Government Policies Towards Israel's High-Tech Powerhouse

Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎

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Technovation

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Government policies towards Israel's high-tech powerhouse

Jarunee Wonglimpiyarat

College of Innovation, Thammasat University, Anekprasong 3 Bldg., Prachan Rd., Bangkok 10200, Thailand article info abstract

Article history: Israel's Silicon Wadi is second only to US Silicon Valley in terms of business start-ups. The government Received 31 January 2014 policies play an important role in promoting innovation and driving the country towards a high-tech Received in revised form powerhouse. In this study the analyses, carried out through the lens of cluster and national innovation 11 September 2015 system (NIS), have shown that the thriving high-tech clusters are the result of government-led policies in Accepted 11 February 2016 creating the venture capital (VC) industry with the impacts of Yozma program. Importantly, the government ﬁnancing did not crowd out but crowd in private investments. Israel presents an interesting Keywords: case of the most successful Silicon Valley-style economy. The lessons of Israel in successfully climbing the Cluster technological ladder to become a high-tech powerhouse would be useful for other countries to learn how National innovation system (NIS) to promote high-tech clusters. Yozma & 2016 Elsevier Ltd. All rights reserved. Government policies Venture capital

1. Introduction powerhouse? The analyses of findings in this study are based on Porter's cluster model (Porter, 1990, 1998, 2001) and the national Silicon Valley is characterized as the high-tech region of the innovation system (NIS) concept (Lundvall, 1992, 1998, 1999, United States. Silicon Valley is the world's best known area of 2003). This research aims to provide practical contributions as electronics and computer-related industries whereby its success is a well as reflections on government policies for promoting national result of effective linkages and cluster policies (Saxenian, 1990, innovative capacity and industrial competitiveness. The policy 1994, 2006; Kaplan, 2000; Rosenberg, 2002). The success of US lessons and experiences drawn from the country case of Israel can Silicon Valley has become a technology catching up model for be applied to other developing economies. countries around the world to follow. In this study, the term ‘Silicon Israel is an innovation driven country having made the suc- Valley’ is based on the scholarly research of Saxenian (1990, 1994, cessful transition from an underdeveloped economy to a high-tech 2006) using such a prevalent term to describe an area of high-tech powerhouse. The country was ranked 24th in the 2014 Interna- industries with network-based structure and agglomeration. tional Institute for Management Development (IMD) World com- The focus of this study is the country case of Israel, one of the petitiveness ranking and 27th according to 2014 World Economic most successful countries in replicating the success of US Silicon Forum (WEF) global competitiveness index. Israel was also ranked Valley. The research attempts to understand the government po- 19th in the category of very high human development according to licies contributing to successful start-up nation of Israel. The reason the United Nations Development Program's Human Development to choose Israel as a case study is because it is the most successful Report Index in 2014. Israel was invited as a full member in the country after the United States in establishing high-tech industries. Organization for Economic Co-operation and Development The creation of Israel's high-tech Silicon Wadi is recognized as the (OECD), an economic group of developed countries since 2010. The most successful Silicon Valley-style economy outside the United competitiveness of Israel is a result of its entrepreneurial culture States. and the government-led technology policies in venture capital fi The government policies play an increasing important role in (VC) nancing. promoting innovation and economic growth. However, there are The structure of this paper is as follows. Following the in- troductory section, Section 2 provides a literature review on in- still considerable knowledge gaps in linking the government po- dustrial innovation policies to promote entrepreneurial financing, licies to innovation financing (Mani, 2004; Hyytinen and Toivanen, the cluster model and the competitive advantage of nations as 2005). Therefore, this study attempts to fill the gap in the existing well as the national innovation system concept. Section 3 dis- research literature. Specifically, the study attempts to answer the cusses the research design, methodology and provides the back- main research question – How could Israel become a high-tech ground of the study. Section 4 presents analyses of findings with emphasis on the government policies that help transform Israel E-mail address: [email protected] into a high-tech powerhouse. There are two subsections providing http://dx.doi.org/10.1016/j.technovation.2016.02.001 0166-4972/& 2016 Elsevier Ltd. All rights reserved.

Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http: //dx.doi.org/10.1016/j.technovation.2016.02.001i 2 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎ analyses of Israeli high-tech industrial clusters based on the cluster (scarce capital) of firms in economic contexts of public policy. model and Israeli innovation system based on the national in- However, Gompers and Lerner (1998) as well as Da Rin et al. (2006) novation system (NIS) concept. Section 5 concludes the paper by have focused their studies in the areas of VC financing which help drawing lessons and policy implications regarding the role of Is- evolve the context of public policy. While Gompers and Lerner raeli government in promoting high-tech clusters. The practical (1998) employ multivariate regression analysis to study the impacts lessons and experiences from the case of Israel would be useful for of venture variables on the industry fundraising, Da Rin et al. (2006) other countries to learn the process of technological and economic use the innovation ratios to evaluate the effectiveness of public catch-ups. policies on the development of VC market. Their study shows the three types of policies to enhance VC growth: the corporate capital gains taxation, the opening of new stock markets, and the reduction 2. Literature review of barriers to entrepreneurship. Considering the level of policy research, the studies by Gom- 2.1. Industrial innovation policies to promote entrepreneurial pers and Lerner (1998) as well as Da Rin et al. (2006) address the financing macro level policies. However, it is interesting to see that the work by Cullen and Gordon (2002) is devoted to the type of tax policy The government policies to promote entrepreneurship are and its impacts on the demand and supply of venture funds. The important in the national economic growth. In particular, the fi- studies by Jeng and Wells (2000) and Bottazzi et al. (2008) are nancial and investment policies are among the key operational focused on the determinants of VC. The results of their studies priorities in developing countries to support investment by local have shown the importance of initial public offerings (IPOs), in- firms, especially small and medium-sized enterprises (SMEs), and stitutional and legal environment, tax policy as well as human transnational corporations investing in these countries. In capital in driving the VC industry. More recently, Yu (2013) and knowledge-based economies, economic growth is increasingly Hsu et al. (2015) have extended their studies by integrating VC dependent upon innovation whereby access to finance is seen as a policies in a broader context of mechanisms for promoting the critical factor in this process (Bygrave and Timmons, 1992; Free- process of technology commercialization. Their studies also take man and Soete, 1997; Pissarides, 1999; Wonglimpiyarat, 2007). into account the limitations of institutional/cultural differences of Therefore, the government policies play an increasing important the VC industry. role in entrepreneurial, venture and economic development (Da- vid et al., 2000; Hall and van Reenen, 2000; Hyytinen and Toiva- 2.2. Cluster model and the competitive advantage of nations nen, 2005). Venture capital (VC) plays an important role in supporting The literature on industrial clusters popularized during the entrepreneurial development. VC is a high-risk, potentially high- 1990s. Porter (1990, 1998, 2001)'s Diamond model provides a return investment to support business creation and growth. In framework of the industrial competitiveness in the form of clus- other words, VC provides the opportunity for entrepreneurs to ters (Fig. 1). By definition, the cluster is a geographically proximate exploit technology and turn it into commercialized innovations. group of interconnected companies and associated institutions in a According to the study by Hellmann and Puri (2000),VCfinancing particular field, linked by commonalities and complementarities is related to the growth of start-ups. The importance of VC fi- (Porter, 1990, 1998, 2001). Porter (1990) has developed a Diamond nancing in the configuration of a geographical concentration is the Model framework to analyze the industrial competitiveness in the regional capacity to engender economic advantages. In other form of clusters. Within an industrial cluster, the social community words, the venture capital investment (clustering) plays a vital role and the economic agents work together to drive product/process in creating phenomenal economic growth. innovations to the marketplace (Gordon and McCann, 2000, The small and innovative companies are important to the Schmitz, 2000). economy. They have assumed a major influence in the economic Porter (1998) argued that the nation's innovative capacity is development, employment and creation of new innovations (Lar- built on the combined strength of common innovation infra- anja, 1998; Kingston, 2001; Gray and Gonsalves, 2002; Massa and structure and vitality of the environment for innovation in parti- Testa, 2008; Peters and Coles, 2010). The literature review on en- cular clusters. According to Porter (1990, 1998, 2001), clusters are trepreneurship reveals that the difficulties of firms lie in their early a source of strategic competitive advantage. The cluster approach stages of business development and innovation process (Gompers provides an understanding of economic development processes. and Lerner, 2001, 2004; Wonglimpiyarat, 2007). Many govern- Clusters lead to increased levels of productivity, growth and em- ments have tried to focus on introducing the innovation policies ployment. Within an industrial cluster, the social community and providing early stage financing to help SMEs reduce the risks the economic agents work together to drive product/process in- underlying the process of entrepreneurial development. In devel- novations to the marketplace (Porter, 1990, 1998, 2001; Feldman, oping countries, the government financing mechanisms play an 2000; Steiner, 1998). important role in innovation system (Mani, 2004). The sets of in- The cluster model focuses upon the conditions that support stitutions and public policies are used to support technology and firm competitiveness at the national scale. It is an economic de- innovation development so that the efforts of research and development model that promotes collaboration among institutions velopment (R&D) institutions and industries can lead to effective to facilitate the exchange of information and technology. Policy technology commercialization, bringing about business creation makers of the government worldwide have been challenged to and economic growth. implement the cluster concept as an economic development One of the important public policies is venture capital (VC) po- model. Industrial clusters are not confined to political boundaries licies to promote innovation and economic growth. Entrepreneurial and can be localized (like the clothing and garment industry of financing plays a critical role in supporting SMEs, particularly in the New York) or dispersed (like the North American auto industry). early stage of venture development. The VC policies are considered Within the context of industrial clusters, the four attributes con- to be instrumental in industrial development. Taking into account tributing to the competitive advantage of nations are: (1) factor previous studies on public policies, Stiglitz and Weiss (1981) and conditions, (2) demand conditions, (3) context for firm strategy Holmstrom and Tirole (1997) study the role of bank and financial and rivalry, and (4) related and supporting industries (Porter, 1990, intermediaries in providing finance to ease capital constraints 1998, 2001).

