SWOT Analysis for Tech Sector in Israel

1. Israel “Start Up” Country Risk Analysis
MGMT 458A, Israel
Ankush Bagotra
“Necessity is the mother of invention” is the perfect quote for emergence of Israel as a “Start Up
Nation” The need of the leading-edge, technology was required to make Israel’s self-defense as self-
sufficient as possible. As a country almost bereft of natural resources, special emphasis was placed from
beginning on the need for advanced education and scientific research. When it had problem to obtain
weaponry from abroad, the government launched Israel Aircraft Industries to provide Israeli made
weapons. History and geography have made Israelis adept at identifying problems, finding solutions, and
shortening the development process to turn them into commercial products.
Having fought three major wars in the first two decades of its existence, the government reached the
conclusion in the late 1960s that it would have to develop as much of its own defense capabilities as
possible. The resulting flurry of R&D activity was aimed principally at military communications and
electronics, but civilian spin-offs from military technology laid the basis for Israel's first generation of
high tech enterprises. The “can-do” attitude of Israelis has made it different it from rest of world. This
attitude was strongly enforced when we met some of the entrepreneurs during the immersion. The
attitude is clearly reflected uniquely among the Synopsys team I met at Israel.
Over the last decade, Israel's research and development (R&D) prowess has rapidly expanded out of the
military sphere, the universities and research institutes, where it was originally concentrated, to create
what is widely acknowledged as a model high technology economy. Israel is second only to the United
States on a per capita basis in its ability to generate new, technology-based companies with innovative,
market-focused products.
Amid the kibbutzim and factories of the early 20th century, the seeds of Israel's future technological
institutions were planted. The Technion-Israel Institute of Technology, the Hebrew University and the
Weizmann Institute of Science were all established prior to the founding of the State in 1948, and the
high influx of scientist, researchers etc. during various immigration programs contributed significantly to
its pool of scientific talent. The fledgling state enjoyed early success in its efforts to make the desert
bloom with innovative pioneer technologies like drip irrigation, and created a large farm-export
industry.
In this paper, we will do the SWOT analysis with consideration of key factors to understand the risk
analysis with focus on sustainability and growth in the tech and related sectors. Then, we will make
some of the key policy recommendations to senior Israeli Government officials seeking to enhance
venture capital investment and related growth and development of the tech sector.

2. Strengths
At the turn of the new millennium, Israel boasts many thousands of high technology companies in a
wide range of fields such as telecommunications equipment, software, semiconductors, biotechnology
and medical electronics. The majority of these companies are start-ups. High technology and
technology-rich products account for some 70% of exports.
Multinational corporations have come to recognize Israel's technology abilities: leading global
companies like Intel, Motorola, IBM, Microsoft, Alcatel and 3Com etc all have research and development
facilities in Israel. Intel and Motorola also manufacture advanced products in Israel, and many other
multinationals have purchased local companies, buying their patents and acquiring their human talent.
Waze is one of the successful acquisitions done by Google.
English is the major foreign language taught in Jews schools which has helped Israelis to work with
international audience really well. To address the growing need for technical man power in industry,
Israel’s school started implementing the computer science courses and bolstering the physical science
and mathematical curriculum in the junior high and high schools. Israeli universities played an important
role in developing and commercializing technology. Israeli universities also pioneered science based
industrial parks adjacent to colleges. Israel established bilateral industrial R&D agreements with foreign
countries including the U.S, Canada, France, Holland and Spain which helped the companies in Israel to
get complement experience from these partners and expand outside Israel.
Majority of the Israelis have to spend mandatory time for military services where they get exposure to
advanced technologies and defense systems. In addition, a military officer gets hand-on opportunity to
manage people and millions of dollars of equipment. This thought affirmed when we visited Iron Dome,
where a lady officer in charge was managing the anti-missile system and there was exceptional
enthusiasm and pride among the young officers. Unit 8200, which runs Israel's tech Intel unit, has
arguably the best military intelligence gathering apparatus in the world. A majority of commercial
products like pill camera for big companies like Motorola are coming from military.
Venture funds like Yozma Venture Capital Ltd. by Israeli Govt. initially boosted the involvement of major
international corporations in the Israel technology sector, and stimulated the development of a private
sector venture capital industry in Israel. Currently, the source of funding is very distributed and rich with
funding available from business angels, crowd financing platforms, accelerators, angel club, venture
capitalists, corporate funds, and office of chief scientist. Israel has the most venture capital per capita:
2.5 times more than USA and 30 times more than Europe.
Dr. Barak Ben Avinoam gave great insight about these venture funds and about the benefits of starting
a venture in Israel. The Israeli economy benefits from phenomena of critical thinking and reassessment,
undergirded by a doctrine of experimentation, rather than standardization, wide enough to have a
national and even a global impact. Israelis have low power distance score (to challenge the boss) and
high uncertainty avoidance score (don’t mind uncertainty on their ventures) which makes them unique
to challenge the common and move forward in uncertainties. Israeli entrepreneurs benefit from Israel’s
nonhierarchical culture, where everyone in business becomes to overlapping networks produced by
small communities, common army services, geographic proximity, and informality.

