Accelerating innovation in Israeli industry

Israel’s prowess in developing successful, leading edge high-tech companies is well known. Such success overshadows the failure of traditional Israeli industry to be more agile and innovative. With this in mind, the government has established several key programs that aim to facilitate and accelerate innovation in Israel’s industrial laggards. Readers will learn about these programs in this article by two people who have been instrumental in building Israel’s reputation for innovation.

“Israel is a start-up nation. It produces more start-up companies than Japan, China, India, Korea, Canada, and the UK; it has attracted over twice as much venture capital investment per person than the U.S. and 30 times more than Europe; it has more companies on the tech-oriented NASDAQ stock exchange than any country outside the U.S. – more than all of Europe, India, and China combined. Not only is it world known for computers, security, and communications innovation, but it is also a strong player in cleantech, biotech and medical devices.  And that’s a country of 7.1 million people, 63 years old, surrounded by enemies, in a constant state of war since its founding, with little natural resources.”

Dan Senor and Saul Singer, who documented these data in their bestseller, Start-up Nation, (from which the above paragraph is excerpted) point to the country’s adversity-driven culture, flattened hierarchies, and supportive government policies as progenitors of its success. It is a common perception in Israel that the country’s best natural resource is peoples’ minds, which combined with a can-do confidence, creates a fertile environment for entrepreneurship.

As appealing as the Start-up narrative is however, entrepreneurship is not synonymous with innovation. Innovation is about successfully implementing creative ideas (Amabile, 2000), a process which gives rise to sequential paradoxes. Innovation starts with a creative idea, which has to be not only new and original (thus requiring unconventional, divergent thinking), but also useful and appropriate for solving the problem at hand. Further into the process, a second paradox arises with the need to strike a balance between maintaining the creativity of the idea and implementing it through standardized procedures. A third paradox arises at the organizational level, between the need to foster an innovation-supportive culture, including a tolerance of ambiguity and mistakes, while sustaining the strict levels of quality and efficiency necessary for an organization’s long-term competitiveness.

An innovation gap between low tech and high tech

Israel enjoys high levels of entrepreneurship and innovation in its hi-tech industries, partly due to its “can-do” confidence and “don’t worry, it will somehow work out” culture. But what facilitates the initial phases of the innovation process might be harmful for later stages, thus impeding the growth of Israeli start-ups into self-contained, stand-alone organizations. Indeed, only a handful of Israeli start-ups evolve into mature companies.

While innovation proliferates in Israeli hi-tech, this is generally not the case in low-tech, traditional industries such as plastics, metal, textiles or food, although there are some Israeli companies that are globally recognized for their innovation in irrigation and water treatment. Nonetheless, traditional industries in Israel generally lag far behind not only the Israeli hi-tech sector, but also their counterparts in other developed countries.  A recent survey of Israel’s traditional industries indicates that 57 percent of firms in the low-tech and medium-low tech sectors do not have R&D divisions, 25 percent have no personnel devoted to development, and 20 percent do not invest at all in any form of R&D. In today’s intensely competitive global market, continuous innovation is a key factor in companies’ success. Thus, improvement of innovative capacities in these industries is crucial.

The chasm between the respective levels of innovation in hi-tech and low-tech has profound implications for Israeli industry and society. In the last two decades a dual economy has developed in Israel, one in which knowledge-intensive industries succeeded in capitalizing on the effects of globalization, while traditional industries struggled to compete in the domestic market, let alone in global markets.

The comprehensive “Israel 2028” policy report, which outlines a vision of the State of Israel in the year of 2028, states that the dual economy is closely linked to income disparities and Israel’s deterioration in measures such as the Gini-index (which charts the income distribution of a country’s residents), which in turn harms both the delicate fabric of society and general economic growth. This dualism also has a geographic (or regional) aspect, as most hi-tech companies are located near Tel-Aviv, in the center of Israel, while low-wage factories are situated further away, in less densely populated areas. According to the “Israel 2028”report, eliminating the dual economy by decreasing the gap between industrial sectors and geographic regions is a crucial step towards the goal of creating a more equal, just society. The report goes further by identifying innovation as a critical tool for achieving this goal.


