Israel: Small Country, Innovative Giant

Israel may be a tiny country, but it is a major force in technology, and research and development

Israel has become a global technological and entrepreneurial powerhouse. The recent Bloomberg Innovation Index, an annual ranking of countries that measures performance in research and development, technology education, patents and other marks of technological prowess, listed Israel at #5 in the world. South Korea, Germany and Finland (which are also home to companies represented by SGR) ranked first, third and fourth, respectively. The U.S. ranked sixth. Digging into the details, Israel ranks second in research and development, and fourth in post-secondary education and research personnel. For a number of years, Israel has ranked at or near the top of foreign countries in terms of the number of companies listed on the Nasdaq.

So, how did this little State of Israel, with its population of eight million people (by comparison, the population of the Atlanta metropolitan area is 6.1 million), generate enough business to be of interest not only to SGR, but also to many of the world’s premier global companies?

Understanding the business success of Israel requires a suspension of the traditional way of looking at things. Successful countries often have valuable natural resources, substantial size, a strategic geographic location, or some combination of these attributes. Until the discovery of natural gas deposits off of Israel’s coast several years ago, which are still in the early stages of development, Israel had few valuable natural resources. The majority of the land area of this tiny country is desert. In the center of the country, where most of the population lives, is an area where the width of Israel is, according to one former governor and U.S. president, smaller than the length of the driveways of many Texas ranches.

There are plenty of countries that are small, located in stressful geographic areas, lack substantial natural resources or have other challenges. So what has made Israel so successful? It was not always this way. From 1979 to 1985, Israel had triple-digit annual inflation, peaking at 444.8 percent in 1984. In that year, per capita GDP was under $12,000 annually. Even today, wages remain very modest, with the June 2015 data showing the equivalent of $2,620 per month in gross income. Even so, housing prices in many parts of Israel rival Manhattan, and automobiles generally cost about twice the price of the same model in the U.S.

Israel’s technological prowess – some say its “economic miracle” (in the view of Dan Senor and Saul Singer, authors of Start-up Nation) – came precisely because Israel and its citizens had no choice but to confront its challenges head-on. Learning to confront adversity was a matter of survival, and led to a combination of attributes that are collectively unique. In Israel, one must achieve success with the resources at one’s disposal, not the resources one would wish to have.

Trying and failing is not a source of embarrassment in Israel. Rather, it is looked upon as a learning opportunity, with the experience gained leading to a higher probability of future success. Thus, taking risks in order to achieve success is culturally accepted. When the neighbors aren’t friendly, your country is only nine miles wide in some places and your back is against the sea, you learn several key things, which have become culturally ingrained for Israelis. Goals must be accomplished quickly. Innovation, including challenging the accepted norm, is essential. The ability to collaborate with one’s colleagues to accomplish a needed outcome can, quite literally, mean the difference between life and death.

In Israel, most adults, both men and women, serve a period of compulsory military service immediately after high school. After military service, Israelis take these experiences with them to the private sector – first in their university studies, and then in business. Many highly successful start-up companies were founded by those who served together in the Israeli military, including elite combat units and Unit 8200, which is Israel’s corollary to America’s National Security Agency.

U.S.–Israeli Economic Ties

The benefits of the U.S.-Israel relationship have been very much a two-way street. A drive along a main highway leading north from Tel Aviv could easily confuse an American driver into thinking they were driving in Silicon Valley. In fact, the area has a nickname: “Silicon Wadi.” On building after building are the signs of major U.S. companies. Intel is Israel’s largest private sector employer, with close to 10,000 employees, and Israel is reputed to be the location of its largest R&D center outside of the United States. Apple recently opened its first non-U.S. R&D center in Herziliya, and now has nearly 1,000 employees in the country. Multiple times a year, acquisitions of Israeli companies and/or the establishment of technology development centers or incubators are announced by the likes of not only Intel and Apple, but also Microsoft, Medtronic, Phillips, IBM, Cisco, Google, HP, Oracle, GE, Qualcomm, Motorola – and the list goes on.

Similarly, very few Americans go through their day without benefiting from technology developed or enhanced in Israel. The development of Microsoft Windows, Intel computer chips, instant messaging, the cellular telephone and many medical devices all have significant research roots in Israel.

Credit for developing the ubiquitous USB drive that we know today is generally given to innovators at the Israeli company M-Systems, which was purchased by Sandisk. Development of capsule endoscopy – the Fantastic Voyage-like swallowable pill that takes and transmits high-resolution images of the digestive tract –was developed by Given Imaging, now owned by Medtronic. Robotic parking garages, to resolve the parking issues in high-density/high-property-value areas, are being built in U.S. cities by Unitronics. High-end manufactured quartz countertops are now being manufactured in the U.S. by Caesarstone. High-performance fabric created by Tefron is found in our clothing. And a much-needed alternative to the dreaded preparation for the highly important colonoscopy examination will soon be available from the Israel/U.S. company HyGIeaCare. (SGR has been pleased to count Given Imaging, Unitronics, Caesarstone, Tefron and HyGIeaCare among its clients.)

In addition, many Israeli innovations are present in upgrades to U.S. Air Force fighters and Army equipment. For example, the Israeli company Elbit developed the helmet-mounted display system for the new F-35 Joint Strike Fighter, and Israel’s Plasan will be one of Oshkosh Corporation’s major subcontractors in the manufacture of the new light multi-purpose military vehicle, which will replace the famous Humvee for U.S. military forces.

Famed investor Warren Buffett has only invested in one country outside of the United States, and that is Israel. He had this to say when announcing that his firm, Berkshire Hathaway, had paid $2 billion for 20 percent of the stock of Israeli toolmaker Iscar (Berkshire Hathaway had previously purchased the other 80 percent): “Israel reminds me of the United States after its birth. … The determination, motivation, intelligence and initiative of its people are remarkable and extraordinary.”