3. One of the common themes seen with companies (like Netafim, TaKudu) we visited or talked to is about
the global mindset. These companies are trying to solve world problems by thinking globally and acting
locally. Most of the technologies are patented. Startups are coming in innovative areas like on big data
analytics on water management, cyber security etc. The customer base of these startups is totally global
like Takadu’s software has been adopted by 14 other utilities in cities from Campo Grande, (Brazil),
Bilbao (Spain) to Sydney (Australia). Additionally, most of the startups we met had patented their
technologies.
Israel has more companies listed on the NASDAQ stock exchange than any country outside the US.
Mobileye is one of the largest IPO Israeli Company on NASDAQ and has R&D primarily based out of
Jerusalem and is doing cutting edge technology collaboration with companies like Tesla.
Figure 1 Figure 2
The start-up phenomenon is exhibited by the highlighted by highest no of USA patents filed by Israel
among OECD countries. Figure 1 highlights this trend.
It is important to understand some of the generic economic factors to do the risk analysis for tech
sector. The trends in GDP spending and macro factors like Inflation, Unemployment, and Taxation etc.
directly impact the tech sector. Israel leads OECD in R&D spending at 4.3% of GDP. The Israeli economy
is very resilient in terms of its Real GDP growth.
In addition, Govt. spending has been stable for decades. Figure 2 & 3 highlights this trend. Despite
extensive cycles of wars and violence, massive immigration waves, a major recession and various other
tumultuous events unique to Israel, there has been a dramatic decline in the country’s debt to GDP ratio
in contrast to other OECD countries esp. the G7. Figure 4 highlights this trend. One result of the steady
decline in the ratio of government expenditures to GDP was a return of Israel to the family of developed
nations in terms of inflation rates.
Figure3 Figure 4

4. The open culture seen on streets of Tele Aviv and in offices based in Tele Aviv and Herzilia matches the
startup culture in San Francisco. Celebration of Purim festival reminded me of the Halloween festival in
USA. I saw the celebration mode on streets where friend, family and colleagues were dressed in popular
costumes and partying in streets and pubs of Tele Aviv.
One of the great strengths is the co-existence of multiple religions in Israel with each religion has the
freedom to worship freely. Visit to Jerusalem glorified the co-existence and worship of different Gods
and beliefs at the same time and same piece of land despite controversies. At Intel Kiryat Gat, it was
great to see how Israelis are passionate about their work and competing against international offices
like Ireland for expansion and Intel USA projects. It was also good to see how Intel Israel is focusing on
hiring diversified talent esp. women and minority Arabs.
The quality roads and basic amenities like quality drinking water, sanitation and healthcare is a founding
factor for startup nation success. On the one hand, visit to IDE Technologies highlighted the strength
and scale of companies in Israel while on the other hand visit to Kibbutz highlighted how communities
can work successfully and solve social problems which leading innovation through creation of global
companies like Netafim.
Figure5 Figure 6
Israel enjoys the lead ratings in R&D in all the indexes recognized by global bodies. Figure 5 highlights
these details. Tech sectors in addition contribute to a great share of industrial export. Figure 6
highlights the year on year trend of High/Mid/Low Tech.
Weakness
The country’s primary problem is a political one. Israel has a very dysfunctional political system that is
inherently unstable and laden with incentives for centrifugal policies that favor business and personal
interests above the common, national interests. The current govt. is coalition govt. which has limitations
in terms of passing strong policies. This creates a risk for foreign investors who don’t get a visibility in
terms of clear visibility.
Despite efforts on peace with inside the country and with neighbors, the country is not able to present
itself as a peaceful nation. This thought clearly haunts the long term investments and strategy of
companies planning to expand or start new operations in Israel. Before we visited Israel, there was a

