Don Wilford

What can Canada learn from Start-up Nation?

By Don Wilford

I recently visited Israel to attend Biomed 2012 and to explore its Technological Incubators Program. It's been 20 years since I was last there and I found a country transformed. Infrastructure development — buildings, roads, hotels — is impressive, although the same can be said for many places around the world. Of more particular surprise was to see the emergence of a practical, unassuming, yet confident research commercialization juggernaut.

The people we met — the head of the Incubators Program, its founder, the then minister of Industry and Trade, the deputy chief scientist, as well as Incubator heads, and local venture capitalists — were enthusiastic and proud of what Israel has achieved.

Israel's economic development over the last 25 years has been remarkable. Its high-tech, export-led economy has exploded from a low-tech, agricultural base. Today, one in four Israelis work in high-tech and account for half of Israel's exports.

Israel's success is the outcome of long-term strategy, confident execution, and sensible underlying principles. So what, if anything, can Canada learn?

Success is high-growth and high-tech. Israel's minister of Finance recently commented that the country's high-tech economy has not been much affected by the 2008 financial melt-down. In fact, last year saw 75% more investment than in 2007. Growth of high-tech exports (more than 11% over the last decade according to a recent OECD report) is evidence of the competitiveness of Israel's large- and medium-sized businesses. And the widely-read Start-Up Nation well describes the success of its venture and business incubation sector (its VC sector is strong with over 1,400 successful, high-growth, high-tech companies created in the last 20 years).

Israel sees its innovation sector as an ecosystem and the government's role as nurturing: ideally, all aspects are in balance, programs are flexibly adjusted as needs arise, and underlying principles are recognized and observed.

The Office of the Chief Scientist provides overall coordination, much as envisioned in last year's Jenkins Panel report. That said, the chief scientist is typically not a scientist. Her role is commercialization. The office is established by law and manages programs across the innovation landscape including: direct and indirect support to companies (through the R&D fund, the biggest tool in the box); pre-seed and seed programs including the Technological Incubators Program; and, pre-competitive R&D.

Four principles have stood the test of time. 1) Government's role is to mitigate risk (different from providing subsidies or picking winners). 2) While government invests up to 80% to encourage initiatives that otherwise would not happen, it makes no claim on outcomes. The private sector is allowed to profit from all upside success. 3) While government provides the driving force, it lets the private sector steer. The private sector makes all key investment decisions. 4) There is rigorous, in-depth review of compliance, which is done by the Office of the Chief Scientist.

It means the private sector is incentivized to take risks: to develop new products and markets (in the case of existing companies), or incubate new high-tech ventures (in the case of promising, high-growth start-ups). Otherwise, investment capital eschews high-risk, a reality seen everywhere including in Canada. Last year the Business Development Bank of Canada declared Canada's VC sector to be broken for precisely this reason. It's a classic market failure that Israel has understood and dealt with.

It means it's not about picking winners (neither sectors nor companies). Direct support is available if it can be convincingly demonstrated that a high-potential challenge is being embraced.

It means government investments are a large fraction (up to 80%) because mitigating risk is not the same as providing matching funds. The intent is to encourage initiatives that are outside business-as-usual paradigms and to decisively tip conventional cost-benefit equations. Government's payback is economic development, exports, company growth, taxes, and jobs.

It also means widening support beyond narrow definitions of R&D to ones of business building and wealth creation.

The attached contour plot provides a closer look. Canada and Israel are well-matched in terms of higher-education expenditure on R&D (HERD), science and engineering degrees, and scientific articles. Otherwise Israel is exemplary and Canada is, at best, middle of the pack. Israel has the highest gross expenditure on R&D (GERD) of all countries (4.9% of GDP in 2008) with business expenditures on R&D also the highest of all countries, at 3.9% of GDP). Israel's high-tech exports have increased by 11.2% over the last decade, the country creates many more high-technology start-ups, and it raises over three times more VC funds than Canada on a GDP basis.

Israeli exceptionalism undoubtedly needs to be added to the picture. Israel's drive to create a vibrant, modern, successful state cannot be readily duplicated. On the other hand, it is unreasonable to discount its example, especially for a country like Canada, in which there is a broad consensus that commercialization of research has been consistently disappointing.

Last year's Jenkins Panel report provided an in-depth and useful review of the situation here and made a number of important recommendations. That said, it did not touch on Israel, or the lessons that might be learned from its 20-year creation of a dynamic and successful commercialization engine.

As Canada struggles to break out of a disappointing commercialization paradigm, Israel is worthy of far more serious attention.

Don Wilford led the Centre for Photonics at the Ontario Centres of Excellence and has extensive industry and product development experience in the aerospace and environmental technologies sectors. With Ran Manor, Wilford is currently promoting www.hi-tech-hive.com in Canada, based on the Israeli Technological Incubators Program.