costs, and an attraction to small, anonymous components and software. This, in turn, positioned Israel perfectly for the global turn toward knowledge-and innovation-based economies, a trend that continues today.
By the time they are out of their twenties, not only are most Israelis tested in discovering exotic opportunities abroad, but they aren’t afraid to enter unfamiliar environments and engage with cultures very different from their own.
Many of Israel’s globe-trotting businesspeople are not just technology evangelists but endeavor to “sell” the entire Israeli economy.
“a million high-tech conferences, on multiple continents. I see Israelis like Medved give presentations all the time, alongside their peers from other countries. The others are always making a pitch for their specific company. The Israelis are always making a pitch for Israel.”
Harvard, Princeton, and Yale
While students in other countries are preoccupied with deciding which college to attend, Israelis are weighing the merits of different military units.
And just as students elsewhere are thinking about what they need to do to get into the best schools, many Israelis are positioning themselves to be recruited by the IDF’s elite units.
In Israel, about one year before reaching draft age, all seventeen-year-old males and females are called to report to IDF recruiting centers for an initial one-day screening that includes aptitude and psychological exams, interviews, and a medical evaluation.
At the end of the day, a health and psychometric classification is determined and service possibilities are presented to the young candidate in a personal interview.
Candidates who meet the health, aptitude, and personality requirements are offered an opportunity to take additional qualifying tests for service in one of the IDF’s elite units or divisions.
Those who complete the training together remain as a team throughout their regular and reserve service. Their unit becomes a second family.
While it’s difficult to get into the top Israeli universities, the nation’s equivalent of Harvard, Princeton, and Yale are the IDF’s elite units. The unit in which an applicant served tells prospective employers what kind of selection process he or she navigated, and what skills and relevant experience he or she may already possess.
“In Israel, one’s academic past is somehow less important than the military past.
The 8200 alumni association now has a national reunion. But instead of using the time together to reflect on past battles and military nostalgia, it is forward-looking. The alumni are focused on business networking. Successful 8200 entrepreneurs give presentations at the reunion about their companies and industries.”
As we’ve seen, the air force and Israel’s elite commando units are well known for their selectivity, the sophistication and difficulty of their training, and the quality of their alumni. But the IDF has a unit that takes the process of extreme selectivity and extensive training to an even higher level, especially in the realm of technological innovation. That unit is Talpiot.
The professors approached then IDF chief of staff Rafael “Raful” Eitan with a simple idea: take a handful of Israel’s most talented young people and give them the most intensive technology training that the universities and the military had to offer.
Started as a one-year experiment, the program has been running continuously for thirty years. Each year, the top 2 percent of Israeli high school students are asked to try out—two thousand students. Of these, only one in ten pass a battery of tests, mainly in physics and mathematics. These two hundred students are then run through two days of intensive personality and aptitude testing.
They also go through basic training with the paratroopers. The idea is to give them an overview of all the major IDF branches so that they understand both the technology and military needs—and especially the connection between them.
Providing the students with such a broad range of knowledge is not, however, the ultimate goal of the course. Rather, it is to transform them into mission-oriented leaders and problem solvers.
Recently, some detractors have claimed that the program is a failure because most of the graduates do not stay in the military beyond the required nine years and do not end up in the IDF’s senior ranks.
However, though Talpiot training is optimized to maintain the IDF’s technological edge, the same combination of leadership experience and technical knowledge is ideal for creating new companies.
Although the program has produced only about 650 graduates in thirty years, they have become some of Israel’s top academics and founders of the country’s most successful companies.
So the architects of Talpiot, Dothan and Yatziv, vigorously reject the criticisms.
· First, they argue that the interservice competition for Talpions within the IDF—which at times has had to be settled by the prime minister—speaks for itself.
· Second, they claim that the Talpions easily pay back the investment during their required six years of service.
· Third, and perhaps most importantly, the two-thirds of Talpiot graduates who end up either in academia or in technology companies continue to make a tremendous contribution to the economy and society, thereby strengthening the country in different ways.
