From Regulation to Relaxation: the Story of Two Start-Up Nations

Since coming into power in May 2017, French President Emmanuel Macron has brought about a peak of new business, mainly geared at turning France into what he envisions as a “start-up nation”. Beyond private initiatives, the French government itself is to play a significant role in the process, from making vast investments into disruptive technologies and assisting start-ups in their initial stages, to announcing new policies that will appeal to global tech talent. In this regard, Tel Aviv has a lot to share with its Hexagon counterpart; with the highest number of start-ups per capita worldwide, Israel is a particularly desirable destination for many entrepreneurs and investors alike. Israel might have much to share with France in order to achieve its desired status of a start-up nation, as it too was once a highly regulated country.

At its onset, the state of Israel had been an extremely socialist country, where government had mostly exerted control over the economic scene. Between 1917 and 1948, the pre-state Israeli economy had developed against an ominous back-drop of an ongoing and bitter conflict. As a result, the Jewish community had established a strong identity, which happened to relate to the socialist sphere. Thus, the economy was dominated by agricultural collectives (Kibbutzim and Moshavim), an extremely authoritative and encompassing federation of trade and labor unions (the Histadrut), and a central government that owned all of the land. This state of affairs did not end with the War of Independence in 1948, and in fact the Israeli economy continued to be dominated and overtaken by the unions and the government.

Despite several attempts to liberalize the economy in the decades to come, protectionism, union domination, and massive expenditures by the central government continued to dominate the Israeli economic scene. This type of economic conduct inevitably led to an unmaintainable public debt predicament, monetization, and hyperinflation. Consequently, by 1985 Israel was forced to announce an extreme and wide-ranging stabilization package which had flung the economy onto an innovative trajectory. The essential necessity for a modern market economy began to be taken more seriously, and by 2009, a total of 96 companies were privatized in Israel, including major state-owned enterprises (SOEs). Privatizations were achieved in many sectors of the economy, including chemicals, banking, shipping, travel, and telecommunications.

Dire necessity had also contributed to the establishment of highly innovative environment in Israel. Israelis innovate because they must do so. In Israel, there exists a dire lack of natural resources such as water, so it became a world leader in water and agricultural technology. Scarce energy sources such as oil had propelled local initiatives to find alternatives. Moreover, the fact that Israel is surrounded by hostile players has led to the development of superb military technology. This also creates profitable spin-offs, particularly in communications. Furthermore, the flood of immigrants from the crumbling Soviet Union in the 1990s enormously enhanced national brainpower. In addition, Israel’s mandatory military service helps to reinforce its robust entrepreneurial culture, as during military service there is minimal guidance from the top, and recruits are expected to improvise, even if this means breaking some rules. Many young entrepreneurs and technical professionals in Israel were and still are molded by the mandatory military service that is enforced by government. In fact, many entrepreneurs in Israel originated from Israel Defense Forces’ high-tech units, such as the 8200 or the Mamram, or participated in elite programs such as Talpiyot and Psagot. These are extremely skilled technical professionals, which their years in the military have provided them with two main advantages.

Another circumstantial factor that necessitated great innovation in Israel is the fact that it is geographically remote from most major markets. Against this backdrop, it is apparent that smart policies played a key role in spurring innovation. The Israeli government made a vital premeditated choice to elevate the science based sector by providing financial funding for commercial research and development, which can be exported easily, regardless of distance between markets. Consequently, today one of the liveliest tech start-up clusters in the world is situated in Israel. As stated prior, some research has emphasized the early role of military research and development, which assisted in creating Israel’s innovative tech industry; at nearly 4% of GDP, Israel spends on research and development, public and private combined, more than any other country in the world. In addition, the Israeli government has gone through great lengths in order to employ more direct measures meant to boost the tech sector. In the 1990s, it subsidized venture capital, incubators, university research and development, and technology transfer programs.

If so, in Israel, very young firms receive a great deal of support. Accelerators, in which entrepreneurs may outline their concepts and meet advisers and investors, are being developed on an ongoing basis. In addition to abundant supportive accelerators, many start-ups receive preferential tax benefits. As a high-tech company operating a center in Israel’s geographical periphery, Amdocs for instance receives substantial government tax breaks. The company does not disclose the amounts, but the Economy Ministry’s Investment Center has a program that subsidizes 35% of salaries, on the condition that the wages are at least 2.5 times the national average. The subsidy can reach 40% in the first year of employment.

It is clear then that market liberalization, alongside circumstantial necessity have played a critical role in boosting innovation in Israel. When government had let go of the economic reins in Israel, it had enabled innovation to sprout, and support programs that were later initiated, assisted in maintaining and advancing innovation progress. Alongside economic liberalization and decentralization, the fact that the Israeli government had given financial aid and tax benefits to had enabled and propelled further entrepreneurship and heightened innovation achievements. The distribution of government induced incentives in the high-tech sector had greatly assisted in cementing Israel as vibrant a start-up hub. Moreover, mandatory military service, which is imposed by the government, assists in creating a job force geared to tackling and leading the innovation sector.

It seems that reduced government involvement in the private economic sector, alongside strong governmental incentives have all contributed to the formation of the start-up nation. As France seeks to cement its role as a start-up and innovation leader, Israel will have a lot to offer its longtime ally and friend in achieving this dream.

About the Author
Sharon holds a Master's degree in Political Science from Tel Aviv University and the prestigious Paris Institute of Political Studies, commonly referred as Sciences Po. During her studies in Paris, Sharon had interned at the Permanent Mission of Israel to the OECD, and was selected as spokesperson on behalf of the European Union of Jewish Students at the Human Rights Council at the United Nations in Geneva.
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