Published in: 2009
Israel has the highest density of innovation and entrepreneurship in the world, a total of 3,850 start-ups, one for every 1,844 Israelis. The country also has the highest density in the world of engineers and R & D spending as well as more companies on the NASDAQ stock exchange than all of Europe. Almost half of the world’s largest technology companies have bought start-ups or opened research and development centers in Israel. In 2006, Warren Buffett broke his decade-long suite of not buying foreign companies with the 80% acquisition of Israeli Iscar Metalworking (for $4.5 billion).
“I’m not Jewish, but Israel reminds me of the United States after its birth. The determination, motivation, intelligence and initiative of its people are remarkable and extraordinary. I’m a big believer in Israel’s economy.” – Warren Buffett
YOUNG AND HUNGRY. Since its founding in 1948 and the number of inhabitants has increased from 0.8 to 7.1 million in sixty years. Immigrants do not mind restarting and adversity increases ingenuity. Foreign-born citizens of Israel today account for over a third of the country’s population and Israel is home to more than seventy different nationalities and cultures. A nation of immigrants is a nation of entrepreneurs (applies to both the United States and Israel). 45% of Israelis have a university degree, which is among the highest percentages in the world.
SURROUNDED BY ENEMIES. Israel’s neighbors Lebanon, Syria, Palestine, Egypt and Iran have, to a greater or lesser degree, stated goals of destroying their neighbor. With limited ability to transport by land (as well as expensive shipping costs to other markets due to distance), it has been natural for Israelis to develop the Internet, software, computers and telecommunications areas. Every major telephone company in the world depends on Israeli telecom equipment and software.
MATTER BEFORE PERSON. The compulsory military service is at least 18 months where the inhabitants are brought up in a culture of treating all results – both successful and unsuccessful – as value-neutral. As long as the risk is taken intelligently, and not ruthlessly, there is something to be learned. In the military, taxi drivers can be the boss of businessmen and 23-year-olds superior to their uncles. Israeli soldiers are not defined by rank, they are defined by what they are good at, and this de-dramatized view of authority is a catalyst for innovation.
THE FIRST BIG STEP. From 1948 to 1970, GDP per capita quadrupled while the population tripled – despite involvement in three major wars. From 1950 to 1960, Israel grew just under 10% annually. During the early development stage, there were easily identifiable opportunities for large-scale investments: roads, water systems, factories, ports, electricity networks and housing construction. In retrospect, it is clear that Israel’s economic performance occurred in part due to government interference. Per capita income relative to the United States increased from 25% in 1950 to 60% in 1970.
ISRAEL’S LOST DECEADE. From the mid-1970s to the mid-1980s, Israel’s “lost decade” lasted. Part of this was due to rising oil prices and reduced immigration. The cars on the roads were bad imports or bad domestic productions. The banking system and the government’s financial regulations were as outdated as the car industry. It was illegal to exchange dollars except at banks and holding a foreign bank account was illegal. Inflation rose from 13% in 1971 to 111% in 1979. Israeli inflation rose to 133% in 1980 and to 445% in 1984. A series of reforms then got the country back on track.
THE SECOND GREAT LEAP. The second major step was from 1990 to the present, during which time Israel was transformed into a leading center for global innovation. Unlike other small and endangered countries such as South Korea, Singapore and Taiwan (all with good growth), none of them have created an entrepreneurial culture comparable to Israel’s. After the financial crisis, the focus on innovation has become more important. When entrepreneurs succeed, they revolutionize the markets. When they fail, they still maintain existing ones with constant competitive pressure, thus stimulating progress.