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E4704 Isidl
E4704 Isidl
Technovation
journal homepage: www.elsevier.com/locate/technovation
art ic l e i nf o a b s t r a c t
Article history: Israel's Silicon Wadi is second only to US Silicon Valley in terms of business start-ups. The government
Received 31 January 2014 policies play an important role in promoting innovation and driving the country towards a high-tech
Received in revised form powerhouse. In this study the analyses, carried out through the lens of cluster and national innovation
11 September 2015
system (NIS), have shown that the thriving high-tech clusters are the result of government-led policies in
Accepted 11 February 2016
creating the venture capital (VC) industry with the impacts of Yozma program. Importantly, the gov-
ernment financing did not crowd out but crowd in private investments. Israel presents an interesting
Keywords: case of the most successful Silicon Valley-style economy. The lessons of Israel in successfully climbing the
Cluster technological ladder to become a high-tech powerhouse would be useful for other countries to learn how
National innovation system (NIS)
to promote high-tech clusters.
Yozma
& 2016 Elsevier Ltd. All rights reserved.
Government policies
Venture capital
http://dx.doi.org/10.1016/j.technovation.2016.02.001
0166-4972/& 2016 Elsevier Ltd. All rights reserved.
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
2 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎
analyses of Israeli high-tech industrial clusters based on the cluster (scarce capital) of firms in economic contexts of public policy.
model and Israeli innovation system based on the national in- However, Gompers and Lerner (1998) as well as Da Rin et al. (2006)
novation system (NIS) concept. Section 5 concludes the paper by have focused their studies in the areas of VC financing which help
drawing lessons and policy implications regarding the role of Is- evolve the context of public policy. While Gompers and Lerner
raeli government in promoting high-tech clusters. The practical (1998) employ multivariate regression analysis to study the impacts
lessons and experiences from the case of Israel would be useful for of venture variables on the industry fundraising, Da Rin et al. (2006)
other countries to learn the process of technological and economic use the innovation ratios to evaluate the effectiveness of public
catch-ups. policies on the development of VC market. Their study shows the
three types of policies to enhance VC growth: the corporate capital
gains taxation, the opening of new stock markets, and the reduction
2. Literature review of barriers to entrepreneurship.
Considering the level of policy research, the studies by Gom-
2.1. Industrial innovation policies to promote entrepreneurial pers and Lerner (1998) as well as Da Rin et al. (2006) address the
financing macro level policies. However, it is interesting to see that the work
by Cullen and Gordon (2002) is devoted to the type of tax policy
The government policies to promote entrepreneurship are and its impacts on the demand and supply of venture funds. The
important in the national economic growth. In particular, the fi- studies by Jeng and Wells (2000) and Bottazzi et al. (2008) are
nancial and investment policies are among the key operational focused on the determinants of VC. The results of their studies
priorities in developing countries to support investment by local have shown the importance of initial public offerings (IPOs), in-
firms, especially small and medium-sized enterprises (SMEs), and stitutional and legal environment, tax policy as well as human
transnational corporations investing in these countries. In capital in driving the VC industry. More recently, Yu (2013) and
knowledge-based economies, economic growth is increasingly Hsu et al. (2015) have extended their studies by integrating VC
dependent upon innovation whereby access to finance is seen as a policies in a broader context of mechanisms for promoting the
critical factor in this process (Bygrave and Timmons, 1992; Free- process of technology commercialization. Their studies also take
man and Soete, 1997; Pissarides, 1999; Wonglimpiyarat, 2007). into account the limitations of institutional/cultural differences of
Therefore, the government policies play an increasing important the VC industry.
role in entrepreneurial, venture and economic development (Da-
vid et al., 2000; Hall and van Reenen, 2000; Hyytinen and Toiva- 2.2. Cluster model and the competitive advantage of nations
nen, 2005).
