BY JOSH KRAM 26 | BUSINESS HORIZON QUARTERLY // SUMMER here is a small framed black and white larger, developed countries like Japan, China, India, photograph hanging in IBM’s Israel Korea, Canada, and the United Kingdom, and headquarters, an impressive complex of attracting more than twice as much venture capital Tmodern buildings in the Tel Aviv suburb of Petach investment per person as the United States and thirty Tikvah, which shows a half-dozen bespectacled, times more than Europe. smiling young men and women standing arm-in-arm. !is was IBM’s Israel team in 1950, during the "rst More than one hundred American "rms have year of the company’s operations in a country that opened R&D operations in Israel and many more was not yet two years old. have acquired companies there, bringing Israel hundreds of billions of dollars in foreign direct Meir Nissensohn, Chairman of IBM Israel, said investment, creating many thousands of high- that even he can’t quite understand why IBM skilled jobs, and serving as a key catalyst for entered Israel back then, but he knew that it was a Israel’s own innovation boom. IBM is just one “pure business decision” not driven by nationalism of many global companies that have set up shop or religion. there, but its story is a telling one. Israel had just won a bloody war of independence In 1972, IBM set up its "rst research and against six Arab countries, in which nearly 10 percent development (R&D) center outside of the United of its population was killed just a few years after States. Today, this site remains IBM’s largest research World War II. !is was a country roughly the size lab in the world (beyond U.S. shores) and is joined of New Jersey, half-covered in desert, surrounded by by dozens of similar centers in cities across Israel that hostile neighbors, with no natural resources, and still employ more than 1,000 people. !e breadth of the in the midst of absorbing hundreds of thousands of center’s research cuts across industries and sectors. Jewish refugees from European and Arab countries. According to Nissensohn, the story goes beyond what !ese refugees lived in primitive shelters while the scientists are doing in the IBM facilities to the wider country faced chronic food shortages and a nearly technologically rich ecosystem in Israel that is IBM’s nonexistent economic infrastructure. real laboratory. Yet, in 64 years, Israel has evolved from a “We have a joint value proposition and work with hardscrabble economy relying on American companies across the country to identify technologies aid, tourism, and fruit exports into a hotbed of that we can together bring to market,” Nissensohn said. entrepreneurship and innovation. Israel’s rate of progress toward an innovation-based economy is !rough joint ventures and partnerships, IBM Israel nothing short of staggering. Today, Israel has the identi"es products that compliment the company’s highest density of start-ups per capita in the world, hardware and software capabilities. !rough producing more start-up companies than much partnerships and joint ventures, IBM brings those // Innovation Nation in the World’s Toughest Neighborhood | 27 solutions to the global market. Nissensohn estimates that !ey wrote that “Israel’s share of the venture capital IBM Israel plus its collaboration with nearly 150 Israeli market did not drop – it doubled, from 15 percent to companies contributes about $1 billion in revenue per 31 percent. And the Tel Aviv stock exchange was higher year for the parent company. on the last day of the Lebanon war than on the "rst, as it was after the three-week military operation in the Gaza What is more, Israel has continued to prosper and Strip in 2009.” foreign investment remains despite a multitude of wars and terrorist attacks. In their must-read book, Start-up !e word “enterprising” in Hebrew translates into two Nation: !e Story of Israel’s Economic Miracle, Dan Senor words: ba’al yozma, which literally means “master of and Saul Singer analyzed Israel’s economic growth in initiative.” !e story of Israel is about one of the most the early 2000s, during the second Intifada, one of the enterprising places in the world, jam-packed with deadliest periods of terrorism, followed by the second masters of initiative, men and women, who helped Lebanon war and a rain of Hezbollah rockets landing transform this country into an international pacesetter across northern Israel. for innovation and a veritable playground for cutting- edge technology, even amidst great challenge. Israel is 28 | BUSINESS HORIZON QUARTERLY // SUMMER having an impact on a wide range of industries, from "e U.S.