States of Innovation: Israel and Flanders as case studies of success

I recently visited Israel, an amazing innovation nation, and also IMEC, the world's leading research centre for computer chip research based in Flanders, Belgium. This article summarises what State actors can learn from these examples of success to build an innovative State.

The key points are:

• In both of these examples, the government had strategy to be world leading in a particular area of technical specialty and then invested to achieve this strategy.
• Both attract more investment in their areas of technical specialty than anywhere else in the world, even though they have relatively small populations.
• It took over a decade for the returns to be seen definitively using global metrics.
• Government investment has explicitly not been parochial and has been willing to invest in global capability development.
• Both have focused on becoming world leaders in scientific and engineering research first to feed their innovation ecosystem.
• Both connect to leading global multi-nationals as well as local universities and entrepreneurs. Multi-nationals go to them because of the world-class capabilities ?and facilities they offer.
• The global business community beats a path to their door to invest.

This report provides a brief description of both the Israeli and IMEC ecosystems and the keys to their success and then draws commonalities and provides supporting evidence from other jurisdictions. ?

ISRAEL

Israel faces the world from a unique perspective. The modern State of Israel was established in 1948 after a resolution by the United Nations and a declaration by the Jewish People's Council. Their Arab neighbours immediately invaded and claimed territory back. In the 1967 Six Day War, military conflict again flared with Israel - winning more territory. Until the recent Abraham Accords, most of their Arab neighbours refused to recognise Israel's right to exist and some still don't. Israel, a tiny country with very limited physical resources, knows that its very existence depends on asymmetric human and technological capability and they invest accordingly.

The AI Innovation Mission to Israel was organised by the Australia Israel Chamber of Commerce and Vestia.AI (which I am a co-founder of) along with co-founder Adam Slonim who actually did most of the leg-work with the Chamber. The Mission had a particular focus on Artificial Intelligence (AI) and involved eight research and business leaders from Australia, led by Professor Simon Lucey from the Australian Institute for Machine Learning (AIML). As a group, we visited government agencies, universities, multi-nationals, start-ups, VC funds, incubators and accelerators in Tel-Aviv and Beersheva (with an incredible side trip to old Jerusalem, which should be on your bucket list).

The country of Israel can quote some extraordinary statistics around VC investment, start-ups created, and the role of technology in their exports. Some of those which stood out to me are:

• There are 500 multinationals with global R&D centres in Israel, and the largest density of multi-nationals outside of Silicon Valley. This is a major driver of their innovation economy, because their graduates get experience in global markets, they have global customers within walking distance and they attract global VC. Microsoft alone has purchased $30B worth of start-ups in Israel.
• Israel argues that there is now more VC funding in Israel than in all of Europe.
• Israel had a clear strategy to be a leader in the world in cyber security, particularly in technological innovation. They said that they attract 43% of all cyber-security VC in the world. One third of all of Israel's 'unicorns' are cyber-security companies. Their strategy has been a success.
• Israel has decided that AI is now the technological capability that is needed for national security and they aim to be in the top 5 in the world for AI. They also think that AI will have a bigger impact on their economy than cybersecurity has, because of its ability to be a force-multiplier across all areas of the economy (see more below).
• As a result of this focus on technology by the Israeli government and industry, technology is 10% of the workforce, 15% of GDP and over 50% of the value of their exports.
• Despite being a tiny, arid country with only one major irrigation basin, Israel is a net exporter of food AND water, due to a major investment in innovation and technology.

