A FivePhase Entrepreneurial Innovation

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A Five-Phase EntrepreneurialInnovation
Technology Policy ProfileThe Israeli Case

• Gil Avnimelech
• School of Management, Ben Gurion University of
  the Negev
• Morris Teubal
• Economic Department, Hebrew University
• Dafna Schwartz
• School of Management, Ben Gurion University of
  the Negev
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• 17 ?????? 2007

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Objectives

• Describe the development of the Israeli
  Innovation Technology Policy (ITP) in the last
  4 decades
• Cast the development of the Israeli ITP in terms
  of an evolutionary phase policy profile
• Suggest Future Policy Implications

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Motivation

• Israel represents the most successful instance of
  diffusion of the Silicon Valley model of VC
  industry and startup-intensive high tech cluster
• Globalization and the increasing importance of
  startup-intensive high tech clusters and the role
  of VC industries in such clusters
• The VC emergence and high tech cluster rapid
  development in Israel was a policy-enhanced
  process
• The absence of dynamic analysis of Innovation
  Technology Policies (ITP)

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Related Literature

• Evolutionary Structural Perspectives
• (Winter Nelson 1982 Dosi 1982, 84 Freeman,
  1988 Arthur 1990)
• (Anderson Tushman, 1990 David, 1994 McKelvey,
  1998 Perez, 2002)
• Innovation and Technology Policy (ST Policy)
• (Freeman, 1987 Nelson, 1993 Matcalfe, 1995,
  Teubal, 1996, 1997, 2002)
• Venture Capital Development Policy
• (Florida Kenney, 1988 Black Gilson, 1998
  Lerner, 2002 Gilson, 2003)
• (Jeng Wells, 1998 Becker Hellmann, 2002
  Avnimelech Teubal, 2006)
• High Tech Cluster Development Policies
• (Bresnahan et al., 2001, Feldman, et al., 2005
  Fornahl and Menzel, 2002)

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Phases in the Development ofIsraels High Tech
Cluster
Source Avnimelech Teubal 2006 (Research Policy)
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Israel's high Tech ClusterSelected Structural
Elements (1969-2006)
Sources IVC (2007), USPTO (2007), IAEI (2007)
and authors processing
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Israels Dynamic ITP Profile

• Outline an ITP profile that focuses on high tech
  startup activities, the creation of a VC Indstry
  and the development of a startup-intensive high
  tech cluster
• A Five (32) Phase Dynamic ITP Profile
• This ITP profile should be part of a broader
  Science, Technology Innovation Strategy

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Israels Dynamic ITP Profile

• Phase 1 - Direct support (Horizental RD Grant
  Program) of business sector RD/Innovation
  activities
• Phase 2 Enhancing entrepreneurship and startup
  activities (expansion of RD grants, increased
  grants for startups, and the technological
  incubators) and experiementation with VC related
  activities (Inbal)
• Phase 3 - Targeting the VC industry (Yozma) and
  enhancing cluster growth (significant increase in
  RD grants)
• Phase 4 Increasing sustainability of the VC
  industry and high tech cluster (Heznek,
  Privatization of Incubators, Taxasion issues,
  etc.)
• Phase 5 - Leveraging success of the
  startup-intensive high tech cluster to other
  areas (more diversified cluster, large companies,
  new sectors, and traditional industries).

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Triggers for ITP Phase Transitions

• Phase 1 - Katchalski committee (1968) leads to
  the creation of the OCS (1969) and the Horizontal
  RD Grants Program
• Phase 2 The New RD Law (1984), grants for
  software firms, significant expansion of RD
  grants and increased grants for startups leads
  to significant learning with startups
• Phase 3 Yozma Program (1993), Incubators and
  significant increase in RD grants Cluster
  emergence
• Phase 4 Weak Policy Responses (2001-2004) -
  Heznek Fund, Privatization of Incubators,
  Taxation issues, Tnufa, ...
• Phase 5 New ITP proirities and programs
  (2007-2010) Targeting specific sectors
  (Biotech, Nano, CleanTech, ...), innovation
  technology adaptation in traditional industries
  increasing RD exploitation, ...

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Phase 1 General Objective

• Creating an Innovative Segment through Direct and
  Indirect Support of RD in the Business Sector
• Significant Diffusion of and Wide Experimentation
  with RD / Innovation in the Business Sector
• Idenfifying potential technological areas of
  competitive advantage
• Assuring existence and operation of a basic set
  of ST education institutions Promoting
  Technological Infrastructure

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Phase 1 Actual Policy (1969-1984)

• Creation of the OCS and the Horizental RD Grant
  Program
• Since 1969 the regular RD grant program is the
  backbone of the Israeli ITP.
• Until 1984 it represented almost 100 of the OCS
  RD support.
• This program is open and give similar support
  (50) to all types sectors, technologies, firms,
  and projects
• Other policies promoting ST infrastructure and
  entry of MNE were implemented.

