A report from a visit to Israel's innovation system in challenging times

Last weekend, I had the opportunity to visit Israel—not exactly a routine visit during these times. I have visited Israel and our R&D Labs quite often, but this time, it certainly felt different.

Despite the challenges faced by the nation, I was surprised to hear in a meeting with the CEO of Start-up Central Israel, Avi Hasson how robust the economy is (GDP growth in 2023: 3.8%) and how much the hi-tech industry contributes to national growth. According to him, 40% of Israel’s growth comes from this industry, contributing 18% of the overall GDP and nearly half of Israel’s exports. Other industry sectors seem to be becoming increasingly irrelevant. In terms of startups per 100K inhabitants and R&D investment (5.6 % of GDP), Israel ranks #1 among all OECD countries. This is astonishing, to say the least. I still remember times when my economics teachers at school used Israel as an example of hyperinflation and failed fiscal policies. Israel’s per capita annual product increased from $400–$500 around the time of its establishment to $52,169 in 2022.  

Where did this success come from, and how did Israel develop this unique type of results-driven “impatient innovation,” to quote Avi? Can this success be emulated by other nations - specifically those facing economic difficulties?

A closer look at Israel’s high-tech sector

High-tech now accounts for 48.3% of all Israeli exports, totaling $71 billion. This sector has become the most significant contributor to the economy, doubling its output from 126 billion shekels in 2012 to 290 billion in 2022. The startup ecosystem grew fivefold between 2013 and 2023, raising capital totaling $95 billion.

Due to its investments in R&D and innovation, Israel is gaining global recognition as a “startup nation.” It has the second-largest number of start-ups (after the United States) and the third-largest number of NASDAQ-listed companies. With 2,000 start-ups founded in the past decade, it is the world’s leader in startups per capita. In 2022, Israeli start-ups raised $15.9 billion in 953 funding rounds. While this represents a decline of almost 45% in total investment compared to 2021, 2022 witnessed similar declines worldwide, although the trend was and more robust in Israel.

Besides Israel’s well-known efforts in cybersecurity and mobility, in my view, four other sectors stand out:

1.       Health tech

Israel boasts a robust and data-driven healthcare system, spearheaded by both public and private institutions that excel in research and medical advancements. Additionally, the country is renowned for its thriving health tech ecosystem. In fact, startups within this sector successfully secured about $1.5 billion in funding last year.

2.       Agritech

Given its harsh climate conditions (about half of Israel is desert) and limited natural water resources, Israel has emerged as a prominent player in the fields of water management, irrigation solutions, and precision agriculture. It stands out as one of the few nations that have successfully reversed desertification and established sustainable agricultural practices in arid environments. While the capital of $550 million raised in 2022 seems to be relatively low, agritech is still an important export product, with an increasing number of countries, including South Africa, Ghana, Chad, and Southeast Asian countries, importing solutions from Israel.

3.       Fintech

Fintech is a crucial sector within the start-up ecosystem, making a substantial contribution to Israel's GDP growth. While many companies concentrate on trading, investment, and payment solutions, there is also an increasing number of young companies focusing on enterprise solutions, risk management, and regulatory compliance.

4.       Climate tech

Climate tech startups focus on a wide range of business goals, including waste management, carbon reduction, and clean energy production or optimization. According to Bayer, a German Agro-Chemical Firm, climate tech raised $6.8 billion between 2018 and 2022, making it one of the most vibrant sectors in the startup ecosystem.

Overall, the start-up ecosystem seems to continue to strive, rebounding from the dive in 2022 and expanding its contribution to the Israeli economy. By all measures, the country’s high-tech and startup landscape is a great success story. However, the economy’s heavy dependence on the high-tech industry makes it vulnerable to disruptions in this sector.

Beyond the startup system, an ever-growing global R&D presence

Avi Hasson and Professor Uriel Reichmann, dean of Reichmann University, spoke to me about the growing presence of global R&D in Israel. Besides domestic tech companies, international companies contribute to the country’s high innovation intensity. Many prominent international companies, including SAP, Intel, Microsoft, Cisco, IBM, and Apple, have established R&D centers in Israel. SAP Labs Israel delivers cutting-edge innovation since more than 25 years!

The R&D boom also demonstrates Israel’s extraordinary innovative talent and highly skilled workforce. While I was aware that Israeli universities and research institutions consistently rank among the best in the world, my conversation with Prof. Reichman offered me a deeper understanding of Israel’s focus on innovation and talent, as well as its development capabilities.

The recipe for success

I’ve come to realize that Israel’s transformation into an innovation-driven economy was facilitated by a global perspective, well-defined objectives, and a skilled workforce. However, this transformation has been a long-term endeavor rather than a quick fix.

• It’s a marathon, not a sprint.

An innovation-driven economy requires foresight, sustained funding, policies, and commitment from all stakeholders, including the government. Israel’s innovation system was built through long-term measures and consistent prioritization of economic policies, which have remained unaffected by political changes. This has fostered predictability and encouraged entrepreneurial risk-taking.

• Talent is intrinsic to a nation’s sustained development.

Israel benefited from highly skilled and motivated immigrants, particularly from Eastern Europe, in the 1990s. Furthermore, the country’s top 10 universities continuously contribute to a pool of talented engineers characterized by confidence, optimism, and a lack of fear of failure. They are risk-takers who firmly believe in their ideas. Moreover, a sense of urgency to innovate faster to stay ahead permeates this energetic and skilled community.

• Israeli start-ups have a global perspective.

US, Chinese, and Indian start-ups typically focus on solving local problems using innovative technologies and seeking funding from local investors. They often define their markets based on their countries’ borders. Of course, 350 million potential users in the US and 1.3 billion in India or China are impressive figures. However, the solutions offered are often highly customized to local conditions, making their export difficult or impossible. In contrast, in a small country with a population of around 12 million, Israeli start-ups have adopted a global mindset. They aim for global users, funding, and applications, often leading to greater success in international markets. About 90% of the funding for Israeli startups comes from international sources. Moreover, Israeli start-ups engage in a wide range of industries, reflecting a diverse range of ideas.

Maintaining ingenuity and creativity in a changing environment

Israel’s educated and highly skilled workforce and entrepreneurial culture create an environment conducive to technological breakthroughs. With flexibility and adaptability playing crucial roles, Israel ranks high in economic competitiveness. Both companies and people have the capacity to transform challenges into opportunities and produce groundbreaking solutions, leading to an impressive array of global market–leading innovations.

I am a firm believer in globalization, and I have always believed in the importance of adopting a global view from day 1 of any innovation endeavor. The wider the diversity and the broader the scope of ideas, the better able we will be to navigate the complexities of global markets and economic and environmental challenges. Working together and sharing innovations across all nations will benefit us all.

(Disclaimer: The ideas and opinions expressed in my LinkedIn posts, articles, and profiles are my own and not those of my current or previous employers or any organizations with which I am associated. All comments on my posts exclusively express the views of their authors.)