ICT – Expanding the Economic Influence

The ICT innovation system (Information and Communication Technology), the most advanced and developed in Israel, has for many years benefitted from a broad and advanced infrastructure that includes: skilled workers, a military system that produces advanced technologies and trains high-quality and experienced personnel, an entrepreneurial culture that yields hundreds of innovative start-up ventures each year, multinational corporations possessing experience, knowledge and a connection to the markets, and a designated and developed government and private finance system (mainly venture capital).

Nevertheless, Israeli ICT has suffered in recent years from two central weaknesses that have prevented it from surging forward. The first is the significant shortage of skilled personnel that serves as the central element fueling the innovation engine. This shortage constitutes an obstacle in the face of future growth and may even harm this field's competitiveness versus parallel systems around the world. One indication of this is the high employment cost of engineers in Israel, reflecting a low level of supply in relation to demand. As an illustration, between the years 2005-2015, the average salary in high-tech rose by 38 percent, the significance of which is even starker for the companies in this sector in light of the 13 percent appreciation in the value of the shekel against the USD during this period.

The system's second weakness is the gulf between the significant technological value it produces and the relatively limited economic impact on the Israeli economy. The Israeli innovation model is largely based on the creation of technological value, mainly in start-up companies and multinational corporations' R&D centers. However, the Israeli innovation system is still in the initial stages of developing efficient mechanisms to capture the economic value resulting from the technological value it produces. The result is that today, much R&D activity performed within the Israeli economy – mainly that in multinational corporations' R&D centers and start-up ventures – is the base for the creation of significant technological value in Israel, while the economic value is captured outside the country.

The ICT sector's economic influence can be expanded via three central steps. The first step is focused on expanding the supply of skilled workers to the sector (mainly in software) while fully utilizing the pools of potential labor in the Israeli market. These pools of human capital exist chiefly in sectors of the population in which the rate of participation in high-tech is relatively low – women, Arabs, Charedim, and older workers.

The second step is to assist further innovation-oriented companies to grow and expand in Israel as "complete companies". Alongside R&D, a complete company includes manufacture of advanced components, global technological support, product engineering and manufacture, design, global operation, accountancy, finance, logistics and others. The high economic influence of these companies is expressed mainly by their ability to employ large numbers of highly paid workers in different professions the fostering of whom is one of the innovation Authority's central strategic objectives. The welcome trend of growth companies' development, to which we referred in the 2016 report, testifies to the fact that the aspiration to increase the economic impact of Israeli innovation is not a mere dream.
The third step is the increase of economic value generated by the multinational corporations' R&D centers in this field. As will be detailed later in this report, multinational corporations possess a significant positive influence on the Israeli innovation system, with emphasis on the knowledge and expertise that they bring with them, and which trickle down to the remaining components of the innovation system. However, here too, the economic potential of the multinational corporations' activity in Israel has yet to be optimized. These corporations, responsible for approximately half of the corporate R&D investment in Israel, largely operate in Israel in the format of R&D centers with only limited financial influence within other circles of the Israeli economy. The more we succeed in creating appropriate incentives for these corporations to expand their Israeli activity to sections of the value change beyond just R&D, so their impact on the Israeli economy will grow.