Innovation Authority – Strategy and Policy

Over the years, the State of Israel supported the development of a thriving innovation ecosystem by providing various tools to support industry R&D. The government’s innovation policy had many achievements and today, Israel is considered a leading innovation hub, boasting exceptional entrepreneurial spirit, extensive investment in business sector R&D, advance scientific research and a mature venture capital scene. The Israel Innovation Authority continuously monitors development in the Israeli innovation ecosystem and updates its policy and industry support tools accordingly. The Innovation Authority’s Strategic and Financial division provides continuous support to such operation by conducting research, planning, evaluation and budgetary control activities.

What is innovation?

The world is changing at a rapid pace; whole industries vanish while other suddenly appear in their stead. A market where companies remain stagnant and where new production lines or innovative products and technologies for existing manufacturing industries are not developed will have difficulty competing in the global market. Therefore, any market interested in maintaining a competitive advantage must encourage companies to constantly engage in “creative destruction,” look for new products and technologies, and build its future competitive anchors. The constant search and its implementations in R&D are the embodiment of innovation, which is the ability to provide better or more appropriate response to existing needs of identify new needs and markets for which one can created a new product or service. This ways, the products of innovation create an added value that is beneficial for the consumers and provide a channel for economic development for the manufacturers.

The OECD defines innovation as:
An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations. (Oslo Manual)

Why governmental intervention is needed for the promotion of innovation?

In a modern economy, innovation is the key for financial growth. However, part of the characteristics of research and development (R&D) activities – such as technological spillover and a high level of risk – result in a lower financial benefit to the investing business entity compared to the overall benefit for the market in general. Subsequently, private investment in R&D may be lower than what the market views as an optimal level of investment. In order to overcome these market failures and reduce the companies’ risk, a government intervention to “compensate” these companies and encourage their investments in the required R&D is required. Most prominent market failures include:
Knowhow and technology spillover
Knowhow and technology tend to spillover outside the organization creating them. This spillover can come about in numerous and diversified manners, such as: transfer of knowhow stemming from joint R&D activities between various companies, in a manner that is not directed or controlled such as integration and implementation of new technologies; transfer of employees from one company to another etc. Knowhow spillover means that the company that developed a certain knowledge will not get the full return for the many efforts they invested in R&D, as people outside the company, who access their knowhow, will pick the fruits of their labor.

Risk and uncertainty

R&D projects are inherently risky but it is also difficult to evaluate the level of their risk. Therefore, they involve a high level of uncertainty, which can exist on two levels: technologically, uncertainty regarding scientific and technological ability to produce and implement the starting ideas and theories; business wise, uncertainty regarding future demand of same technological developments, especially those developing a product for a completely new niche market. Statistics indicate that usually, failure rate exceeds success rate, and every success comes after a long line of trials and errors. Therefore, even though this rocky road is vital for the market to achieve competitive advantage, on an individual corporate level, considerations of short-term profit and loss may result in altogether avoiding risk, which may create a benefit for the company in the long-run.

Risk evaluation made difficult by uncertainty is much more acute for the various investment entities. In general, technology developers will have greatest information, compared to an investor, regarding the technological potential and its success rate. Such knowledge gaps, that can be bridged only partially, makes investing in technology companies difficult.

In such reality, lack of governmental involvement will result in a situation where private investment in R&D is significantly lower than socially desirable, as demonstrated by the Economy’s Nobel Prize laureate, Kenneth Arrow who’s claim was empirically proved by dozens of researches.

In light of the above, public support of business R&D in various forms is customary in all developed nations. The purpose of governmental involvement in this area is to ensure optimal flow of knowledge in this market. The purpose of governmental activities is to increase companies’ R&D expenditure to a higher level than would be made possible solely based on profit-loss considerations, by removing investment blocks or by providing direct support in R&D activities, so that at the end of the day, companies will see higher yield and choose their investment accordingly.

Government support toolkit usually include a combination of direct and indirect support measures. Direct measures include direct government investments in the form of grants or R&D loans dedicated for the business sector or for inter-government R&D activities such as, military R&D or the acquisition of technologies. Indirect support tools mostly include various tax incentives for companies dealing with R&D and innovation.

Israel’s innovation eco-system

Israel has rightfully earned the name of “Start UP Nation” following the success of many Israeli Startup companies who positioned themselves in the international market as making breakthroughs in numerous markets, including communication, internet, medical systems, agriculture, biotechnology, security, water desalination, digital printing and more. The quality of the human capital, entrepreneurial culture and bold innovation spirit along with government commitment to support breakthrough R&D activities, position Israel at the global front of technological entrepreneurship.

World leaders in research and development
Israel is ranked #1 in private R&D expenditure as percentage of GDP – about 4.3% (as of 2016), of which 84% comes from the private sector – the highest among OECD countries, reflecting the prospering private sector innovation ecosystem. Israel is also ranked #2 at the Innovation Index of the Global Financial Forum (Global Competitiveness Report, 2016-2017), that includes parameters such as scientific research institutions, business sector R&D expenditures, academy – industry cooperation, scientists and engineers pool and the number of patents in ratio to the size of the population.

Thriving Technological entrepreneurship
Israel’s thriving technological entrepreneurial activities draws investors and mega companies from all over the world who are at the forefront of global technology. Over the years, this activity was responsible for numerous success stories of both entrepreneurs who made a huge exit as well as entrepreneurs who established a large and leading company based on an innovative technological development. Israeli entrepreneurs are known for their creativity, high skills, audacity, and multidisciplinary thinking.

Today, Israel is ranked #1 in Venture Capital investments as percentage of GDP. Some 5,000 Startup companies are active in Israel and a net of 600 more are launched on an annual basis. In 2006, Israeli high tech firms raised $4.8 billion from venture capitals and other investors. Israel is ranked #3 in the number of companies listed on NASDAQ, following superpowers such as the USA and China.

Involvement of multinational corporations
During the last few decades, over 300 multinational corporations operating at the forefront of technology selected to establish R&D centers in Israel, some are even operating several centers in various fields of development. These  R&D centers account for about 50% of the business enterprise R&D expenditure. Over the years, the multinational corporations who operate R&D centers in Israel acquired a total of 100 Israeli companies. A number of them, such as – Intel, Microsoft, Broadcom, Cisco, IBM and EMC acquired over ten local companies over the span of their operation in Israel. This bustling activity feeds off the many of the Israeli innovation ecosystem assets: leading research, skilled personnel, entrepreneurial culture, technological leadership and a well-established ecosystem.

Effective government support of innovation

Israeli government’s support of technological innovation has a significant bearing on the growth and prosperity of the Israeli innovation ecosystem. For decades, the State of Israel encouraged technological entrepreneurship and investment in industrial R&D through various programs it operated via the Office of the Chief Scientist, and continues doing so, even more vigorously, through the Innovation Authority.
A research conducted by Prof. Shaul Lach of the Hebrew University in Jerusalem’s (2008) examined the impact of government support on innovative R&D in the business enterprise sector. This research indicates that the direct result of governmental support in R&D is the creation of new research of up to two or three times higher value than the amount of the initial governmental grant, even in the industrial and software markets. This research further indicated that governmental support creates an added value to the industry which is five to ten times higher than the governmental investments, and that these investments do not push private investors away, rather create a significant and separate addition to the Israeli R&D.

Complete and well connected ecosystem of innovation

Each one of the above-mentioned pillars plays a significant role in Israel’s growth as a global leader in the field of innovation and technological entrepreneurship. However, their combination into a complete and well-connected ecosystem is perhaps the essence of our success story and what allows the continued prosperity of the Israeli innovation system.