Some of the keys to Israel's success have been

• Large numbers of well-trained engineers and scientists: The economy was in a dire state in the 1980’s. After the end of the Soviet Union, one million Soviet Jews emigrated to Israel, many of them scientists, engineers and musicians. Israel now has more engineers per capita than anywhere else in the world. Immigration of educated people is an important component of their innovation ecosystem.
• Government lowers the risk: Israel set up the Office of Chief Scientist and Innovation Authority and gave them real clout and serious money to invest. Government sees its role as investing in the riskier opportunities for innovation rather than the safer ones. In fact, if their success rate is too high, they feel like they are not being risky enough! These two Offices invest at very favourable terms for the innovators and co-investors.
• The positive culture of Israel: It was exhilarating just to talk to all members of the innovation ecosystem. Their energy and optimism was infectious. The culture is one that celebrates success, but also accepts failure as simply a part of the process. We spoke to a number of start-ups who had pivoted (failed) multiple times and just kept pushing on until they succeeded (with investors following them on the journey). At quite a few presentations, our technical experts raised technical risks with their businesses, which were largely shrugged off as 'we will deal with it when we get to that point of risk'. They move fast and deal with risks as they arise. Of course, a lot fail completely as a result. But they try and try again. Failure, in Israel, means you are learning to succeed.
• A questioning culture of Israel: The Jewish tradition is one of going over the same text over and over, questioning, discussing, reforming. They expect to question the status quo and look for new ways of interpreting things.
• The culture of the VC industry: It was a delight to talk to VCs. They were clear about their role. Their investees describe the VCs as supportive. There is a culture that those who succeed become investors themselves and support the next generation coming through.
• The role of the defence sector: Every Jewish citizen is required to do three years of military service and their is a strong focus on investing in defence to achieve asymmetric superiority compared to their neighbours. The investment in defence technology development has created a very strong 'can do' culture amongst the military graduates, and world's best skills in their cybersecurity unit. The Defence sector invests directly in Israeli start-ups. Many of the start-up founders we spoke to had come from the military. A critical point of difference is that IP generated in the military can belong to the individual who invents it.
• The role of universities: It is interesting to observe how Israel regards the university sector's role in this triumph of innovation success. They are seen as valuable trainers of high quality graduates and PhD students. While there are clearly some research centres of global excellence (e.g. Weizmann Institute) and some impressive incubators and accelerators, universities are not seen as driving innovation. In fact, the same complaints about universities being difficult to work with and to get IP out of are made in Israel as elsewhere. Nevertheless, the Weizmann Institute had managed to accumulate a $40bn endowment fund from doing world class research and THEN looking to license it (NOTE: some of this endowment fund has also come from donations). And Israel have some impressive incubators and accelerators that provide substantial incentives to academics, students and investors to participate. But the role is clear: universities are expected to focus on high quality teaching and research, not be primary drivers of the innovation ecosystem.
• Global focus: Every Israeli startup we met was engineered from inception to go global, linked to the multinationals who are based in Israel. The local access to multi-national R&D offices and regional sales offices gives start-ups ready access to global customers.
• Israeli hutzpah: This was almost to the point of comedy. One of their senior government officials said to accept everything we were told and apply a 30% discount! Yet Hutzpah is part of the culture of challenging and disrupting the status quo and pushing through with new ideas and approaches, which is vital to innovation.

In terms of AI in particular, Israel have a target to be top 5 in the world. They have announced a National Program in AI - with 1.5B shekel investment over 5 years, (ie USD87M per annum for 5 years or ~0.02% of GDP). Their top scientists, who include Nobel laureates, will design the program and then invite their best scientists to be involved. The focus is first on global excellence. Their Defence Forces are establishing dedicated AI units and there is a national AI defence strategy. All high school students will learn machine learning skills. They have the commercialisation ecosystem and confidence to convert this into value for their country. Already, Israel AI startups have raised $20B in AI. They are applying it to areas of the economy regardless of whether they have core industrial capacity in that space (there is no car industry in Israel but 600 AI companies focused on the car industry).

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IMEC

IMEC is a global centre of research excellence in computer chip design, based in the town of Leuven (pop 100,000) in Flanders, Belgium. The centre was proposed by a number of academics who had come back from working in Stanford University and Silicon Valley with a vision to create a world class centre for computer chip design. The vision was supported by the local universities and the Flemish regional government, which invested in establishing IMEC in 1984 and whose investment has only increased over time.

The founders adopted a quite brilliant open innovation model for IMEC. Through this model, the entire semiconductor value chain co-invests in pre-competitive research, and share the burdens and risks of increasingly complex and expensive R&D. While Flanders became very prosperous after the Second World War based on pharmaceuticals and petrochemical engineering, the Flemish government see their investment in IMEC as their mechanism to transition to the modern, technology economy. Before the establishment of IMEC, there was no micro-electronics industry in the Region.