Venture capital (VC) plays an important role in supporting The literature on industrial clusters popularized during the
entrepreneurial development. VC is a high-risk, potentially high- 1990s. Porter (1990, 1998, 2001)'s Diamond model provides a
return investment to support business creation and growth. In framework of the industrial competitiveness in the form of clus-
other words, VC provides the opportunity for entrepreneurs to ters (Fig. 1). By definition, the cluster is a geographically proximate
exploit technology and turn it into commercialized innovations. group of interconnected companies and associated institutions in a
According to the study by Hellmann and Puri (2000), VC financing particular field, linked by commonalities and complementarities
is related to the growth of start-ups. The importance of VC fi- (Porter, 1990, 1998, 2001). Porter (1990) has developed a Diamond
nancing in the configuration of a geographical concentration is the Model framework to analyze the industrial competitiveness in the
regional capacity to engender economic advantages. In other form of clusters. Within an industrial cluster, the social community
words, the venture capital investment (clustering) plays a vital role and the economic agents work together to drive product/process
in creating phenomenal economic growth. innovations to the marketplace (Gordon and McCann, 2000,
The small and innovative companies are important to the Schmitz, 2000).
economy. They have assumed a major influence in the economic Porter (1998) argued that the nation's innovative capacity is
development, employment and creation of new innovations (Lar- built on the combined strength of common innovation infra-
anja, 1998; Kingston, 2001; Gray and Gonsalves, 2002; Massa and structure and vitality of the environment for innovation in parti-
Testa, 2008; Peters and Coles, 2010). The literature review on en- cular clusters. According to Porter (1990, 1998, 2001), clusters are
trepreneurship reveals that the difficulties of firms lie in their early a source of strategic competitive advantage. The cluster approach
stages of business development and innovation process (Gompers provides an understanding of economic development processes.
and Lerner, 2001, 2004; Wonglimpiyarat, 2007). Many govern- Clusters lead to increased levels of productivity, growth and em-
ments have tried to focus on introducing the innovation policies ployment. Within an industrial cluster, the social community and
providing early stage financing to help SMEs reduce the risks the economic agents work together to drive product/process in-
underlying the process of entrepreneurial development. In devel- novations to the marketplace (Porter, 1990, 1998, 2001; Feldman,
oping countries, the government financing mechanisms play an 2000; Steiner, 1998).
important role in innovation system (Mani, 2004). The sets of in- The cluster model focuses upon the conditions that support
stitutions and public policies are used to support technology and firm competitiveness at the national scale. It is an economic de-
innovation development so that the efforts of research and de- velopment model that promotes collaboration among institutions
velopment (R&D) institutions and industries can lead to effective to facilitate the exchange of information and technology. Policy
technology commercialization, bringing about business creation makers of the government worldwide have been challenged to
and economic growth. implement the cluster concept as an economic development
One of the important public policies is venture capital (VC) po- model. Industrial clusters are not confined to political boundaries
licies to promote innovation and economic growth. Entrepreneurial and can be localized (like the clothing and garment industry of
financing plays a critical role in supporting SMEs, particularly in the New York) or dispersed (like the North American auto industry).
early stage of venture development. The VC policies are considered Within the context of industrial clusters, the four attributes con-
to be instrumental in industrial development. Taking into account tributing to the competitive advantage of nations are: (1) factor
previous studies on public policies, Stiglitz and Weiss (1981) and conditions, (2) demand conditions, (3) context for firm strategy
Holmstrom and Tirole (1997) study the role of bank and financial and rivalry, and (4) related and supporting industries (Porter, 1990,
intermediaries in providing finance to ease capital constraints 1998, 2001).
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎ 3
The cluster can help reduce uncertainty in innovation and production, diffusion and exploitation of knowledge within na-
support technological development to increase the competitive- tional borders (Lundvall, 1992, 1998, 1999, 2003; Freeman, 1987;
ness of a region or a country (Saxenian, 1994; Beckeman and Nelson, 1988, 1993; Fagerberg and Srholec, 2008; Guan and Chen,
Skjöldebrand, 2007; Gnyawali and Srivastava, 2013). Concerning 2012). Interactions can be achieved by both market mechanism
the cluster performance and the effects of clusters on societies, the and non-market mechanisms such as collaboration and long-term
economist – Schumpeter (1934, 1939) argued that the technolo- network arrangements.
