In the past two decades, the Jewish state has produced numerous small companies specializing in innovative technology, bringing economic growth to the country and exporting new devices and software abroad. The most successful of these companies have been bought by large, multinational corporations, which have also been setting up their own research centers in Israel, hoping to tap into Israeli talent. But, explains Matthew Kalman, such international investment, while it has benefited the country in the short term, may be undermining its now-famous start-up ethos:
There is certainly evidence to suggest that the influx of multinational interest and investment is taking the fizz out of Israel’s start-up ecosystem. The number of start-ups founded each year is falling, while the number that close each year is rising. The total amount of capital raised by Israeli high-tech continues to climb, but the number of deals has fallen by 10 percent since 2015. . . .
[Furthermore], foreign firms don’t benefit the Israeli economy nearly as much as home-grown ones do. A recent trend has been for multinationals to buy Israeli companies and turn them into research-and-development branches. . . . Statistics show that for each employee of an Israeli high-tech manufacturer, two more local jobs are created. For each research-and-development center employee, [however], only one-third of another job is created. When a growing local company turns into a research-based subsidiary of a foreign corporation, then, those potential jobs are lost. So are any intellectual-property revenues and taxes that the independent local business might have generated. . . .
But the corporations won’t stop coming. That’s because they need Israel’s innovation. The converse is true as well, though: people with a start-up mentality need big organizations, says Saul Singer, one of the two authors of [the book] Start-Up Nation. “Start-ups are great at innovation, but it’s very hard for them to scale up,” he says. “Big companies are very good at scaling—but it’s hard for them to innovate.”
The Israel Innovation Authority, a branch of the Ministry of the Economy, is taking steps that could counteract some of these problems, while some Israel businessmen have begun initiatives of their own.