Perspectives

The Israeli Technological Eco-system

A powerhouse of innovation

We are lucky to be sitting in one of the hottest hubs for innovation and technology in the world. With an outsized 6,000+ active startups and an economy dominated by industrial high-tech and entrepreneurship, Israel earned its nickname 'The Startup Nation'. At Deloitte, our goal is to scale up the local ecosystem both within Deloitte and to our global clients.

Disruptive innovation across various industries is rapidly changing the corporate landscape globally, creating new challenges and opportunities for business. Traditional business models are running the risk of becoming obsolete if they do not evolve at the same pace. Israel's unique ecosystem and innovation system are very successful at catering to these constant changes.

Israel is an entrepreneurial powerhouse and hotbed of pioneering technologies, profitable business opportunities, and high investment returns. For these reasons, it is no surprise that the world's leading multinational companies have all made the choice of Israel: Microsoft, Motorola, Google, Apple (three R&D centers), Facebook, Berkshire-Hathaway, Intel, HP, Siemens, GE, IBM, Philips, Lucent, AOL, Cisco, Applied Materials, IBM, J&J, EMC, and Toshiba spark the long list of over 200 MNCs who have realized that Israel is their ideal choice for investment.

Besides that, many multinational corporates have established innovation centers in Israel, some of which include Tata, Kodak, Citi bank, and many more.

So how does Israel manage to stay on top of technology in a variety of sectors? Moreover, what makes it so unique that causes so many international players come and seek the next innovation here?

Israel's unique society and culture, strong economy and government support, and "global-first" market approach are just a few of the factors that make Israel's innovation system one of the most successful in the world. In 2016 alone, Israeli startups raised a record $4.8 billion from investors, and high-tech and startup companies were sold for $10.02 billion to other companies or through IPO's. Israel is also home to the highest number of engineers per capita and has the world's 2nd highest R&D expenditure as percent of GDP (4.3%).

Additional attributes of the Israeli ecosystem include:

Highly innovative - Israel is world renowned as being the “start-up nation” and is the world leader for number of start-ups per capita—with 2,000 startups that were founded in the past decade—another 3,000 small- and medium-size startup and high-tech companies, 30 growth companies, 50 large technology companies, and 300 R&D centers of multinational corporations. Profit-driven Israeli innovations include a long list of market firsts such as disk-on-key technology, IP telephony, ZIP compression, the ingestible pill-size camera and many more.

Strong R&D capabilities - Israel ranked second in the world in R&D expenditure per capita. Israel invests about 4.1% of its GDP in R&D, which is the second highest ratio of any country in the world, after South Korea. The average among the OECD is 2%.

Educated and skilled workforce - Israel enjoys the highest percentage of engineers and scientists per capita in the work force in the world, and one of the highest ratios of university degrees and academic publications per capita. Israel has a high quality educational system and is among the most educated societies in the world.

 

Due to the mandatory military service, young people already receive a high technical training during their military services and get equipped with a high sense of responsibility and success orientation. On top of it, Israel has experienced several waves of high-educated immigrants from all over the world. Israel's creative, skilled, and ambitious workforce is one of the most obvious reasons leading executives turn to Israel to do business. In fact, Israel boasts one of the most highly educated, entrepreneurial, and multi-cultural workforces in the world, producing technologies, innovations, and research adopted around the globe and across sectors.

Government Support - R&D government support - The Israeli government founded the Technology Incubator program in the early 1990s. Today there are over 25 incubators across the country, all of which have been privatized. The incubators offer government funding of up to 85% of early stage project costs for two years. They nurture the companies from seed to early stage minimizing the risk to the investor. More than 1100 projects have so far graduated from the incubators, with over 45% successfully attracting additional investments from different investors.

Moreover, the Office of the Chief Scientist provides a variety of support programs on an annual budget of about 400 million dollars. The main program is the R&D Fund, which offers R&D grants of up to 40% of the approved R&D program.

Other programs operated by the OCS include bi-national funds (joint R&D programs with foreign counterpart such as China, Canada, USA, etc.), which are entitled to financial assistance of 50% of the Israeli company’s R&D costs.

Investment Support - The Investment Law enables foreign companies to benefit from a reduced company tax rate, and investment grants. Another incentive program offered by the ministry provides employment grants for R&D centers and large enterprises. The program offers a 4-year grant scheme covering on average 25% of the employer's cost of salaries for each new employee.

VC Industry - Israel's thriving start-up industry is complimented by a flourishing venture capital market. Israel’s venture capital industry has approximately 70 active venture capital funds, of which 14 are international VCs with offices in Israel. By far outperforming any other country in VC volume per capita, Israel's venture capital availability is a symbol of the breath of its innovative industries and of the highly efficient financial sector underpinning them.

A Flexible, Creative Economy - Flexibility and adaptability to change are widely considered primary factors affecting business performance. IMD's world competitiveness index in fact places this parameter among the leading indexes of economic competitiveness. Creativity and flexibility are the fuel of innovation, and a high degree of responsiveness to changing business environments is crucial to thriving enterprises in today's dynamic global market. Israel's ability to swiftly translate market demands into organizational action explains why Israel has consistently performed so strongly in the flexibility index and is broadly recognized as a capital of innovation.

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