world development report BACKGROUND PAPER Digital Dividends Best Practices and Lessons Learned in ICT Sector Innovation: A Case Study of Israel Authors Dr. Daphne Daphne Getz Getz and Dr. Itzhak Goldberg Senior Research Fellow, Head of the Center for Science, Technology & Innovation Policy Manager of the Data Center of the Samuel Neaman Institute Researchers Technion-Israel Institute of Technology Eliezer Shein, Bahina Eidelman, Ella Barzani Dr. Itzhak Goldberg Fellow, CASE Center for Social and Economic Research, Warsaw, Poland Researchers Eliezer Shein, Bahina Eidelman, Ella Barzani Samuel Neaman Institute Technion-Israel Institute of Technology world development report world development report BACKGROUND PAPER BACKGROUND PAPER Digital Dividends BestDigital Practices Dividends and Lessons Learned in Best Practices and Lessons ICT SectorBest Practices Innovation: and Lessons Learned in ICT Sector A CaseLearned Study in of ICT Israel Sector Innovation: A Case Study Innovation: A Case Study of Israel Authors of Israel Dr. DaphneAuthors Getz Senior Research Fellow, Head of the Center for Science, Technology & Innovation Policy Dr. Daphne Getz andAuthors Dr. Itzhak Goldberg and Manager of the Data Center of Samuel Neaman Institute, Technion-Israel Institute Dr. Daphne Getz and Dr. Itzhak Goldberg of TechnologyResearchers in Haifa, Israel Eliezer Shein, BahinaResearchers Eidelman, Ella Barzani Dr. Itzhak Goldberg Eliezer Shein, Bahina Eidelman, Ella Barzani Fellow, CASE Center for Social and Economic Research, Warsaw, Poland Researchers Eliezer Shein, Bahina Eidelman, Ella Barzani Samuel Neaman Institute Technion-Israel Institute of Technology This report is available online at www.worldbank.org/en/publication/wdr2016/background-papers This background paper was prepared for the World Development Report 2016 Digital Dividends. It is made available here to communicate the results of the Bank’s work to the development community with the least possible delay. The manuscript of this paper therefore has not been prepared in accordance with the procedures appropriate to formally-edited texts. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. world development report world development report BACKGROUND PAPER BACKGROUND PAPER Digital Dividends BestDigital Practices Dividends and Lessons Learned in Best Practices and Lessons ICT SectorBest Practices Innovation: and Lessons Learned in ICT Sector A CaseLearned Study in of ICT Israel Sector Innovation: A Case Study Innovation: A Case Study of Israel of Israel Authors Dr. DaphneAuthors Getz Senior Research Fellow, Head of the Center for Science, Technology & Innovation Policy Dr. Daphne Getz andAuthors Dr. Itzhak Goldberg and Manager of the Data Center of Samuel Neaman Institute, Technion-Israel Institute Dr. Daphne Getz and Dr. Itzhak Goldberg of TechnologyResearchers in Haifa, Israel Eliezer Shein, BahinaResearchers Eidelman, Ella Barzani Dr. Itzhak Goldberg Eliezer Shein, Bahina Eidelman, Ella Barzani Fellow, CASE Center for Social and Economic Research, Warsaw, Poland Researchers Eliezer Shein, Bahina Eidelman, Ella Barzani Samuel Neaman Institute Technion-Israel Institute of Technology This report will be available online at www.worldbank.org/en/publication/wdr2016/background-papers 1 Table of Contents Executive Summary and Key Findings ......... 5 1 Background and Sources for the Development of the ICT Sector in Israel ....... 8 A Brief History of Israel's Science, Engineering, and Technology Innovation ............................... 8 Economic Context ................................................................................................................................................. 9 Government Policies and Initiatives for the ICT Sector in Israel ...................................................... 10 Analysis of the ICT Ecosystem for Entrepreneurship in Israel ........................................................... 12 Case Studies of Successful ICT Start-Up Companies............................................................................ 12 Benchmarking and the Distinctive Ingredients that Make Israel a “Start-Up Nation” ............ 13 Conclusion and Lessons for the Emerging and Developing Countries ......................................... 13 Notes ....................................................................................................................................................................... 14 2 The Role of Government: Policies and Initiatives for the ICT Sector in Israel 15 Introduction .......................................................................................................................................................... 15 The Role of Government in Achieving Global Competitiveness ...................................................... 16 Education ............................................................................................................................................................... 18 Immigration .......................................................................................................................................................... 21 Investment Incentives and Capital Market Reforms ............................................................................. 23 Foreign Direct Investment (FDI) .................................................................................................................... 24 Government Support for R&D ...................................................................................................................... 28 International Support ........................................................................................................................................ 32 Innovation: Technology Incubators ............................................................................................................. 32 Notes ....................................................................................................................................................................... 36 3 Analysis of the ICT Ecosystem for Entrepreneurship in Israel ....... 38 Overview of Israel’s Silicon Wadi .................................................................................................................. 38 The Domestic ICT Market in Israel ............................................................................................................... 44 Financing Channels for the High-Tech and Innovation Industry ..................................................... 47 Telecommunications, Semiconductor and Software Industry .......................................................... 50 Empowering Society: ICT and Internet Usage ......................................................................................... 53 Cybersecurity in Israel ....................................................................................................................................... 56 Israel and e-Government ................................................................................................................................. 57 Notes ....................................................................................................................................................................... 59 2 4 Case Studies of Successful ICT Start-ups ....... 62 The Role of Failure and Success in Innovation: Two Case Studies.................................................. 62 Five Case Studies ................................................................................................................................................ 66 Conclusions ........................................................................................................................................................... 77 Notes ....................................................................................................................................................................... 79 5 Learning from the Ingredients that Make Israel a “Start-Up Nation: Replicability to Emerging and Developing Nations ....... 80 Comparison with a Similar Country: Singapore ..................................................................................... 82 5.1 Replication in Poland and Armenia ................................................................................................... 84 Conclusion ............................................................................................................................................................. 86 Notes ....................................................................................................................................................................... 86 6 Conclusions and Lessons for Emerging and Developing Countries ....... 88 Notes ....................................................................................................................................................................... 91 3 List of Figures Figure 1.1 2014 Venture Capital Funds Raised, 2006–15 (in US$ millions) ..........................................