How has Israel utilised neoliberal ideas and policy to
initiate its start-up sector?
Research Paper
by:Hannah Keaveney
h.n.keaveney@umail.leidenuniv.nl
student number: 2207370
03/07/2019
MA International Relations
Faculty of Humanities
Leiden University
Supervisor: Dr. Salvador Santino Regilme
Second Reader: Dr. Jeffrey Fynn-Paul
Content
Introduction 3
Literature Review 4
Theory and Methodology 13
Section I: Israel’s neoliberalism 18
1.1 Israel’s economic background 19
1.2 How Israel adapted neoliberalism 21
Section II: Yozma for start-ups 24
2.1 How Yozma results in start-ups 25
2.2 Yozma as a neoliberal tool 29
Section III: Research and Development in Start-ups 32
3.1. How R&D results in start–ups 32
3.2 R&D as a neoliberal tool 35
Conclusion 37
Introduction
On a per- capita basis, Israel was named the nation with the most start-ups-in the world (The Economist, 2014). Statistically, this accounts for 1 start-up per 1,400 people (Bordo, 2018). This is comparatively large given the size of Israel’s population being 8.6 million (Worldometers.info, 2019). Contrastingly, Europe accounts for 5 start-ups per 100,000 people (e-Estonia, 2019) with a total population of 734 million (Worldometers.info, 2019). Particularly successful start-ups are those in Israel’s technology sector. Over the years these have become increasingly successful and show no signs of slowing. Since its creation in 1948, Israel has been dependent on foreign monetary assistance and capital; funds are essential in fertilising the start-up sector (Broude, Deger ,and Sen, 2013). The technological start-up sector has been so successful, that President Netanyahu coined it the Silicon Valley of the Eastern Hemisphere (Israel Ministry of Foreign Affairs, 1997). Nevertheless, this title was not awarded by economic luck, it was carefully formulated by the application of neoliberal economic principles from the 1980s. The long term goal for the start-up sector in Israel was to achieve economic growth. Isenberg’s (2010, 11) study on Israel’s start-up sector advances that entrepreneurship was used to transform the economy.
It was the implementation of neoliberal policies that resulted in the start-up growth, which did not remain separate to the watchful eye of the state. Neoliberalism is defined as “entrepreneurial freedoms within an institutional framework characterized by private property rights, individual liberty, unencumbered markets ,and free trade” (Harvey, 2007). Block (2008) dictates in his analysis of Polyani’s work on the great transformation “even when the official ideology is laissez-faire, the state is deeply involved in managing market economies” meaning that the systematised market was not independent and needed government action to exist. This was integral in Israel's approach. As a result, the Israeli government used neoliberal policies tailored to their ambitions for economic growth (Nitzan and Bichler, 2002 p.30). This was done through tools utilised by the Israeli government, Yozma and Research and Development (R&D). The Yozma initiative combined with the R&D for venture capital both aimed at increasing funding for the start-up sector as part of Israeli government policy. The Yozma initiative is defined as being the creator of the Israeli venture capital sector, a government policy that generates equity investments in technology start-ups (Yozma, 2000). Moreover, their usage of neoliberal policies ignited a model of application in Israel’s political economy.
This thesis examines these models and answers the following research question: how did the Israeli government implement neoliberal policies to foster success within the technological start-up sector? The core argument of the paper is that Israel’s growth in the start-up sector was facilitated by a state-initiated neoliberal strategy implemented through Yozma and R&D as methods of neoliberal policies to encourage start-up growth. This paper assesses the research question by analysing how neoliberalism explains the actions taken by the Israeli government. This thesis can provide direction for future research and applicability of the neoliberal start-up connection, as well as on how success in the start-up sector can be achieved in the future, along with further knowledge. Through this approach, the possible limits concerned are bias by Israeli scholars rhetoric on the subject of neoliberalism and their start-up growth. Another possible limit to using process tracing as a method, as a qualitative research method, it has the ability to create generalisations (Beach, 2016). Nevertheless, choosing this approach has benefits as it has great potential for making causal inference in research (Beach, 2016). This thesis will continue in its organisational logic by reviewing the scholarly literature on neoliberalism, Yozma ,and R&D in Israel in the broader context. Secondly, it discusses the theory and research methodology utilised in this thesis. Thirdly, this analysis discusses neoliberal ideas and policies used by Israel in the initiation of its start-up sector in three separate sections. There is an evaluation and discussion of each section within the sections themselves. Finally, the thesis will conclude by confirming the research question and hypothesis set out in the paper.
Literature Review
Understanding how the economic foundation for start-ups was formulated is imperative. After Israel’s adoption of neoliberal principles in the 1980s, a great debate on economic growth began. Neoliberalism traditionally demands a market- first approach, however, there is state involvement according to Jessop (Jessop, 2002, 454-455) in the form of state intervention to progress new forms of governance. He elaborates that intervention is an appropriate form as “intervention is rescaled in the hope of securing conditions for a smoothly operating world market and to promote supply-side competitiveness on various scales above and below the national level”, this is important as Jessop acknowledges the presence of state intervention within neoliberalism.
Yozma and R&D are demonstrations of policies utilised by the Israeli state laced with neoliberal principles. Furthermore, they were utilised to cultivate start-ups by moving subsidies and providing a foundation for entrepreneurs to bring their innovative ideas into reality. Due to how they were formulated and applied, it is evident that both are neoliberal in nature. Therefore, this literature review aims to analyse the scholarly debate on neoliberalism; Yozma and R&D have focused on. This literature review is structured as such: first, it will pertain to the discussion of neoliberalism, focusing on Israel’s neoliberalism. Secondly, it examines Yozma and the scholarly debate regarding its function in enabling start-ups to be founded, particularly in regard to the connection between Yozma and the state. Then the discussion will pertain to how R&D by the Israeli Innovation Authority was involved in the founding of start-ups, particularly in regard to governmental subsidies. This is not the primary study on Israel’s start-up sector or its policies, nor is it a primary study on neoliberalism in Israel. However, this study aims to connect Israel’s start-up sector to neoliberalism and therefore contributes to the literature on Israel’s economic growth through its start-up sector by attributing it to a neoliberal strategy.
Neoliberalism
The rhetoric for neoliberalism is that it is “the necessity and desirability of transferring economic power and control from governments to private markets”(Centeno and Cohen, 2012). Regilme (2019, 5) argues that “within a neoliberal framework, a state establishes a coercive apparatus and a legal system in a way that makes free markets possible and secures private property rights”. Harvey (2007) states that neoliberalism has touched every corner of the globe with institutional reform and adjustment. Harvey places neoliberalism within the global political economy. Thus, these scholars place their perspective on neoliberalism within a retrenchment of the state from markets and society. To bring the literature to Israel specifically, Hooks (Hooks, Makaryan ,and Almeida, 2016) argues that both Israel and Ireland utilised a combination of neoliberal policy. Israel is very dependent on the global economy, which decides in a considerable extent Israel’s economic policy (Hanieh, 2003).
