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Israel's start-up tech sector doesn't come without costs to broader economy

Photo for Israel

David Rosenberg, author and journalist, speaking at UCLA Anderson School of Management about Israel's tech economy.

During a Nov. 6 discussion about Israel's tech economy, Haaretz Economics Editor and Columnist David Rosenberg talked about how the sector is thriving and attracting foreign investment yet leaving behind big chunks of the population.

"Israel has not found an industry where it's competitive outside of high-tech, so the situation is you basically have a tale of two cities in Israel – a thriving high-tech sector and the rest of the economy that does alright but not spectacularly well." - David Rosenberg speaking at UCLA

Issues and challenges faced by Israel's high-tech sector were highlighted last week by a prominent Israeli business journalist who has written a revealing book about the country's tech economy.

David Rosenberg, author of Israel's Technology Economy: Origins and Impact (Palgrave Mcmillan, "Middle East in Focus" series, 2018), told an audience at UCLA hat Israel's appetite for risk-taking has served it well when it comes to developing a booming tech sector and start-ups. He said tech success was helped in part by the development of Israel's military and defense industry.

"California has Silicon Valley, and in Israel, we're known as start-up nation," said Rosenberg, economics editor and a columnist at Haaretz, an Israeli newspaper. Israeli tech innovation and entrepreneurial culture have made it a global force in cybersecurity, autonomous driving, medical tech, and artificial intelligence.

Rosenberg's Nov. 6 talk was co-sponsored by the UCLA Y&S Nazarian Center for Israel Studies, the UCLA Anderson Center for Global Management, and the UCLA Center for Middle East Development. UCLA Anderson's Stuart Gabriel, Arden Realty Chair and Professor of Finance, introduced the discussion.

Over the past decade, Israel has had some years when as many as 1,300 start-ups have formed. Even so, the country has a poor track record of building and growing companies in Israel.

Nearly 8 percent of Israel's workforce worked in the high-tech sector at the end of 2018, essentially unchanged from a decade ago. Rosenberg said that's a serious problem since most Israelis don't have engineering skills that are required for tech start-ups or advanced research and development facilities.

The generally poor state of the country's K-12 education and the lack of inclusion of both Arabs and ultra-orthodox Jews in the tech economy is another key issue. Also, women are underrepresented in tech sector companies in the country of about 9 million people.

"The rest of the economy is left to fend for itself," he said. "Israel has not found an industry where it's competitive outside of high-tech, so the situation is you basically have a tale of two cities in Israel – a thriving high-tech sector and the rest of the economy that does alright but not spectacularly well."

Moreover, Rosenberg said Israeli start-up companies by their nature are small and, as a result, have a relatively little knock-on effect in the broader economy. In other words, he explained that the start-ups typically don't spend much and usually don't build factories or require much office space.

American companies have become significant investors in Israel's tech sector, and Silicon Valley companies have spent billions of dollars acquiring Israeli start-ups. Indeed, large multinational corporations such as Apple, Google, Facebook, and Microsoft are among the many firms operating research and development facilities in Israel.

"In Israel, the phenomenon is there are no big companies to sell yourself to because it is a start-up nation," said Rosenberg. "The start-up sometimes sells itself for crazy amounts of money. Companies with 10 or 15 employees selling themselves for hundreds of millions of dollars in some extreme cases."

Back in 2013, Google purchased Waze, a social navigation app, for about $1 billion. In 2017, Intel paid more than $15 billion for Mobileye, an Israeli company known for its computer vision tech for autonomous driving.

Israel's entrepreneurial culture comes from the country's original pioneer ethos, problem-solving orientation, as well as a history of teamwork in the military and other areas to achieve goals, according to Rosenberg.

"Zionism was a project every step of the way and was regarded as a mission," he said. "The second factor is a strong culture of teamwork and group loyalty, which is the obvious outcome of this kind of Israeli brand of socialism."

He said another outcome of Israeli history is a business culture with "a very strong stomach for risk-taking. High-tech and certainly start-ups, that's what it's all about.”

Meantime, the Chinese have become more active in Israel's tech sector and secured wide-ranging financing deals with start-ups despite concerns from the United States. It comes as Washington and Beijing are in a bitter fight over technology and trade.

"Oddly enough in all this, Israel is considered a technology power to the point that Americans have made it quite clear to Israel that we [Israelis] cannot be helping the Chinese to the extent we have until now," said Rosenberg.

He said it's still unclear whether Israel is helping the Chinese on the tech front "because a lot of what goes on is going on quietly."

Chinese companies have invested in dozens of Israeli start-ups, and the two countries maintain strong education ties in science and engineering. For example, Rosenberg said there's a joint Israeli-Chinese engineering college that operates in China.

"The Chinese are actually looking to Israeli technology to give them a leg up in certain areas," he said. Artificial intelligence is one area where the Chinese are trying to catch up with the United States.

He told the audience that Israel's tech sector is mostly unregulated, and there's been industry concern raised about having Jerusalem look hard at foreign investment because it could chill sector growth and become "a bureaucratic disaster."

Rosenberg credits Israel's focus on essential defense needs for creating industries such as electronics and communications back in the late 1960s, which then formed the basis of what became the high-tech sector.

"The first generation of Israeli technology was in telecom," said Rosenberg, who has covered Israeli business for more than three decades. "Where did this telecommunications expertise come from - it came from the army."

Finally, he gave a few examples of Israeli inventions – from consumer products to health care – that grew out of defense technology. Israel developed one of the world's first robotic vacuum cleaners in the 1990 based on guided-missile technology, and another Israeli start-up firm borrowed military tech to develop a pill-sized disposable camera that patients can swallow for diagnosing gastrointestinal ailments.

To view a Q&A with David Rosenberg, click here.