Innovation Europe > News > Innovation EU Vol2-1 > Innovation Israel

The effect of the global economic crisis hit Israel later than most industrialised economies and was to a certain extent ameliorated by continuing stability in the banking sector and no drastic drops in real estate prices.

The strongest indicator of lower economic activity was in government tax revenues which started declining at the start of 2008, in turn causing the 2008 budget to show a 2.8% of GDP deficit after reaching a balance in 2007.

The general election of February 2009 led to the election of a new coalition government that had no approved budget for the year. The budget was finally approved in July 2009 for two years and is forecasting a 6% of GDP deficit in 2009. The effects of the crisis on the innovation system were very fast: the public markets for IPOs on NASDAQ and the Tel Aviv Stock Exchange effectively shut down and funding of start-ups by venture capital contracted immediately.

It is clear that the crisis will also limit the capacity of local VC firms to raise new funds, but there is insufficient data to measure the exact effect yet. Israeli policy-makers focus nearly entirely on industrial innovation. Other aspects of the innovation system such as research in universities or thematic research sponsored by the government did not enjoy any increases in their budget, and there are indications that, in actual fact, the budgets for research and higher education, which were increased somewhat in 2008, will decline slightly in 2009.

Main innovation challenges

• Decline in private-sector funding for innovation, especially for start-ups, but also in more mature firms.
• Lack of enough larger innovating firms. Data shows that these firms provide higher additionality than start-ups and SMEs and are better placed to withstand crises.
• Long-term education programmes necessary for provision of required human capital.

Conclusion

The OCS is doing a good job and has done so consistently over the years, however their activity is not broad enough to encompass the real challenges that threaten a highly successful national innovation system. The government’s plunge into private equity involvement in biotechnology is encouraging because it demonstrates a willingness to try entirely new tools. This however deals with one sector and involves a level of expenditure that will not be onerous because it is spread over several years.

Coping with the problems of research and the higher-education system will be very expensive and involves debate at a national level. Similarly, creating a toolbox of incentives that will persuade entrepreneurs and venture capitalists to grow firms rather than sell them early will involve debate in which a broad variety of societal factors will have to be brought into play.

Regarding the challenge of company size, there is no toolbox of policy recommendations, but research shows that there is a clear economic advantage in going beyond the existing raft of innovation policy tools to allow more innovative firms to grow rather than be sold out.