Five reasons why Israel has a booming start-up and R&D landscape

15 November 2018 Authored by Consultancy-me.com

Israel is home to booming start-up and scale-up community. A new report looks into the key factors behind the country’s success, finding that a combination of rock solid infrastructure combined with an entrepreneurial, risk-taking culture is driving growth in the scene.

Israelis call their country ‘Startup Nation’ for good reason: the country saw the creation of 1,370 new tech startups last year, making it the world leader in startups per capita. With a population of only eight million, Israel is home to over 6,000 startups. Clustered mostly in the country’s business capital of Tel Aviv, Israel’s premier tech startups include fintech BlueVine, which allows small businesses to get paid instantly on outstanding invoices, and Airobotics, which uses drones to collect aerial data and insights for industrial facilities. 

In 2017, Israel startups attracted $5.2 billion in funding, beating out Germany ($4.9 billion) and France ($3.1 billion). Meanwhile, foreign and local firms shelled out $23 billion to acquire 112 Israel tech companies last year. The tech-savvy country currently has the third-most tech firms listed on the NASDAQ, after the US and China. 

But what are the factors that have made Israel such a tech startup dynamo, punching well above its weight in terms of population? A recent report from management consultancy Roland Berger has identified a number of strengths that set Israel up for current and future startup success, including its financial climate, educated workforce, strong technology sector, government policy, and innovative culture.

Israel as a reliable investment region for financial partners

Good financial climate

A recent venture capital survey reflects that investors have great confidence in their investments in Israel, with the country beating out Canada, China, Australia, and Japan for level of investor confidence. As such, foreign investment in Israeli startups accounts for 84% of the $5.2 billion spent last year. Apparently investors see a strong overall business environment with little risk, and a body of strong underlying firms that are likely to realize their investment goals. 

Adding to this, Israel’s research and development investments as a share of GDP are the highest in the world – tied with South Korea. According to Roland Berger, this creates a base for knowledge growth, which leads to new business developments.

Educated workforce

Since Israel lacks any natural resources, the country has worked hard to create a strong base of human capital to create value-added services and products. The country has invested heavily into education, with almost half of the country’s workforce holding a tertiary education level (compared to a 33.3% OECD average). Israel’s effective education network includes schools, university, and centrally, the military – in which every citizen must serve for a period of at least two years. The IDF trains soldiers to become experts in specific fields like engineering and technology, depending on their strengths. As a result, the country boasts many more engineers per capita than the US or Germany.

Furthermore, the large R&D investments mentioned above have driven Israel to hold a much higher per capita amount of full-time equivalent researchers, as well as a higher volume of published scientific and technical journal articles.

Israel's human capital

Strong technology sector

Owing to a similar strategy to that of Singapore – which emphasizes high value-added technology manufacturing – over 40% of Israels manufacturing exports are high-tech products. The average for OECD countries is 16%. What’s more, 60% of its exported services are of the booming information technology variety – compared to a 30% OECD average. As such, the country has developed a strong emphasis on high-tech goods and services exports. 

Government policy

The Israeli government has, unsurprisingly, created a supportive framework for new businesses. Policy initiatives have included extensive R&D support programs, marketing and network institutions, and various tax-reduction frameworks. For example, the government approved a $55 million plan last year to support the smart mobility industry – including autonomous vehicles and related technologies. 

Business culture

Israel is one of the most innovative countries in the world, according to the Bloomberg Innovation Index, where it ranked 10th. As mentioned above, the country has a very high rate of investment in R&D, accounting for 4.2% of GDP vs an OECD average of 2.4%. This translates into a high share of researchers – the highest in the world, in fact – at 17.4 per 1000 employed persons (versus OECD average: 7.8 per 1000).

According to the Roland Berger report, the education system – including the military – has created a direct and confrontational business culture with a strong work ethic. Israeli business culture also reflects a straightforward attitude toward taking risks, where failure in business is not considered shameful – an especially important factor for startup culture. Furthermore, the close-knit community of the country makes it relatively easy for businesses to find partners to team up with. Short geographical distances and clustered population centres further facilitate the ease of doing business in the country.

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