Economic Co-operation and Development (OECD), 45 percent of Israelis are university-educated, which is among the highest percentages in the world. And according to a recent IMD World Competitiveness Yearbook, Israel was ranked second among sixty developed nations on the criterion of whether “university education meets the needs of a competitive economy.”
By the time students finish college, they’re in their mid-twenties; some already have graduate degrees, and a large number are married. “All this changes the mental ability of the individual,” Shainberg reasoned. “They’re much more mature; they’ve got more life experience. Innovation is all about finding ideas.”
This maturity is especially powerful when mixed with an almost childish impatience.
So for combat soldiers, connections made in the army are constantly renewed through decades of reserve duty.
The social graph is very simple here. Everybody knows everybody; everybody was serving in the army with the brother of everybody; the mother of everybody was the teacher in their school; the uncle was the commander of somebody else’s unit. Nobody can hide. If you don’t behave, you cannot disappear to Wyoming or California. There is a very high degree of transparency.”
“The military gets you at a young age and teaches you that when you are in charge of something, you are responsible for everything that happens… and everything that does not happen,”
“The phrase ‘It was not my fault’ does not exist in the military culture.”
“The people you are serving with come from all walks of life; the military is this great purely merit-based institution in our society. Learning how to deal with anybody—wherever they come from—is something that I leverage today in business when dealing with my suppliers and customers.”
Junior commanders in America’s new wars find themselves playing the role of small-town mayor, economic-reconstruction czar, diplomat, tribal negotiator, manager of millions of dollars’ worth of assets, and security chief, depending on the day.
There is a correlation between battlefield experience and the proclivity of subordinates to challenge their commanders.
While Israeli businesses still look for private-sector experience, military service provides the critical standardized metric for employers—all of whom know what it means to be an officer or to have served in an elite unit.
Where Order Meets Chaos
ABOUT THIRTY NATIONS have compulsory military service that lasts longer than eighteen months. Most of these countries are developing or nondemocratic or both. But among first-world countries, only three require such a lengthy period of military service: Israel, South Korea, and Singapore.
Singapore’s leaders have failed to keep up in a world that puts a high premium on a trio of attributes historically alien to Singapore’s culture: initiative, risk-taking, and agility.
Conscription, serving in the reserves, living under threat, and even being technologically savvy are not enough. What, then, are the other ingredients?
In the Israeli army, soldiers are divided into those who think with a rosh gadol—literally, a “big head”—and those who operate with a rosh katan, or “little head.”
Rosh katan behavior, which is shunned, means interpreting orders as narrowly as possible to avoid taking on responsibility or extra work.
Rosh gadol thinking means following orders but doing so in the best possible way, using judgment, and investing whatever effort is necessary. It emphasizes improvisation over discipline, and challenging the chief over respect for hierarchy. Indeed, “challenge the chief” is an injunction issued to junior Israeli soldiers, one that comes directly from a postwar military commission that we’ll look at later.
“The debrief is as important as the drill or live battle,”
Explaining away a bad decision is unacceptable. “Defending stuff that you’ve done is just not popular. If you screwed up, your job is to show the lessons you’ve learned. Nobody learns from someone who is being defensive.”
Nor is the purpose of debriefings simply to admit mistakes. Rather, the effect of the debriefing system is that pilots learn that mistakes are acceptable, provided they are used as opportunities to improve individual and group performance.
The entire Israeli military tradition is to be traditionless. Commanders and soldiers are not to become wedded to any idea or solution just because it worked in the past.
The victory in the 1967 Six-Day War was the most decisive one Israel has ever achieved.
And yet, even in victory, the same thing happened: self-examination followed by an overhaul of the IDF. Senior officials have actually been fired after a successful war.
Large organizations, whether military or corporate, must be constantly wary of kowtowing and groupthink, or the entire apparatus can rush headlong into terrible mistakes.
Yet most militaries, and many corporations, seem willing to sacrifice flexibility for discipline, initiative for organization, and innovation for predictability. This, at least in principle, is not the Israeli way.
