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RIO Country Report Israel 2015

 

Chapters

1. Overview of the R&I system

The Israeli innovation system is a dynamic one, with a large investment in R&D mostly from private funding and almost half of it coming from foreign investors.

Israel has an active start-up sector and the high tech industry is particularly dynamic, especially in some sectors like ICT. All important multinationals in this sector have research labs in Israel: Google, IBM and Microsoft.

The dynamic industrial sector is combined with a vibrant academic environment, which fosters the creation of new knowledge in a wide variety of topics. Collaboration and links are frequent, and successful innovations come to the market every year out of these collaborations, while the number of publications per capita is among the highest in the world.

All this makes Israel a world leader in innovation, which is reflected in any international ranking. In Europe, only Sweden, Switzerland and Finland show higher levels of innovation performance. Israel is ranked second (to the United States) worldwide in terms of venture capital availability, thus ensuring the right conditions for highly innovative small companies across all sectors.

2. Recent developments in research and innovation policy and systems

Israel is a small country, and its innovation policy is not centralised but distributed across different ministries, while regional authorities play a marginal role.

The Office of the Chief Scientist has led the recent comprehensive strategic process that examined how to adapt to the dynamic reality. This process was adopted and approved by the Israeli government by government decision number 2092 to establish the Israel Innovation Authority, , and aims to further boost research and development activities and foster technological innovation in the economy.  The new organisation is the result of closer collaboration between the Ministry of Finance and the Ministry of Economics, and it aims to offer a more flexible environment towards its customers. Thus future potential innovators will be organized in the following domains:

  1. Early Stage. Supporting innovators since the generation of the innovation aim at grouping previous existing programs: Incubators, Seed program, and Nuka.
  2. Groups. Helping small and medium sized enterprise (SMEs) and big companies on their different projects. These will coordinate the previous R&D fund, a basic pillar in the public funding of innovation for Israel.
  3. Academic and industry relations. Based on MAGNET, will focus on building and sustaining a healthy network of collaboration between the universities and firms. Closing the gap between the new knowledge successfully carried out by researchers in public and academics labs and the needs of innovative firms close on their activities to basic research.
  4. Advanced manufacturing. Building on the traditional industries program, the plan is to support process innovation in traditional products by pushing firms to be at the peak of the innovation international frontier, and helping them to drive up the country’s economy and diversify its exports.
  5. Public and societal needs. This domain aims at serving societal goals. It will cover an extended spectrum of activities from the transmission of military technology to societal goals, oil substitutes and cyber security.

All these domains will have a horizontal provider of international services, to assist innovators in accessing the international markets, providing them with legal support and informing them of international funding from which they could benefit.

3. Public and private funding of R&I and expenditure

Israel is an example of a country that has followed the principle of smart fiscal consolidation.  Hence, government debt has fallen from 69.9 % of the GDP in 2012 to 67.5% in 2014. Moreover, it seems to follow a stable decreasing trend. Meanwhile the proportion of public expenditure in R&D rose in those same years from 3.97% to 4.21%. The public debt has been reduced, yet it has never been at the expense of public investment in innovation.

In terms of public investments in R&D, Israel seems to be recovering from the effect of the crisis. GERD, measured as a percentage of GDP, rose steadily from 4.01% in 2011 to 4.11% in 2014. This highlights the recovery of the research and innovation system to global financial conditions, and stems from the very high share of business in funding R&D.  Total GERD figures relate only to civil R&D, as there are no unclassified data on the total expenditure of the large defence related R&D system. The government has never set out specific targets for R&D expenditure, and is unlikely to do so in the future.

The contribution of the business sector to the funding of R&D continues to rise, with its share of GERD reaching 84.71% in 2014. These levels, although normal for Israel, are surprisingly high, especially when compared with the EU average for 2013, where BERD contributed  63.68% of the GERD.

4. Quality of science base and priorities of the European Research Area

Israel is a highly knowledge-intensive country. It has a strong and dynamic academic sector and has achieved excellence in scientific and technical education and research. As commented in previous sections, Israel is well above the EU average for the majority of the R&I indicators.  A similar comparison is made for indicators of the quality of the science: in 2013 the number of publications per thousand of the population was 2.04 while the average for the EU was 1.43. It is well ahead in the international index for co-publications, reaching 46.6% in 2013 compared to the average of 36.4% for the same year.  The percentage of publications in the top 10% of journals in 2010 was 14.44 compared to 12.25 for the EU average. Indeed, Israel’s overall level of innovation performance places it among the group of European “innovation leaders”. The share of private public collaborations for 2011-2013 was twice as high as the EU average, a remarkable difference.

In terms of ERA (European Research Area) and Innovation Union objectives the report analyses each of the pillars, and in general finds that the country is moving towards these objectives. For all the objectives the government is presenting plans to make improvements.

5. Framework conditions for R&I and science-business cooperation

Israel ranks 53rd in the World Bank’s “Ease of Doing Business Index 2016” (World Bank, 2016), as to start a business in the country takes 56 days on average. The overall distance to the frontier is 70.56 (on a range of 1-100). The country has hardly been affected by the 2008 crisis, so no insolvency regulations have been needed. In general, only one out of ten entrepreneurs are successful with their ideas in the market, but society even encourages failure as a way to become successful. In comparison with previous years, however, the situation for doing business in Israel seems to have worsened.

The environment in Israel is highly conductive for young companies and for start-ups, so it is not without reason that the country is known as the “start-up nation”. The government is very aware of the need for new ideas and hence it offers pre-seed and incubators programs. Funding is also offered to SMEs, although there is no prioritisation of specific sectors. The aim of the government is also not to interfere with private VC, and supports mostly firms which are unable to attract investment from private markets.

The MAGNET program is structured to transfer knowledge and increase collaboration between universities and industry.

In 2014, Israeli high-tech companies managed to raise € 2.56bn and made a hundred exits worth about seven billion dollars, including mergers and acquisitions to approximately € 3.61bn, and IPOs about € 1.58bn.  Israeli venture capital funds raised € 688m this year, an increase of 68% compared with 2013. Investments of Israeli venture capital funds into local high-tech companies stood at € 432m in 2014.

6. Conclusions

The Israeli RDI system faces three major structural challenges that require systematic solutions. These structural challenges are as follows:

1. Reviving research in Israeli universities: Budgets for Israeli universities essentially stagnated during the first decade of the century despite a growth in the number of students, thus causing a decline in bibliometric scores.

2. Over-reliance on ICT: Companies dealing with computing and communications technologies are one of the mainstays of the Israeli economy. However, the period of explosive growth for ICT is over and policymakers have been trying for a number of years by various means to find new engines of growth.

3. State of Venture Capital: Returns on VC investments in Israel match returns in the US, where results have been disappointing.

Geo coverage
Report year
2015
Official publication date
Wednesday, 26 October, 2016
National expert name
Abraham Garcia Torres
Country Report file
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