Shepherding Innovation: Two Very Different Models

Innovation as a socio-intellectual phenomenon also reflects the multitude of ways to skin a cat.

In absolute terms, Switzerland has long been recognized as the world’s most innovative country. Of course, the criteria one picks can oddly vary results: if you count patents per capita, Eindhoven, domicile of Philips, is the innovation capital of the world, followed by San Diego. Israel does not even figure on that list.

The secret to Swiss success has been reliance on cheap and abundant capital including foreign investment, highly selected skilled immigrants, and two world-renowned Federal Institutes of Technology (in Zurich and Lausanne). Over 60 percent of R&D expenditures come from the private sector. The country tops the World Economic Forum’s Global Competitiveness Report, the EU’s Innovation Union Scoreboard, the Global Innovation Index, and patent applications in Europe. But despite comparatively very low taxes for an industrialized country, Switzerland is neither an entrepreneurship hub – its innovation is driven by large and well-established companies, not startups – nor is it known for easy access to venture capital or IPOs. To an extent, it is fair to call the Swiss model of innovation establishment-driven. As such, it is extremely successful and sustainable by any standard.

On the other hand, Israel, a.k.a. Start-Up Nation, a.k.a. Silicon Wadi, a country roughly the size of New Jersey, is world champion at churning out technology at a feverish pace with far more limited resources and infrastructure. It is also world champion in R&D expenditures, clocking 4.3 percent of GDP, almost half of it from foreign investors. It has been called the best country to found a startup and the worst to keep it alive. But it is also the world’s leading model for public-private partnership in innovation.

Take Yissum, a technology transfer vehicle of Hebrew University. Established 1964, it is a wholly-owned subsidiary of the university, it accounts for almost 10,000 patents and 120 spin-offs. When a patent is registered, the inventors / scientists take 40 percent of patent revenue; 20 percent goes to their lab, and 40 percent to the university. This covers one-tenth of Hebrew University’s research budget. Long-term research cooperation exists with several multinational enterprises that established over 320 R&D centers. The downside of market orientation is equally obvious: applied research is prioritized over foundational research, further exacerbating its lag.

More than 8000 startups were created in Israel in the last decade. They employ 500,000 individuals. Just in 2016, some 1,400 new companies were founded. Even though, like everywhere else, the vast majority of startups does not survive, there are at any given time some 6,000 operational startups. The country has no choice but to try new things. Its domestic market is too small, and a foothold in foreign markets requires products the consumer has not realized a need for yet.

Venture Capital finance also follows its own model (although only $4.8 bn was raised in 2016). Terra Venture Partners, a private business development fund, operates in an environment Silicon Valley can only dream of: every shekel invested by the fund will be matched with six shekels by the state.

The government’s Israel Innovation Authority, by now an agency independent of the Ministry of Economics, funds 2,000 projects from all walks of life, with the exception of foundational and military research. Select projects are funded with up to 85 percent of their budget requirements, while university research with up to 90 percent. Israel Innovation Authority recovers 35 percent of its investments on average. If it were more, the agency would conclude that they took insufficient risk. But if a funded company is sold abroad, it must repay three times the amount received.

Not surprisingly, and very much based on the factors described above, the international advantage of Switzerland lay in health and material sciences, while Israel has become a focal point in data sciences, alternative energy, and natural resource substitution.

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