Singapore differs dramatically from Israel both in its order and in its insistence on obedience. Singapore’s politeness, manicured lawns, and one-party rule have cleansed the fluidity from its economy.
Fluidity, according to a new school of economists studying key ingredients for entrepreneurialism, is produced when people can cross boundaries, turn societal norms upside down, and agitate in a free-market economy, all to catalyze radical ideas.
Thus, the most formidable obstacle to fluidity is order.
The leading thinkers in this area—economists William Baumol, Robert Litan, and Carl Schramm—argue that the ideal environment is best described by a concept in “complexity science” called the “edge of chaos.” They define that edge as “the estuary region where rigid order and random chaos meet and generate high levels of adaptation, complexity, and creativity.”
This is precisely the environment in which Israeli entrepreneurs thrive. They benefit from the stable institutions and rule of law that exist in an advanced democracy. Yet they also benefit from Israel’s nonhierarchical culture, where everyone in business belongs to overlapping networks produced by small communities, common army service, geographic proximity, and informality.
An Industrial Policy That Worked
A bitzu’ist is someone who just gets things done. Bitzu’ism is at the heart of the pioneering ethos and Israel’s entrepreneurial drive.
Today, at less than 2 percent of Israel’s population, kibbutzniks produce 12 percent of the nation’s exports.
Historians have called the kibbutz “the world’s most successful commune movement.”
Created as agricultural settlements dedicated to abolishing private property and to complete equality, the movement grew over the following twenty years to eighty thousand people living in 250 communities, but this still amounted to only 4 percent of Israel’s population.
The country’s disadvantage of having some of its area taken up by a desert was turned into an asset.
Israel now leads the world in recycling waste water; over 70 percent is recycled, which is three times the percentage recycled in Spain, the country in second place.
the kibbutzniks found a way to use water deemed useless not once, but twice.
In December 2008, Ben-Gurion University hosted a United Nations–sponsored conference on combating desertification, the world’s largest ever. Experts from forty countries came, interested to see with their own eyes why Israel is the only country whose desert is receding.
The kibbutz story is just a part of the overall trajectory of the Israeli economic revolution. Whether it was socialist, developmentalist, or a hybrid, the economic track record of Israel’s first twenty years was impressive.
it is clear that Israel’s economic performance occurred in part because of the government’s meddling, and not just in spite of it. During the early stages of development in any primitive economy, there are easily identifiable opportunities for large-scale investment: roads, water systems, factories, ports, electrical grids, and housing construction.
But it is important not to generalize: many developing countries engaged in large infrastructure projects waste vast amounts of government funds due to corruption and government inefficiencies.
the economy had a limited capacity to capitalize on the entrepreneurial talent that the culture and the military had inculcated.
For the economy to truly take off, it required three additional factors: a new wave of immigration, a new war, and a new venture capital industry.
Israel’s economic miracle is due as much to immigration as to anything.
Israel is now home to more than seventy different nationalities and cultures.
we were victims of anti-Semitism—you had to be exceptional in your profession, whether it was chess, music, mathematics, medicine, or ballet…. That was the only way to build some kind of protection for yourself, because you would always be starting from behind.”
Walk into an Israeli technology start-up or a big R&D center in Israel today and you’ll likely overhear workers speaking Russian.
You don’t see what you’ve got to lose; you see what you could win. That’s the attitude we have here—across the entire population.”
“One or two generations back, someone in our family was packing very quickly and leaving. Immigrants are not averse to starting over. They are, by definition, risk takers. A nation of immigrants is a nation of entrepreneurs.”
Israel became the only nation in history to explicitly address in its founding documents the need for a liberal immigration policy.
Unlike the U.S. Citizenship and Immigration Service, which maintains as one of its primary responsibilities keeping immigrants out, the Israeli Immigration and Absorption Ministry is solely focused on bringing them in.
“whereas in China and in India there is quite a bit of engineering work done, when it comes to pure innovation and acquisition activity, Israel is still holding the front line.”
“brain circulation,” model of Israelis going abroad and returning to Israel is one important part of the innovation ecosystem linking Israel and the Diaspora.