Fig. 1. Porter's Diamond model. Source: Porter (1990, 1998, 2001).

The cluster can help reduce uncertainty in innovation and production, diffusion and exploitation of knowledge within na- support technological development to increase the competitive- tional borders (Lundvall, 1992, 1998, 1999, 2003; Freeman, 1987; ness of a region or a country (Saxenian, 1994; Beckeman and Nelson, 1988, 1993; Fagerberg and Srholec, 2008; Guan and Chen, Skjöldebrand, 2007; Gnyawali and Srivastava, 2013). Concerning 2012). Interactions can be achieved by both market mechanism the cluster performance and the effects of clusters on societies, the and non-market mechanisms such as collaboration and long-term economist – Schumpeter (1934, 1939) argued that the technolo- network arrangements. gical innovations pioneered by entrepreneurs have strong band- The level of resources devoted by each nation to research and wagon effects. Geographic proximity (geographic concentration development (R&D) and innovative activities represents a basic among firms, research institutions, suppliers and other organiza- characteristic of the NIS (Lundvall, 1992; Nelson, 1993; MjØset, tions) can support information transfer within the clusters/net- 1992). Determinants of national economic performance and works which thereby help drive the innovation process. The technological capabilities are the size of a country, R&D intensity knowledge spillovers from universities and research institutes can and market structure (Freeman, 1987; Archibugi and Michie, 1997). engender technology transfer among firms which help create jobs The NIS concept is expanded further to the sectoral system of in- and economic growth. This condition reflects the highly successful novation emphasizing interactions and innovative activities at the model of Silicon Valley clusters where high-tech firms have been level of sectoral production system (Breschi and Malerba, 1997; created (Wonglimpiyarat, 2005). Malerba, 2002, 2004). The boundary of NIS is explained by the scope and interrelations between technological development and 2.3. National innovation system concept the institutional embeddedness of innovative organizations (Freeman, 1987; Lundvall, 1992, 1993, 1998, 1999, 2003; Nelson, Over the past 30 years, the concept of national innovation 1988, 1993, Fagerberg and Srholec, 2008; Guan and Chen, 2012 system (NIS) has widely been recognized as a dynamic tool to among others). An understanding of NIS can help policy makers investigate, formulate, plan and position the national economic develop approaches to enhance the nation's innovative and social development. The emergence of the NIS concept, par- performance. ticularly in the industrialized countries in the Northern hemi- sphere, can be traced back to the work of Professors Bent-Åke Lundvall, Christopher Freeman and Richard Nelson in the 1980s 3. Research methodology and background of the study (Lundvall, 1992, 1998, 1999, 2003; Freeman, 1987; Nelson, 1988, 1993). The NIS framework stresses the importance of interactions 3.1. Research methodology and relationships among the actors and institutions to facilitate economic development and growth. The innovation system is To date, the role of government in the process of en- composed of institutions, private and public firms (either large or trepreneurial development has been understudied. Even less is in small), universities and government agencies, aiming at the the area of innovation financing. Therefore, this research attempts

Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http: //dx.doi.org/10.1016/j.technovation.2016.02.001i 4 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎ to fill the existing research gap by focusing on exploring the concept. This research is guided by the main question: how could government policies towards Israel's high-tech powerhouse. This Israel become a high-tech powerhouse? research employs a case study methodology (Eisenhardt, 1989; The present study follows the traditional neo-classical eco- Yin, 2003) to understand in-depth the logical or causal drivers of nomics, focusing on the macro variable – the national economy. phenomena (rather than statistical generalization). In particular, The integrated frameworks of cluster and NIS would take into the case study research attempts to understand how the innova- account institutional and policy factors underlying the develop- tion financing policies/programs can help support the growth of ment of high-tech Silicon Wadi. At the same time the research will high-tech industries, leading Israel to become a high-tech offer recommendations to inform the long-term development of powerhouse. science, technology, and innovation policy. The findings based on The analysis in this study is based on the two main concepts this integrated framework would help fulfill an important gap in underlying industrial development – the cluster model and the existing research of innovation financing policies and allow for a national innovation system (NIS) concept (the reasons are stated in deeper understanding on the role of government and public po- the next paragraph). The results from carrying out the case study licies in enhancing VC growth and development. The results from analysis provide insights in terms of content and mechanisms of the study aim to draw attention of researchers in the policy arena the operating policies behind the successful high-tech industry – to the structural approach for promoting innovation and industrial Silicon Wadi of Israel. The analyses of findings in the next section development (policy mechanisms driving the VC emergence as reveal that the rise of Silicon Wadi have confirmed the academic well as the innovation financing programs underlying the Israeli term of ‘Silicon Valley’ in the United States. To avoid confusion in NIS). using of the term ‘Silicon Valley’ as a buzzword, the study follows The context-specific settings of Israel are an exceptional case the scholarly work of Saxenian (1990, 1994, 2006) describing it as and indeed interesting in policy practice. However, the use of a an area of high-tech industries with network-based structure and single case study has a limitation in that it cannot lead to gen- agglomeration. The analyses in Section 4 also reflect on the success eralization. Despite such limitation, an understanding of the dy- of Israel's high-tech powerhouse with Silicon Valley style of namic process underlying the localized context of Israel's Silicon management. Wadi would provide important lessons and insights to learn the fi The analyses in this research study are carried out through the development processes behind a high-tech powerhouse. Speci - lens of cluster and national innovation system (NIS) (Porter, 1990, cally, the lessons of Israel in its growth process of industrialized 1998, 2001; Lundvall, 1992, 1998, 1999, 2003). The reasons of in- economy would be useful for other countries to learn the stages of tegrating these frameworks are twofold. Firstly, the use of cluster technological and economic catch-ups. model (Porter, 1990, 1998, 2001) offers an opportunity to explore the components (factor conditions, demand conditions, context for 3.2. Background of the study firm strategy and rivalry, related and supporting industries as well “How is it that Israel—a country of 7.1 million people, only sixty as chance and government policy) underlying the competitiveness years old, surrounded by enemies, in a constant state of war since of the nation. The analysis based on Porter's competitive Diamond its founding, with no natural resources—produces more start-up model would provide a better understanding on the government companies than large, peaceful, and stable nations like Japan, policies behind the success of Israel as a start-up nation. Secondly, China, India, Korea, Canada, and the United Kingdom?” it is useful to view the combination of policies as well as the lin- – The Council on Foreign Relations, Start-up Nation Book – kages and interactions among numerous actors/institutions in the overall landscape of Israeli innovation system through the NIS The above statements highlight the economic miracle and the technological leadership of the Israel. Israel represents the most successful country after the United States in creating high-tech Table 1 industries. The rapid economic growth of Israel is attributable to Overview of Israel's economy. its high-skilled labor force and outstanding academic resources (Trajtenberg, 2001, 2002; Avnimelech and Teubal, 2004, 2006). Year 2013 Year 2014 Table 1 provides an overview of Israeli economy. It shows the competitiveness of Israel compared with the Organization for Competitiveness ranking by IMD 19 24 Competitiveness ranking by WEF 27 27 Economic Co-operation and Development (OECD) countries in Human development index by UNDP 19 19 various dimensions. The country was ranked 24th in the 2014 % of R&D to GDP 3.93 4.2 International Institute for Management Development (IMD) World Unemployment rate (%) 5.6 5.6 competitiveness ranking and 27th according to 2014 World Eco- Inflation rate (%) 1.55 0.54 nomic Forum (WEF) global competitiveness index. Israel was also GDP growth Unemployment rate Investment Export volume ranked 19th in the category of very high human development growth according to the United Nations Development Program's Human Development Report Index in 2014. Israel was invited as a full member in the Organization for Economic Co-operation and De- velopment (OECD), an economic group of developed countries since 2010. The percentage of research and development (R&D) contribution to gross domestic product (GDP) is 3.93 in 2013 and 4.2 in 2014. The percentage of R&D investments to GDP of Israel is highest in the world, compared with 2.4% in the Organization for Economic Co-operation and Development (OECD) countries. The highest percentage of contribution to GDP among the OECD nations has shown that Israel is a leading country in industrial R&D. denotes Israel The GDP growth of Israel is 2.5% (compared to OECD of 1.8%) while denotes OECD countries the unemployment rate as a percentage of labor force of Israel is

denotes the forecast period 6.1% (compared to OECD of 7.3%).

Chance: Context for firm strategy and rivalry: • High skilled labor force of immigrants • from former USSR provides an Entrepreneurial and risk-taking culture opportunity for the future growth of high- • Companies pursuing the global strategy by choosing VC tech industries exits on NASDAQ and European markets • Strong relationships and long-term • Global start-up ecosystem: Israeli start-ups compete in the cooperation with the US and US global markets companies as well as Europe open up a chance for future international trade

Demand conditions: Factor (inputs) conditions: • Small domestic market • • Israeli companies’ focus on exporting Small country with few natural resources innovations to drive economic growth • Entrepreneurial spirits • Sophisticated demand for • High quality human resource technologically advanced products • Availability of VC financing • University-industry research collaboration

Government:

• Government directed policies to create Related and supporting industries: VC industry • The 1984 R&D Law • Domestic and foreign public equity capital markets to support VC exits • Effective financing programs and tax • Government support through technological incubators program incentives • • Solid infrastructure to support corporate spin-offs Government policies to support foreign direct investment (FDI) in high-tech sectors

Fig. 2. Analysis of Israeli high-tech industrial clusters using Porter's competitive Diamond model. Source: The author's design, based on the framework by Porter (1990, 1998, 2001).