IMEC:

• Provides 'Research as a Service' and is number one in the world for CMOS technology research. This global achievement is based on state of the art manufacturing, a large international network of expertise, and access to the best researchers in the world.
• Focus on cutting edge, pre-competitive research and development.
• Delivers non-exclusive IP from the Program to companies that invest and provide unencumbered access to all of the research staff. The Program is designed by the research leaders, who have a strong understanding of both the state of research and state of the industry. Computer chip manufacturers are compelled to invest, or they risk losing access to this world leading IP - which is required to accelerate their product roadmap and speed to market.
• Also provides a development service in terms of design of microchips for individual companies from all over the world in all industry sectors.
• Has a ventures fund for start-ups which is so successful, it now has enough returns to reinvest so that it no longer needs additional outside investment.
• Is a not-for-profit company, with 5,000 people (which includes assignees from companies and universities), of which 3,500 are on the payroll.
• Receives 700M Euro per annum in external research income, and 100M Euro is from the Flemish government. The Flemish government tends to fund buildings, and the equipment while research staff is funded through research collaborations. Compare this to about 350M Euro equivalent in external industry investment into Australia’s national science agency CSIRO and 400M Euro to MIT in the USA. All in a research centre based in a town the size of Bendigo (Australia) or Nampa Idaho (USA). ?
• Has 800 PhD students and 200 postdocs.

Some of the keys to their success are:

• IMEC pitches itself as the 'Switzerland' of computer chip research because it will do research for the global computer chip market, and is not targeted to the Belgium economy. IMEC was the same size as French, German and US research centres but these others have had more constrained growth because they are locally focused.
• Deep partnerships with multi-nationals who invest in research and equipment that makes IMEC a unique capability globally and provides an immediate path to market for their research outcomes.
• Partnerships with leading universities who are at the top of their field (KU Leuven is ranked in the top 40-90 on various global ranking indices) and in terms of innovation (KU Leuven is the top university for innovation in Europe)
• It has taken sustained investment and commitment from the regional government and the universities to sustain the momentum and continue to grow this Institute that started quite modestly.
• A major investment by the Regional government in education - Flanders spends 24% (updated figure from my original quote of 13%) of its GDP on education (most countries spend 3% to 6%).
• The return of a major 'brain drain' from the 70s and 80s back to Belgium in the 80s and 90s, bringing with them skills and global connections.

OTHER EXAMPLES OF THE GLOBAL INNOVATION MODEL

This model of building a global innovation capability by preparing an explicit strategy, leveraging world class research talent, investing heavily in building talent and attracting multinationals to co-locate has been repeated elsewhere:

• Silicon Valley is the undisputed leader in technology innovation. Most of the dominant technology companies in the West have emerged within Silicon Valley. The innovation ecosystem relies heavily on accessing talent from the world-class research labs of Stanford University, deep connections to venture capital and global multi-nationals, support from the US government in terms of research funding and a local culture of risk-taking and innovation that attracts the same from around the world.
• The Netherlands is a leading provider of high tech for the agricultural sector and is also a major adopter – contributing to its dominant role in food production (the Netherlands is the second biggest exporter of food by value in the world – despite being a small country). This dominance is underpinned by Wageningen University which is the global leader in agricultural research (QS rankings). Based on the small town of Wageningen (pop 39,000) in the Netherlands, it has created a globally dominant ag-tech innovation ecosystem. Multi-nationals play an important role with twelve of the world’s largest food multinationals establishing R&D facilities in the Netherlands.
• Canada has had a long standing strategy to be a global leader in Artificial Intelligence (AI). In the state of Ontario (pop 14M), $2.86B was invested in 2021-22, and over 22,000 jobs in AI were created. 51% of local businesses say AI played a strategically important role in achieving their objectives (Ontario AI ecosystem report 2022). This is supported by a major investment in R&D (over $800M for the year) and education (1,000 students graduated from Masters programs in AI) – based substantially around a multi-university Vector Institute for AI research. The Vector Institute works with multinationals such as Google, Nvidia, Shopify, Accenture, Deloitte, EY, KPMG, pwc and Thales.

The ability of a State actor to achieve global leadership in innovation can be achieved with a long term strategy of sustaining and building world class research and education capability, attracting multinationals to collaborate and set up local R&D centres and engendering a culture of risk taking and starting up new ventures.