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Phase 2 General Objective

• Creating Conditions for Accelerating Innovation
  and Entrepreneurship
• Developing complementary skills in the RD
  performing segment and Identifying specific
  System Failures in the Innovation System
• Facilitating Technological Entrepreneurship
• Generating ITP Operational Capabilities
• Creating a critical mass of high tech startups ?
  Generating sufficient demand for the future VC
  industry

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Phase 2 Actual Policy (1984-1992)

• The ITP increasingly became oriented toward
  startup promotion
• Between 1985-1992 the regular RD grant
  represented about 90 of the OCS RD support.
• Extended grant to RD conducted by startups (66)
• The OCS Support also RD complementary skills in
  the business sector and links with the US
  (BIRD-F)
• Software development is recognized as RD
  activity by the OCS
• The creation of the technological incubator
  program

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Phase 3 General Objective

• Acceleration of Innovation and Transition to a
  Startup-Intensive High Tech Cluster
• Significant increase in RD/Innovation rate in
  the economy and rapid growth of the high tech
  cluster
• Significant increase in the share of Business
  Sector in financing RD activities
• Creating a globally linked VC industry/market
• Achieve significant world market shares in a
  number of RD/Innovation based sectors

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Phase 3 Actual Policy (1993-2000)

• Yozma Program and Significant increase in all
  types of OCS RD Grants
• Implementation of Yozma Program
• Regulatory changes enhancing foreign investors
  activity in the Israeli VC industry.
• Significant increase in OCS RD grants through
  the regular fund, the technological incubators,
  Magnet program and other programs.

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Evolutionary Development Policy

• Evolutionary Development Policy is based on
  market-led development processes with policy
  enhancements
• It includes a mix of horizontal and targeted
  policies that aim at dealing with system failures
  in spontaneous evolutionary development
• Horizontal policies are aimed at enhancing
  variety creation and bottom-up market-led
  identification development of competitive
  advantage
• Targeted policies are aim at enhancing
  reproduction leading to industry/market emergence

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Evolutionary Targeting Policy

• The goal of a Targeted Program is to enhance the
  emergence of new areas
• This is done through the enhancement of a
  critical mass of activities in markets
  pre-selected areas
• Major issues in this process include
• Identification of the areas to be targeted and
  the timing of targeting
• Identifying specific system barriers and their
  causes
• Identifying components with significant
  cumulative positive externalities potential
  (including effective use of global sources)

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Targeting Policy Capabilities

• Targeting policies are much more complex than
  Horizontal Policies.
• Operational ITP capabilities are necessary but
  not sufficient for implementation of Targeted
  programs Adopting strategic ITP view and
  capabilitires is also required.
• Between the first implementation of horizontal
  policies and targeted policies an intermediation
  phase of experimentation, learning and selection
  should exist.

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Israels experience with Targeting VC

• Emergence of a new priorities at the OCS (Startup
  promotion and VC emergence rather than higher
  levels of RD per se)
• Idenfication of specific system failures and
  their causes in startup development and VC
  industry creation
• Yozma Program (1993-1998) design directed to
  overcome these specific failures

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YOZMA Critical Features

• Objective Creation of a VC Industry
• Attracting High Quality VC Agents
• Enhancing Collective Learning
• Triggering Selection Processes
• Achieving critical mass of capital, activities
  and capabilities within a short time

A successful VC Emergence during
1993-2000 Significant Impact on the Clusters
Growth
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Current Challenges

• Fundamental changes in the external environment
  high tech crisis, U.S. decline, India, China,
  markets consolidation,
• New emerging sectors Biotech, Nanotech,
  Cleantech,
• The demand for OCS RD Grants is continuously
  growing budget distress
• A Severe problem of dual economy
• Losing potential economic potential - too much
  fast exits (Exploration vs. Exploitation)

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Phase 45 Strategic Priorities

• Upgrading the ICT cluster more diversified
  cluster with a balance between exploration and
  exploitation and between startups and large
  companies.
• Upgrading the PE market more diversified PE
  market with a variety of business models.
• Developing a Platform for Targeted Programs for
  targeting new areas with high potential.
• Enhancing Innovation in Traditional Industries
  leveraging the success and experience from the
  high tech cluster to the rest of the economy.

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Conclutions

• We propose a new dynamic perspective to ITP, one
  embedded in evolutionary processes
• ITPs should be linked through time
• The impact of early policies and Policy Learning
  is reflected in later policies
• There are two mechanisms later policies should
  either leverage the impact of early policies or
  minimize problems which early policies generate.
• Diminishing returns to ITP could be an indicator
  of the success of the current ITP and the need
  for a new ITP.