So it has required creativity for Israel to learn how to use its Diaspora community in order to catalyze its economy.
The Buffett Test
Israelis are confident that their start-ups will survive during war and turbulence.
Frohman announced that he was leaving Intel to teach electrical engineering in Ghana. In his words, he was “looking for adventure, personal freedom, and self-development”—another “person of the Book.”
“The more they attack us, the more we will succeed.”
Israelis, by making their economy and their business reputation both a matter of national pride and a measure of national steadfastness, have created for foreign investors a confidence in Israel’s ability to honor, or even surpass, its commitments.
In the West, the role of the venture capitalist is not simply to provide cash. It’s mentoring, plus introductions to a network of other investors, prospective acquirers, and new customers and partners, that makes the venture industry so valuable to a budding start-up. A good VC will help entrepreneurs build their companies.
in the late 1980s. “While Israel was very good at developing technologies, Israelis didn’t know how to manage companies or market products.”
Mlavsky called BIRD a kind of “dating service,” because he and his team played matchmaker between an Israeli company with a technology and an American company that could market and distribute the product in the United States. Not only that, but this matchmaker would subsidize the cost of the date.
Mlavsky recalls, “We came to [U.S. companies] and said, ‘There is this place called Israel, which you may or may not have heard of. We can put you in touch with smart, creative, and well-trained engineers there. You don’t have to pay to hire them, relocate them, and you don’t have to worry about what happens after the project is over. We will not only introduce you to such a group—we’ll give you half the money for your part of the project and half the money the Israelis will need for their part.”
To date, BIRD has invested over $250 million in 780 projects, which has resulted in $8 billion in direct and indirect sales.
The idea was for the government to invest $100 million to create ten new venture capital funds. Each fund had to be represented by three parties: Israeli venture capitalists in training, a foreign venture capital firm, and an Israeli investment company or bank. There was also one Yozma fund of $20 million that would invest directly in technology companies.
The Yozma program initially offered an almost one-and-a-half-to-one match. If the Israeli partners could raise $12 million to invest in new Israeli technologies, the government would give the fund $8 million. There was a line around the corner. So the government raised the bar. It required VC firms to raise $16 million in order to get the government’s $8 million.
The real allure for foreign VCs, however, was the potential upside built into this program. The government would retain a 40 percent equity stake in the new fund but would offer the partners the option to cheaply buy out that equity stake—plus annual interest—after five years, if the fund was successful. This meant that while the government shared the risk, it offered investors all of the reward. From an investor’s perspective, it was an unusually good deal.
And it was also rare for a government program to actually disappear once it had served its initial purpose, rather than continue indefinitely.
A reform happens when you change the policy of the government; a revolution happens when you change the mind-set of a country.
If they wanted to go into high tech, there were plenty of start-ups that would gobble them up after their army service. But if they wanted to go into finance, they’d have to leave the country. That’s now changed. Just think about this,” he continued. “There are Israelis working on Fleet Street in London because there was no place for them here. Now, since 2003, there is a place for them in Israel.”
Betrayal and Opportunity
The major increase in military R&D that followed France’s boycott of Israel gave a generation of Israeli engineers remarkable experience. But it would not have catalyzed Israel’s start-up hothouse if it had not been combined with something else: a profound interdisciplinary approach and a willingness to try anything, no matter how destabilizing to societal norms.
From Nose Cones to Geysers
It’s not surprising that multitasking, like many other advantages Israeli technologists seem to have, is fostered by the IDF. Fighter pilot Tal Keinan told us that there is a distinct bias against specialization in the Israeli military.
The IAF could not pull off a system like this even if it had the resources; it would just be a big mess. We’re not disciplined enough.”
“It’s not as effective, but it’s a hell of a lot more flexible.”
In the Israeli system, each pilot learns not only his own target but also other targets in separate formations.
in Israel the titles are kind of arbitrary, really, because they are interchangeable in some ways and people do work on more than one thing.
the latest generation of PillCams painlessly transmit eighteen photographs per second, for hours, from deep within the intestines of a patient. The video produced can be viewed by a doctor in real time, in the same room or across the globe.