Nitzan and Bichler (2002) argue that since the 1990s, Israel’s usage of neoliberalism enabled Israel to become a destination for high-tech investors and a source of capital inflow. They argue that neoliberalism serves as an explanation of how Israel achieved such a high rate of growth
as a late- developing economy. They trace the path from Israel’s Zionist nationalism to an increasingly globally integrated neoliberal market (Nitzan and Bichler, 2002). This sets the scene for neoliberalism’s adaption in Israel within the thesis. Maron and Shalev (2017) attribute Israel’s conversion to neoliberalism due to political change through the Likud political party forming the governing coalition in Israel for the first time. They attribute this conversion to Netanyahu in particular through his abandonment of social democracy for capitalist principles (Maron and Shalev, 2017). Charney (2017)also attributes Israel’s neoliberalism to Netanyahu by stating that Netanyahu is the “champion of Israeli neoliberalism” due to his fierce adoption of it. To support this, Sperber (2015) connect this political change to neoliberalism with Israel’s rising inequality, relating this as detrimental to the Labor government and its Keynesian policies. He asserts that the Labor government was unable to connect said Keynesian policies with the economic rhetoric and demanded transformation that results from neoliberalism being applied in the global world economy (Sperber, 2015). Dyduch and Olszewska (2018) maintain that Israel’s neoliberal strategy was to ensure “sturdy industry and the government must support it”. As a result, these scholars firmly connect neoliberalism in Israel to its politics. Krampf (2018) argues that “in late-developing economies, states build markets to further their interests and in most cases, these endeavours are legitimised by nationalistic narratives, values ,and identities... national project just like any other national project” ( Krampf, 2018). He further analyses this by stating that many late-developing countries globally aim to govern their markets by creating links between the state and the market ( Krampf, 2018). He epitomises this concept through acknowledgement that without intervention by the state in the financial market, the state is doomed to a slow and long process for gaining industrialisation which would result it in being placed low globally in the world trade system and also result in lower levels of social welfare for its citizens (Krampf, 2018). Thus, he emphasizes the need for state intervention with neoliberalism. This is particularly relevant for the case study on neoliberalism in this thesis.
Messica (2008) argues that Israel’s growth in their exports and their high advantage was a direct result of globalisation of the competitive capital market in America. Preminger (2018) expresses similar views to Messica on the subject. He examines how Israel’s political elites subscribe to Harvey’s critique of neoliberalism ¨that human well-being can best be advanced by liberating entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade”. This change is portrayed as a change from the era of intervention to the era of liberalisation and globalisation
(Krampf, 2018). Preminger (2018), in his book Labour in Israel-Beyond Nationalism and Neoliberalism, he looks at neoliberal thinkers. Preminger (2018) adds to Harvey’s critique by adducing that the current Israeli political economy may also be based on a post- Fordist model: a model based on compromises between state, capital, and labour. Moreover, he asserts that capital in Israel reasserts its power over markets, akin to the United States and Western Europe. To further encapsulate this, Sabbagh (2019) stipulates that under neoliberalism individuals are not free agents that are not subject to the demands of the state. She reiterates that it is the state’s duty to interfere in society to create the institutions, laws and conditions that are necessary for creating market competition. It is evident that these scholars view neoliberalism as a management of the economy by the state in favour of economic growth, business/capital interests.
There are other academics such as Ben-Porat and scholars in the field of global political economy who are also combing the neoliberal approach with a globalised approach. Moreover, they are looking at Israel’s economic state expansion and how globalisation is an agent of neoliberal policies. Ben-Porat (2013) discusses the conclusion that globalisation is part of Israel’s economic changes and the dismantling of markets in favour of free markets. He argues that globalisation does this “in favour of the neoliberal order and a self-regulating market” (Ben-Porat, 2013). This encourages the “adoption of flexible identities” which enable the state to take advantage of “global world opportunities” (Ben-Porat, 2013). In addition to this, it is argued by Nitzan and Bichler (2002, 9) that globalisation is the neoliberal phase of capital integration and a global interconnection, they persuade that Israel is part of this as it has always been globally integrated, although they state that integration has not always been positive. Thus, affirming the presence of globalisation within neoliberalism.
Hooks on the other hand holds views that are notably different. Hooks discusses how Israel’s desire to increase its industrialisation was fuelled by state efforts to gain supremacy; however, Hooks (2016) chooses to examine the dramatic increase in inequality in Israel, which he chooses to highlight as “second only to the United States among wealthy nations”. His states that neoliberal cutbacks in social benefits and workers unionizing have caused this high increase in inequality. He argues that government subsidies are being utilised as a method of industrialisation for research and development. The predominant discourse in the scholarly literature on neoliberalism in Israel indicates the willingness of the Israeli government and state to utilise neoliberal policies as a tool to boost their economy, which is extremely prevalent in
the discourse. Although Israel is a late- developing economy, research adduces that it is an example of where neoliberal policies have been extremely effective in building an economy.
Yozma
In the scholarly discourse, Yozma as an entity is widespread in political and economic contexts. It is most often mentioned in regards to Israel’s growing start-up sector, particularly in its venture capital sector. According to Avnimelech (2009), Yozma was a venture capital “policy-enhanced process” of “targeted government policy”. Yozma appears as a policy of transformation that met Israel’s needs of enabling the change of “high tech sector toward a start-up-intensive ICT cluster” (Avnimelech, 2009). Buzzacchi, Scellator ,and Ughetto (2013) submit that Yozma is one of the most successful venture capital funds worldwide. Avnimelech (2009) further debates that Yozma was the catalyst needed for Israel’s venture capital industry. These scholars illustrate what Yozma is, a catalyst and the beginning of Israel’s start-up sector. The following opinions illustrate Yozma as a government policy as the key to Israel’s successful high-tech sector. “The objective of the government's policy was to encourage foreign VC firms not only to enter Israel and contribute to the development of a local VC industry but also to underpin the entry into international markets of Israeli high technology firms”(Khavul and Deeds, 2016). Avnimelech (2009) argues that Yozma was the trigger for spreading the growth of venture capital and start-ups in Israel. This is the scholarly perspective that is highly relevant to this thesis as it focuses on start-ups as the goal. Breznitz (2007) claims that an aim of Yozma was also to give the Israeli technology industrial start-ups the knowledge that of the American financial and product knowledge so that they could become commercially successful. As such, Yozma was the primary initiative to promote the Israeli economy and markets as it “mirrored the willingness of the Israeli government to take risks in VC investments” (Wonglimpiyarat, 2016). Wonglimpiyarat (2016), in light of this further clarifies that “Yozma funds were private VC funds that invested directly in the business start-ups”. Therefore, Trajtenberg (2002) also argues that Israel is a laboratory case to be analysed due to its government intervention. His argument revolves around the idea that the Israeli government through Yozma acted quickly in a need to catch up as a late- developing country. Trajtenberg’s (2002) point is that Israel developed Yozma as a neoliberal policy. It managed to attract important foreign investors who brought along their expertise, a feat made simple due to the
hospitality of Israel’s government. Agreeing with Trajtenberg’s (2002) argument Wonglimpiyarat (2016) advocates that Israel’s strategy through Yozma was to assure that “government financing did not crowd out but crowd in private investments”. Gold (2018) acknowledges this by advancing that the policy aided foreign investors and international enterprises in investing in Israeli start-ups by helping them overcome the fear of doing so due to having Yozma present. This is important as it created a safety-net for investors. This is supported by Khavul and Deeds (2016) who urge that due to the liability of newness associated with an investment in Israel’s venture capital firms, this liability created an incentive to syndicate with foreign and domestic investors. As a result, the literature affirms the usage of Yozma for start-up success, particularly through the linkage to foreign investment.