4. Analyses of findings economic growth. Israel's entrepreneurial clusters are one of the most successful 4.1. Analysis of Israeli high-tech industrial clusters based on the high-tech industrial clusters outside the US. The government po- cluster model licies in the 1960s and 1970s are focused on R&D in defense industry but the policies are later directed towards creating high- The analysis of Israeli high-tech cluster and strategy based on tech industries in the late 1980s. The government has put a strong the cluster model (Porter, 1990, 1998, 2001) is shown in Fig. 2. The emphasis on R&D and provided financial supports to advance analysis was made on factors affecting the competitiveness of Is- technologies. Among the government policies in innovation fi- raeli economy. The Porter's Diamond model can be seen as a basis nancing are the major programs of Inbal, Yozma and Magnet. for policy making since the model assists in understanding why These programs were introduced since the early 1990s through and how the cluster and network conditions could support the Office of the Chief Scientist (OCS), Ministry of Economy with

‘Silicon Wadi’ - Israeli Silicon Valley

• Tel Aviv • Herzliya-Pituach • Haifa • Jerusalem • Rehovot

Fig. 3. Israel's high-tech industrial clusters. Source: The author's design.

Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http: //dx.doi.org/10.1016/j.technovation.2016.02.001i 6 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎ the aim to leverage the VC industry. Particularly, the government- 1,398 1,400 led policy of Yozma program introduced in 1992 had helped 1,2220 1,201 1,197 11,227 transform the defense industry into high-tech clusters. 1,200 1,110 One of the main factors behind the growth of high-tech cluster 1,000 development is the human capital since the immigrants from the 884 867 768 former Soviet Union were scientists, engineers, technicians and 800 7355 skilled professionals. These immigrants are human capital characterized by entrepreneurial and risk-taking culture (Chorev and 600

Anderson, 2006). The immigrants who were university graduates 400 and highly skilled professionals at that time provided the valuable human resource that helped drive the high-tech clusters to be- 200 come a successful Silicon Valley type of technology centers. In 0 establishing entrepreneurial high-tech clusters, the government 2003 20004 20052006 2 2007 2008 20099 2010 20011 2012 introduced the technological incubators program to support the Fig. 5. Annual VC investments (in USD million). projects proposed by these skilled immigrants. The universities Source: PwC Israel MoneyTree Report. also served as research incubators undertaking R&D activities in collaboration with the industries. The universities provided im- 2436, comprised of 855 VC-backed companies. As a result of the portant sources of human capital (knowledge workers as in- OCS' policy to support R&D investments, the number of Israeli tellectual capital). R&D undertakings were carried out in major patenting in the US has grown very rapidly at the average rate over universities like the Hebrew University of Jerusalem, Technion- 10% per year, placing Israel as the 14th largest foreign recipient of Israel Institute of Technology, Weizmann Institute of Science, Ben– US patents. The patents are mostly in the key technological areas Gurion University of the Negev. The scientific research and tech- of computers, communications and biotechnology. nologies were commercialized through the universities' owned Looking back to the early 1990s, there were virtually no VC Technology Transfer Companies (TTCs). Today, many Israeli uni- investments in Israeli companies. Only 4 VC Limited Partnerships versities have entrepreneurship centers, for example, Bronica En- (LP) operated in Israel in 1992 but this number increased to 50 in trepreneurship Center at Technion, StarTau at Tel Aviv University. the year 2000 (Avnimelech and Teubal, 2006). Venture capital (VC) Israel had formed one of the world's most successful high-tech is the main mechanism behind the successful creation of Israeli industrial clusters since the 1990s. The thriving VC industry has high-tech clusters. The emergence of Israel's VC market was trig- – transformed Israel into Silicon Wadi Israeli Silicon Valley (Fig. 3). gered by the Yozma program, a government-targeted policy to Silicon Wadi is located around Tel-Aviv where it is second only to support R&D activities. The launch of Yozma program mirrored the US Silicon Valley in terms of business start-ups. It is the techno- willingness of the Israeli government to take risks in VC invest- fi logical hub generating innovations in the elds of information and ments. Yozma funds were private VC funds that invested directly communications technology (ICT), software, data communications, in the business start-ups. These VC funds were part of the Yozma electro-optics, hardware design, internet, etc. The thriving VC in- program, a government-targeted program launched during 1993– dustry has helped create cluster effects to support the growth of 1998. Yozma funds had induced private VC investments by sti- high-tech clusters. In other words, the successful cluster devel- mulating co-investments. The funds by far brought about 10 pri- opment was a result of effective interactions among the govern- vate VC funds in a few years of operation. The development of ment (the OCS under the Ministry of Economy in particular), the Yozma program has led Israel's VC industry to the highest growth universities and industries. The Yozma program effectively sup- in the 1990s. At present, the high-tech industry of Israel accounts ported investments oriented in the ICT and life science sectors for more than 54% of industrial exports, and over 26% of the during 1993–2000. The Yozma funds and other Limited Partner- country's exports. Fig. 4 shows the share of venture capital-backed ship (LP) VCs have attracted follow-up funds to provide additional investments in high-tech companies from the years 2007 to 2012. capital for further investments. Given that the Yozma VC fund It can be seen that foreign investments account for 72% of total required involvement of reputable foreign financial institutions investments in 2012. (generally a foreign private equity or VC company), such require- Interestingly, behind the growth of industrial clusters are ment had triggered collective learning process via VC cooperation. strong linkages and effective interactions in the NIS. The The Israeli government, through the OCS, provides grants and financing to support R&D in collaboration with universities and industries. With heavy R&D investments amounted to 4.5% of GDP, 900 this has fueled the number of high-tech start-ups during 1993– 800 2000. The number of high-tech start-ups in this period totaled 700