5. stabbing of an American student. All these incidents create a wrong impression for the country. Within
the country, there are strong boundaries drawn between Jewish and Arab societies who practice
different schooling system where some of the schools have less focus on science and math. In general,
there is a lot of caution exercised to visit Arab or Muslim societies in Israel for security reasons. For our
entire trip, we were escorted by a security guard. Every software or otherwise company has to
accommodate the provision of its employee going to military duty in case of war or emergency. The
setups close to border have to install checks and balances to counter any terrorist attacks. One of the
setups we saw when we visited water treatment plant by IDE technology close to border.
Inequality among households in Israel is almost the highest in the OECD. About one-fifth of households
in Israel are below the poverty line after taking the effect of the welfare system and taxes into account.
Much of the increase in Israel’s income inequality over the past two decades can be attributed to
increasing poverty among two very large – and growing – segments of the country’s population:
Haredim (ultra-Orthodox Jews) and Arab- Israelis.
With the expansion of startup culture, the income inequality is further increasing with a small
percentage of IT population making high incomes. With-in Tele Aviv, we could see high rise building
which signify wealth but on the other hand there is a section which is still struggling to meet ends for
basic livelihood.
The tax rate on the self-employed and small businesses is greatest relative to OECD countries. The
overall tax rate in Israel (composed of VAT, corporate tax and dividend tax for shareholders) stands at
almost 58%, a relatively high rate. Additionally, the taxation is biased towards large companies.
Companies like Intel enjoy extremely good tax breaks by paying around 5-10%in taxes.
Israel’s economy has enjoyed one of the highest growth rates among the world’s developed economies,
thanks to cautious fiscal and monetary policies, but it has failed to deliver the fruits of growth to much
of its population. Israel has small market to test its products. While entrepreneurs have great
relationships with each other in Israel, there is definitely not the built-in audience for new consumer
products that there are in the other startup hubs like San Francisco. Most of the products that make big
waves in the country are security-based or big data focused with inspiration from military experience.
The innovation in other software services and sectors is less or missing.
The general employment trend over the past half century has been a negative one for males and a
positive one for females. Until about a decade ago, the decline in male employment was roughly offset
by the increase in female employment (primarily due to an increasing share of educated women in the
population) leaving overall employment rates relatively steady. At 5.9%, Israel’s unemployment rate was
among the lowest in the developed world in 2014 but labor force participation among prime working
age men is very low.
The transport infrastructure has not scaled to meet the needs to growing commuters esp. the software
community working in IT business parks like in Tele Aviv. This leads to traffic jams at peak times and
gates people to travel from remote places.

6. To build a long-term success story takes hard work, many years and lots of patience. Patience is not a
strong point in Israel's start-up culture, where entrepreneurs like to move from one idea to the next.
Israeli venture capital-backed companies take an average of 3.95 years from the first round of funding to
acquisition, compared with 6.41 years in Britain and 6.66 in France. Many Israeli companies are not
growing into global players that acquire others rather than being acquired. This trend is creating an
economic problem Only R&D is kept in Israel, not sales, not logistics. Israel needs companies that are
creating jobs not just for talented engineers and programmers. There are 282 R&D center in Israel, most
owned by foreign firms. Eight out of 10 Israeli technology firms bought by multinationals become a
foreign R&D center in Israel, or are integrated in existing foreign R&D center.
Threats
Israel is surrounded by hostile neighbors. Any issues with peace treaties with any neighbor like Egypt will
push Israel back to war and impact its growth. The emergence of ISIS and its activities in Syria is forcing
the focus on defense spending. The Palestinian trouble continuously haunts the country with terrorist
attacks. The current Govt. is not a single party majority Govt. and has to depend on coalition partners to
push the reforms which at times dilute the original reforms and puts an uncertainty on govt. existence.
The smuggling of immigrants is another major threat faced by the country. During our stay at hotel, we
met with some of black immigrants who have miserable jobs and are slowly trying to integrate
themselves to Israeli society.
Complex bureaucracy means new construction in Israel takes an average of 13 years. In addition, the
low interest rates and the low taxation levels for income from rental properties have increased the
demand for investment properties, and the high prices. A typical apartment in a good street of Tele-Aviv
cost around 1 million. The condition forces people working in software clusters like Tele-Aviv, Herzilia
to travel from remote places affordable rents.
Israel’s labor productivity is not only low, it has been falling further and further behind the leading
countries of the world since the mid- 1970s. A part of Israel is cutting edge – the universities, hi-tech,
medicine, and so on – but a large, and growing, share of the population is not receiving either the tools
or conditions to work in a modern, competitive global economy. This part of Israel is like a huge weight
on the shoulders of the rest, a weight that is becoming increasingly heavier over time. Figure 7
highlights this trend.
Figure 7 Figure 8 Figure 9