In Agmon and Messica’s (2008) view, Yozma was an essential bridge for Israel’s growth. They further engage in the discussion by arguing that Yozma was used to fund start-ups and the venture capital mission while stating that Yozma enabled a firm foundation for a joint venture in venture capital (thus, start-ups investments) between Israel and the United States. This they refer to as being the result of successful government intervention (Agmon and Messica, 2008). Baygon (2003) reasons that Yozma aided Israel’s venture capital industry in reaching the stage where the private sector was where more investments were sought instead of the public sector, thus, the private sector led the public sector. Baygan (2003) states that Yozma was needed to kickstart the private sector investment as Yozma gave start-ups their foundation and provided them with an amount of 100 million U.S dollars at the beginning with it later rising to 250 million U.S dollars by 1996. Essentially, by using Yozma as a tool it validated Israel’s entry into the global technological market by way of a government policy, which also acted as a catalyst (Agmon and Messica, 2008). Dyduch and Olszewska (2018) provide a critique of the research of Yozma, which tended to neglect the fact that Israel’s innovation came purely from government intervention only. They argue that “without constant financial, legal and also political (at home and external / foreign policy) support, the success of the innovative private sector would not be possible”.
However, a contrary opinion on Yozma’s relevance rests with Hamilton and Hepburn (2017), they argue that Yozma has been greatly successful, yet has also suffered failures. De Fontenay and Carmel (2010) question the extent to which Yozma is responsible. They argue that the increase in venture capital can be attributed to being primarily a result from global technology and financial booms, but they do concede that Yozma substantially accelerated the founding
of Israel’s venture capital industry and thus Israel’s start-ups (De Fontenay and Carmel, cited in Bresnahan, 2010). Notwithstanding this, Lerner (2010) argues Yozma was ultimately a great success in itself; despite previous efforts and failures in Israel to promote the nation’s high-technological entrepreneurship. Therefore, It is clear that Yozma was what worked. Meanwhile, Messica (2008) categorises FDI in Israel’s case to symbolise capital flows from developed countries to smaller developing and/or developed countries and their developing markets. Gilson (2002) regards Yozma from an American perspective as a continuance from American venture capital success in Silicon Valley. He argues that Yozma was highly influenced by the success of Silicon Valley and that Yozma’s investment was passive as the fund itself did not make investment decisions. Instead, it was the managers of the fund that would select which start-ups would gain the investment (Gilson, 2002).
Gilson (2002) also draws correlations between Chile’s Corfu subsidy program and Yozma, with both attempting to replicate the success of Silicon Valley. Ultimately, Gilson (2002) concludes that Yozma’s workings are consistent with a highly incentivized investment plan. The Economist (2008) also defends that “many people would argue that the world's second most important technology cluster, called Silicon Wadi (“canyon” or “gorge” in Hebrew), is essentially a clone of the first”. This is further supported by Gompers, Lerner, Blair ,and Hellman (1998) as the acknowledge that the Yozma program has successfully occupied spillovers of investment knowledge from American and British venture capital initiatives. Thus, as surmised from these scholars opinions, Israel utilised Yozma as a policy tool to promote investment within its venture capital industry and start-up industry, a firm example of state interference.
Research & Development (R&D)
To set the tone for R&D, Griliches (1980) states “R&D is an investment flow”. While Shefer and Frenkel (2005) state that the purpose of R&D is that “Investment in R&D spawns innovations, which in turn fosters economic growth”, this is the scholarly perspective that is highly relevant to this thesis as it focuses on the end goal of economic growth. “The Israeli experience is of interest because its high-tech sector boomed in the course of the last decade, both by national and international standards. Government R&D and innovation policies are perceived as crucial elements of this success story” (Lach, 2002). Justman and Zuscovitch
(2002) attribute this innovation policy to the Law of R&D promotion which was enacted by the Office of the Chief Scientist in Israel.
They further claim that the contribution of this policy through R&D to the Israeli economy has been substantial with their estimations suggesting a balance of 31 million dollars resulting from the policy alone. In support of this, Yu and Hang (2011) analysed a particular R&D program that created Intel Centrino chipsets and they argue that R&D in Israel has been a substantial commercial success, most in part due to to the state’s R&D policies. There is a large amount of discourse in the media concerning Israel being the most successful R&D centre in the world, this too is followed by scholarly opinion. Building upon Lach’s (2002) argument, Wu, Ma and Zhuo (2017) argue that the state of Israel funded “26.1% of all civil R&D by businesses in 1994 to support all types of research and development (R&D) from basic research to near-market research”. Their argument is that the Israeli government promotes innovation such as start-ups through their policies (R&D policies in particular) that their economic policies that encourage inward capital investments such as FDI Wu, Ma ,and Zhuo, 2017). In their work, they address innovation in emerging economies or late-developing economies. Their point is that international trade and incoming foreign investments are key players to helping improve innovation in late- developing economies, by using Israel as the example (Wu, Ma ,and Zhuo, 2017). As a result, it is highly evident that the scholars discussed above view R&D as fostered and initiated by the state through its conception in Israel.
Justman and Zuscovitch (2002) argue that Israel’s R&D projects filled a gap in Israel’s reform of their financial sector that allowed its entry and integration into capital and the world markets. They elaborate that this promoted their domestic venture capital sectors emergence through start-ups and that the R&D projects were essential in filling the gap for the country (Justman and Zuscovitch, 2002). This justifies the later start-up success and growth which is detailed within the thesis analysis. Moreover, according to Alam, Yuddin ,and Yazdifar (2019), the reasons for Israel’s successful R&D is intrinsically linked to their successful government policies, while contrasting it to Egypt’s poor government effectiveness, accounts for its poor R&D performance. Therefore, the government of a country is crucial in shaping its R&D. The idea is that by taking a proactive government approach to R&D, it can be used to influence innovation and thereby can be used as a tool to increase investment into the start-up sector. From research executed by Lach on Israel’s manufacturing firms between the years 1990-1995, Choi and Lee (2017) conclude that R&D subsidies do not work for large firms. The reason
proposed is that the R&D subsidy by the Israeli government finds that smaller firms perform better when given R&D subsidies. For example, most start-ups begin as smaller firms, thus making it ideal for them to profit and expand from R&D subsidies (Choi and Lee, 2017). This reinforce’s the presence and success of R&D within the start-up sector, rather than established enterprises within Israel.