Innovation as a stimulus of economic growth

Israeli governments are not blind to this need, and they have set up several bodies and mechanisms to support innovation. The most important of them is the Office of the Chief Scientist (OCS) in the Ministry of Industry, Trade and Labor. OCS is responsible for executing government policy relating to industrial R&D. Its objectives are to support industrial R&D, encourage entrepreneurs in high-tech start-up companies, leverage Israel’s highly capable scientific and technological labor force, facilitate the academic-industrial interface for the transfer of scientific know-how and technology, and in general, to stimulate cooperation in state-of-the art R&D at national and international levels. These objectives are achieved through the use of different mechanisms. Among them are:

  • The R&D Fund: The primary financial supporter of the OCS, the R & D Fund is available to all Israeli registered firms who wish to engage in technological research and development. Proposals are screened by technological evaluators, and chaired grants are provided as a percentage of the total approved R&D expenditures (up to 50 percent). The grants are given as a conditional loan – in case of a technological and commercial success, it is subject to paying royalties of 3-5 percent of sales); in the case of non-commercialization, no repayment is required. The terms stipulate that the royalties received will, in turn, be returned to the R&D Fund, In other words, they will be used to fund future grants to encourage and support industrial R&D. The annual budget of over $1 billion is spent on about 1,000 projects being undertaken by 500 companies.
  • Incubators: The incubators are supportive frameworks that enable novice entrepreneurs with innovative concepts to translate their ideas into commercial products and to establish their own companies. The incubators fiscally support entrepreneurs in the earliest stages of technological entrepreneurship, in which the entrepreneurs are not yet ready for private investors, thereby preventing commercially viable technological ideas from going to waste due to a lack of funding.
  • MAGNET program: This program is intended to make Israeli industrial technology competitive with state-of-the-art technologies of global interest. The new technologies are developed in a cooperative venture between an industry and leading academic-scientific research institutions in a field, and should provide the basis for new high-tech products and processes.
  • Complimentary program: The CSO offers several other programs, among them Mini-Magnet, that promotes technology transfer from academia to industry through the mutual cooperation of individual companies and specific academic research programs; a bio-tech support program, which aims to bridge the gap between basic and applied research (a problem that characterizes biotechnology); pre-seed and seed funding, and more.

The OCS programs are considered successful and effective. However, when checking the division of the companies who received support from the R&D Fund, the Hi-tech–Low-tech gap again becomes apparent. Traditional industries have applied for and received funds in much smaller amounts than the Hi-tech companies. A recent initiative by the OCS, offering special terms for traditional industries, such as higher grants and exemption from royalties, was left partly unfulfilled, as companies did not recognize its possible benefits or did not have the capacity to make use of them. The situation is much the same in other flagship programs, where traditional industries are under represented (and funded).


Traditional industries struggle to keep up

If big organizations in traditional industries are having difficulty in keeping up with the pace of the globalizing world, SMEs in these industries are struggling just to survive. However, while innovation might be the key for big corporations, many SMEs have to reach basic levels of quality standardizations and managerial practices before they can move on to innovate. The agency for SMEs at the Ministry of Industry, Trade and Labor initiated a holistic consulting program last year, which replaced many specific programs that were each focused on a particular aspect. It is yet to be seen if the holistic consulting program will bring about the hoped for change.

It is clear though, that top-down oriented initiatives, i.e. governmental funds, only have a limited effect on traditional industries’ level of innovation. Radical change must be combined with bottom-up processes, which originate within the organization itself.


