August 29, 2009

By Ted Belman

We all know how Israel began its statehood as a socialist endeavour. Over the years the Histradut, Israel’s Labor Union, held Israel in a stranglehold. It was only a few decades ago that Israel was experiencing crippling inflation and high unemployment. Now Israel is the toast of the town, at least in innovation and entrepreneurship. How did we get from there to here.

In a major article, Silicon Israel, George Gilder explains. Here’s an excerpt.

In under 25 years—starting from those first modest tax reforms of the mid-1980s—Israel has accomplished the most overwhelming transformation in the history of economics, from a nondescript laggard in the industrial world to a luminous first. Today, on a per-capita basis, Israel far leads the world in research and technological creativity. Between 1991 and 2000, even before the big reform of 2005, Israel’s annual venture-capital outlays, nearly all private, rose nearly 60-fold, from $58 million to $3.3 billion; companies launched by Israeli venture funds rose from 100 to 800; and Israel’s information-technology revenues rose from $1.6 billion to $12.5 billion. By 1999, Israel ranked second only to the United States in invested private-equity capital as a share of GDP. And it led the world in the share of its growth attributable to high-tech ventures: 70 percent.

Even a year or two later—while the rest of the world slumped after the millennial telecom and dot-com crash and Israel suffered an acute recession—its venture capitalists strengthened its lead in technological enterprise. During the first five years of the twenty-first century, venture-capital outlays in Israel rivaled venture-capital outlays in all of the United States outside California, long the world’s paramount source of entrepreneurial activity in high technology.

Today, Israel’s tech supremacy is even greater. A 2008 survey of the world’s venture capitalists by Deloitte & Touche showed that in six key fields—telecom, microchips, software, biopharmaceuticals, medical devices, and clean energy—Israel ranked second only to the United States in technological innovation. Germany, ten times larger, roughly tied Israel. In 2008, Israel produced 483 venture-backed companies with just over $2 billion invested; Germany produces approximately 100 venture-backed companies annually. The rankings registered absolute performance, but adjusted for its population, Israel comes in far ahead of all other countries, including the United States.

Read it all.