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Recent Research: Israeli Model Provides Framework for Use of Research and Venture Capital Initiatives

May 21, 2008

During the 1990s, especially the mid- to late-part of the decade, many countries experienced booms in their high-tech and venture capital industries. Few, however, grew at the same pace as Israel.
Israeli entrepreneurs created eight times as many high-tech companies during the 1990s than in the previous decade and equity investment in Israeli start-ups grew from $50 million to $6.65 billion. The number of venture capital companies in the country jumped from two in 1990 to about 100 in 2000.
In "From Direct Support of Business Sector R&D/Innovation to Targeting Venture Capital/Private Equity: A Catching-Up Innovation and Technology Policy Life Cycle Perspective," Gil Avnimelech and Morris Teubal explore this phenomenal growth and how the Israeli government effectively intervened and bolstered the venture capital economy.
The paper draws on earlier work by the authors in which they found that Israel's high-tech economy and Innovation and Technologies Policies (ITP) could be divided into a three-phase model. During the first phase, from 1969 to 1984, the nation's government provided horizontal grants to the business sector for R&D in order to build research capacity and spur the initial creation of high-tech companies. Then, between 1985 and 1992, the country significantly increased its R&D grants to leverage the companies that had sprung up in the preceding decades. It also began to expand its science and technology infrastructure and form its first entrepreneurial support programs, such as incubators and research partnerships. By 1993, Israel had built a substantial amount of high-tech activity, but found itself with a surplus of trained but unemployed engineers, due to an influx of Russian immigrants. At that point the government began its targeted development of the venture capital sector.
Avnimelech and Teubal use the Israeli experience as a framework to create a three-phase general model of ITP and venture capital development, complete with strategies for each phase and conditions for transition to the next phase. In the first stage, direct government support for business sector research is used to stimulate R&D and create innovative start-ups. In the final phase, the government targets its financial support toward building clusters and venture investment in strategic industries. The second stage is an intermediate phase in which elements of the other phases both exist, but funding is increased considerably over the previous period as high-tech industries begin to emerge.
The authors contend certain conditions should be met to begin the transition to phase three policies, which include intervention in the venture capital industry. The conditions include:

  • Sufficient R&D/ innovation capabilities;
  • Emergence of demand for the services of a future venture industry;
  • Examples of successful pilot programs and partnerships;
  • Policy capabilities (design of an overall strategy for TBED);
  • Strengthening of international links; and,
  • High-tech leader companies.

Only after these conditions have been met should government begin larger programs to increase the availability of capital. Before reaching that point, high-tech economic policies and strategies should address the need for a research infrastructure and R&D within existing businesses. These efforts should continue throughout the third and second phases while adding programs to target specific needs and industries.
"From Direct Support of Business Sector R&D/Innovation to Targeting Venture Capital/Private Equity: A Catching-Up Innovation and Technology Policy Life Cycle Perspective" by Avnimelech and Teubal is available for purchase at: http://www.informaworld.com/smpp/content~db=all~content=a789454689~tab=linking