The Secrets of Israel's Success

Convershaken Staff
January 4, 2016

A past issue of Investors Chronicle explains how Israel - a small, isolated country with few natural resources that is surrounded by hostile countries - punches above its weight on the international stage.

Often referred to as the second Silicon Valley, Israel has the largest technology sector per capita in the world. Together with life sciences, technology accounts for more than half of the Middle Eastern nation’s exports. More than 75 Israeli start-ups have bloomed into billion-dollar businesses in the past four decades, and a flurry of public listings in recent years has given the country a disproportionate presence on global stock exchanges.

There are several explanations for the country's success. The authors of Start-Up Nation: The Story of Israel’s Economic Miracle suggest that innovation and chutzpah have become part of the national identity. The Israeli government has also outspent most other developed nations, investing close to 4 per cent of annual GDP in research and development over the past decade. Israel has also benefited from a large influx of brave, pioneering and enterprising immigrants: more than 3m Jews have migrated to Israel since 1948, and droves of Russian, Polish, Hungarian and German Jews fled to their spiritual homeland over the preceding six decades.

Another factor might be mandatory military service, which has taught many Israelis how to lead, work as a team and exploit enemies’ weaknesses. Meanwhile, writers Malcolm Gladwell and Nicholas Nassim Taleb have proposed that adversity can make people more resilient and drive them to outperform. But two Israeli management consultants and a Harvard business professor may offer the most compelling theory. In Harvard Business Review, they argue that Israeli companies have punched above their weight by picking their fights carefully.

Israeli business have avoided taking on foreign giants with famous brands, dominant market positions and deep pockets. They have also evaded small businesses that have close relationships with suppliers and officials, strong ties to the community and excellent knowledge of local regulations. Instead, they target ‘middle ground’ markets are too small and costly to appeal to global corporations but, when combined, offer a major opportunity.And they maintain their lead through acquisitions and innovations, preventing competitors from catching up.

Similarly, they seek out markets where they have better technology or business acumen than locals, can compete financially and won’t face biased regulation. They often acquire or partner with local players to enter markets quietly. The authors give the example of Amdocs in the 1980s: the telephone directory software group's  technology was superior to that of its smaller US competitors, while industry giants such as IBM and Microsoft were concentrating their efforts on building a broad portfolio of products. Amdocs is now the global leader in its market, earns over $3bn in annual revenues and operates in more than 70 countries.

“Israeli companies have demonstrated that with an entrepreneurial spirit tempered by humility and careful planning, small- and mid-size companies can succeed abroad,” the authors write. “By pursuing middle-ground strategies, they can become tomorrow’s global giants.”

Read the full story in Investors Chronicle.