The story of Given Imaging is not just one of technology transfer from the military to the civilian sectors, or of an entrepreneur emerging from a major defense technology company.
Mixing missiles and pills, jets and inhalers may seem strange enough,
It is a product of the multidisciplinary backgrounds that Israelis often obtain by combining their military and civilian experiences. But it is also a way of thinking that produces particularly creative solutions and potentially opens up new industries and “disruptive” advances in technology. It is a form of free thinking that is hard to imagine in less free or more culturally rigid societies, including some that superficially seem to be on the cutting edge of commercial development.
The Sheikh’s Dilemma
Margalit has converted a printing house into the headquarters for a burgeoning animation company, Animation Lab, which aims to compete with Pixar and others in the production of full-length animated films.
Jerusalem might seem like the last place to build a world-class movie studio. As a center for the three monotheist religions, the ancient city of Jerusalem is about as different from Hollywood as one could imagine. Filmmaking is not an Israeli specialty, though Israeli movies have recently been prominently featured in international film festivals. Further complicating matters is the fact that the Israeli arts scene is centered in secular Tel Aviv, rather than Jerusalem, known more for holy sites, tourists, and government offices. But Margalit’s vision for creating companies, jobs, industries, and creative outlets was specifically a vision for Jerusalem.
This cultural commitment can be central to the success of economic clusters, of which Israel’s high-tech industry is a case in point.
A cluster, as described by the author of the concept, Harvard Business School professor Michael Porter, is a unique model for economic development because it’s based on “geographic concentrations” of interconnected institutions—businesses, government agencies, universities—in a specific field.1 Clusters produce exponential growth for their communities because people living and working within the cluster are in some way connected to each other.
Porter argues that an intense concentration of people working in and talking about the same industry provides companies with better access to employees, suppliers, and specialized information. A cluster does not exist only in the workplace; it is part of the fabric of daily life, involving interaction among peers at the local coffee shop, when picking up kids from school, and at church. Community connections become industry connections, and vice versa.
As Porter says, “the social glue” that binds a cluster together also facilitates access to critical information. A cluster, he notes, must be built around “personal relationships, face-to-face contact, a sense of common interest, and ‘insider’ status.”
Though Israel was already well into its high-tech swing by then, the ICQ sale was a national phenomenon. It inspired many more Israelis to become entrepreneurs. The founders, after all, were a group of young hippies. Exhibiting the common Israeli response to all forms of success, many figured, If these guys did it, I can do it better. Further, the sale was a source of national pride, like winning a gold medal in the world’s technology Olympics. One local headline declared that Israel had become an Internet “superpower.”
In the best-selling book Built to Last, business guru James Collins identifies several enduring business successes that all have one thing in common: a core purpose articulated in one or two sentences. “Core purpose,” Collins writes, “is the organization’s fundamental reason for being. [It] reflects the importance people attach to the company’s work… beyond just making money.”
Collins describes Israel’s core purpose as “to provide a secure place on Earth for the Jewish people.” Building Israel’s economy and participating in its cluster—which are interchangeable—and pitching it to the most far-flung places in the world are what in part motivates Israel’s “profitable patriots.”
So what are the barriers to an Arab “start-up nation”? The answer includes oil, limits on political liberties, the status of women, and the quality of education.
The United Nations’ Arab Human Development Report, which presented the organization’s research from 2002 through 2005, found that the number of books translated annually into Arabic in all Arab countries combined was one-fifth the number translated into Greek in Greece.
The number of patents registered between 1980 and 2000 from Saudi Arabia was 171; from Egypt, 77; from Kuwait, 52; from the United Arab Emirates, 32; from Syria, 20; and from Jordan, 15—compared with 7,652 from Israel.
The Arab world has the highest illiteracy rates globally and one of the lowest numbers of active research scientists with frequently cited articles.
In 2003, China published a list of the five hundred best universities in the world; it did not include a single mention of the more than two hundred universities in the Arab world.
