One in five Israeli households, and one in three Israeli children, live below the poverty line in the start-up economy. A new study, “State of the Nation 2016,” based primarily on Taub Center research, reported that Israel’s economic slowdown was already in motion. The study highlighted the reality of a start-up-frenzied economy, reflecting a healthy growth rate, yet at the same time exposing the top-heavy and unevenly distributed nature of growth overall.
On a per capita basis, from 2012 to 2016 the economy slowed to an average annual per capita growth rate of about 0.9% – a much slower rate than other developed countries. The conventional belief in the high-octane nature of the startup model—which couples market-viable innovation with swift capitalization—as the main driver for modern economic growth is being upset by one of its original framers.
Israel is once again acting as a disruptive force in the global innovation market, only in this case it’s disrupting the current orthodoxy that innovation economies with tech start-ups serving as the primary driver can sustain growth in the long term. Israel today is demonstrating that it is no longer ideal to prove out an idea to the highest bidder, while leaving a negligible net effect on the wider economy; it is demonstrating that in order for such economies to have any chance of maintaining economic health and social cohesion, they need to see startup success not as an end but as a crucial means to more mature growth.
This new reality is made even more challenging when we recognize that the start-up marketplace has adapted over the last decade, and has drastically narrowed the laboratory gap with Israel. South Korea, for instance, has bumped Israel from the top spot (which it held for more than a decade) for research & development (R&D) investment among OECD countries. Foreseeably, Israel will increasingly have to compete for foreign startup dollars.
In addition to foreign capital being lured away, Israel is also at risk of losing what we might call domestic R&D capital, a resource quantified by the number of available brains. Yoram Yaacovi, the general manager of the Microsoft Israel R&D Center in Herzliya, noted earlier this year that Israel was “running out of geeks.”
But incentivizing “geeks” to stick around is not the silver bullet since highly-skilled, mobile elites of the innovation world will always be susceptible to poaching by bigger, more sophisticated economic centers. The deeper problem that Israel is beginning to struggle with is the sheer amount of untapped value, and un-harnessed human capital, that the current innovation engine leaves on the table. That is, a highly skilled workforce, with 47.4% of its population having graduated from university or third stage education (tied with Japan), as compared with an average of 33% amongst OECD countries.
Scaling Israeli innovation does not equal the rejection of the start-up model. On the contrary, it requires investment in those very start-ups to mature into mass producing enterprises. What’s paramount is the ability to increase the human-capital bandwidth by creating real growth upon an innovation economy’s natural R&D strengths. Innovation economies can utilize their native tech sectors as a springboard to catapult themselves into advanced manufacturing economies rooted in much bigger industries, like aeronautics (including UAV and space components), biotech, agrotech and renewable energy. Israel has indeed created revolutionary innovation in these industries, but until recently has consistently stopped short of scaling up the R&D center into manufacturing engines.
We are now seeing signs of a graduating class of Israeli startups changing the model from cashing out to scaling up. What most observers missed in the $15 billion announcement of Intel’s acquisition of Mobileye last month is that an important part of this deal was a commitment by Intel to base its future self-driving operations at the Israeli company’s Jerusalem headquarters. Eli Cohen, the minister of economy, projected the addition of 3000 jobs to the Israeli economy. This wasn’t an exit for Mobileye. It was the moment Mobileye went from a start-up to an industrial player, and scaled its vision to become one of the leading distributors of self-driving products in the global market.
This approach to developing advanced manufacturing sectors based in native tech innovation is not new, but for small nations like Israel it has not been considered a viable avenue until now. The typical objections to transforming Israel into a manufacturing hub are government incompetence—which makes oversight and coordination of such an economic pivot difficult—and the sheer lack of resources. Yet it is increasingly hard to ignore the advantages an advanced manufacturing sector would hold for a highly-educated nation as Israel that uses robotics to close the manpower gap; a sector that could leverage a pool of high-quality blue-collar labor in a way that the current start-up economy in Israel can never realize.
Achieving this is about coming to terms with the fact that (all platitudes about being “nimble” and “agile” aside) no one actually wants to stay young and small forever. Real success requires scalability, and scalability means expanding the vision of an entrepreneurial class beyond building the next big app and towards companies capable of developing, building and exporting the next big device.