Protecting the heart and soul of the economy

Asian countries are known for their patient diplomacy and Israel will have to brush aside its at times abrasive culture to boost relationships via “soft diplomacy.”

Prime Minister Benjamin Netanyahu (R) welcomes Japanese Prime Minister Shinzo Abe in Jerusalem (photo credit: KOBI GIDEON/GPO)
Prime Minister Benjamin Netanyahu (R) welcomes Japanese Prime Minister Shinzo Abe in Jerusalem
(photo credit: KOBI GIDEON/GPO)
When it comes to entrepreneurship, Israel is, quite clearly, a high performer.
The flash drive, Internet messaging service and commercial firewall originate in Israel. As a testament to the entrepreneurial spirit Israel possesses, the most innovative firms have seized the opportunity to establish offices there, including Microsoft, IBM and Google. Apple launched an R&D center in Israel a few years ago; until then it had only conducted research in its California HQ. Why has Israel done so well? Economists cite many reasons, including multilingual, educated and well networked workers who are gritty and determined to enact change.
Today, Israel ranks at the top of the OECD venture capital index, a measure of how much of residents’ income goes into supporting new businesses. About 0.18 percent of Israel GDP goes to venture capital, about six times higher than the OECD average of 0.031%. In 2013, 1,000 new businesses sprang up and Israel spent over 4% of its GDP on research and development, the highest in the OECD. Only China has more non-US companies listed on NASDAQ than Israel. Clearly, Israel performs well when it comes to entrepreneurial activity compared to the rest of the world.
With Europe and the United States still struggling to grow post-recession, a domestic market of just eight million people and a regional market notoriously unfriendly to Israel, the Israeli government has rightly turned to China. Bilateral trade with the Far-East superpower has risen from $50 million in 1992 to $9 billion last year. Last year, nearly $4b. of Chinese investment came to Israel, and the Chinese government has provided funds to some of its firms to invest specifically in Israel. Indicative of the strong relationship, this year Jerusalem-based Venture Partners joined with Shengjing, a leading management consultancy firm in China, for the Global Innovation Rewards, a global competition to find new start-ups.
But the “big picture” reveals there is potential for so much more. Currently, just 4% of exports go to China, a small figure when you take into account it is the world’s most populous country with a recession- busting growth rate of 7.4% last year. In fact, half of exports to Asia come from just two companies (Intel Israel and Israel Chemicals).
Economy and Trade Minister Naftali Bennett is quoted as wanting dealings with Asia to rise “tenfold.”
Asian countries are known for their patient diplomacy and Israel will have to brush aside its at times abrasive culture to boost relationships via “soft diplomacy.”
In October, Britain made quite a fuss over the Chinese president’s state visit, and was richly rewarded with $45.3b. worth of trade and investment deals and around 4,000 new jobs. While there is a backand- forth of government officials, no Chinese president has visited Israel since president Zeming in 2000. Given what happened in the UK, “getting the president over” appears a highly rewarding decision.
Making cultural connections is all the more important when the language barrier is virtually impenetrable, given that Israelis are already learning English as a foreign language, so to add Mandarin would understandably be a little overwhelming.
Brain drain also threatens to siphon off entrepreneurship, as the best minds move abroad in search for better career opportunities. This has long been a reported problem for Israel, and according to official government statistics, in 2014 an astonishing 21,400 Israeli academics were living abroad for at least three years, primarily in America and Europe. Just as bad, one in five PhD holders in computer science, statistics and mathematics have lived outside Israel for over three years. With high-tech companies dominating the start-up success stories, this is a considerable cause for concern.
To tackle this, the aptly named National Brain Gain Program was set up in 2013 to woo these self-starters back to Israel, and more than 250 have done just that. However, the program is entirely reactionary. A better option would be to make Israel a more entrepreneurship-friendly environment, so these individuals do not feel the need to set up overseas in the first place.
Science and maths education in Israel is in desperate need of improvement. Performance in science ranks at the very lowest part of OECD median, and the doctoral graduation rate in science and engineering just hits average. The OECD’s PISA exam, taken in 2009 and used to compare 15-year-olds around the world, scored Israel as 41 out of 64 countries for mathematics and science, a very poor result given that it is reliant on the application of these subjects to drive innovation and exports. It is perfectly plausible that would-be entrepreneurs go overseas to harness a more skilled workforce.
The Israeli government dedicates more of its resources to education spending than most OECD countries, yet performance ranks low in crucial areas. Spending more is not the solution. Stemming the brain drain through more serious and bold attempts at re-structuring the educational system and engaging in soft diplomacy offer more promising solutions to keeping up Israel’s entrepreneurial spirit in both the short and long term. With a globalized economy, keeping an entrepreneurial edge to stay ahead of your rivals remains as crucial as ever, and Israel cannot afford to take its foot off the gas when it comes to nurturing this spirit.
The author is a Research Fellow at The Jerusalem Institute for Market Studies.