gical innovations pioneered by entrepreneurs have strong band- The level of resources devoted by each nation to research and
wagon effects. Geographic proximity (geographic concentration development (R&D) and innovative activities represents a basic
among firms, research institutions, suppliers and other organiza- characteristic of the NIS (Lundvall, 1992; Nelson, 1993; MjØset,
tions) can support information transfer within the clusters/net- 1992). Determinants of national economic performance and
works which thereby help drive the innovation process. The technological capabilities are the size of a country, R&D intensity
knowledge spillovers from universities and research institutes can and market structure (Freeman, 1987; Archibugi and Michie, 1997).
engender technology transfer among firms which help create jobs The NIS concept is expanded further to the sectoral system of in-
and economic growth. This condition reflects the highly successful novation emphasizing interactions and innovative activities at the
model of Silicon Valley clusters where high-tech firms have been level of sectoral production system (Breschi and Malerba, 1997;
created (Wonglimpiyarat, 2005). Malerba, 2002, 2004). The boundary of NIS is explained by the
scope and interrelations between technological development and
2.3. National innovation system concept the institutional embeddedness of innovative organizations
(Freeman, 1987; Lundvall, 1992, 1993, 1998, 1999, 2003; Nelson,
Over the past 30 years, the concept of national innovation 1988, 1993, Fagerberg and Srholec, 2008; Guan and Chen, 2012
system (NIS) has widely been recognized as a dynamic tool to among others). An understanding of NIS can help policy makers
investigate, formulate, plan and position the national economic develop approaches to enhance the nation's innovative
and social development. The emergence of the NIS concept, par- performance.
ticularly in the industrialized countries in the Northern hemi-
sphere, can be traced back to the work of Professors Bent-Åke
Lundvall, Christopher Freeman and Richard Nelson in the 1980s 3. Research methodology and background of the study
(Lundvall, 1992, 1998, 1999, 2003; Freeman, 1987; Nelson, 1988,
1993). The NIS framework stresses the importance of interactions 3.1. Research methodology
and relationships among the actors and institutions to facilitate
economic development and growth. The innovation system is To date, the role of government in the process of en-
composed of institutions, private and public firms (either large or trepreneurial development has been understudied. Even less is in
small), universities and government agencies, aiming at the the area of innovation financing. Therefore, this research attempts
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
4 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎
to fill the existing research gap by focusing on exploring the concept. This research is guided by the main question: how could
government policies towards Israel's high-tech powerhouse. This Israel become a high-tech powerhouse?
research employs a case study methodology (Eisenhardt, 1989; The present study follows the traditional neo-classical eco-
Yin, 2003) to understand in-depth the logical or causal drivers of nomics, focusing on the macro variable – the national economy.
phenomena (rather than statistical generalization). In particular, The integrated frameworks of cluster and NIS would take into
the case study research attempts to understand how the innova- account institutional and policy factors underlying the develop-
tion financing policies/programs can help support the growth of ment of high-tech Silicon Wadi. At the same time the research will
high-tech industries, leading Israel to become a high-tech offer recommendations to inform the long-term development of
powerhouse. science, technology, and innovation policy. The findings based on
The analysis in this study is based on the two main concepts this integrated framework would help fulfill an important gap in
underlying industrial development – the cluster model and the existing research of innovation financing policies and allow for a
national innovation system (NIS) concept (the reasons are stated in deeper understanding on the role of government and public po-
the next paragraph). The results from carrying out the case study licies in enhancing VC growth and development. The results from
analysis provide insights in terms of content and mechanisms of the study aim to draw attention of researchers in the policy arena
the operating policies behind the successful high-tech industry – to the structural approach for promoting innovation and industrial
Silicon Wadi of Israel. The analyses of findings in the next section development (policy mechanisms driving the VC emergence as
reveal that the rise of Silicon Wadi have confirmed the academic well as the innovation financing programs underlying the Israeli
term of ‘Silicon Valley’ in the United States. To avoid confusion in NIS).