The capacity to innovate

Research has emphasized the importance of organizational culture in promoting innovation (Miron, Erez & Naveh, 2004; Naveh & Erez, 2004). Specific dimensions such as high autonomy, risk-taking, tolerance of mistakes, and limited bureaucracy have been found to be the most prevalent characteristics of an organizational culture of innovation (Brown & Eisenhart, 1998; O’Reilly et al., 1991; Scott & Bruce, 1994; van de Ven, Polley, Garud, & Venkataraman, 1999). An innovative culture reflects a learning orientation (Amabile, 1996; Glynn, 1996) that in turn facilitates inventiveness (Cohen &Levinthal, 1990), combined with the pursuit of new knowledge (Levinthal& March, 1993). Organizations whose culture supports innovation and rewards innovative behavior breed more innovative performance outcomes (West, 2002). These findings illustrate some specific attributes of organizational culture that promote innovation and therefore should aid in developing an innovation culture in companies from traditional industries.

A second, central component of a capacity to innovate is access to advanced knowledge and the ability to successfully assimilate and utilize this knowledge (Subramaniam & Youndt, 2005).  Nevertheless, there is little awareness of the importance of knowledge acquisition, assimilation and utilization in traditional industries. For example, 85 percent of survey respondents from traditional industries regard the adoption of advanced technologies as being not worthwhile or only minimally worthwhile. Moreover, firms in outlying areas are further limited in accessing advanced scientific and technological knowledge due to their isolation from knowledge centers in academia, government and industry.

The need to synchronize top-down policies with bottom-up processes was a major factor in the establishment of the Knowledge Center for Innovation (KCI) at the Technion-Israel Institute of Technology in 2008. The KCI aims to accelerate innovation in organizations by disseminating information and knowledge, conducting academic research, fostering collaboration, and establishing a network of researchers, business people and policy makers. Some of its initiatives have been proven successful in promoting bottom-up innovation. Among them are:

  • The Managing Innovation Forum, where both high-tech and low-tech companies build their skills through expert input and by sharing best practices for improving innovation management. The forum brings together senior managers from approximately 40 leading Israeli companies to listen to lectures by senior Israeli managers, to learn about the latest discoveries in academic research, to discuss a variety of methods for enhancing innovation in organizations, and most important – to meet, share and create a synergistic network for innovation which crosses industrial sectors.
  • Moving Up is a unique innovation-management education program for executives in traditional-industry companies, led by the KCI, in cooperation with the Neaman Institute at the Technion. Its objectives are to give managers the knowledge, tools and methodologies for managing innovation processes and upgrading products, services and processes through innovation; to create a framework for cooperation between the participants in the program; and to develop and implement innovative and measurable projects at the participating companies. Each cycle includes the executive management of up to seven companies. Management participation in the program is a prerequisite for a company’s participation, so that the odds of achieving long-term progress in the company’s capacity to innovate are increased.
  • Facilitation of a MAGNET cooperative R&D venture in traditional industries was a major challenge, but one whose successful resolution led to the development of innovative, advanced food packaging. As described above, traditional industries make very limited use of the generous support programs offered by the Office of the Chief Scientist. KCI thus initiated a process that brought together R&D staff from various traditional industries and researchers in academia, to attend sessions of needs identification and assessment, which finally led to the establishment of a new MAGNET venture.
  • Engineering students’ projects of technological and business innovation in traditional industries
    has had double the effect. Companies receive high-quality solutions to problems they are facing, and the students get practical experience while getting to know industries that seldom receive positive media coverage. The initiative, which began as a pilot in 2009, now includes five Israeli universities  and is coordinated by the KCI.

These KCI initiatives have received very positive feedback from participating companies, indicating that both the will and the need to enhance innovation exist. Still, translating this into a formidable process that generates continuous innovation remains a long and challenging process.


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About the Author

Yaara Ben-Nahum is in charge of the Technion’s innovation center’s knowledge-base development. She holds an M.Sc in Organizational Psychology from the faculty of Industrial Engineering….Read Yaara Ben-Nahum's full bio

About the Author

Miriam Erez, is Professor Emeritus at the Faculty of Industrial Engineering and Management, Technion, Israel. She launched the Knowledge Center for Innovation in 2008 and serves as chairperson….
Read Miriam Erez's full bio

About the Author

Miriam Erez, is Professor Emeritus at the Faculty of Industrial Engineering and Management, Technion, Israel. She launched the Knowledge Center for Innovation in 2008 and serves as chairperson….
Read Miriam Erez's full bio