1,759 2,076 1,122 1,262 2,139 1,924 600

500

400 USD million 61 62 63 300 71 75 72 DDomestic 200

100 Foreign 0 39 38 37 Seed/Start-up Eaarly/Expansionn Later stage 29 28 25 2012 69 656 142 2011 79 844 304 2007 2008 2009 2010 20112012 2010 49 695 140

Fig. 4. Venture capital in high-tech companies (in USD million and %). Fig. 6. VC investments by stages. Source: Investment Promotion Center, IVC Research Center. Source: PwC Israel MoneyTree Report.

Israel USA

Ministry of Finance Ministry of Economy Ministry of Immigrant Department of Commerce (formerly Ministry of Industry and Trade) Absorption

MATI Centers

Small and Medium Centers for the promotion US-Israel Science & National Institute of Bank of Israel Securities Office of the Business Agency of entrepreneurship Technology Commission Standards and Israel Authority (ISA) Chief Scientist (SMBA) and Technology (NIST) (OCS) Foundation Israel Small and Other (USISTC and USISTF) Israel Tax Medium Enterprises agencies Authority (ITA) Authority (ISMEA) Strengthen R&D relationship between the US and Israel to promote economic growth Support small business growth through innovation and development

Tel-Aviv Stock NYSE Exchange (TASE) Government Insurance Company - NASDAQ • Inbal Program Technological business R&D grants Other incubator program •R&D fund programs Cross-listing agreements Binational Industrial • Guarantees VC funds traded • Research and Development Magnet program in TASE Yozma Program – • HEZNEK fund Foundation (BIRD) • The program phased out in Yozma Venture Funds • TNUFA program the late 1990s • Supports R&D cooperation between Magneton program • Israel and USA The program phased out in the NOFAR program late 1990s • R&D and investment incentives

Fig. 7. The Israeli innovation system. Source: The author's design.

Table 2 Table 3 The number of deals and total exits of high-tech companies. Major innovation ﬁnancing programs in Israel. Source: IVC Research Center. Source: The author's design (compiled from various sources).

