Four Lessons From Israel: Learning From a Global Innovation Leader

Darren Gresch Research Associate, Innovation Policy

Paul Preston Associate Director Innovation Policy

Canada’s innovation performance has been weak for decades, earning “C” and “D” grades year after year on The Conference Board of Canada’s “How Canada Performs: Innovation” report card. To explore how Canada might improve its innovation ecosystem, the Conference Board’s Council for Innovation and Commercialization (CIC) organized a tour of key components of Israel’s innovation ecosystem for a group of Canadian innovation stakeholders in the fall of 2016. The Conference Board subsequently produced a report and a webinar on the topic.

Israel has the highest business enterprise research and development (BERD) spending when compared with the other Organisation for Economic Co-operation and Development (OECD) countries (see Chart 1); it has high-tech firms that attract massive amounts of venture capital and are deeply integrated into global technology value chains; and it has a large pool of well-educated and skilled researchers in a wide range of innovative technology and component areas. In short, Israel has established itself as a global innovation leader.

There are several metrics with which to compare innovation performance between Canada and Israel. In terms of researchers employed in research and development (R&D) per 1,000 employed, and new firms as a percentage of active firms, Israel performs better than Canada by almost a factor of two. As a percentage of gross domestic product (GDP), Israel has more venture capital investment and BERD than Canada by a factor of three. (See Chart 2.) Even more telling is that Canada lags the OECD average on BERD spending by a significant margin and is at the bottom of the developed nation pack.

However, these metrics do not fully capture the story of Israel’s success. How did Israel, a largely protectionist, agricultural economy in the 1950s, transform into one of the world’s leading nations for start-ups and rapid-growth firms?
Positioned in a tumultuous region of the world, the country shifted a massive amount of resources to develop skills and technologies for the military—at 5.7 per cent, military spending in Israel is higher as a percentage of GDP than it is in the United States. This required educating and training technicians and engineers on an equally massive scale, fundamentally re-shaping the Israeli labour force and positioning it for long-term, R&D-intensive activity. Further technological development and commercialization was led by firms in the private sector, while the government was responsible for procurement.
From exploring the innovation ecosystem in Israel, four broad lessons can be distilled and considered for Canada.

Find the Innovation Motivation

Israel’s geopolitical circumstances provided a reason to innovate—but why should innovation be a national imperative for Canada? Could Canada help solve climate change through its energy-related firms? With an aging population and rising health care costs, will health care stakeholders lead the charge? And will this represent our innovation motivation? Knowing where Canada’s strengths lie may be the key to creating a national innovation identity and subsequent innovation motivation.

Design Firm-Centric Programs and Policy

Traditionally, Canada has focused on its innovation ecosystem (universities, incubators, venture capital programs) without a clear sense of exactly how it supports innovation. There appears to be an idea that if the country is facing a large problem, government should have a policy to solve it. But there are vital roles for business, academia, and other organizations to play. And, while science and higher education spending are important for science policy, it does not directly translate into innovation policy. Putting firms at the centre of analysis, and designing programs from a firm-centric point of view, will provide a better lens on needs and opportunities.

Identify Global Supply Chain Niches and Revisit the Mix of Direct and Indirect R&D Support

It is important to focus on niche areas where you can have a strong impact, especially for countries with smaller populations and domestic economies. You can’t be everything—focus on key areas to drive the type of development and competitiveness needed. Israel focused on becoming an R&D leader for technology and innovation, tapping into global supply chains. They didn’t focus on being a leader in full-vertical value chains but, rather, they sought partners from around the world for growth and scale-up. In addition, Israel aimed to lower firms’ R&D risk by providing direct funding and loans for approved R&D projects, with some indirect support later. Canada, by contrast, has one of the most generous indirect R&D programs in the world, but provides less direct support to firms, relatively speaking. The direct funding model allows Israel to support specific R&D projects by firms, rather than simply reviewing tax credit claims for ongoing R&D activities. (See Chart 3.)

Address Gaps in Management and Marketing Capacity

Canada could benefit from improved education and training in innovation, sales, and marketing skills—this includes teaching at the high school level and possibly earlier. Young Canadians should be exposed to and informed of these career paths to avoid skill shortages of this type in the future.

Taken together, these form an important set of lessons for Canada, to drive innovation and economic competitiveness across the country. Notably, new programs from the Government of Canada may help address these learnings from Israel. The Innovation Superclusters Initiative (ISI), with an investment of up to $950 million for 2017–22, takes a firm-centric view of the innovation ecosystem. Also, continued support and expansion of programs offered by Innovative Solutions Canada, with a budget of $100 million to position the federal government as a first customer of Canadian innovations, are important steps toward more direct innovation support for business. It will take several years to see the full impact of these programs. Innovation success is not a linear process, it will require us to learn, adapt, and try new things. The extent to which we can accept some risk and ambiguity will determine the ultimate success of these, and other, initiatives.