Technology's Promise Land

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Moses sure looked hard to find the Promised Land. But who would’ve thought that the land of milk and honey would eventually turn out to be the land of silicon chips and UNIX (search) code?

Israel (search) has quickly become the hotbed for new technology, which has been the driving force behind its economy. Although Israel occupies a landmass slightly smaller than the state of New Jersey, the country boasts an economy with a GDP of over $120 billion. In 2000, the country had over 15,000 industrial firms producing output of approximately $50 billion and employing over 350,000 Israeli workers. And of the nearly $30 billion in annual exports, approximately 70 percent contain high-tech components.

Much of that can be attributed to a deep culture of technological entrepreneurialism in the country. At any given time, Israel has somewhere between 1,500 and 2,000 start-up companies, which in absolute terms number more than any other country in the world besides the U.S. One of the major reasons for all of this high-tech prowess? Education.

Says Tal Keinan, Investment Manager for Israeli-based venture firm Giza Venture Capital, “In terms of early stage technology markets: Massachusetts, California and Israel are the top three in the world. Why? The education system in Israel. Israel has the highest number of engineers per capita in the world.”

In fact, nearly fifteen percent of Israel’s workers hold higher education degrees, a ratio that ranks behind only the U.S. and Holland. What’s more, as Keinan points out, a large number of those workers were highly skilled in science and technology. During the nineties, 135 out of every 10,000 Israeli workers were engineers, which significantly exceeded the 70 per 10,000 in the U.S. and 65 per 10,000 in Japan.

And it’s not simply the quantity of engineers that’s impressive; the quality of their education is equally noteworthy. Notes Microsoft founder and Chairman Bill Gates, "Thanks to quality education, Israel is one of the most advanced countries in the world. Israel is advancing in high-tech even more than other developed countries."

That’s exactly why investment firms like Giza invest so much money to Israeli companies, particularly in the areas of computer software, communications, biotechnology and medical equipment.

Says venture capitalist, Keinan, “Israeli start-ups tend to be built around proprietary technologies, as opposed to novel business models. The classic Internet start-up of the bubble years was a relatively rare phenomenon here. About ninety percent [of startups] in Israel are core-technology companies.”

So much so that Israel breeds more high-tech startups than all the countries in Western Europe combined, according to Natan Sharansky, a senior Israeli Minister and former Minister of Industry and Trade.

As a result, an average of $1.2 billion in foreign investment flows into Israel’s high-tech industry, through direct investment in the startups. Even more money flows into that segment through the major world stock exchanges, notably the NASDAQ. Today, there are over 100 Israeli companies listed on the NASDAQ, New York Stock Exchange and American Stock Exchange, including such notable companies as Check Point Software (NASDAQ: CHKP) and Teva Pharmaceutical (NASDAQ: TEVA). Which means that aside from Canada, Israel has more stocks trading on Wall Street than any other country outside of the U.S.

In addition to the nation’s educational prowess, the maturity of Israel’s venture capital infrastructure has also been a critical factor in the country’s high-tech success story. In mid-1992, the Israeli Ministry of Industry and Trade launched a $100 million government-sponsored venture capital initiative entitled, Yozma (which in Hebrew, literally means, “initiative”). The idea was to create an Israeli venture capital community to combine with the country’s technological capabilities that could nurture emerging high-tech startup companies. Yozma functioned by having the Israeli government participate as a limited partner in new private sector and foreign venture capital funds that the program attracted to the country. This process also accelerated the country’s development of an already modern legal and accounting system.

Moreover, Yozma not only successfully raised nearly $3 billion in capital for investment in Israeli high-tech startups, but it imported venture capital knowledge and operating experience as well. Now, most major venture capital firms have offices in Israel, with several prominent Silicon Valley firms having raised dedicated Israeli funds. Benchmark Capital, the venture capital powerhouse which backed such companies as eBay, Ariba and Handspring, raised a $200 million Israeli fund in 2000, and in 2001, Sequoia Capital, which funded Apple, Google and Cisco, raised a $150 million Israeli fund.

Corporate technology giants are equally aware of Israel’s high-tech capabilities. IBM has had a presence in Israel since the state was founded in 1948. And not only did Intel establish a $1.6 billion plant in Kirat Gat, but its next-generation Centrino chip was developed by an Israeli R&D team. Adds Cisco Systems Chairman John Morgridge, “We have acquired five companies in Israel and set up a research center, and you can be sure we will make further acquisitions there because of the start-up culture.”

Along with the rest of the high-tech world, Israel has suffered some during the recent tech downturn. And its political issues that the media puts on the front pages often cloud the country’s economic success. In spite of those circumstances, the growth potential for Israel’s economy remains tremendous. Because at the end of the day, Israel really has no choice but to excel in technology.

Like technological giant Japan, the lack of natural resources in Israel has compelled the country to hone its human resources in areas requiring technical competence and to become a net exporter to global markets. Unlike Japan, however, Israel has a very small population and massive defense requirements. It’s this security situation that makes Israel’s domestic markets so volatile. Consequently, the combination of security concerns and the country’s small national market led Israel to target global markets, particularly in the area of technology, which is largely independent of the country’s local economy.

Israel serves as a great example of a country building its own core competencies that attract Western investment and capabilities, and uniting those elements to propel its domestic industries. It won’t be long before Israel’s silicon chips and UNIX code produces milk and honey not just for its own economy, but also for foreign investors wise enough to follow Moses into the Promised Land.

Hilary Kramer serves as a business news contributor at FOX News Channel. She can be seen on Cashin’ In every Saturday at 11:30 am and Monday at 5:30 am on the FOX News Channel.