using of the term ‘Silicon Valley’ as a buzzword, the study follows The context-specific settings of Israel are an exceptional case
the scholarly work of Saxenian (1990, 1994, 2006) describing it as and indeed interesting in policy practice. However, the use of a
an area of high-tech industries with network-based structure and single case study has a limitation in that it cannot lead to gen-
agglomeration. The analyses in Section 4 also reflect on the success eralization. Despite such limitation, an understanding of the dy-
of Israel's high-tech powerhouse with Silicon Valley style of namic process underlying the localized context of Israel's Silicon
management. Wadi would provide important lessons and insights to learn the
The analyses in this research study are carried out through the development processes behind a high-tech powerhouse. Specifi-
lens of cluster and national innovation system (NIS) (Porter, 1990, cally, the lessons of Israel in its growth process of industrialized
1998, 2001; Lundvall, 1992, 1998, 1999, 2003). The reasons of in- economy would be useful for other countries to learn the stages of
tegrating these frameworks are twofold. Firstly, the use of cluster technological and economic catch-ups.
model (Porter, 1990, 1998, 2001) offers an opportunity to explore
the components (factor conditions, demand conditions, context for 3.2. Background of the study
firm strategy and rivalry, related and supporting industries as well
“How is it that Israel—a country of 7.1 million people, only sixty
as chance and government policy) underlying the competitiveness
years old, surrounded by enemies, in a constant state of war since
of the nation. The analysis based on Porter's competitive Diamond its founding, with no natural resources—produces more start-up
model would provide a better understanding on the government companies than large, peaceful, and stable nations like Japan,
policies behind the success of Israel as a start-up nation. Secondly, China, India, Korea, Canada, and the United Kingdom?”
it is useful to view the combination of policies as well as the lin- – The Council on Foreign Relations, Start-up Nation Book –
kages and interactions among numerous actors/institutions in the
overall landscape of Israeli innovation system through the NIS The above statements highlight the economic miracle and the
technological leadership of the Israel. Israel represents the most
successful country after the United States in creating high-tech
Table 1 industries. The rapid economic growth of Israel is attributable to
Overview of Israel's economy. its high-skilled labor force and outstanding academic resources
(Trajtenberg, 2001, 2002; Avnimelech and Teubal, 2004, 2006).
Year 2013 Year 2014 Table 1 provides an overview of Israeli economy. It shows the
competitiveness of Israel compared with the Organization for
Competitiveness ranking by IMD 19 24
Competitiveness ranking by WEF 27 27 Economic Co-operation and Development (OECD) countries in
Human development index by UNDP 19 19 various dimensions. The country was ranked 24th in the 2014
% of R&D to GDP 3.93 4.2 International Institute for Management Development (IMD) World
Unemployment rate (%) 5.6 5.6
competitiveness ranking and 27th according to 2014 World Eco-
Inflation rate (%) 1.55 0.54
nomic Forum (WEF) global competitiveness index. Israel was also
GDP growth Unemployment rate Investment Export volume ranked 19th in the category of very high human development
growth according to the United Nations Development Program's Human
Development Report Index in 2014. Israel was invited as a full
member in the Organization for Economic Co-operation and De-
velopment (OECD), an economic group of developed countries
since 2010. The percentage of research and development (R&D)
contribution to gross domestic product (GDP) is 3.93 in 2013 and
4.2 in 2014. The percentage of R&D investments to GDP of Israel is
highest in the world, compared with 2.4% in the Organization for
Economic Co-operation and Development (OECD) countries. The
highest percentage of contribution to GDP among the OECD na-
tions has shown that Israel is a leading country in industrial R&D.
denotes Israel The GDP growth of Israel is 2.5% (compared to OECD of 1.8%) while
denotes OECD countries the unemployment rate as a percentage of labor force of Israel is
denotes the forecast period 6.1% (compared to OECD of 7.3%).
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎ 5
Chance:
Context for firm strategy and rivalry:
• High skilled labor force of immigrants
from former USSR provides an • Entrepreneurial and risk-taking culture
opportunity for the future growth of high- • Companies pursuing the global strategy by choosing VC
tech industries exits on NASDAQ and European markets
• Strong relationships and long-term • Global start-up ecosystem: Israeli start-ups compete in the
cooperation with the US and US global markets
companies as well as Europe open up a
chance for future international trade
Demand conditions:
Factor (inputs) conditions:
• Small domestic market
• Israeli companies’ focus on exporting
• Small country with few natural resources innovations to drive economic growth
• Entrepreneurial spirits • Sophisticated demand for
• High quality human resource technologically advanced products
• Availability of VC financing
• University-industry research
collaboration
Government:
Fig. 2. Analysis of Israeli high-tech industrial clusters using Porter's competitive Diamond model.
