From upstart nation to ‘Start-Up Nation’

Start-Up Nation: The Story of Israel’s Economic Miracle” is one heck of a fine book – which helps explain why it’s now No. 6 on The New York Times Business best-seller list.

You might expect that a book dealing with economics and technology, and about a foreign country yet, would be one great big sleeping pill. But “Start-Up Nation” happens to be lively, surprising, and fun to read.

A key reason: The authors heeded the advice of their publisher, Twelve Books, and emphasized story-telling. The book is chockfull of short, punchy narratives – such as one about Yossi Klein, a 20-year-old helicopter pilot serving in Lebanon during the war. (See box.)

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The authors – Dan Senor, adjunct senior fellow for Middle East studies at the Council of Foreign Relations, and Saul Singer, former editorial page director of the Jerusalem Post – present powerful evidence that Israel is far, far above most other nations when it comes to creating important technology, and then they try to explain why – every which way since Sunday.

The authors also answer such probing questions as:

How can the United States and other nations emulate Israel? (Short of reinstituting the draft: Apparently compulsory military service helps account for the Israelis’ success.)

Why have other formidable nations, like Singapore, not enjoyed anything like Israel’s success when it comes to innovation?

What’s the greatest threat to Israel’s continuing economic growth?

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If there’s a flaw in the book, it may be that the authors downplay the importance of certain aspects of Jewish/Israeli culture – the historic Jewish emphasis on education, the historic approval of ambition (the “My son the doctor” syndrome). When the authors told people about Israel’s being so innovative, many responded, “It’s simple – Jews are smart, so it’s no surprise that Israel is innovative.”

The authors disagree. Israelis have little in common, they argue, with 70 different nationalities living there. Jews from Iraq, Poland, or Ethiopia, they contend, don’t share a language, education, culture, or history (apart from a legacy of persecution).

Well, some might argue, Jews do seem to share smarts, wherever the heck they came from – not that other factors don’t help explain Israel’s technological success. Natan Sharansky, the famous Soviet refusenik, is quoted as saying, “For us in the Soviet Union, we received with our mothers’ milk the knowledge that because you are a Jew … you had to be exceptional in your profession, whether it was chess, music, mathematics, medicine, or ballet…. That was the only way to build some kind of protection for yourself, because you were always going to be starting from behind” because of anti-Semitism.

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Here is some of the evidence the authors produce to show how far in front Israel is in regard to originating technology:

“¢ Israel is only 60 years old, surrounded by enemies, in a state of war since its founding, and with no natural resources like oil or precious metals. Yet it has produced more new companies than Japan, India, China, Korea, Canada, and the United Kingdom.

“¢ Israel has more companies listed on the U.S. NASDAQ (mainly for small, promising companies) than those from all of Europe, Korea, Japan, Singapore, China, and India combined.

“¢ In 2008, venture capital investments in Israel, per person, were over 30 times greater than in Europe, 80 times greater than in China, and 350 times greater than in India.

“¢ Google’s CEO and chairman, Eric Schmidt, has said that the United States is the best place in the world for entrepreneurs, but “after the U.S., Israel is the best.” Steve Ballmer, who runs Microsoft, has called Microsoft “an Israeli company as much as an American company” – because of all the Microsoft teams working in Israel.

Granted, Israel is in a class unto itself. In fact, in June a major financial service, Morgan Stanley Capital International, decided to upgrade Israel from an emerging market to a developed market. This will happen next year. Both South Korea and Taiwan were not promoted.

Over the last five years, the Standard & Poor’s 500 Stock Index has fallen 4 percent. The Tel Aviv Index has soared 60 percent.

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Here are just some of the many explanations that Senor and Singer give for Israel’s pre-eminence in technological innovation:

“¢ Young Israelis are unnaturally mature. They must serve two to three years in the army, so early in life they learn responsibility. “It comes down to maturity,” says an officer of a British company working in Israel. Nowhere else in the world, he points out, “where people work in a center of technological innovation, do they also have to do national service.” In Israel, the authors write, “you get experience, perspective, and maturity at a younger age, because the society jams so many transformative experiences into Israelis when they’re barely out of high school.”

“¢ Israelis tend to know a lot of other Israelis – in large part, from their military service. That’s why some companies, when they need new employees, don’t bother using help-wanted ads. “It’s now all word of mouth,” someone says. “Everybody knows everybody; everybody was serving in the army with the brother of everybody….”

“¢ Israelis are impatient. Their future has always been in question, the authors write, so, when an entrepreneur has a business idea, he or she will start it that week. (And when an Israeli wants to date a woman, he asks her out that night.)

“¢ If you’re looking for the cream of the cream, you can readily find it – in the Israel Defense Forces’ elite units, such as the 8200. “The unit in which an applicant served tells prospective employers what kind of selection process he or she navigated, and what skills and relevant experience he or she may already possess,” the authors write.

“¢ Israel gives special training to its best students. The Talpiot program has produced only some 650 graduates in 30 years, but many have become the founders of a country’s most successful companies. NICE Systems, the company behind call-monitoring systems used by 85 of the Forbes 100 companies, was founded by a team of Talpions.

“¢ Failure may be failure, but it’s not “abject.” There’s a tolerance in Israel for what some Israelis call “constructive failures” or “intelligent failures.” In fact, South Korea – another country with a military draft – hasn’t emulated Israel’s success, the authors argue, because the bursting of the Internet bubble in 2000 caused many Koreans to fear losing face in the future. As for Singapore, even though its military is modeled after the IDF, Senor and Singer report that its culture doesn’t encourage initiative and risk-taking.

“¢ Israelis, as President Shimon Peres has said, are eternally dissatisfied. “The greatest contribution of the Jewish people in history is dissatisfaction,” he claims. “That’s poor for politics but good for science.” They tend to believe that whatever is “clearly impossible” is in reality perfectly possible.