Himmelberg and Peterson (1994) also share the opinion of Choi and Lee in that financing through R&D is best for small firms, especially those that are technology- focused as they utilise R&D to acquire technology. Meseri and Maital (2001) research how R&D plays a role and where the technology originated in Israel. The technology originates in universities, which is then transferred to the private sector to be commercialized. However, only 10% of R&D resources are allocated to the universities which Meseri and Maital (2001)identify as a problem. They persuade that this will be judged upon these criteria: “existence and size of the potential market and the need for the product; existence of intellectual property patent.; the probability that the proposed R&D project will succeed; the degree of innovativeness, and degree of maturity of the idea source” (Meseri and Maital, 2001). Therefore, R&D could be seen as instrumental in deciding which start-ups will be accepted in Israel, certainly by the Israeli innovation authority, to keep its reputation as a country which is successful with start-ups. According to other scholars, the initial objective of R&D policy for a country is to increase its innovation, thus increase its start-ups. The final destination ,however for the policy scope is to strengthen the position of the country among the leading knowledge and competence- based countries (Aiello, Albanese and Piselli, 2019). In Aiello, Albanese and Piselli’s (2019) view public R&D subsidies, are successful in stimulating private R&D expenditure. Framing it as very dependent on the government’s application. The scholarly literature on R&D chiefly emphasizes its importance in creating innovation and start-ups in countries and admits its usage as being instrumental in this shaping late- developing countries in particular.
This literature review on the concepts of neoliberalism, Yozma ,and R&D lays the infrastructure for the research question through determining different academic perspectives. Through the comparison and contrast of multiple perspectives within the literature, this section also pinpointed gaps in the research in line with how neoliberalism is connected to the start-up sector because start-ups have been a way to boost the Israeli economy and it is evident that neoliberalism was adopted by Israel. In regard to Yozma, a gap was found in the research concerning Yozma’s neoliberal link. Yozma is neoliberal in its application and was introduced
as an economic boost for start-ups yet, little research explores it as being a result of neoliberalism. In regard to R&D, the literature relies on economic knowledge and government application, narrowing the understanding of how and why it is implemented. The idea is such that today R&D is widespread and very much dependent on how a state applies it. As a result, the analysis of it does not take into account that it is highly linked with neoliberal economic policies, which can be shown with how Israel applies R&D. A suggestion for future research is to expand the scope by which these policies are analysed and to look at the global political economy of Israel as a whole and what the Israeli government aimed to achieve.
Theory and Methodology
The goal of this thesis is to analyse how neoliberalism was instrumental in the Israeli government’s economic policies after the 1980’s. This theoretical framework, mediated around neoliberal theory will substantiate the correlations between the key concepts and arguments of this thesis. What is crucial in understanding Israeli political discourse is that the endeavour to build its market was justified by nationalistic aims; by strongly connecting it to Jewish values and identity(Cohen, 2009). This will be validated later in the analysis by illustrating how Israeli neoliberalism was adopted and used in the country, the central assertion will be determined in the subsequent three stages. The first section of the analysis will consider Israeli neoliberalism with regard to both its own definition of neoliberalism and how it adapted neoliberalism. The aim is to inspect Israel’s neoliberal applications and policies in relation to how they were ultimately able to expand and build up start-ups. Starting from the position that Israel’s usage of neoliberalism kick-started it as a late stage economy, it allows for the continuation of the discussion on Yozma. Accordingly, this will be evaluated in the second section of the analysis. The goal is to examine Israel’s usage of neoliberalism namely: Yozma being neoliberal in nature and how such, one can analyse the process for which these policies were used as an instrument resulting in start-ups. Finally, the third section of the analysis will examine the role of research and development (previously under control of the OCS, now known as the Israeli innovation authority) and how it was utilised to stimulate start-ups. The capacity of this section is to assess how R&D was stimulated by the Israeli government, encouraged the establishment of start-ups, and how this was a result of neoliberal ideas. The conclusion of this thesis answers the research question provided and analysed throughout the thesis.
Neoliberalism is a theory and concept of market based ideas and policies. According to Cahill (2018, 985), through neoliberalism, “the state should be used to enforce competition and market rule even if this entails suppressing democracy or expanding the size and scope of government”. However, Konings (2012, 89) interpretation of neoliberalism is more relevant to the case study on Israel discussed here. He states “We need to move beyond an account of neoliberalism that is consistent with its self-description, i.e., as the subordination of governmental authority and public purpose to the disciplinary pressures of dis-embedding market”, as he affirms the presence of state involvement. Furthermore, Konings (2012, 89) expresses that the implementation of neoliberal policies “do not involve a literal retreat of the state from society” In Regilme’s (2019, 162) discussion on neoliberalism within the era of Donald Trump, he affirms “the role of the state as a guarantor of free markets, property rights, and capital accumulation”. As a result, he affirms the role of the state. Rapley (2005, 148) further connects neoliberalism with accumulation, being that of economic accumulation which resulted in very effective regimes. Scholars argue that the purpose of neoliberalism is to place all public and private institutions into a sphere, whereby they would behave in a manner reminiscent of business corporations (Crouch 2011, 167). The overall discourse is that state intervention in a neoliberal sphere is consistent with creating an economic order based on competition that has its foundations in private property. This resulted in a profound impact on economic globalisation (Ravenhill, 2017).
Krampf (2018) an Israeli scholar, defined neoliberalism as the process that “led the government to abandon its policy of direct intervention in favour of deregulation, liberalisation and privatisation”. Krampf (2018) identifies that this was done for the function of “the need of Israel and especially its right-wing governments, to create an economic reality that reduces the pressure Israel faces from the international community in the wake of its continued occupation of the territories”. He emphasizes how neoliberalism was a means to an end and such a theory was applied to prime and shape the target (which in this case was the economy) into a realm whereby it would be accepted internationally.
Regilme (2019, 159) establishes that neoliberalism as a political economic theory aims to advance entrepreneurial freedom within a governmental structure which includes a free market, private property and free trade. His analysis heightens the aspect of state responsibility regarding the implementation of neoliberal policy in respect of internal and external networks which is necessary regarding the process of capital accumulation and economic market
expansion. In stating such, Abramovitz (2014, 226) also emphasised that neoliberalism advocates that it is the markets that should be the main tool for governance of the economy, society and politics. The critical outlook of the scholars in question has enabled the state responsibility for neoliberal policy perspective and governance to be placed within international relations while acknowledging the importance of the markets for economic growth. In saying this, neoliberalism continues to be one of the main theories within the study of global politics, while proposing individual and market freedoms (Hayek, 2001).
