Excerpt

By the end of the twentieth century, Israel was second only to Canada in the number of companies traded on the NASDAQ. It was second to none in the number of startup companies per capita. The companies that were established and operated within Israel attracted more venture capital dollar per capita than in any other country in the world (and  third in the world in absolute terms). Venture capital was drawn to invest in these new technologies, new ideas, and new applications that were being created at a rate of over 50 new companies per day. Israel was nicknamed ‘the land of milk and start-ups’ (The Economist), ‘The Startup Nation’ (Dan Senor and Saul Singer), and ‘Silicon Wadi’ (in a reference to Silicon Valley).

The rise of Israeli technology companies and their participation on the global stage was a result of unique characteristics and events that took place in the twenty years that proceeded the turn of the century. The massive immigration that followed the fall of the Soviet Union expanded the country’s population by over twenty percent within a less than a five-year period. The immigrants that came to Israel were highly skilled, exceptionally educated, and eager to succeed in their new country. A series of government initiatives encouraged the US venture capital industry to expand their operations to Israel. A newly liberated telecom industry, with massive military investment behind it, led to the development of cutting edge technologies and applications. And series of trade agreements allowed Israeli companies to compete in American and European markets. All of these events and government policies helped to develop and shape Israeli industry in a unique way. Today, Israeli technology has become the gold standard for innovation and excellence in the fields of communication, software, and security. The characteristics of today’s Israeli economy, its innovative solutions, its reliance on IP creations, and its entrepreneurial and global reach is very much the result of these events and the environment in which Israeli companies and its people grew up and operate in.

While Israel transformed into the ‘startup nation,’ other economies developed in different ways. During the 1990s, India underwent a series of reforms and investments in infrastructure. Although still considered lacking in the development of electricity, water, roads, and rail infrastructure, all of these areas were heavily invested in. During the Internet bubble that led up to 2000, heavy investments in undersea fiber optic cables connected Asia to the rest of the world. The fall that followed the economic boom resulted in the auction of cheap fiber optic cables at one-tenth of their original price. This development resulted in widely available low-cost communications infrastructure. All of these investments and events, not to mention a swell of available talent, resulted in India becoming almost overnight the center for outsourcing. The country began to host everything from call centers to basic R&D activities. During the decade that followed, the Indian economy grew at admirable two-digit rates. Yet the engines of the Indian economy reduced gear after some time. Investments in infrastructure there have declined, reforms have stopped, and red-tape-bureaucracy has returned. High inflation combined with a new shortage of talent has resulted in a salary hike that has reduced the country’s main source of competitive advantage. Ten years later, foreign direct investments are halved (as of 2011) and the country’s GDP growth rate has been reduced by thirty percent (1990–2000 compared to 2000–2010).

 

Like India, the engines that drove Israeli economic growth could not work forever and could not increase their overall output. Despite continuing startup activity,
Most countries around the world would trade for Israel’s economic structure, innovation, and entrepreneurial spirit in a heartbeat. Yet not being able to reproduce its success across industries and not being able to transform companies into large, sustainable ones has taken a heavy economic toll. Small companies may have a reputation of being quicker to react to events and more innovative, but this reputation has little basis in reality and no economic data to support it. By comparison, large companies generally enjoy higher productivity and create more intellectual property. They enjoy economic of scale and for that reason are able to produce more products per dollar spent. In Europe, manufacturing companies with 250 or more workers are 30–40% more productive (per employee) than ‘micro’ firms with fewer than ten employees. Size also creates more room for innovation. Large companies that have developed a collaborative environment are able to encourage innovation, which generally emerges at the intersections of functions and disciplines. In addition large companies that sustain innovative cultures provide their employees more resources to try out new things and are also more tolerant of failures, which is another big part of innovation. Innovation is not about having one great idea, but about having a lot of bad ideas that can be experimented with and whose mistakes can be educative. Big companies are able to commit to the investments that are necessary for innovation and to go through processes of trial-and-error. Big companies are able to tackle big problems. It is easier for an engineer at a large multinational to devote himself completely to a problem when he isn’t asked to help fix the CEO’s computer. In addition to being more productive and innovative, large companies offer better wages and create more jobs. The opposite notion that startup companies create more jobs has little statistical support. It is true that a new company creates new jobs, mostly because it didn’t exist before, but statistical data show that, after one year, larger companies create more jobs and at a faster rate than smaller ones.Israel has yet to produce the giants of Silicon Valley. Companies on the scale of

Apple, Google, Cisco, AMD, and Intel have not emerged from the Israeli Silicon Wadi, nor have companies half their sizes. Israel has also not been able to duplicate the success of its communication and security sectors in other industries and sectors. Despite investments in biotechnology, nanotechnology, and other industries, there has yet to emerge an industry with the same success characteristics as the ones that drove the Israeli success of the late 1990s.

For nation’s economies, the demographic characteristics of its businesses are very important. The recent economic crisis has demonstrated that countries that are based on small and micro businesses are less resilient to external shocks. In countries such as Greece, Spain, Portugal, and Ireland, the lack of resilience of these companies created a domino effect that has led to a long and painful recovery.

Despite this economic data, policymakers worldwide have developed a fixation on small companies. Today a large part of policymakers’ initiatives are geared toward supporting such companies. The lesson from the last two decades of economic downturn is that what matters most is economic growth, regardless of size. Growth matters because it enables resilience in the event of economic shock.

What’s next for the Startup Nation is now available at selected retailers.

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