-Israel commercial relationship is a growth energy to life sciences. For years, Israel has been a critical engine for both of our economies – creating jobs, innovation hub for so many of the American technology contributing to economic advancement, and enabling giants, such as Intel, with its more than 7,500 employees companies on both sides of the Atlantic to innovate, in Israel who have been responsible for some of Intel’s build, and grow new products that transform blockbuster hits. American auto giant General Motors industries and society. Yet, as the conversation in the and global consumer product giant Proctor and Gamble States continues to focus on how we can maintain (P&G) have innovation centers in Israel as well. our competitive edge, produce the most innovative companies, and create jobs for “We !nd technologies the best and brightest, there are everywhere in Israel,” said also lessons we can learn and Dr. Lital Asher, head of best practices we can glean from P&G’s Israel House of Israel’s success story in building Innovation. Dr. Asher up this enterprising nation: explained how P&G “WE FIND has leveraged homeland Y Signi!cant and e#ective security technology to spending on basic science and improve P&G’s ability TECHNOLOGIES R&D – "e Israeli government to understand people’s makes the highest investments behavior, relying on new in R&D in the world, totaling tools to provide insights EVERYWHERE 5 percent of the country’s into how, for example, GNP, compared with an people do laundry. IN ISRAEL.” American and an OECD average of 2.5 percent. Israel Dr. Lital said that has also developed innovative P&G realized Israel’s ways to increase its return on potential as a truly investment. Since 1997, Israel unique environment has ranked above Asia and for innovation and Europe in the percentage of its established a center that citizens working in R&D. collaborates and co-develops products with the Israel ecosystem: start-up companies, academia, industry Y Integration of high-skilled immigrants – More than and beyond. Last September, P&G announced a joint a quarter of the general Israeli workforce holds university venture between Duracell and the Israeli company degrees. Israel has progressive immigration policies to Powermat, a developer of wireless technology to charge further boost the strength of its human capital. During mobile devices without plugging them into a charging the early 1990s, nearly one million people immigrated source, which is introducing wireless charging stations in New York and has plans for national expansion. // Innovation Nation in the World’s Toughest Neighborhood | 29 to Israel from the former Soviet Union, increasing the 142 countries in university-industry collaboration for overall population by 20 percent. Nearly 40 percent of R&D and !rst in the quality of its scienti!c research those immigrants held academic degrees, many who institutions. What’s known as “Silicon Wadi” stretches are scientists, engineers and specialized technicians. from Tel Aviv to Haifa and is home to much of the high- Israel’s immigration policies encourage engineers, tech community in Israel. Modeled on Silicon Valley, scientists, and business professionals to come and stay this region grew up where it did because of a strong and build new companies. partnership between companies and elite tech universities and research institutions nearby, such as the Technion Y Incorporation of highly trained military veterans and the Weitzman Institute of Science. IBM’s own R&D and their innovations into the workforce – All Israeli facility was founded by an engineering professor who, men and women must serve in the Israel Defense Forces along with three researchers, was based at the Technion (IDF). Some serve in special operations units or tank in Israel’s early years; its largest center is currently divisions, while others are placed into Talpiot, an elite located on the Haifa University campus. What is more, IDF training force, or Unit 8200, the equivalent of as early as the 1960s, all of Israel’s major universities the National Security Agency, where they are part of had “technology transfer units” where scientists developing sophisticated scienti!c and industrial tools could patent and spin o# research or products for for protecting the Israeli homeland. Israel’s private sector commercial purposes. knows almost instinctively how to integrate graduates from a technological and progressive army that has Y Pro-active and targeted government support – spearheaded a high-tech boom by adapting cutting-edge Recognizing the importance of the technology sector defense technologies for civilian applications. "ese to the economic growth and welfare of the country, the graduates learn to work as teams and improvise under Israeli government has over the years provided signi!cant intense pressure, all while receiving formative training in incentives to encourage and support investment. the army’s technical units. Moreover, the formation of the Israeli venture capital industry—now second only in size to the United States Y Strong university-industry collaboration – "e – can be traced back to 1993, when the government World Economic Forum ranked Israel seventh among decided to establish a fund of funds known as the 30 | BUSINESS HORIZON QUARTERLY // SUMMER “Yozma Program.” Under that program, 10 new venture communities into Israel’s knowledge-based economy is a capital funds were formed managing $20 million each, of serious question.