Still a strong hi-tech stronghold.
Atidim Park in Ramat Hay'al/PR
The highly reputable magazine "Foreign Policy" recently predicted that the war in Gaza will have far-reaching effects on Israel's economy and assessed that there is a tangible danger that it will lose its status as the "start-up nation".
There is no need to exaggerate the value of scholarly predictions that have crashed into the rocks of reality, but it is recommended to read the things with a grain of salt, that is, with the skepticism and criticism that are appropriate for such sharp conclusions.
First of all because the magazine itself has failed in several predictions in the recent past.
For example, he estimated in 2022 that the rapprochement between Israel and Turkey "will change the diplomatic map of the Middle East", only a year after he predicted that the President of Turkey, Recep Tayyip Erdogan, might not run for another term in the presidential elections in 2023, due to illness.
Everyone knows what happened in the end.
The argument of the "foreign policy" in a nutshell is that the economic prosperity in Israel in the last 20-30 years, which is mainly based on high-tech and innovation, was due to the relative peace that the country enjoyed and the reduced burden of defense spending.
These arguments should not be underestimated, and they correspond with quite a few warnings that have been voiced recently that Israel is facing a "lost economic decade" due to the new security burden - an echo of the decade that followed the Yom Kippur War, when defense spending soared to about a third of GNP. However, the situation Today is completely different from the one that existed at the end of 1973. The Israeli economy is in a completely different place and the foundations on which the "start-up nation" rests are also solid. This does not necessarily mean that what was is what will be and Israel will continue to be a nation of innovation in any case, but neither should it be determined deterministically that the situation will change My
humble
assessment is that Israel will continue to be at the forefront of global technology in the coming decades and that Israeli high-tech will manage to get out of the crisis it has fallen into in recent years, partly because some of the reasons that led to the crisis are external to the Israeli system, exogenous in the language of economists.
The power and influence of the defense industry
I base the above forecast also on an in-depth analysis of the Israeli innovation model.
In this context, one of the main strengths of Israeli technological innovation is the defense industry, the demand for its products has only increased since the war, and it is a huge incubator for technological developments.
In fact, they began to grow greatly and exponentially since the war in Ukraine, which created a geo-strategic upheaval and profoundly changed the perception of security among key European players such as Germany.
Let's recall that on the eve of the "Iron Swords" war, the huge deal with Germany to purchase the Arrow 3 missile defense system worth 3.5 billion dollars was approved.
Several Israeli defense companies are involved in this deal: Israel Aerospace Industries (IAI) is the main contractor for the development of the weapons system, including the Arrow interceptors and the "Oran Adir" radar detection system;
Elbit develops the control and monitoring system;
Whereas the Rafael company and the Tomer company, the government company for rocket propulsion systems, are the main subcontractors for the development and production of the Arrow 3 interceptor. For dessert, the American company STARK Aerospace, owned by the Israel Defense Forces, is the main contractor in the USA.
continue to succeed.
Experiment in "Raphael"/official website, Ministry of Defense and Rafale
This is just one of many examples of a series of defense export deals from recent years, which have turned Israel into an arms export powerhouse, with an emphasis on weapons, weapon systems and cyber.
Let's mention the "David Slingshot" system that was sold to Finland for NIS 1.1 billion, and Elbit rockets, launch systems and cannons that were sold to Denmark for NIS 260 million.
In relation to the size of the country and the size of the market, the scope of activity of the defense industries is unusual on an international scale.
It is important not only because of the bottom line, but also because of its enormous impact on Israeli high-tech.
This is manifested in three dimensions: in the cooperation between the large defense companies and start-ups (a recent survey revealed that the defense industries cooperate with about 200 start-ups), in the spillover of human capital, entrepreneurship and innovation to the civilian field, and in the nationalization of military technologies.
It should be remembered that in Israel there are not only large companies operating in the field of defense industries, but also a long line of medium and small companies, whose activities touch the various security fields, or are subcontractors of the large industries.
Moreover, since the defense companies are high-tech companies, they are actually a significant part of the high-tech industry.
This is an industry characterized by long-term projects with great technological complexity.
In fact, the Israeli defense industries are at the forefront of technology, for example in regards to the development of radar systems, robotic systems, AI-integrated drones, electro-optical systems, and more. Another example of the broad and deep influence of the defense industries on the high-tech industry was following the Halavya project in the late 1990s. 80 who built the foundations of the high-tech industry in Israel both by building and investing in human capital, technological knowledge, and large budgets as of that time and all this in a relatively small market with a very large impact that affected the entire market and in fact created many chain reactions and all together built the infrastructure required to build a successful high-tech industry .