7. Housing prices rose sharply in last few years and a limited building supply caused by over-centralization
and complex bureaucracy that impede planning processes. Figure 8 highlights this trend.
Demographic projections also indicate that a major aging process has begun in Israel. This is still a very
young society in comparison with other developed countries, with the ratio of elderly to working-age
population (generally referred to as the elderly dependency ratio) relatively low and steady during the
past two decades. However, this ratio has begun to take off and is expected to increase by half over the
next two decades. The imminent threat is how Israel will finance its future social security needs. Figure 9
highlights this trend.
Wage gaps resulting from differences in education levels are the primary source of the high and rising
inequality within Israel. Not only are these gaps substantially higher than wage gaps between men and
women and between experienced and relatively inexperienced workers, the education-related gaps
have been rising in recent years. With high growth in tech sector, the housing pricing, home
maintenance bill, housing rents are increasing sharply which makes owing a house unaffordable for a
large section of people.
The percentage of the workforce employed in hi-tech has been dropping in parallel. In 2013, the latest
year for which figures are available, just under 9 percent of the Israeli labor force worked in hi-tech,
compared to 10.7 percent in 2008. This could be interpreted as the result of increased efficiency and
greater labor productivity in the industry, but in 2012, two-thirds of all companies reported a shortage
of appropriately trained and skilled workers.
Some 7,000 new jobs are created each year in Israeli hi-tech, but the country's colleges and universities
are producing only about 4,700 engineering and computer science graduates annually despite average
starting salaries exceeding 18,000 shekels ($4,500) a month or 2.5 times the average national wage.
Young Israelis are not pursuing math and science studies in sufficient numbers. Only 10 percent of Israeli
high-school students study math and take its matriculation exam at the highest level. Of those, only 5.6
percent score above 85, the cut-off for potential recruits. And of those, many still opt to study
professions such as medicine, law and economics, rather than science and technology.
After job creation in the high-tech sector grew an average of 2.5 percent annually from 2004-2012, it
has started to shrink, contracting nearly 2 percent in total in the past two years, government figures
show, even as the overall jobless rate fell.
The conservative culture and slow pace of adoption towards new technologies, management process,
and business models could hinder Israel becoming a number one eco system. For example, the culture
and life style in Tele Aviv and Jerusalem is vastly different.
Most of the major investment and Govt. Tax breaks are for big companies like Intel. But the success of
these companies in one generation of technology offers no guarantee of future success. In addition,
other countries like Ireland are offering similar incentives for companies to setup up. Israel Competes
with Ireland for USA Intel investments.

8. Opportunities
Israel is not a developing country by any stretch of the imagination. All the knowledge that Israel needs
for implementing a turnaround is already within its borders and does not have to be learned or
imported from abroad. Confidence in the ability of Israelis to think outside the box and find solutions to
myriad issues has led to more money flowing into Israel than flowing out – with a very strong and stable
currency just one indication of this confidence.
Israel has unique opportunity to invest and scale in technology and be a regional leader in technology.
This might open doors to having better relations with neighbors like Jordan, Palestine state by having
positive impact on their economy with more technology based employment.
But Israel also has a very engaged and unique population. 400,000 Israelis (5% of the entire population)
went out into the streets on one Saturday evening in the summer of 2011 to protest high prices that are
just the tip of the iceberg. One can only imagine what kind of a reaction there would be if the majority
of Israelis were aware of the magnitude of the entire iceberg. Israel is still home to some of the world’s
leading research centers. Its universities were ranked second in the world (on the basis of the
academically accepted measure of citations per article) in the area of computer science, sixth in physics
and tenth overall. Academic excellence is a fundamental cornerstone for technological advances – and
Israel still has it.
Ensuring Israel’s ability to remain a technological leader requires both research and development. While
the basic research done at its universities is among the best in the world, the country invests in R&D at
higher rates than any other country.
In an international environment in which developing giants such as China and India are rapidly growing,
the ability for Israel to compete in more basic industrial and service areas is diminishing. On the other
hand, as these countries grow and become wealthier, their demand will increase for the kind of
technological products that Israel has a comparative advantage in. Israel’s combination of research
universities, R&D and its innovative capacity have led to technological capabilities that have been
consistently attracting venture capital investments at rates unseen elsewhere in the developed world.
There is something striking, and telling, in the ranking of the world’s developed countries when it comes
to the confidence that their children have in learning math. The two leaders in this ranking are Israel and
the United States – with neither country actually doing particularly well in this area. The startup culture
in Israel is extremely open and supportive. The country doesn’t fear failure the same way that other
places in the world do.
Policy Recommendations
Below are the set of policy recommendations for senior Israeli Government officials seeking to enhance
venture capital investment and related growth and development of the tech sector:
 Encourage careers in science and engineering among youth, students and those who served the
army in technology units, including incentives for scientific excellence, broader academic admission
criteria and better quality of instructions.