Source: The author's design, based on the framework by Porter (1990, 1998, 2001).
• Tel Aviv
• Herzliya-Pituach
• Haifa
• Jerusalem
• Rehovot
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
6 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎
introduced the technological incubators program to support the Fig. 5. Annual VC investments (in USD million).
projects proposed by these skilled immigrants. The universities Source: PwC Israel MoneyTree Report.
also served as research incubators undertaking R&D activities in
collaboration with the industries. The universities provided im- 2436, comprised of 855 VC-backed companies. As a result of the
portant sources of human capital (knowledge workers as in- OCS' policy to support R&D investments, the number of Israeli
tellectual capital). R&D undertakings were carried out in major patenting in the US has grown very rapidly at the average rate over
universities like the Hebrew University of Jerusalem, Technion- 10% per year, placing Israel as the 14th largest foreign recipient of
Israel Institute of Technology, Weizmann Institute of Science, Ben– US patents. The patents are mostly in the key technological areas
Gurion University of the Negev. The scientific research and tech- of computers, communications and biotechnology.
nologies were commercialized through the universities' owned Looking back to the early 1990s, there were virtually no VC
Technology Transfer Companies (TTCs). Today, many Israeli uni- investments in Israeli companies. Only 4 VC Limited Partnerships
versities have entrepreneurship centers, for example, Bronica En- (LP) operated in Israel in 1992 but this number increased to 50 in
trepreneurship Center at Technion, StarTau at Tel Aviv University. the year 2000 (Avnimelech and Teubal, 2006). Venture capital (VC)
Israel had formed one of the world's most successful high-tech is the main mechanism behind the successful creation of Israeli
industrial clusters since the 1990s. The thriving VC industry has high-tech clusters. The emergence of Israel's VC market was trig-
transformed Israel into Silicon Wadi – Israeli Silicon Valley (Fig. 3). gered by the Yozma program, a government-targeted policy to
Silicon Wadi is located around Tel-Aviv where it is second only to support R&D activities. The launch of Yozma program mirrored the
US Silicon Valley in terms of business start-ups. It is the techno- willingness of the Israeli government to take risks in VC invest-
logical hub generating innovations in the fields of information and ments. Yozma funds were private VC funds that invested directly
communications technology (ICT), software, data communications, in the business start-ups. These VC funds were part of the Yozma
electro-optics, hardware design, internet, etc. The thriving VC in- program, a government-targeted program launched during 1993–
dustry has helped create cluster effects to support the growth of
1998. Yozma funds had induced private VC investments by sti-
high-tech clusters. In other words, the successful cluster devel-
mulating co-investments. The funds by far brought about 10 pri-
opment was a result of effective interactions among the govern-
vate VC funds in a few years of operation. The development of
ment (the OCS under the Ministry of Economy in particular), the
Yozma program has led Israel's VC industry to the highest growth
universities and industries. The Yozma program effectively sup-
in the 1990s. At present, the high-tech industry of Israel accounts
ported investments oriented in the ICT and life science sectors
for more than 54% of industrial exports, and over 26% of the
during 1993–2000. The Yozma funds and other Limited Partner-
country's exports. Fig. 4 shows the share of venture capital-backed
ship (LP) VCs have attracted follow-up funds to provide additional
investments in high-tech companies from the years 2007 to 2012.
capital for further investments. Given that the Yozma VC fund
It can be seen that foreign investments account for 72% of total
required involvement of reputable foreign financial institutions
investments in 2012.