Year Total capital raised Total exits Number of deals Programs Description

(USD billion) (USD billion) Inbal The Inbal program was established in 1992. The program objective was to stimulate publicly-traded VC funds by 2004 1.38 2.55 77 guaranteeing the downside of investments. A govern- 2005 1.38 3.56 96 ment owned insurance company (Inbal) gave partial 2006 1.57 10.75 116 guarantees (70%) of initial capital assets. The Inbal pro- 2007 2.08 4.38 115 gram placed restrictions on the investments of the VC 2008 1.16 2.70 86 companies which it covered. However, the implementa- 2009 1.01 2.59 78 tion of the Inbal program was not successful and was 2010 1.40 2.33 81 later phased out. 2011 1.37 5.23 100 Yozma The Yozma program was launched in 1993. It was a USD 2012 1.31 9.67 82 100 million government owned VC company to finance 2013 1.26 6.98 81 early stage VC funds. The aim of the Yozma program was to support the establishment of domestic Limited Part- nership VC funds. Through inducing private sector investments, the Yozma program had triggered the creation high-tech companies establish linkages with the global markets. of the VC industry in Israel. The program was phased out These linkages not only help bring more investments to Israel but after the successful creation of Israeli VC industry. also help Israeli companies grow their international trade. At Magnet The Magnet program was established in 1992 to en- present, Israel has the largest number of listed companies on the courage pre-competitive generic research conducted by consortia of industrial companies. The program aims to NASDAQ market than any country outside the US. The incumbent support business R&D activities – cooperative R&D in- companies in NASDAQ are, for example, Scitex Corporation Ltd., volving two or more firms and at least one university. Elbit Systems Ltd., Teva Pharmaceutical Industries Ltd. It is inter- Mini-Magnet The Mini-Magnet (Magneton) program encourages tech- esting to see that the VC policies and government financing pro- (Magneton) nology transfer from academia to industry via the mutual cooperation of individual companies and specific aca- grams, the spin-off of high technology companies (particularly in demic research programs. The program offers grants of the ICT sector) as well as their linkages with the global capital up to 66% of the approved budget with no requirements market reflect effective linkages and interactions among actors/ on royalty repayment. institutions that help facilitate the process of technology transfer Technological The technological incubators program was established in and commercialization. incubators 1992. The incubators program has annual total program program budget of USD 25–30 million to support business start- The OCS, Ministry of Economy plays a major role in introducing ups. The technological incubators program aims to sup- national innovation policies. In particular, the OCS is responsible port ventures in their first three years of operation. At for implementing the government policies with regard to in- present, the program is open to all Israeli start-ups to dustrial R&D supports. Table 3 summarizes the major innovation help them translate innovative ideas into commercial innovations. financing programs to support R&D undertakings in Israel. These R&D fund The R&D fund is the main financing mechanism of the fi innovation nancing programs have contributed to the growth of OCS to support all Israeli companies engaged in techno- Israeli economy and led the country to become the high-tech logical R&D activities. Grants are provided up to 50% of powerhouse. the total approved R&D expenditures. The R&D fund fi fi fi The technological incubators program supports the translation provides nancial supports to various scienti c elds such as communications, IT, biotechnology, etc. of ideas into commercial innovations. From its inception in 1991, TNUFA TNUFA program supports technological entrepreneurship the program had already created over 1700 companies through the and innovation by assisting business start-ups in the pre- government investments of around USD 650 million. The suc- seed stage. The program also provides assistance in cessful companies graduated from the technological incubators evaluating the concept’s technological and economic potential, patent proposal preparation, prototype con- program are, for example, Protalix – Meytav Incubator, D-Pharm – struction, business plan preparation, establishing busi- – Orit (now Incentive) Incubator, Compugen Am-Shav Incubator, ness relationships with industry partners. Grants are Sightline – Eltam Incubator, Remon Medical – Naiot Incubator, provided up to 85% of approved expenses with a max- Mazor – Technion Incubator, Contipi – L.N. Incubator, Imagine – imum of USD 50,000 for each project. Iris Incubator, Zoomix – JVP Incubator, Double Fusion – JVP In- NOFAR NOFAR program helps bridge the gap between basic and – – applied research in biotechnology. Grants are provided cubator, Lucid Ma'ayan Incubator, Aeronautics Orit (now In- up to 90% of project expenditure with the remaining 10% centive) Incubator. To date, the program provides incubating coming from outside sources. The maximum grant is supports to approximately 180 companies in various stages of approximately USD 100,000 per project and no royalties R&D. The success of the program implementation can be seen or repayments are required. from its ability to create approximately 70–80 new ventures each HEZNEK HEZNEK program is the government seed fund. It is a co- investment fund based on the government matching an year. investment in a start-up company, proportional to the Given the policy goal to portray the case of Israel in successfully investment of an investing entity. The investor is given an climbing the technological ladder to become a high-tech power- option to purchase the government shares in the start-up house, the analyses in Sections 4.1 and 4.2 above highlight the company at the initial price. Binational In- The Israel–US Binational Industrial Research and Devel- theoretical and practical contributions as follows. Theoretically, dustrial Re- opment (BIRD) program was founded in the early 1980s the study has made an attempt to fill the gap in the body of search and De- with the aim to promote and support joint, non-defense, knowledge with regard to the role of government policies in in- velopment industrial R&D activities of mutual benefit to the (private novation financing. The analyses, based on the cluster model Foundation sectors of the) two countries. The program offers funding ’ (Porter, 1990, 1998, 2001) and the national innovation system (BIRD) of up to 50% of each company s R&D expenses associated with the joint project. (NIS) concept (Lundvall, 1992, 1998, 1999, 2003) provide a better Britain–Israel In- The BRITECH fund was established in 1999. The program understanding of the government policies and innovation strate- dustrial R&D provides funding to support firms operating and head- gies (particularly the Yozma venture financing program) aimed at Foundation quartered in the UK and Israel on condition that at least advancing the industrial clusters, making Israel a high-tech (BRITECH) 30% of the R&D work must be done in either country. The

Table 3 (continued ) Table 4 Policy aspects to promote entrepreneurial ﬁnancing of Israel. Programs Description Source: The author's design.