The increase in the defense budget will flow to high-tech
The security-strategic reality facing Israel today will oblige the government to increase the defense budget (there is even talk of doubling it) and a significant portion of this increase will flow to defense R&D, which will continue to drive the wheels of Israeli high-tech. The government anyway plays a central role in security development - both as an end customer and as an infrastructure builder, driving development processes and allocating resources - and it will continue to play a key role in this field in the future
as well. The demand for Israeli-made weapons will also continue and even more strongly in light of the geopolitical developments in the world. For example, in Southeast Asia, where tensions are increasing against China in the South China Sea and the growing concern about a Chinese invasion of Taiwan. The fear of North Korea's unexpected reactions also leads to an increase in defense budgets on the continent, for example Japan, which greatly increases its military procurement. In this context, we will mention the security agreement signed between the defense ministries of Japan and Israel in 2019 and for the first time it was possible for the defense industries to reveal classified Israeli systems and technologies to the Japanese. India will also continue to be equipped with Israeli-made weapons and may even increase purchases due to its attempt to reduce its dependence on Russian weapons (India currently purchases military systems from Israel to the extent of one billion dollars per year).
That is, the automatic assumption that the increase in defense budgets will harm Israeli high-tech is an unfounded assumption.
Even given a dramatic increase in the defense budget, its rate will not be about a third of GDP, as it was after the Yom Kippur War - at the most it will reach 6% instead of 4% today also due to the huge increase in Israeli GDP which creates a new ratio between defense spending and the total GDP, and also because a significant part of the defense budgets will surely flow into the high-tech sector.
Recovery will come to Israel, albeit late
It is likely that the other foundations of Israeli high-tech and innovation will not be seriously affected by the challenging times we are experiencing - transfer of knowledge from academia to industry (Israel is among the leaders in the world in the application of academic research), the existence of entrepreneurial human capital with a strong technological orientation, broad government support for entrepreneurial risk, a high rate of investment in R&D as a percentage of GDP and more.
The buds started even before that.
The high-tech protest in 2023/documentation on social networks according to Article 27 A of the Copyright Law
However, there is no denying the crisis in Israeli high-tech, which already began to show the first signs of slowing down at the end of 2021. In the past year, for example, a decade low was recorded in the exits of Israeli companies.
This was primarily due to the slowdown in the international markets that Israeli high-tech is affected by, depends on and involves.
Since the end of the era of "cheap money" and interest rate increases, especially in the US, investments in the global high-tech industry have decreased dramatically and this has had a strong impact on the Israeli technology industry, which has developed a great dependence on venture capital investors, mainly American. From an assessment made by the Innovation Authority based on IVC data, it appears that the weight of foreign investors in the years 2018-2022 in the field of venture capital was about 75%-80%.
There is an argument that global high-tech is showing signs of recovery and these are not yet evident in Israeli high-tech. It should be remembered that the effects of any recovery, and certainly in high-tech, arrive late in Israel and according to My assessment is that it will be felt more significantly in the second half of 2024. Furthermore, the prospect of a drop in interest rates in the US will encourage investors to take advantage of opportunities and invest in Israeli technology companies.
The government must intervene
Having said all that, you can't expect the high-tech recovery to happen anyway.
The government must intervene immediately and provide the necessary conditions for this, including financing and participation in the entrepreneurs' risk.
Only when government and public policy meets the private sector, in places where it can develop and influence, will change occur.
In the area of financing, the government must dramatically increase the Innovation Authority's budget in order to allow it to play a central role in the high-tech recovery and in order to return the Authority to its iconic position in its previous incarnation as the chief scientist.
In addition, the government must incentivize the institutional factors to greatly increase their investments in technology companies, partly to reduce the dependence on foreign venture capital.
Dr. Esther Lozato/relation
In the regulatory field, the government must remove barriers and encourage the growth of Israeli high-tech companies whose intangible asset, aka intellectual property, is their main asset, while encouraging capital investments.
The government also needs to create incentives that will encourage more entrepreneurship, while establishing more new companies with high innovation potential and high risk, and providing an envelope to the entrepreneurs who stand behind those companies, so that they will be able to grow as Israeli companies and succeed globally.
Since time immemorial, the government has stood at the foundation of the advancement of the technological industries, for example through the "Yozma" programs, which laid the foundations for the Israeli venture capital industry, and through the incubator model.
The government has to reproduce this practice, when it is adapted to the time and place.
In conclusion, the rumors about the death of the "start-up nation" were not only too early but also too exaggerated, if we refer to the original expression of the writer Mark Twain, the Israeli spirit and the strong foundations that were built here instead of the state, can provide us all with reasons for cautious optimism.
The author is a patent editor and CEO of the Lozato Group, the oldest intellectual property and patent group in Israel
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