(generally a foreign private equity or VC company), such require-
Interestingly, behind the growth of industrial clusters are
ment had triggered collective learning process via VC cooperation.
strong linkages and effective interactions in the NIS. The
The Israeli government, through the OCS, provides grants and
financing to support R&D in collaboration with universities and
industries. With heavy R&D investments amounted to 4.5% of GDP, 900
this has fueled the number of high-tech start-ups during 1993– 800
2000. The number of high-tech start-ups in this period totaled
700
500
400
61 62 63 300
71 775 72
D
Domestic
200
100
Foreign
0
39 38 37 Seed/Start-up Eaarly/Expansionn Later stage
29 225 28
2012 69 656 142
2011 79 844 304
2007 2008 2009 2010 20111 2012 2010 49 695 140
Fig. 4. Venture capital in high-tech companies (in USD million and %). Fig. 6. VC investments by stages.
Source: Investment Promotion Center, IVC Research Center. Source: PwC Israel MoneyTree Report.
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎ 7
government's policies and OCS activities have created an enabling designed the VC policies and implemented the innovation finan-
environment to support entrepreneurial firms in the clusters. cing programs to support the development of VC industry which
Under these circumstances, the clusters have attracted R&D op- will be discussed further.
erations of major multinational companies that invest heavily in Taking into account the functioning of actors/institutions in the
R&D. Examples of major multinational companies investing in Is- innovation system, the Israeli government through the Office of
rael are Microsoft, Apple, Lucent, Intel, IBM, Oracle, Pfizer, Google, the Chief Scientist (OCS) created the technological business in-
Motorola, Facebook, Siemens, AOL, Cisco, GE, HP, and Toshiba. The cubator program to leverage the strengths of immigrants from
nation continues to develop high-tech clusters oriented in ICT former USSR, many of whom were scientists, engineers, techni-
areas. cians and physicians. The OCS also worked cooperatively with
Israel's Yozma program has triggered the emergence of a do- other nations to establish bilateral R&D foundations providing fi-
mestic VC industry. With a pool of human capital and VC supports nance for projects in areas of strategic importance to Israel's
from the OCS in sharing the risks of R&D projects, this led to the economy. The programs to support Israeli high-tech companies
successful development of Silicon Wadi – the model of high-tech administered by the OCS include technological incubators as well
industrial clusters. Israel has become one of the most dynamic as financial assistance to companies in pre-seed and seed stages
technological areas today. Fig. 5 provides the annual VC invest- such as TNUFA, HEZNEK, NOFAR, Magnet programs. From Fig. 7,
ments from the years 2003–2012. VC funds with most deal in- one can also see that the Ministry of Economy assumes the stra-
vestments in 2012 include Carmel, Horizons Ventures, Gemini, tegic role in providing financial and developmental resources to
Genesis, JVP, Magma, Pitango, OrbiMed Israel, Accel, Blumberg entrepreneurs in supporting industrial R&D.
Capital, Bessemer among others. Underlying the Israeli innovation system, the OCS plays a
Fig. 6 shows the stage of VC investments during 2010–2012 dominant role in creating a solid base for the VC industry in Israel
where most investments were made in early and expansion stages. by introducing the Yozma program. Yozma is an important gov-
The supports of SMEs by the OCS have helped facilitate the process ernment program providing financial supports (Yozma funds) in
of research commercialization. The OCS remains committed to enabling the creation of high-tech clusters. The implementation of
advancing the VC industry to promote job creation and employ- Yozma program provided rapid VC supply to overcome the fi-
ment growth. According to Small- and Medium-size Business nancial constraints of start-up firms. Supports of entrepreneurial
Authority data, there are 400,000 small businesses in Israel that start-ups and small- and medium-sized enterprises (SMEs)
employ more than 50% of Israel's workforce constituting about thereby helped foster job creation and economic growth.
96% of all businesses in Israel. Today, Israel is recognized as a The stock market is another important institution in the Israeli
model of high-tech clusters whereby the successful cluster de- innovation system that helps reinforce the cluster development.
velopment is seen as a result of government's policy in advancing The Tel-Aviv Stock Exchange (TASE), regulated by the Israel Secu-
VC landscape to support entrepreneurship. rities Authority, provides an exit route for high-tech companies.