9.  Israeli government should provide a long-term plan for incentives and support to companies rather
than simply early-stage aid to ensure start-ups grow for long term rather than early buyouts.
 Govt. should wean employers from their addiction to cheap foreign labor. In a country inundated
with relatively unskilled and uneducated Israeli adults, it is inconceivable that the government
allows the import of hundreds of thousands of additional unskilled and uneducated workers from
abroad. Roughly one in eight workers in Israel’s business sector is not Israeli. Of these non-Israeli
workers, 70% come from abroad and 30% are Palestinians.
 Realize untapped potential through targeted placement—especially of women, Arabs and the Ultra-
Orthodox. Govt. should increase incentives to work and to employ the untapped population with
special tax breaks to companies.
 Govt. should formulate incentives to bring Israeli academics back from overseas and engage them in
building next generation policy infrastructure.
 Govt. should pursue an accommodative monetary policy appropriate to prevent an appreciation of
the shekel, as long as inflation remains low and other major central banks maintain their
expansionary stances.
 Govt. should provide incentives to companies for providing transport facilities to employees and
hiring diversified population esp. women, Arabs and Orthodox Jews.
 Govt. should provide vocational training coordinated with the needs of the private sector and
encourage job placement with incentives based on the workers’ success.
 Govt. should reduce the child benefits and instead channelize the same money toward the building
of lunchrooms and the provision of nutritional meals (particularly in the poorer areas) –and only in
schools providing a full core curriculum. This will ensure that the current funds are better spent on
today’s children and it will also improve the employment prospects of many of these children in the
future.
 Govt. should promote special funds to encourage Israelis to build software products and services in
new areas like gaming, diversified web and mobile products.
 Govt. should take substantial steps upgrade of the transportation infrastructure esp. the public
transport to convert the peripheries into suburbs. This will motivate skilled workforce to move out
of big cities to counter increasing housing cost and provide incentives with companies to take
advantage of lower real estate prices in new areas.
 Govt. should ensure provide schemes with check and balances to ensure affordable housing for the
needy.
 Govt. should provide tax breaks to companies to setup offices, factories in southern part to ensure
there is balanced growth on all fronts.

10.  On international front, Govt. should work on joint partnership projects with other developed nations
to ensure there is inflow of new technology development in the country in new sectors
Conclusion
Israel as a country has grown exceptional from its existence and shown the world about the innovation
and leadership it can bring to table. The country has experimented over years different models to excel
out of necessity. The current need requires Israel to focus on some of imminent threats, to fix some of
the weakness, and to capitalize on its opportunities with the above specific policy recommendations to
ensure the growth of the startup phenomenon is sustained and scales over time.
References
Ben-David, Dan (2012), “The Start-Up Nation’s Threat from Within,” in Dan Ben-David (ed.), State of the
Nation Report: Society, Economy and Policy in Israel 2011-2012.
Ben-David, Dan (2013), State of the Nation in Pictures: Society, Economy and Policy in Israel, Taub
Center.
A Picture of the Nation (2015), Israel’s Society and Economy in Israel, Taub Center.
Ben-David, Dan (2003), “Israel's Long-Run Socio-Economic Trajectories,” Israel’s Quarterly Journal of
Economics.
Ben-Moshe, Eliahu (2011), “Changes in the Structure and Composition of Israel’s Population by Religion
and Culture in the Next 20 Years and the Implications,” Ministry of Industry.
OECD, various statistics.
Ben-David, Dan (2015), The Shoresh Handbook on Israel’s society and economy.
Different Paths to Success - The Growth of the Electronics Sector in Ireland and Israel Stephen Roper
and Amnon Frenkel.
IMF Report Israel (2015)
Economic Activity, Distribution, and Innovation (2016), Professor Stuart Gabriel.
Company Presentations from onsite visits at Israel.