Israel As Incubator
Maureen Farrell | Forbes
The global downturn has only whetted the appetite of policymakers, business leaders and universities seeking to create the next Silicon Valley. There's no clear consensus on what cultural, societal or academic roots came together to make the area outside San Francisco such an incubator for high-growth companies, and its success has been even more difficult to replicate. Some countries have figured out how to attract large multi-national corporations–through cheap labor, like China, or by erasing corporate taxes, in the case of Ireland–but few countries or locales have been able to build the next Google, Microsoft or Hewlett-Packard.
The glaring exception: Israel. A case for the country as the next Silicon Valley can hardly be disputed: The figures are staggering. It has the highest density of start-ups in the world–3,850, or one for every 1,844 Israelis. And the tiny nation, with just 7.1 million people, has the most non-U.S. Nasdaq-listed companies in the world–more than China, India, Korea, Japan, Canada or the entire European continent. Foreign affairs analyst Dan Senor and Jerusalem Post editorial page editor Saul Singer explore this phenomenon–largely ignored by researchers and historians–in their new book Start-Up Nation: The Story of Israel's Economic Miracle. Their central, compelling, question: How has Israel, despite every imaginable obstacle, generated so many high-growth start-ups?
The answers make for an engrossing narrative but may frustrate those looking to follow Israel's lead. The “start-up nation” hasn't been nurtured. Instead it's been fomented by a host of factors that no other country or locale would want.
Singer and Senor cite estimates that Israel has lost out on $100 billion in opportunities because of boycotts on Israeli goods, terrorism and warfare. But, the authors argue, living under the constant threat of terrorism, surrounded by hostile neighbors and with few stable existing industries and an influx of immigrants has given Israelis traits essential to entrepreneurship–such as risk taking, a positive attitude toward failure and an inclination to question authority. Isolation, for example, has forced Israelis to travel to far-off places in order to cultivate business relationships, poising Israel to profit from the boom in Asia.
Throughout the book, the authors keep coming back to the Israel Defense Forces to understand innovation and entrepreneurship in Israel, and these stories are among the most engrossing in the book. The military is the great equalizer in Israeli society: All citizens must enter the military at age 18 and serve for two to three years, and the reserve forces are an active part of the military. “Hierarchy,” the authors point out, “is naturally diminished when taxi drivers can command millionaires and 23-year-olds can train their uncles.” Rank doesn't mean much, as Israeli forces regularly vote to oust their unit leaders. Saluting is rare, and all soldiers, regardless of rank, greet each other on a first name basis.
Moreover, in the elite Israeli units, every evening the entire group sits down for 90 minutes to debrief all the day's battles and activities, look at mistakes and learn from them. The military structure they describe bears little resemblance to the U.S. military or any other. Since all citizens serve in the military, it creates an automatic network for entrepreneurs once they become civilians who provide a ready source of capital, employees and ideas for new companies.
The authors also dig into specific government policies that have fostered the start-up culture as well as some glaring mistakes along the way. Israeli suffered a “lost decade” from the mid-1970s through the mid-1980s, following the Yom Kippur War of 1973 when the government meddled in all private banking industry and raised taxes. Immigration to Israel declined and the country was hit by hyperinflation. Learning from mistakes, the government found ways to invest in start-ups. One example: the Yozma Fund, a partly government-backed, partly privately funded venture capital fund that, since its inception in 1993, has spent $170 million to fund 40 technology companies.
While Senor and Singer introduce a cast of interesting characters and paint a rich portrait of an innovative society, the book suffers a bit from haphazard structuring. The narrative frequently jumps around through history, industries and ideas within individual chapters and sections, obfuscating their often thoughtful points and detracting from the overall engaging storytelling.
But most disappointing, and perhaps surprising, is that the authors ignore two elements that have played a huge role in Israel's economic history: the ongoing Palestinian conflict and U.S. foreign aid. Senor and Singer discuss Israel's wars and terrorism generally but barely mention the word “Palestine.” Furthermore, they never address how the nearly $3 billion in foreign aid that Israel receives annually from the U.S. has affected Israel's economy. While much has been written on both these subjects, the story of Israel's economic miracle is simply incomplete without them.
Despite these holes, the book is worth reading to understand not just Israel's history but the history of capitalism and innovation. Capitalism, the authors remind us, can build booming economies, spawn ideas and give people a way to take big risks. Fail and try again. With the scary state of the world economy, it also provides a window of hope for so many suffering locales around the world: Israel has thrived not despite its obstacles but because of them; maybe other places can too.