Israel became a high-tech hothouse because she had to. True, she enjoys favorable conditions for the growth of high-tech industries; chief among them, well-educated, inventive, enterprising people. Relative to the size of her population, Israel has more engineers, and sees more scientific articles published, than any other country in the world. (Israel has 135 engineers per 10,000 people; the US has 85.) However, the stimulus for the industry's growth has been national survival, military and economic.
David among Goliaths
As a small country in a hostile neighborhood, Israel must strive to maintain a qualitative military edge over her potential enemies. Experience in a series of wars has taught her that she needs to develop that edge independently as far as she can. In large part, her high tech industries are a spin-off from that process.
Israel fought the 1967 Six Day War largely with French weaponry. When President de Gaulle imposed an arms embargo after that war, Israel turned to the United States, and to herself. The commercial consequences can be seen today. Blades Technology, for example, a company originally set up to manufacture engine parts for the Israel Air Force's Mirage aircraft, now has annual sales of $90 million, and joint ventures with Pratt & Whitney and Rolls Royce.
In the 1973 Yom Kippur War, Israel was surprised by the technological capabilities of her enemies, and also experienced difficulty in obtaining vital materiel from her foreign suppliers. This spurred on the drive for technological supremacy and self-sufficiency.
Lavi grounded - high tech takes off
This drive proved to have its limits. Israel tried to develop her own combat aircraft, the Lavi. The cost proved beyond her and the project was abandoned, but this meant that, in the mid-eighties, hundreds of engineers with experience at the cutting edge of the disciplines involved were released onto the market. The Lavi project's demise has been described as one of the greatest ever boosts to Israeli high-tech industry.
New threats, new responses
The military imperative has not disappeared. Even in the era of the peace process, Israel must keep up her guard. The Iraqi Scuds that hit Tel Aviv in the 1991 Gulf War showed Israel's vulnerability to long range missile attack. The Arrow anti-missile missile, which Israel began developing as part of the Star Wars program, and which required considerable advances in radar and ballistics, is the answer. In general, the search for better systems in the areas of weapons, intelligence gathering, and command and control, goes on apace. The two leading Israeli high tech companies in terms of turnover are defense companies in whole or in part: Israel Military Industries, and Tadiran.
Economic imperatives - export or die
In part, the economic necessity derives from the military one. Israel's defense budget is inadequate for her to maintain her military advantage. One solution is export. Israel is indeed a highly successful defense systems exporter. Recent deals include the sale of Tadiran command and control systems to the Swiss army, and Israel Aircraft Industries' contract to upgrade combat aircraft for Turkey.
See "The Big Picture" - Standard & Poor's review of the Israeli economy and capital markets
However, the global defense market is shrinking. Civilian applications of the skills in software, communications, imaging, process control, and so on, developed through the military industries, have therefore become more and more important. For example, the need for better night-vision equipment led to local engineers becoming trained in the field of image processing, and to the establishment of two trailblazing Israeli high-tech companies: Scitex, and Elscint. Because Israel is such a small market, export is the name of the game in civilian products too. This provides a further incentive to maintain technological excellence, particularly in certain niche markets - network security, for example, where Check Point is a world leader.
Riding immigration wave
The wave of immigration from the countries of the former Soviet Union in the first half of the 1990s meant an influx of skilled scientists and engineers. The government's technology incubator program was largely a response to the need to provide these newcomers with employment, and harness their talents to the needs of industry. The immigrants helped fuel Israel's phenomenal growth rate between 1991 and 1994, especially in high tech. Since the rate of immigration has slowed, the Israeli high-tech industry has begun to suffer from a shortage of skilled manpower.
Israel has few natural resources. The aspiration of her population for a Western standard of living can only be satisfied through integration into the global market. Israel's transition from a centralized, protectionist economy to a free market means that traditional industries such as textiles are disappearing, losing out to low-cost overseas competition. How far and how fast this transition should go is a matter of debate, but there is no doubt that high-tech, where Israel enjoys a relative advantage, is expected to be a mainstay of Israel's economic future.
Foreign involvement
An important aspect of Israel's integration into the world economy has been increasing inward investment, particularly in the high-tech industry. Companies like Motorola, Intel, IBM, Nortel, Microsoft, Mitsubishi, Deutsche Telekom, and Baan, to mention just a few, have recognized that Israel is a fount of high-tech innovation they cannot afford to ignore. They have set up subsidiaries and research centers here, invested in Israeli companies, technology incubators, and venture capital funds, or found Israeli strategic partners. Annual foreign investment in Israel grew from $0.4 billion in 1992, to $2.36 billion in 1996, and $3.7 billion in 1997.
Next steps
In any discussion of the future of Israeli high-tech, the following points tend to emerge:
- The limiting factor on the sector's growth is a shortage of engineers and managers. It will take three of four years before graduates of expanded scientific and technical departments in the universities come onto the job market, and meanwhile, other solutions need to be found.
- The industry needs to consolidate through company mergers.
- The government's role needs to be reviewed. Many argue that government support for R&D is not sufficiently discriminating, resulting in financial and human resources becoming too thinly spread.
- Tax rules which hamper mergers and make it difficult to reward employees need to be revised. This process is in hand.
- Some in the industry see a danger in companies selling their new technologies to multi-national giants rather than seeking to become major companies in their own right.
- New directions need to be identified. Biotechnology is seen as the coming field. While Israel is well placed to exploit it, with outstanding life sciences and medical research institutions, this will mean a departure from the military-industrial symbiosis which has done so much to sustain high-tech development up to now.
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