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Why does Israel have so many entrepreneurs?

Why does Israel have so many entrepreneurs?
On any measure Israel is winning the entrepreneurial war.

From the land that brought you the parting of the Red Sea comes a 21st-century miracle: Israel, the startup nation.

On any measure Israel is winning the entrepreneurial war. It has:

* more start-ups than any other country and more companies listed on the Nasdaq technology index (after the USA)

* the highest amount of R&D spent as a proportion of GDP

* 2.5 times more VC invested per capita than the USA, 30 times more than Europe, 80 times more than China and 350 times more than India

* a string of high profile wins that has encouraged multinationals such as Intel and Siemens to base R&D facilities in what's effectively a war zone.

And it seems to be having an impact. Israel is the fastest growing economy in the developed world and continues to defy global recession with three percent annual growth.

Um, why? The success is particularly puzzling when you consider the straightened circumstances of this 60 year-old country. Not much more than a strip of sand and host to centuries of conflict, Israel is bereft of the stuff that makes nations great: it has few natural resources, a tiny population (six million), no trading partners and a history of wealth destruction through war and poor government. It's not even handily located for trade routes.

But the wealth of the nations in modern times appears to rely on other stuff. In fact, if ever a poster child for the knowledge economy existed, this is it.

The success boils down to three factors.

Good character: Suffering breeds resilience and the Jews have had their share. In the book Start Up Nation, which chronicles this startling success, journalist Saul Singer argues that it’s precisely this suffering that has generated chutzpah, the entrepreneurial, pragmatic, hard-working national character. It's a belligerence that Israel is famous for, for both good and for ill. "Assertiveness versus insolence, independence versus insubordination, ambition versus arrogance – whatever your perspective on those word, they describe the Israeli entrepreneur,” he writes.

Technical talent: Israel was already an immigrant nation, but between 1990 and 1995 it was deluged by one million arrivals from Eastern Europe. Escaping a collapsing soviet bloc this group contained a disproportionate number of scientists and technologists. In New Zealand such folk end up in takeaways and taxis, but responding to the influx, the government channelled them into universities and business, which in turn led to an explosion of R&D. Many of the successful start-ups trace their origins to research developed in this period or to the families of the wave.

Smart policy: After failed experiments in a controlled economy in the 60s and 70s, Israel got its settings right for fostering growth, and two interventions in particular had a profound effect. In response to the wave of migrants just described, it created 24 business incubators to help transfer knowledge from institutions to business. In 2000 the incubators were privatized, leading to an influx of professional VC and fund management. The result: in 15 years they generated 1000 start-up companies, 60 percent of which are still in business today.

At the same time, the government fostered early-stage investment through a VC fund that eventually came to known as Yozma, a co-investment programme that matches government funds with private VC. Yozma spawned a wave of investment and by 2009 Israel boasted 240 VC firms and 40 VC funds.

All in all, the Israel experiment seems to be working. Makes you wonder what we can do in New Zealand. All that’s missing is an intifada.