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05/19/2010

Book Review: Start-Up Nation


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Start-Up Nation

As the U.S. economy attempts to recover, leaders in government, business, and academia search for ways to modernize the economy and reduce unemployment by creating high-tech jobs. In Start-Up Nation: The Story of Israel’s Economic Miracle, authors Dan Senor and Saul Singer analyze a question that might help American policymakers: How does a small country that is only 60 years old, with only 7.1 million people, surrounded by hostile neighbors, radically restructure its economy to become one of the world’s most technologically oriented and entrepreneurial nations?

Dan Senor, a foreign policy analyst and investment fund advisor, and Saul Singer, a columnist for the Jerusalem Post, explore a topic not often written about—how, in only 20 years, the contemporary Israeli economy developed from one dominated by agriculture into a high-tech phenomenon. By 2008 per capita venture capital investment in Israel was 2.5 times greater in than the United States, more than 30 times greater than in Europe, 80 times greater than in China, and 350 times greater than in India. With 63 companies listed on NASDAQ, Israel is second only to the United States.

This book elucidates the success of the Israeli economy through a series of fascinating anecdotes. The authors describe in great detail how the Israeli Defense Forces train soldiers to self-manage projects and assignments. The military’s relatively nonauthoritarian command structure encourages soldiers to innovate and constantly review their work. Additionally, the soldiers who are trained in counterinsurgency generally learn to make their own decisions in the field so they become experienced in improvisation. Contrasting the Israeli experience, the authors detail how U.S. companies fail to appreciate the ability of U.S. military veterans to innovate. The authors go on to explain the management style of many Israeli companies and institutions, as well as government programs that have been unusually successful.

Senor and Singer compare the Israeli economy with the economies of two other small, young countries that have hostile neighbors as well—South Korea and Singapore. The authors also look at a third small country often in the news now, the United Arab Emirates. In the chapter, “The Sheik’s Dilemma,” the authors review the concept of “clusters” as set forth by professor Michael Porter of the Harvard Business School. Porter’s model posits that economic development is based on geographic concentrations of interconnected institutions. Successful clusters produce exponential growth. The book explores how Israel had the ingredients to become a high-tech cluster like Hollywood did for entertainment, Boston for high tech, and Wall Street for finance. Israel, the authors argue, presents a natural cluster with its small population, high degree of transparency, and sense of common interest (which is more than just a profit motive).

The development of the Israeli cluster might begin in high schools, where the military recruits exceptional students for high-tech education, projects, and assignments. This creates social networks during and after service. By contrast, Dubai, where only 15% of its 1.4 million residents are citizens, has spent inordinate sums of money on building clusters. The authors argue Dubai cannot be as successful because its system is based on patronage rather than merit, and its model lacks the sense of common interest the Israeli model possesses.

In addition to the high-tech military training and building of social networks, immigration has made a significant contribution toward the development of Israel’s successful cluster. The authors write that Israel’s citizens are from many countries and that the country has more engineers and scientists per capita than any other in the world. As a result, the Israeli approach to entrepreneurial endeavors creates start-ups that transform entire global industries. The book explains that “high growth entrepreneurship is distinct in that it uses specialized talent—from engineers and scientists to managers and marketers—to commercialize a radically innovative idea.”

The government also played an active role in restructuring the economy. Created in the 1990s, the Yozma (Hebrew for initiative) program allowed for the creation of 10 new venture capital funds. However, each fund had to be represented by Israeli venture-capitalists-in-training, a foreign venture capital firm, and an Israeli investment bank. The government matched the funds contributed by the new firm. The program was successful because the foreign venture capital could buy out the Israeli government share at an extremely attractive price. Thus, the government shared the risk but offered the investors the full reward in a successful project. The 10 funds created between 1992 and 1997 raised more than $200 million and were bought out or privatized within five years. Today, they manage approximately $3 billion in capital and support hundreds of new Israeli companies. Additionally, with the success of these firms, many VC firms were set up without government assistance as the clusters were now proliferating.

The book analyzes some of the potential pitfalls to the Israeli high-tech economy going forward. The authors note that high-tech investment actually grew despite frequent acts of terrorism and the 2006 war with Lebanon. However, two groups within Israel, the ultra-Orthodox Jews and the Israeli Arabs have generally been excluded from the success others have enjoyed. Why? First, the authors note, neither group generally serves in the Israel Defense Forces so they fail to receive the training and social networking the military participants receive. Second, they don’t enjoy the opportunities for innovation that the others do. Both of these groups are not only increasing in number but also represent the largest segments of the unemployed and ways to include them need to be explored.

This book provides a qualitative analysis, mostly through well-written stories of successful start-ups. The authors tell the stories of how these companies were created and the ingredients that went into their success. It would be advantageous to formulate policy in the United States taking into account the lessons learned from how Israel restructured its own economy.

–Jerrold Klein

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