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Israel's lively start-up culture keeps economy thriving

By Dan Senor and Saul Singer, Special to CNN

Dan Senor, left, and Saul Singer
Dan Senor, left, and Saul Singer
STORY HIGHLIGHTS
  • Senor and Singer: U.S. could learn lessons from Israel's vital economy
  • Israel has most concentrated combo of innovation and entrepreneurship in the world
  • Reasons: Lessons from military service, openness to new immigrants
  • Also: Conservative banking practices, high transparency, detailed reporting to regulators

Editor's note: Dan Senor is an author, adjunct senior fellow for Middle East studies at the Council on Foreign Relations, and an investor in Israeli companies. Saul Singer is an author and a columnist for the Jerusalem Post. They are co-authors of the new book, "Start-Up Nation: The Story of Israel's Economic Miracle" (Twelve Books).

New York (CNN) -- Israeli Prime Minister Benjamin Netanyahu returns to Washington, D.C., Monday to address a conference of the American Jewish Federations at a time of concern in Israel that the U.S.-Israel relationship is adrift.

Although Netanyahu has used each of his recent U.S. visits to make the case for confronting Iran and its nuclear ambitions, he might consider broadening the subject.

Israel's leader should speak to Americans not just about what threatens Israel, or what Israel's critics say, but also on what is unique about his nation's economy at a time of great economic uncertainty for Americans, when the unemployment rate here has just crossed the 10 percent threshold.

Israel has stood out among advanced economies as a place where the crisis hit softer, and may have passed quicker, than almost anywhere else. Israel's economic growth has not been based on easy credit or a real estate boom, but on the technology-driven productivity gains that economists believe is the key to sustained economic growth.

So what are the lessons for the U.S. economy?

The answer is not a mystery. In 1987, MIT economist Robert Solow received the Nobel Prize for his work demonstrating that productivity increases are the basis for durable growth, and the main source of increased productivity is innovation, and especially technological innovation.

This straightforward idea remains central to the economic consensus today. The question has become, as a BusinessWeek cover recently put it, "Can America invent its way back?"

If innovation is the key, where does it come from? The best place to look for a model is the country that has produced the most concentrated combination of innovation and entrepreneurship in the world: Israel.

As an investor in Israeli start-ups (Senor), and as a journalist who has covered the Israeli economy (Singer), we have seen first-hand the dynamic combination at work.

With fewer people than the state of New Jersey, Israel has more companies on the tech-oriented NASDAQ than any country outside the United States -- more than all of Europe, Japan, Korea, India, and China combined. Israel also attracts more of the global pool of venture capital investments per capita than any other country -- 2.5 times America's, 30 times Europe's, 80 times China's, and 300 times India's.

An ingredient of ... start-up culture is openness to immigrants, who are natural risk takers.
--Dan Senor and Saul Singer, authors
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The reason for this is not that Israel has particularly smart people. Students from Singapore outperform most of their peers in math and science, according to international rankings. But Singapore -- and other countries with impressive economies like Korea, Japan and Finland -- don't produce an ecosystem of tech start-ups.

What makes a start-up culture? The Israeli military, surprisingly, is a big part of this, not so much because of its own research and development, but rather as a result of the training that most Israelis must go through.

The military matures young people faster than the American undergraduate college experience, teaches them about teamwork, serving something beyond themselves, and how to improvise and complete missions with inadequate resources and imperfect information.

In the military, Israelis get used to dealing with adversity, as individuals and as a country. Yet unlike other militaries, including that of the United States, they learn that rank and titles are not really what matters, and that junior officers must challenge their superiors if they think they are wrong.

The tendency to tinker, question and improvise that often begins in the military leads to a particular Israeli specialty: technological "mashups."

Israel leads the world in medical device patents, partly because when Israelis discover a technology, they can't help considering applications to solve unrelated problems.

Just look at a company called Given Imaging, whose founder realized that the miniaturized sensing systems in the nose cone of a fighter jet could serve a medical purpose.

He adapted the sensor to produce a swallowable camera, the size of a pill, to beam out a movie from inside a patient's intestines. This is making some highly invasive and painful diagnostic surgeries all but obsolete. As with so many Israeli start-ups, PillCam is now a major company and has spawned a new industry.

Another major ingredient of Israel's start-up culture is openness to new immigrants, who are natural risk takers. Israel is home to some 70 different nationalities, including Jewish refugees from Ethiopia, Iran, Ukraine and Poland, and the Israeli government has implemented unique policies to assimilate them. Two out of every three Israelis are newcomers or the children of immigrants.

The result of all this has been an economy that for the past five years has substantially outstripped the average GDP growth rate of developed countries.

This pattern was not broken by the recent global downturn. In February 2008, a mystified International Monetary Fund asked in its own report, "Why was Israel's financial sector not more affected by the global financial crisis?" Its answer: conservative banking practices, high transparency and detailed reporting to regulators.

As a result, the IMF found that Israel had become "something of a safe haven" for locals repatriating capital from more hostile global environments.

For the global economy to recover and thrive, it is not enough for individual companies to cultivate innovation.

What is needed is for countries to build a comprehensive culture of innovation that welcomes risk-takers from all over the world; encourages young people to improvise, to be mission oriented, question established business models; and institute sensible regulations and monetary policies that do not create perverse "easy money" proxies for growth.

While Israel has much to learn from the world, other countries need to look at how Israel has produced the world's most innovative start-up economy. That's what Netanyahu should talk about in his address today.

The opinions expressed in this commentary are solely those of the authors.