BRITECH fund also provides financial supports of up to Policy initiatives of Israel 50% of the eligible R&D costs of joint projects. Israeli life science The Israeli life science funds aim to support the thriving Industrial innovation policies The competitiveness of Israel is a result of its funds industry of life sciences in Israel. The government pro- to promote entrepreneurial entrepreneurial culture and the government- vides an aggregate of USD 80 million to the funds as a financing led technology policies in venture capital limited partner of each fund. The government commit- (VC) financing. ments are matched by commitments of private sector The government-targeted policies and finan- investors amounting to a multiple of the government cing programs effectively triggered crowd- commitments. The funds invest at least 3 times govern- ing-in effects in terms of creating a quantum ment commitment in the biopharmaceutical sector. jump in VC investments and private VC sup- Eureka EUREKA is the pan-European intergovernmental program ply in the market (unlike the process of established with the aim to coordinate efforts by the crowding out private investments that took governments, research institutions and private sectors place in other countries). relating to innovation. Within the scope of this initiative, The cluster model The rapid growth of innovative information Israel provides funding equal to 50% of eligible projects. and communications technology (ICT) cluster Matimop, the Israeli Industry Center for R&D, is the na- is a result of domestic VC support. tional agency acting on behalf of the OCS as the Israeli The thriving Israeli high-tech clusters are the national program coordinator for Eureka. The program result of government-led policies in creating provides funding channels for Israeli companies to access VC industry with the financial support of R&D grants from the OCS. Yozma program. Bridging aid Bridging aid program offers support for the transition The national innovation sys- The government, through the Office of the program between R&D and manufacturing and marketing. The tem concept Chief Scientist (OCS), Ministry of Economy, program objective is to enable companies that have plays an important role in providing grants completed the R&D stage to manufacture a number of and financing to support R&D in collabora- prototypes for installation on the premises of potential tion with universities and industries to sup- clients, especially abroad. port the creation of Silicon Wadi – Israel’s Katamon Katamon program promotes water technology projects. Silicon Valley. The program encourages cooperation between industrial Effective linkages and interactions among the company, academic research group and water infra- various actors and institutions in the in- structure company. The project provides grants up to 50% novation system (under the lead of OCS, of project expenditure with no royalty payment Ministry of Economy in policy implementa- requirements. tion) facilitate the process of climbing the Sub-contracting The sub-contracting industrial R&D program supports the technological ladder to become a high-tech industrial R&D civilian R&D project undertakings for foreign companies, powerhouse. program by Israeli enterprises acting as subcontractors. The program aims to initiate joint ventures with foreign partners in order to assist Israeli companies market their techno- promoting innovation and driving Israel towards a high-tech logically advanced products abroad. The program pro- powerhouse. The analyses are carried out through the lens of vides grants of up to 20% of R&D costs. Exploratory The exploratory studies for industrial R&D projects pro- cluster (Porter, 1990, 1998, 2001) and national innovation system studies for gram supports studies of the market potential for new (NIS) (Lundvall, 1992, 1998, 1999, 2003). The analyses have shown industrial R&D technologies, prior to the investment of large sums in the that the success of Israeli economy is a result of strong govern- projects R&D stage. The program aims to assist start-up firms or ment-led policies to create Silicon Wadi – a model similar to Si- program those with limited R&D experience. The program sup- licon Valley in the United States. The high-tech clusters are driven ports 50% of the approved project costs, up to USD 30,000. by the government policies particularly Yozma and technological Europe's R&D The EU's R&D Framework Program (ISERD) facilitates incubator programs which make Israel a global innovative hub, Framework research funding in Europe, bringing together industrial second only to the US Silicon Valley. The case analyses have shown Agreement and academic research. The program offers Israeli com- effective linkages and interactions underlying the Israeli innova- (ISERD) panies and research organizations an opportunity to participate in jointly implemented projects with Eur- tion system which help facilitate the process of technology opean counterparts so as to help them better integrated transfer and commercialization. The government financing pro- into European business and scientific communities. The grams to support university-industry R&D projects have helped program aims to promote joint Israeli–EU R&D ventures. advance the industrial clusters, making Israel the high-tech The program provides grants to cover 75% of the full cost miracle. with real overheads for SMEs and 50% of the full cost with real overheads for large industrial partners. This study has made a theoretical contribution to the body of knowledge by filling the existing gap concerning scarcity of research linking the government policies to innovation financing. In miracle. Practically, the findings of this research provide a better respect of the practical contribution of this study, the case analyses understanding of the mechanisms to enhance innovative capacity provide a better understanding of the mechanisms for enhancing of nations. The case analysis of Israel gives insights into policy innovative capacity of nations that can be applied to other coun- measures and institutional interventions to harness the power of tries attempting to learn how to promote high-tech clusters. Al- VC financing in national industrial development. Developing though the use of a single case study may have limitations in terms of generalizability, the analysis provides important insights countries can learn and apply the policy initiatives from the case attracting the attention of researchers and policymakers around study of Israel to support entrepreneurial financing, national the world to learn the process of technological and economic economic growth and competitiveness (Table 4). catch-ups. Arguably, the case study of Israel is an exceptional one providing useful lessons for other countries to learn Silicon style of management and in particular how could Israel transform itself 5. Conclusions and policy implications from an underdeveloped economy towards a high-tech economy. The present study offers interesting avenue for future research. This study is concerned with the government policies for The inclusion of multiple case studies would allow more useful

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Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http: //dx.doi.org/10.1016/j.technovation.2016.02.001i