Today, Israel has eight universities and twenty-seven colleges. Four of them are in the top 150 worldwide universities and seven are in the top 100 Asia Pacific universities. None of them are satellite campuses from abroad. Israeli research institutions were also the first in the world to commercialize academic discoveries.
Israel, a nation of immigrants, has continually been dependent on successive waves of immigration to grow its economy. It is in large part thanks to these immigrants that Israel currently has more engineers and scientists per capita than any other country and produces more scientific papers per capita than any other nation—109 per 10,000 people.
Jewish newcomers and their non-Jewish family members are readily granted residency, citizenship, and benefits. Israel is universally regarded as highly entrepreneurial and—like the IDF—dismissive of the strictures of hierarchy.
One of the major challenges to a high-growth entrepreneurial culture elsewhere in the Arab world—beyond just the gulf—is that the teaching models in primary and secondary schools and even the universities are focused on rote memorization.
This emphasis on standardization has shaped an education policy that defines success by measuring inputs rather than outcomes.
international evidence suggests that low student-teacher ratios correlate poorly with strong student performance and are far less important than the quality of the teachers.
Focusing on the number of teachers has particularly harmful implications for boys in the Arab world. Many government schools are segregated by gender: boys are taught by men, girls by women. Since teaching positions have traditionally been less appealing to men, there is a shortage of teachers for boys. As a result of the smaller talent pool, boys’ schools often employ lower-quality teachers. In fact, the GCC gender gap in student performance is among the most extreme in the world.
Finally, a perhaps even larger factor in the limit on high-growth entrepreneurial economies is the role of women.
Harvard University’s David Landes, author of the seminal book The Wealth and Poverty of Nations, argues that the best barometer of an economy’s growth potential lies in the legal rights and status of its women.
This kind of distortion makes an economy inherently uncompetitive, and it is the result of the subordinated economic status of women in the Arab world.
Threats to the Economic Miracle
In addition to an overdependence on global venture capital, Israeli companies are also overdependent on export markets.
A little over half of Israel’s workforce contributes to the economy in a productive way, compared to a 65 percent rate in the United States.
The low Israeli workforce participation rate is chiefly attributable to two minority communities: haredim, or ultra-Orthodox Jews, and Israeli Arabs.
Among mainstream Israeli Jewish civilians aged twenty-five to sixty-four, to take one metric, 84 percent of men and 75 percent of women are employed. Among Arab women and haredi men, these percentages are almost flipped: 79 percent and 73 percent, respectively, are not employed.
The result of this has been triply harmful to the economy. Haredim are socially isolated from the workforce because of their lack of army experience; plus, since they are not allowed to work if they want a military exemption—they have to be studying—as young adults they receive neither private-sector nor military (entrepreneurial) experience; and thus haredi society becomes increasingly dependent on government welfare payments for survival.
There are two primary reasons why Israeli Arabs have low participation rates in the economy.
· First, because they are not drafted into the army, they, like the haredim, are less likely to develop the entrepreneurial and improvisational skills that the IDF inculcates.
· Second, they also do not develop the business networks that young Israeli Jews build while serving in the military, a disparity that exacerbates an already long-standing cultural divide between the country’s Jewish and Arab communities.
Each year, thousands of Arab students graduate from Israel’s technology and engineering schools. Yet, according to Helmi Kittani and Hanoch Marmari, who codirect the Center for Jewish-Arab Economic Development, “only a few manage to find jobs which reflect their training and skills…. Israel’s Arab graduates need to be equipped with a crucial resource which the government cannot supply: a network of friends in the right places.”
Women Against Violence director Aida Touma-Suleiman said that she sees men as partners for change, including a new acceptance of women who work outside the home. “There are Arab men who are unhappy with this balance of power, and wish to improve the relations between the genders. They see it as in their interest as much as anyone else’s,” she said.
Yet because of the high birth rates in both the haredi and the Arab sectors, efforts to increase workforce participation in these sectors are racing against the demographic clock. According to Israel 2028, the report issued by an official blue-ribbon commission, the haredi and Arab sectors are projected to increase from 29 percent of Israel’s total population in 2007 to 39 percent by 2028. Without dramatic changes in workforce patterns, this shift will reduce labor-force participation rates even further. “The existing trends are working in stark opposition to the desired development,” the report warns.