Interestingly, the Dual Listing Law enacted in 2000 provides cross
4.2. Analysis of the Israeli innovation system based on the national listing opportunities to broaden the investors' base. Most Israeli
innovation system (NIS) concept high-tech companies pursued a global strategy of exiting VC in-
vestments on the NASDAQ market. Approximately 50% of exits on
The analysis of the Israeli innovation system (Fig. 7) is based on NASDAQ are VC-backed companies. High-tech companies also exit
the national innovation system (NIS) framework (Lundvall, 1992, through the New York Stock Exchange and the Alternative In-
1998, 1999, 2003). The Israeli government is the main actor of the vestment Market (AIM) in London.
innovation system playing an intervention role to enhance the Table 2 shows the number of deals and total exits from the
supply of venture capital (VC). Specifically, the Israeli government years 2004-2013. The listing on global exchanges has helped these
Israel
USA
Ministry of Finance Ministry of Economy Ministry of Immigrant
Department of Commerce (formerly Ministry of Industry and Trade) Absorption
MATI Centers
Tel-Aviv Stock
NYSE Exchange (TASE) Government
NASDAQ Insurance Company -
Inbal Program Technological business • R&D grants Other
incubator program • R&D fund programs
Cross-listing agreements Binational Industrial • Guarantees VC funds traded • Magnet program
Research and Development in TASE
Foundation (BIRD) Yozma Program – • HEZNEK fund
• The program phased out in Yozma Venture Funds • TNUFA program
the late 1990s
Supports R&D cooperation between • Magneton program
Israel and USA The program phased out in the • NOFAR program
late 1990s • R&D and investment
incentives
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
//dx.doi.org/10.1016/j.technovation.2016.02.001i
8 J. Wonglimpiyarat / Technovation ∎ (∎∎∎∎) ∎∎∎–∎∎∎
Table 2 Table 3
The number of deals and total exits of high-tech companies. Major innovation financing programs in Israel.
Source: IVC Research Center. Source: The author's design (compiled from various sources).
Year Total capital raised Total exits Number of deals Programs Description
(USD billion) (USD billion) Inbal The Inbal program was established in 1992. The program
objective was to stimulate publicly-traded VC funds by
2004 1.38 2.55 77 guaranteeing the downside of investments. A govern-
2005 1.38 3.56 96 ment owned insurance company (Inbal) gave partial
2006 1.57 10.75 116 guarantees (70%) of initial capital assets. The Inbal pro-
2007 2.08 4.38 115 gram placed restrictions on the investments of the VC
2008 1.16 2.70 86 companies which it covered. However, the implementa-
2009 1.01 2.59 78 tion of the Inbal program was not successful and was
2010 1.40 2.33 81 later phased out.
2011 1.37 5.23 100 Yozma The Yozma program was launched in 1993. It was a USD
2012 1.31 9.67 82 100 million government owned VC company to finance
2013 1.26 6.98 81 early stage VC funds. The aim of the Yozma program was
to support the establishment of domestic Limited Part-
nership VC funds. Through inducing private sector in-
vestments, the Yozma program had triggered the creation
high-tech companies establish linkages with the global markets. of the VC industry in Israel. The program was phased out
These linkages not only help bring more investments to Israel but after the successful creation of Israeli VC industry.
also help Israeli companies grow their international trade. At Magnet The Magnet program was established in 1992 to en-
courage pre-competitive generic research conducted by
present, Israel has the largest number of listed companies on the
consortia of industrial companies. The program aims to
NASDAQ market than any country outside the US. The incumbent support business R&D activities – cooperative R&D in-
companies in NASDAQ are, for example, Scitex Corporation Ltd., volving two or more firms and at least one university.