It is argued by Hayek (2001) that an ecosystem for innovation can be achieved through neoliberal policy for establishing the free market which in turn fuels competition. This has led to neoliberalism becoming hegemonic in its discourse in its persuasion through its encouragement of entrepreneurial risk and innovation (Harvey, 2007). The definition of neoliberalism that will be employed in my analysis will be the definition of Regilme (2019, 159) as it takes into account the entrepreneurial freedom associated with neoliberalism stemming from a government structure. This is further encapsulated by Freeman (2007) as she proposes that the entrepreneur and emerging entrepreneur is the classic actor for neoliberalism. Hardin (2012) associates neo-liberalisms political reasoning with a prescription for citizens to be entrepreneurial and to have the freedom to become such. This is important for the analysis on Israel as the adoption of neoliberalism is highly interlinked with the entrepreneurial freedom associated with the policies of Yozma and R&D.
The next compelling concept for deciphering the research, is that of ups. Typically start-ups are new business ventures that are created to meet a need in the market with the aim of creating a product or service. For instance, Robehmed (2013) of Forbes describes them as “when people join your company and are still making the explicit decision to forgo stability in exchange for the promise of tremendous growth and the excitement of making immediate impact”. In the case of Israel, this is confirmed as “new high-tech ventures are seen as an essential element of the economy” (Chorev and Anderson, 2006). There are also contrasting international perspectives for how start-ups have contributed to a country's success. Idealistic expectations regarding profit, caused a lack of substance which caused high technology start-ups to crash from what is known as the dot.com bubble and Nasdaq crash (Chorev and Anderson, 2006). However, this was not the case with Israeli start-ups as they continued to flourish. Another crucial point is that it is necessary to comprehend start-up financing, which is most often conducted through venture capital. This is initially done with less funding than
necessary for the business plan. This is done in order to test whether or not the start-up performs well; it will then be financed further if it does (Bankman and Gilson, 1999). Having established the concept of start-ups, the thesis will explore the neoliberal policies and methods utilised by the Israeli government to foster them.
In response to my research question, this thesis is structured regarding the ensuing organisational plan. In the following section, I will discuss Israel’s economic background and it’s late- developing economy. I will also trace it’s economic evolution in order to develop the stage for how neoliberalism was incorporated to effect economic growth and change, which was later enacted by encouraging start-ups. In the second part of my first section I will introduce how Israel adapted neoliberalism and discuss the Israeli perception of neoliberalism by Israeli academics. In my first section, the scene will be set to answer the research question, ‘How did the Israeli government implement neoliberal policies to foster success within the technological start-up sector? In the second section, this thesis critically analyses Yozma as a government entity that encourages ups. This section will trace how Yozma results in start-ups and how it has benefitted the economy. The second part of this section will analyse how Yozma is a neoliberal tool, designed to effect economic growth through encouraging start-up formation. That section constitutes a core element of the paper as Yozma is seen as a catalyst for the beginning of Israel’s start-ups and its connection with neoliberalism is a vital part of the core argument of the thesis that neoliberalism encouraged the initiation of Israel’s start-up sector. The sub questions of ‘What policies did the Israeli government set forth to encourage technical start-ups?’ and ‘how are these policies neoliberal’ will be answered in this section concerning Yozma.
The third section of this thesis, makes the substantive case that R&D is another catalyst that has been used by Israel to fertilise its start-up sector. In this section, the process is traced for how R&D results in start-ups and what steps are available to entrepreneurs. The second part of this section concerns how R&D is utilised as a neoliberal tool by Israel to foster economic growth through start-up formation. It outlines the conditions for which R&D is a neoliberal tool and confirms its usage as being part of Israel’s neoliberal plan. The sub questions will also be answered in this section concerning R&D. I conclude the thesis by confirming the answer to the research question and sub questions by affirming that Israel has utilised neoliberalism to initiate its start-up sector which has resulted in economic growth for the country in the era of growing innovation.
In terms of methodology, this thesis will utilise the process tracing approach in order to examine and analyse the application of neoliberalism in Israel and how its application resulted in successful start-ups in the country. The process tracing approach allows for the discovery of how the world works and how to extrapolate explanations into a conclusion of research. This approach was selected as it will help focus on the causal mechanisms of how start-up’s in Israel came to be. As a method it can contribute to political, economic and social phenomena (Collier, 2011). In examining the research question, this study will utilise primary and secondary research sources. In regard to primary sources, this thesis will analyse and inspect official Israeli government documents, speeches, and news documents. The secondary sources that will be used, will consist of academic articles and books which have been written by multiple academics such as Jonathan Nitzan, Shimshon Bichler, Asa Maron and Michael Shalev. In order to explain Israeli neoliberalism, books written by Israeli scholars, as well as academic articles are examined. The chosen books and articles were written to examine the Israeli neoliberalism transformation. The academic articles featured will mainly be from prominent Israeli academics such as Maman and Rosenhek. The reason for choosing these books and articles is because it is important to examine what Israeli academics have said regarding the discussion and to observe their conclusions regarding Israeli neoliberalism. In this section the theory of neoliberalism will be utilised in order to comprehend how and why the Israeli government used neoliberalism to build the economic aspects of their economy, as opposed to just aiming to connect it directly to the success of start-ups. The scene must be set first, to demonstrate how Israeli adapted neoliberalism to its own economic culture. This research will be an empirical analysis utilising a qualitative research method. This paper will also observe how neoliberal principles were utilised to trigger the success of start-ups and how it was an instrument in the Israeli government’s policy initiatives. Such policies discussed include Yozma (a group through which the Israeli government leveraged financing to companies) (Baygan, 2003) and research and development (R&D: innovative activities taken by governments and companies in order to develop new products or new services (Kenton, 2019). Neoliberalism in Israel has been adapted differently than in other parts of the world; the United States for example. It is of great importance to specifically state how neoliberalism in Israel is different and unique. As a result, the academic discussion on the subject is very Israel focused with little focus on other countries for comparison, which creates the need for specificity on the subject. However, the subject does also connect certain concepts such as ‘Silicon Wadi’ to
‘Silicon Valley’ and Taiwan. This is done as the Israeli government focused on emulating ‘Silicon Valley’s’ start-up growth.
Section I, Israel’s Neoliberalism
This section will lay the foundations for answering the research question. In such, it will discuss neoliberalism and how it has been applied in Israel. The chapter will portray how Israel’s academics define neoliberalism and discuss how Israel has adapted neoliberalism as a tool and the significance of neoliberalism in regards to building the Israeli start-up sector.