But the point that Israel can, should, and must grow its economy faster is crucial. Of all the threats and challenges facing Israel, an inability to keep the economy growing is perhaps the greatest, since it involves overcoming political obstacles and giving attention to neglected problems.
Israel has a rare, maybe unique, cultural and institutional foundation that generates both innovation and entrepreneurship; what it lacks are policy fixes to further amplify and spread these assets within Israeli society. Fortunately for Israel, it is probably easier to change policies than it is to change a culture, as countries like Singapore demonstrate.
As the New York Times’ Thomas Friedman put it, “I would much rather have Israel’s problems, which are mostly financial, mostly about governance, and mostly about infrastructure, rather than Singapore’s problem because Singapore’s problem is culture-bound.”
Farmers of High Tech
“Agriculture is more revolutionary than industry,”
“In twenty-five years, Israel increased its agricultural yields seventeen times. This is amazing,” he told us. People don’t realize this, Peres said, but agriculture is “ninety-five percent science, five percent work.”
“Ben-Gurion thought the future was science. He would always say that in the army it’s not enough to be up to date; you have to be up to tomorrow,” Peres recalled.
As of 2005, Israel was the world’s tenth-largest producer of nuclear patents.
Today, Israel leads the world in the percentage of its GDP that goes to research and development, creating both a technological edge critical to national security and a civilian tech sector that is the main engine of the economy. The key, however, is the way the entrepreneurial nation building Peres embodies has morphed into a national condition of entrepreneurship.
Indeed, what makes the current Israeli blend so powerful is that it is a mashup of the founders’ patriotism, drive, and constant consciousness of scarcity and adversity and the curiosity and restlessness that have deep roots in Israeli and Jewish history.
“The greatest contribution of the Jewish people in history is dissatisfaction,” Peres explained. “That’s poor for politics but good for science.
What makes Israel so innovative and entrepreneurial?
It consists of the tight proximity of great universities, large companies, start-ups, and the ecosystem that connects them—including everything from suppliers, an engineering talent pool, and venture capital. Part of this more visible part of the cluster is the role of the military in pumping R&D funds into cutting-edge systems and elite technological units, and the spillover from this substantial investment, both in technologies and human resources, into the civilian economy.
Vilpponen about the start-up scene in Finland, he lamented, “Finns produce lots of technology patents but we have failed to capitalize on them in the form of start-ups.
In addition to the institutional elements that make up clusters—which Finland, Singapore, and Korea already possess—what’s missing in these other countries is a cultural core built on a rich stew of aggressiveness and team orientation, on isolation and connectedness, and on being small and aiming big.
And when you complete your military service, everything you need to launch a start-up will be a phone call away, if you have the right idea. Everyone knows someone in his or her family, university, or army orbit who is an entrepreneur or understands how to help. Everyone is reachable by cell phone or e-mail. Cold-calling is acceptable but almost never fully cold; almost everyone can find some connection to whomever he or she needs to contact to get started.
What in most countries is somewhat exceptional in Israel has become an almost standard career track, despite the fact that everyone knows that, even in Israel, the chances of success for start-ups are low. It’s okay to try and to fail. Success is best, but failure is not a stigma; it’s an important experience for your résumé.
renewable resource. Unlike finite natural resources, ideas can spread and benefit whichever countries are best positioned to take advantage of them, regardless of where they were invented. George Bernard Shaw wrote, “If you have an apple and I have an apple and we exchange apples, then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.”
while other democracies have no reason to institute a military draft like Israel’s, a mandatory or voluntary national service program that is sufficiently challenging could give young college-age people—before they begin college—something like the leadership, teamwork, and mission-oriented skills and experience Israelis receive through military service. Such a program would also increase social solidarity and help inculcate the value of serving something larger than oneself, whether a family, a community, a company, or a nation. And when U.S. military men and women, for example, are transitioning to civilian life, they should not be advised to deemphasize their military experience when applying for a job.