Elbit Systems Ltd., Teva Pharmaceutical Industries Ltd. It is inter- Mini-Magnet The Mini-Magnet (Magneton) program encourages tech-
esting to see that the VC policies and government financing pro- (Magneton) nology transfer from academia to industry via the mutual
cooperation of individual companies and specific aca-
grams, the spin-off of high technology companies (particularly in demic research programs. The program offers grants of
the ICT sector) as well as their linkages with the global capital up to 66% of the approved budget with no requirements
market reflect effective linkages and interactions among actors/ on royalty repayment.
institutions that help facilitate the process of technology transfer Technological The technological incubators program was established in
incubators 1992. The incubators program has annual total program
and commercialization.
program budget of USD 25–30 million to support business start-
The OCS, Ministry of Economy plays a major role in introducing ups. The technological incubators program aims to sup-
national innovation policies. In particular, the OCS is responsible port ventures in their first three years of operation. At
for implementing the government policies with regard to in- present, the program is open to all Israeli start-ups to
dustrial R&D supports. Table 3 summarizes the major innovation help them translate innovative ideas into commercial
innovations.
financing programs to support R&D undertakings in Israel. These R&D fund The R&D fund is the main financing mechanism of the
innovation financing programs have contributed to the growth of OCS to support all Israeli companies engaged in techno-
Israeli economy and led the country to become the high-tech logical R&D activities. Grants are provided up to 50% of
powerhouse. the total approved R&D expenditures. The R&D fund
provides financial supports to various scientific fields
The technological incubators program supports the translation
such as communications, IT, biotechnology, etc.
of ideas into commercial innovations. From its inception in 1991, TNUFA TNUFA program supports technological entrepreneurship
the program had already created over 1700 companies through the and innovation by assisting business start-ups in the pre-
government investments of around USD 650 million. The suc- seed stage. The program also provides assistance in
cessful companies graduated from the technological incubators evaluating the concept’s technological and economic
potential, patent proposal preparation, prototype con-
program are, for example, Protalix – Meytav Incubator, D-Pharm –
struction, business plan preparation, establishing busi-
Orit (now Incentive) Incubator, Compugen – Am-Shav Incubator, ness relationships with industry partners. Grants are
Sightline – Eltam Incubator, Remon Medical – Naiot Incubator, provided up to 85% of approved expenses with a max-
Mazor – Technion Incubator, Contipi – L.N. Incubator, Imagine – imum of USD 50,000 for each project.
NOFAR NOFAR program helps bridge the gap between basic and
Iris Incubator, Zoomix – JVP Incubator, Double Fusion – JVP In-
applied research in biotechnology. Grants are provided
cubator, Lucid – Ma'ayan Incubator, Aeronautics – Orit (now In- up to 90% of project expenditure with the remaining 10%
centive) Incubator. To date, the program provides incubating coming from outside sources. The maximum grant is
supports to approximately 180 companies in various stages of approximately USD 100,000 per project and no royalties
R&D. The success of the program implementation can be seen or repayments are required.
HEZNEK HEZNEK program is the government seed fund. It is a co-
from its ability to create approximately 70–80 new ventures each
investment fund based on the government matching an
year. investment in a start-up company, proportional to the
Given the policy goal to portray the case of Israel in successfully investment of an investing entity. The investor is given an
climbing the technological ladder to become a high-tech power- option to purchase the government shares in the start-up
company at the initial price.
house, the analyses in Sections 4.1 and 4.2 above highlight the
Binational In- The Israel–US Binational Industrial Research and Devel-
theoretical and practical contributions as follows. Theoretically, dustrial Re- opment (BIRD) program was founded in the early 1980s
the study has made an attempt to fill the gap in the body of search and De- with the aim to promote and support joint, non-defense,
knowledge with regard to the role of government policies in in- velopment industrial R&D activities of mutual benefit to the (private
novation financing. The analyses, based on the cluster model Foundation sectors of the) two countries. The program offers funding
(BIRD) of up to 50% of each company’s R&D expenses associated
(Porter, 1990, 1998, 2001) and the national innovation system
with the joint project.
(NIS) concept (Lundvall, 1992, 1998, 1999, 2003) provide a better Britain–Israel In- The BRITECH fund was established in 1999. The program
understanding of the government policies and innovation strate- dustrial R&D provides funding to support firms operating and head-
gies (particularly the Yozma venture financing program) aimed at Foundation quartered in the UK and Israel on condition that at least
(BRITECH) 30% of the R&D work must be done in either country. The
advancing the industrial clusters, making Israel a high-tech
Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
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Please cite this article as: Wonglimpiyarat, J., Government policies towards Israel's high-tech powerhouse. Technovation (2016), http:
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