Is the Startup Nation running out of steam?
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Photo credit: Ilan Shacham / Getty Images Israel

Photo credit: Ilan Shacham / Getty Images Israel

A new report says that Israel needs to wake up and see that other countries are catching up. This is what it suggests the Startup Nation needs to do

On Wednesday, the Chairman of the Israel Innovation Authority presented the 2nd annual report on the state of Israel’s hi-tech and innovation industry to Prime Minister Benjamin Netanyahu. Although 2015 was a record year in terms of exits ($8 billion), capital raised ($4.4 billion), and growth in number of companies (a net addition of more than 700 firms), the report identifies a long list of urgent challenges that threaten the continued growth of the hi-tech sector and its global position.

In a press release, Chief Scientist Avi Hasson warned that “We are at a crossroads…Thanks to the extensive activity in Israel over the past two decades, we have accomplished extraordinary achievements, but it looks like the ‘seven good years’ are over and that we are approaching our glass ceiling.”

The main challenges Israel faces is a downgrading in international innovation rankings and a shortfall in hi-tech talent. Israel has slipped in relation to global competitors on several important factors: Government R&D spending has dropped from 0.8% of GDP in 2002 to 0.52% in 2015 (although GDP has more than doubled), Israel has fallen in ease-of-doing-business rankings, and innovation as a national brand has been appropriated by countries like Canada, Australia, and South Korea.

Specifically, there is a serious projected deficit in skilled personnel will limit growth and competitiveness of the hi-tech sector. An estimated shortfall of 10,000 engineers and programmers over the next decade is the main obstacle for the continued success of the hi-tech sector.

Some additional concerns in the report were the following:

  • Meeting the increasingly diverse funding needs of mature and growth companies, e.g. supporting debt-funding through banks and government-guaranteed growth loans
  • The introduction of the OECD Base Erosion and Profit Shifting (BEPS) guidelines to Israel is set to complicate tax planning for more than 300 multinationals with R&D centers in Israel
  • Bringing innovation to Israel’s manufacturing sector is a must in order to boost productivity and bring up wages outside of the hi-tech sector
  • Preparing to seize the opportunities presented by the further liberalization of China’s economy
  • Supporting the upward trend of Arab participation in the hi-tech sector
  • Marshaling government support for the Israeli robotics ecosystem in order to fully develop its potential as a producer of final products and not just as a components supplier

These challenges come as the hi-tech industry has grown and matured, and the Innovation Authority has presented the government with its “Making a Leap” program that contains recommendations for addressing these issues. Whether there is the political will or competence to take the necessary steps are another matter.

Prime Minister Netanyahu responded to the report, stating “We have made enormous achievements, but must not rest on our laurels,” and acknowledged that while some measures were primarily budgetary, others would be more difficult to address. As recent reports from the OECD and the Bank of Israel suggest, underlying shortcomings in the Israeli economy threaten the hi-tech sector’s global competitiveness and its prospects of sustained success. If these are not addressed alongside the industry-specific challenges outlined by the Innovation Authority, the Israeli innovation miracle might be in danger of running out of steam.

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