1.1 -Israel’s Economic Background
Israel is a country located in the Middle East. It became an independent state as a result of the termination of the British Mandate of Palestine in 1948, making it a young state at only seventy years old. It had few natural resources and very little financial resources. This was coupled with an inadequate economic framework. It has grown remarkably since this time both on a local and global level. Being a late-developing country, we have the ability to view its economic growth in line with the global political economy. When addressing Israel, it is important to mention the role of Zionism within its global political economy, as it was the ideology that effectively founded the Jewish state. Zionism is a Jewish movement that supported the creation of a Jewish national state (Brown, 2001). Its role today is centred in making Israel an effective and globally integrated Jewish state, both economically and politically. Early Israel (post-1948) was founded upon socialist principles and during its early conception, its economic growth was similar to that of a developing country (Zilberfarb, 2005). Early financial support from the World Zionist Organisation and the British mandate led existing labour organisations to be structured around the Histadrut,a Zionist trade union established in 1920 (Maron and Shalev, 2017; Zionism-israel.com, n.d.).
Nitzan and Bichler (2002) deemed Israel to be the a very socialist country due to the extent of which the government enacted socialist principles upon Israel’s economy. Its government budget was in excess of its economic output and the country was under a constant state of threat due to its security situation. In order to combat this, Israel in the 1970’s moved to a statist
political economy approach to boost its economy (Nitzan and Bichler, 2002). Moreover, the austerity program Tzena was implemented through statism. Tzena was aimed at combating Israel’s lack of financial reserves and the countries unsupported mass immigration which occurred as a result of its independence. Tzena promoted statist rhetoric in that it ensured that the government controlled every aspect of the economy. In particular, every citizen received the same food rations, irrespective of their role in society (Naor, 2008). Without such a measure, Israel would have become an aborted state both economically and physically. The food rations were constructed by Dov Yosef who combined his Zionist view with the need to have full governmental control over the country. In particular, he exclaimed that if Tzena had not been enacted, thousands would have perished from starvation (Naor, 2008). The statist concept derives from Fredrich List, who conceived the term as a reaction to his support of infant industry and his criticism of England’s imperialism (Selwyn, 2009). In particular, Lists proclamations became a proponent of the popularisation of nationalism (Levi-Faur, 1997), which also aligned into Israel’s nationalist rhetoric.
Governmental interference in the Israeli economy naturally enabled it to choose statist principles as its tool of choice, with it being a state that was completely controlled by political parties. In economic terms, this links in with Zionism as statist political economy dictates that the state should be the controller of the economy (Selwyn, 2014). This was important for Israel as it allowed it to achieve broad macroeconomic goals and macro-political goals of stability and militarisation (Nitzan and Bichler, 2002). Between 1950 and 1965, Israel’s economy began to grow, achieved from the outside rather than the inside, in the form of capital aid. The United States enacted loans and donations towards the state, while Germany began its reparations and restitutions to the country, as well as to individuals (Eh.net, n.d.). These repatriations were crucial to the states infrastructure, as they allowed the building of roads, trains and ports (Solomon, 2018). The adoption of statist principles in Israel to fulfil its desire for economic growth was dependent on two factors.
The first challenge was a direct result from the Holocaust. This resulted in mass immigration of European Jews to Israel. The second was a goal of a stabilised economy in Israel and a fair, even distribution of burdens throughout society (Gross, 1990). The impact of immigration from the 1950s on the country was profound in that it resulted in food rationing which only deepened the government involvement in the country. The Yom Kippur war of 1973 caused stagnation
to the Israeli economy and caused the economy to become entirely dependent on the state, thus resulting in a strong statist political economy.
There was a massive debt increase and very little labour force due to military drafting, which in turn brought economic growth to a halt. As such, all industry in Israel received generous subsidies and protection from tariffs, while the Israeli financial sector was nationalised. These measures carried out ensured that the Israeli markets were effectively closed to foreign interference (Israel21c.org, 2008). This was then followed by a period of stabilisation after the war, by which government expenditures were cut back in order to recover the economy, which in turn resulted in a more efficient private sector. Shimon Peres, the Prime Minister and Minister of Finance was a major player in the stabilisation plan of 1985, aimed at halting economic hyperinflation while also beginning a process of liberalising the political economy. This ensured a transition to an era of technocracy whereby political party politics were neutralised in favour of macroeconomic state institutions and agencies becoming the surveyors of a new state economic project (Maron and Shalev, 2017). The measures carried out by the Israeli government ascertains that statism was more powerful economically than Zionism for Israel. Zionism although present since Israel’s beginnings, even before its independent statehood, had established a community which resulted in a weak and rural economy (Hadar, 1990). Statism allowed for a functioning economy to be driven by the late-developing state. In the mid 1980’s Israel began to adopt a neoliberal agenda, along with the rest of the westernized political economy. The agenda was to open Israel up to foreign currency, investment, and to its consumers (Israel21c, 2008). This allowed Israel to become globalised and would allow its economy to become globally integrated.
The adoption of neoliberal principles was a turning point for Israel (Krampf, 2018). Neoliberal practices went against their statist rhetoric and closure to foreign interference (Bichler and Nitzan, 2002, 19-20). This case advances the perspective in determining how a late-developing country can become economically viable and successful within their commitment to improving their economic standing. It could be argued that the main deterrent for Israel’s economy was their constant state of threat, but rather it was their mass immigration during their early years. Israel is now prepared to handle heavy immigration, after absorbing high rates of immigrants (Shachar, 1998, 209-210). Furthermore, immigration has slowed, stabilising the country. One of the main indications of Israel’s economic growth is through the application of neoliberal policies. As a result it was able to exert itself to become a highly successful start-up hub. It also
raises questions as to how the Israeli neoliberal policies were enacted. The state government shifted economic focus to build innovation and development from neoliberal ideals in the hopes it would foster success.
1.2 - How Israel adapted neoliberalism
The agenda of the Israeli government to open Israel up to Foreign Direct Investment (FDI), foreign currency and innovation is an example of how Israel adapted neoliberalism. Given this consideration, this subsection will provide an analysis of how Israel adapted neoliberalism and how it came to influence the establishment of start-ups. Neoliberalism has been one of the most widely used global political economic theories of the twentieth and twenty-first century for analysing the economic liberalisation of countries. Its origins began as an alternative to Keynesian thought in the western political economy. Hooks (2016) mediates it to be “a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedom and skills within an institutional framework characterized by strong private property rights, free markets, and free trade”. The theory is now mediated to have had real world effects, particularly within the fields of markets and innovation. It has been argued over the years that while many policy makers and scholars recognised the potential of neoliberalism, the idea only gained popularity after Milton Friedman asserted his interest in it (Hooks, 2016).