“¢ Israelis aren’t timid about challenging authority. Somewhere, “Israelis learn that assertiveness is the norm, reticence something that risks your being left behind.” As one Intel employee put it, “From the age of zero we are educated to challenge the obvious, ask questions, debate everything, innovate.”

One Israeli lawyer claims that in the Israeli army, “A private will tell a general in an exercise, ‘You are doing this wrong, you should do it this way.'”

Using your own judgment instead of blindly following orders is admired in Israel. Soldiers in the army are divided into those with a rosh gadol (a “big head”), who think for themselves, and those with a rosh katan (“little head”), who interpret orders as narrowly as possible.

This sense of entitlement is re-enforced by Israelis’ two- or three-year military experience. In the IDF, low-ranking soldiers have a lot more responsibility than in other nations’ militias.

“¢ Israelis are willing to try new things. They spend more time on the Internet than people in any other country, and the average Israeli even has more than one cell phone.

“¢ Israelis admire the ability to get things done – and someone with this ability is admiringly called a bitzu’ist, a pragmatist.

“¢ Employers can readily find well-educated employees. Israel has the highest concentration of engineers in the world. Today, Israel has eight universities and 27 colleges – four are among the top 150 worldwide universities, and seven in the top 100 Asia Pacific universities.

“¢ Israel spends a lot on research and development – a higher percentage of its economy than other nations spend.

“¢ The kibbutzim, those famous communes, helped. With less than 2 percent of the Israeli population, today kibbutzniks produce 12 percent of the country’s exports.

“¢ Immigration, especially from the former Soviet Union, was a big shot in the arm. Between 1990 and 2000, 800,000 immigrants came to Israel – among them many professionals, from engineers to physicians. Which is why Israel has more engineers and scientists per capita than any other country. They were also risk-takers. One Israeli is quoted as saying, “A nation of immigrants is a nation of entrepreneurs.”

“¢ Israel is a land of multi-taskers. In the army, specialization is frowned upon; everyone is expected to be somewhat knowledgeable about everything. This fosters “mashups,” where innovation results from the combination of wildly different technologies and disciplines. Example: fitting a camera into a pill that someone could swallow, so a physician could study his or her insides. (Given Imaging, which sells PillCams, went public in 2001.) Multi-tasking, the authors assert, “produces particularly creative solutions.”

“¢ Surrounded as they are by enemies, Israelis love to travel. “There is a sense of a mental prison here,” an Israeli editor says. “When the sky opens, you get out.”

Another way to escape: telecommunications. An Israeli venture capitalist says, “High-tech telecommunications became a national sport to help us fend against the claustrophobia that is life in a small country surrounded by enemies.”

This “avid internationalism” has helped Israel penetrate industries in nations around the world. Netafim, an Israeli company that provides drip-irrigation systems, now operates in 110 countries. Just in Asia, it has offices in Vietnam, Taiwan, New Zealand, China (two offices), India, Thailand, Japan, the Philippines, Korea, and Indonesia.

“¢ Finally, there are “clusters” in Israel. Lots of schools, big companies, start-ups, suppliers, and venture capital in close proximity – as in Silicon Valley.

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Senor and Singer sum up their wide-ranging explanations for Israel’s economic success this way:

“[I]t is a story not just of talent but of tenacity, of insatiable questioning of authority, of determined informality [those at the bottom can question those at the top], combined with a unique attitude toward failure [go ahead, try again], teamwork, mission, risk, and cross-disciplinary creativity.”

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Israel certainly should not rest on its laurels. There’s a lot to worry about.

“¢ The biggest threat, as the authors see it, is to Israel’s continued economic growth. Only a little over half of the workforce contributes to the economy, compared to 65 percent in the United States. Two minority communities are the laggards: the haredim, or fervently Orthodox Jews, and Israeli Arabs.

The haredim are not permitted to work if they want a military exemption, and ten of thousands of Israeli haredim go to yeshiva instead of the army.

As for Israeli Arabs, they are not drafted into the army and they don’t develop business networks that help people become successful entrepreneurs.

Both groups are expected to increase from 29 percent of Israel’s population in 2007 to 39 percent by 2028 – meaning that an even smaller percentage of Israelis will be working.

“¢ Israel depends too much on global venture capital, and Israeli companies depend too much on exports – to Europe, North America, and Asia. Because of the Arab boycott, Israel doesn’t trade with most regional markets.

“¢ If Iran becomes a nuclear power, there could be a nuclear arms race throughout the Arab world – and discourage foreign investment in the region.

“¢ There’s a “brain drain” from Israeli universities. The authors report that an estimated 3,000 tenured Israeli professors have relocated to schools abroad. One possible reason: Gidi Grinstein, a political leader, is quoted as saying that “the quality of life and the quality of public services in Israel are low, and for many emigration is an opportunity to improve their lot.”

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What advice do the authors have for the United States? That it create not a military draft but a national service – compulsory or voluntary – to give young people, before they attend college, “something like the leadership, teamwork, and mission-oriented skills and experience Israelis receive through military service.” (Something like the Peace Corps?)

The authors also pass along the advice that Peres gave to Israeli entrepreneurs and policymakers: “Leave the old industries. There are going to be five new industries. Tremendous new forms of energy, water, bio-technology, teaching devices (there’s a shortage of teachers), and homeland security to defend against terrorism.”

Dan Senor dedicated this remarkable book to Jim Senor, his father, and Saul Singer dedicated it to his brother, Alex. On his 25th birthday, Sept. 15, 1987, Alex was flown by helicopter into Lebanon to intercept terrorists bound for Israel, and was killed while trying to rescue his downed company commander.