Israel began their adaption of neoliberalism in the 1980s. Some Israeli scholars attribute Israel’s adaption of neoliberalism to state institutions being developed by the government, a change in domestic political processes and the evolution of new ideas. Other scholars regard it to be a result of an amendment to the balance of classist power, which in turn lead to financialisation and capital globalisation (Maron and Shalev, 2017). Essentially, the idea of neoliberalism’s application is that it is not a consistent amalgamation of ideas, models and formal institutions that are applied in identical processes in every location and context. Neoliberalism varies because it cannot take-over existing cultural interactions in every country. Instead, neoliberalism moulds itself to fit into existing cultural and institutional regimes which exist within the national political economy of a country, while replacing some previous economic processes and adding new ones (Brenner and Theodore, 2002, 342-343).
The former Israeli Prime Minister Shimon Peres, attributed Israel’s adaption of neoliberal ideas to Netanyahu, whom he accused of spreading “piggish capitalism” (Maron and Shalev, 2017). This attributes the shift in economic ideas to Israel’s political economy, resulting from the political controversy which occurred in 1977, whereby the Likud party formed a governing coalition government for the first time since the creation of the state. The original idea was for neoliberalism in Israel to be a state market building project as building a market economy can be articulated as a national project, which is at ease with any other national projects (Krampf, 2018). For Doron, Israel’s adoption of neoliberalism is due to an ideological conversion to neoliberalism as a doctrine (Maron and Shalev, 2017). Geddes regarded this project as an immense instrument of government; she believed that in order to comprehend the political aspect of economic liberalisation for countries, those analysing it need to examine it in respect of the interests of the state and its state officials (Maron and Shalev, 2017).
The design of neoliberalism in Israel began through the dismantlement of the Histadrut workers organisation that had been a crucial tool of Israel’s statist and socialist state. It had often acted against state expansion, its tools of public services, pension funds and economic ventures were demolished with no alternatives set-up to replace their functions. Therefore, control would be maintained by the Ministry of Finance “reinstating the pivotal positioning of the Ministry of Finance within the state configuration and to restore its power” (Krampf, 2018). In evaluating how Israel implemented its adaption of neoliberalism on its economy, Maron and Shalev (2017) argue that four specific forms of governmental policies were instrumental in increasing neoliberalism in Israel, through augmenting the establishment of large businesses and increasing political importance of said large businesses. These specific forms are the privatisation of public and Histadrut owned enterprises, dismantling the dominant role of banks in the economy, financial liberalisation policies, and changes in state subsidies for businesses. Over the last few decades, the constitutional creed of the neoliberal axiom is the withdrawal of the state from the economy. While the privatisation of industrial and financial institutions that are state owned is of great importance to this axiom, it can also be utilised to deliver a strategy to forward the interests of state agencies. Through the selling and privatisation of state and Histadrut entities, Israel’s finance ministry was able to reduce its vulnerability and its serviance to the demands of trade unions. This led to what are currently the largest and most successful business groups in the country such as the IDB group (Maron and Shalev, 2017). The establishment of the Brodet committee and the Bachar committee prohibited Israel’s banks
from occupying real economic assets and also introduced new financial competitors into Israel’s financial markets. This aided the development of primary and secondary capital in Israel’s market (Sokoler, 2006). The reform of the financial system was achieved by introducing new rules and instruments in order to liberalise it. The reform was initiated by the Ministry of Finance by reducing the capacity by which institutional investors would invest in state bonds. This resulted in colossal volumes of money being transported into the financial circuits (Maron and Shalev, 2017). Against the general neoliberal thought of free market with little to no state involvement, the state of Israel has continued to be directly involved in channelling direct and indirect financial aid to privately owned corporations. Previous to its adaption of neoliberalism, state support generally went to financing big businesses in order to create jobs. With the adaption of neoliberalism, the state’s financial aid is more selective and has been directed in supporting innovation, start-ups and research and development (R&D) (Maron and Shalev, 2017). The most blatant example is its technological sector which benefits from investment grants along with tax benefits to both local and foreign firms established in Israel. The neoliberal agenda of Israel was aimed at creating opportunities and incentives for heightened concentration. This was driven by the involved and ardent role of state agencies, which shows the interests of the state agencies for what the economy should look like rather than the power of capital itself.
The purpose of this section is to discuss how neoliberalism was adapted in Israel and how it eventually led to the formation of the start-up sector. One of the key debates after the liberalisation is about businesses in Israel having structural power over the state itself. One may argue that this is indeed the case. Yet, the state continues to influence which major competitors gain access to their finance and investment sectors and how far they gain such access. Moreover, Israel’s state agencies managed Israel’s adaption and transition to neoliberalism by shepherding the economic growth and integration. This process means that the state did not retreat from the economic sector in the adaption of neoliberalism, but altered their variety of involvement. The further purpose of this section was to administer an insight into how neoliberalism in Israel was triggered and the debates surrounding its economic incorporation. As such, neoliberalism is a mechanism which shows how governments, in particular those in late- developing economies can foster financial investment and competition, which is then leading to innovation.
Section II - Yozma and start-ups
Following the analysis of Israel’s neoliberalism in terms of how its economy was built and how Israel adapted neoliberalism, this section will analyse Yozma as a tool for the conception of start-ups in Israel. The coming section intends to examine how Yozma was conceived and its practices as an instrument for fostering start-ups driven by Israel’s neoliberalism. The concept is that neoliberalism in Israel aided in asserting their goal of building a high amount of start-ups and Yozma was a conceived tool in order to achieve this goal. This section will establish how, because of Yozma’s application in Israel, start-ups were created and how the implementation of Yozma is neoliberal. The first part of section two will evaluate how Yozma resulted in start-ups, and refer to the conception of Yozma in the pursuit to conceive ‘Silicon Wadi’ as a start-up centre in Israel. The second part will state that Yozma is a neoliberal tool due to it encouraging FDI, being part of neoliberal social imaginary and being part of economic growth within a developmental state.
2.1 - How Yozma results in start-ups
Israel’s quickly rose to become a global leader in start-ups. “Israel houses one of the world’s highest performing innovation ecosystems and a leading source of technologies that change the world” (Itrade.gov.il, n.d.). This has been generated by extensive planning by the Israeli government and has formulated a great deal of discussion on how the state achieved this. In particular, debates focus on how Israel created Yozma as an apparatus. The past section examined and analysed neoliberalism in Israel as well as Israel’s economic background, which both combined eventually triggered Yozma, as an economic tool for kick-starting innovation practices in Israel. As such, the discussion of neoliberalism applied to Yozma’s activities leads to a debate on how it aided in start-up formation. Another large debate, which arose from Yozma’s activities is that it had the ability to leverage money from public government funds in order to attract foreign private investment into Israel. It is an example of a government venture capital initiative being a success. In such, few other countries compare to Israel in ecosystem of support for innovation and venture capital. Some scholars have observed that the process of emergence of venture capital in Israel was the transformation that was needed for the intense start-up industry (Avnimelech and Teubal, 2004). As a result, there is much
discussion on the policy process of how star-ups came to be, with its catalyst deemed to be Yozma (Bartzokas and Mani, 2004).
In order to encourage innovation, government policy is essential. In recent years it became part of the Israeli plan to encourage the cluster of start-up formation. Prior to Israel’s stabilisation and Yozma’s conception economic inflation was at 445% (Steinitz, 2011). Due to little employment opportunities, many Israeli’s had emigrated to the United States to work in the newly founded Silicon Valley (Ellard, 2019). Prior to Yozma, the total number of start-ups in Israel was approximately 200 companies (Ivarsson, 2013). Yozma’s establishment occurred between the years 1993-1998, with the design to embolden growth of the technological start-up industry with capital invested from venture capital funds. There is legitimation to this, if one is to regard the immigration aspects of Israel, for much of the immigrants skilled in science and engineering were greatly influential in the setting up of the start-up industry which kickstarted the government development of Yozma. Israel needed a reason to keep its skilled technological citizens in Israel, rather than encourage their emigration to work in Silicon Valley. Yigal Erlich, who was credited as being the founding father of venture capital in Israel and the current manager of Yozma stated that creating start-ups through Yozma was a result of three specific things to Israel: a wealth of human capital, mass immigration and an entrepreneurial spirit (Brenner, 2019). By way of identifying a market failure in Israel and the lack of investment capital for start-ups, Erlich achieved a professional venture capital industry that was aligned with government support to fund the technological innovations in Israel. It should also be noted that start-ups are a worldwide phenomenon of which Israel has taken part of, since their unprecedented success in Silicon Valley. It is noted by Yeung (2016) that in terms of achieving financial and capitalist development that strategies such as start-ups allow a country to engage in a more systemic manner with transnational technological entrepreneurs and managerial actors. This in turn would encourage the adoption of start-ups globally as it extends relations between states. The prevailing discourse on start-ups globally was about the emergence of entrepreneurial start-ups that begin conducting business internationally from the outset (Cavusgil and Knight, 2015). It is contended that globalisation, the internet and modern technology helped fuel this trend. Cavugil and Knight (2015) further elaborate that a lot of start-up’s are “born global” in that they are throughout the world, not just confined to hubs and that such firms look towards international markets for their products. Tripathi et al (2019) further discuss the aspect of a certain ecosystem encouraging the global phenomenon of
start-ups. They emphasize that “start-ups and their supporting elements interact in an environment that is built to foster these start-ups’ development and growth”. Analysing this it is evident that start-ups need to have an ecosystem available to them, the idea of such Israel aimed to create. Nevertheless for Israel, in 1992, Erlich convinced the Israeli government to fund his venture capital conception through the donation of 100 million dollars to his newly founded Yozma (Yozma.com, 2000). After the success of Yozma’s establishment Israel’s venture capital cluster went through three phases; growth fluidity (1993-1995), rapid growth (1993-1995) and then a bubble (1999-2000) (Avnimelech, 2009). For academics there is a strong consensus why Yozma was more successful in triggering the venture capital industry than previous efforts in Israel. Namely, being that at the time of its emergence there were favourable background conditions, a willing by the government to experiment between policy and market, the era was favourable to technological expansion and the design and implementation strategy of Yozma being tailored to Israel (Avnimelech, 2009).
Investment in venture capital in the Israeli case was a way of building its market, along with its political standing in the global economy. As such, Yozma was oriented in that the government pursued investments in ten private Yozma funds and direct investments in technology companies, foreign investment would also be pursued in order to replicate the growth of other start-up centres (Avnimelech, 2009). One could argue that the basic idea was to protect the founding of local venture capital to be invested in new Israeli technological start-ups with government support and the support of foreign investors. Wonglimpiyarat (2016) argues that Israel’s capacity to innovate is due to the combination of its innovative infrastructure that began with Yozma and the entrepreneurial environment that Yozma set in order to foster innovation by giving it an environment that had vitality, “clusters are a source of strategic competitive advantage”. Therefore, by Yozma enabling start-ups in a cluster formation, they drive innovation and competition which in turn leads to growth. Within the Yozma cluster, the government and economic agents worked together to increase product and process innovations to be delivered to the market. This is further supported in the Israeli political sphere, in particular by Prime Minister Benjamin Netanyahu who commented on the effects of Yozma as “Israel is the Innovation Nation. The future belongs to those who innovate” (Wonglimpiyarat, 2016).
After the initial start of Yozma, its practices became the central strategy for setting up start-ups. Yozma provided the advance of the industrial clusters which in turn created the
opportunity by which Silicon Wadi was created (Wonglimpiyarat, 2016). Israel created a Silicon- Valley style economy for themselves which had Yozma as a mechanism. As such, Silicon Wadi is located around Tel-Aviv and has become second in line to the United States Silicon Valley in terms of start-ups. It can also be argued that through its own unique government initiative of Yozma, start-ups in Israel have been a result of the Israeli government copying the Silicon Valley style of innovation which does include government funding. Most often thought of as a self-made billionaires paradise (Fontevecchia, 2014), many of the companies present in Silicon Valley have successfully obtained some form of financial finance from the United States government. “The US government has launched the policy initiatives to fill the gaps in VC financing. For example, the Bayh-Dole Act of 1980 and the Federal Technology Transfer Act of 1986 facilitate the commercialisation of early-stage technology” while also utilising the tax policy to promote innovation through the lowering of capital gains tax rates (Wonglimpiyarat, 2006). As such, Yozma’s practices and conception are strikingly similar to that of Silicon Valleys.
Moreover, it is also argued that for Israel that apart from it adopting the Silicon Valley entrepreneurial style that began with Yozma, it also had two local ingredients to leverage its own start-up success and make it distinctly Israeli (Mitchell, 2016). These were indeed its military service and the concept of Chutzpah, which means to have audacity in Yiddish (Mitchell, 2016). As such, it could be argued that in the innovation age, if states are looking to exert ways to innovate, it must be particular to their own culture and region of course. “In the Israeli military, there is a tendency to treat all performance, both successful and unsuccessful, in training and simulations, and sometimes even in battle, as value-neutral” (Senor, Singer and Peres, 2011), thus this attitude encourages innovation even when a start-up fails. Entrepreneurs who fail in their first start-up have a much higher success rate for later ups (Senor, Singer and Peres, 2011). As mentioned earlier, how Yozma resulted in start-ups is also analysed through the concept of Chutzpah, in the Israeli aspiration of a Silicon Valley style start-up centre. “Chutzpah has been defined as audacity, insolence, impudence, gall, brazen nerve, effrontery, incredible guts, presumption and arrogance” (Freeman, n.d.). The idea is that this is the normal way of behaving for Israeli’s. One could argue that such a concept encourages assertiveness as the norm (Senor, Singer and Peres, 2011). Such gall allows an approach which encourages innovation which is still encouraged if indeed there is a failure in a start-up, having been moulded from years of military service in the Israeli defence force. Chutzpah as an aspect of society, encourages the government to fund innovation as it did
