What #China can learn from #Israel

| August 15, 2019

China has achieved tremendous economic success in the past few decades, but its extensive growth relied mainly on resources, capital, and cheap labour. However, this growth model is no longer competent. There is an urgent need for a development model based on technological innovation to continue supporting growth after the outbreak of US-China trade war, write Chen Gong and Yu Zhongxin.

During the trade war, the United States has repeatedly lashed out at China’s lax intellectual property rights (IPR) protection laws, which forced technology transfer to take place, as well as alleged intellectual property theft. In addition, the United States has also restricted the export of high-tech products such as chips from China in an effort to suppress China’s technology companies.

One of the examples of the restriction is listing Huawei in the entity list. Undoubtedly, all these practices have had a certain impact on China’s economy. The impact from this trade war on China’s economy has shown that China has yet to achieve development driven by technological innovation. There are still too few enterprises in China to sufficiently establish competitiveness through technological innovation. In this respect, Israel could be a good role model for China to learn from, especially from the context of stimulating innovation and increasing R&D activities in enterprises.

Israel’s land area is about 25,000 square kilometres, which is almost 1/400 of China’s. Although Israel is surrounded by war and geographically bounded by desert and water, the virtue of their technology has made them one of the most developed countries in the world. Education is a vital key to development. Israel Institute of Technology, founded in 1912, currently have 13,000 students, nearly 600 professors, and 3 Nobel Prize winners.

They are a global leader in electronics, medical, and biotechnology, even going as far as founding a few new technologies in the medical field. For example, they built a spine surgery robot which costs US$ 1.6 billion of technology transfer fee, a human capsule camera which made minimally invasive surgery a reality, a limb intelligence assistive technology which has helped millions of disabled people, and a missile defence technology which creates a security barrier for Israel.

70% of Israel’s engineers, 68% of Israel’s founders, and 74% of all managers in the Israeli electronics industry graduated from Israel Institute of Technology. It is undeniable that Israel did a good job in their technology and education with only a population of 8 million, and even so when they are facing a serious deprivation in natural resources and having a harsh living condition. Looking at the development in Israel, China should really reflect on the kind of future that the country is working towards.

Besides that, Israeli government has made outstanding contributions in scientific research. In 1984, the Israeli parliament has passed the Encourage the Industrial Research and Development Act, also known as the Israel’s Innovation Law. The Israeli government has also implemented a series of innovations based on the act, which included forming the National Science Foundation, Office of the Chief Scientist, and the Israel Export Association.

The strength of Israel’s scientific research capabilities was first reflected in its emphasis on basic scientific research and direct investment in scientific funds by the National Science Foundation of Israel. Around US$ 60 million per year is funded for scientific research, while 1300 projects were given the green light among thousands of projects each year. Each project will be funded less than $100,000 and the main supported research areas are precision science, life science and pharmaceuticals, humanities and social science.

Generally, all these research results cannot be directly commercialized and needs to be connected to more entrepreneurial parties.

If the Science Fund is a purely scientific investment, then Office of the Chief Scientist who is affiliated with the Ministry of Trade, Industry and Labor of Israel are the most important institutions which connect the science-based technology to the market. The Office of the Chief Scientist receives tens of millions of dollars each year to support the research and development of general-purpose technology and high-tech products. It also implements a high-tech incubator project which provides financial assistance for scientific and technological personnel to realize the technological achievements and products’ industrialization.

In addition to financial support, the Office of the Chief Scientist also assists supported companies in developing markets, to further encourage a purely market-oriented operation. At the same time, the office has also established an international cooperative investment funds with other countries to provide co-operation in international R&D, in order to ensure a development direction that is competent with international demands.

Furthermore, the Export Association which is in turn affiliated with the Ministry of Trade Industry in Israel has gathered several Israeli companies with export capabilities to obtain relevant business information through Israel’s embassies and consulates abroad. This information can help to connect production enterprises with external markets, and coordinate export enterprises to prevent competition within the same industry.

The purpose of the Export Association is also to provide a broad international market for high-tech companies, instead of providing them with a sufficient domestic market. Basic scientific research, cultivation of commercial operation, and support for international market development has led to today’s Israeli high-tech industry development. Despite the not so favorable geopolitical factors and depletion of natural resources, Israel has indeed managed to create a miracle in their economic development.

ANBOUND researchers believe that Israel’s development is certainly worth pondering. Even though China is a huge country economy with different conditions from Israel, the principle of innovation-driven economic growth is equally applicable for both countries. As early as 1995, China has announced their decision in implementing the strategy of rejuvenating the country through scientific technology and education, and it is true that certain results have been achieved in the past two decades. Statistics have shown that China has a total number of 4.19million of national R&D personnel in 2018, which ranked first in the world for six consecutive years.

Meanwhile, China’s R&D expenditures has reached 1195.7 billion yuan in 2018, which is 138 times that of 1991. In 2018, the number of patent applications and authorizations in China were 4.323 million and 2.448 million respectively, which is 86 times and 98 times that of 1991. Lastly, the national financial technology grant was 8383.6bn yuan, and it is 130 times that of 1980. All these statistics have shown that the government’s support is constantly increasing, but it still does not have a significant result from the integration of innovation and technology into the economy. The key of integrated innovation development lies in the mechanism that drives the development of innovation.

Israel’s special history and geographical location has made them a long-term geopolitical risk centre, which stopped them from trading with the neighbouring countries. In addition to their small domestic market, it is also a challenge for them to attract capital investment. Due to this unique environment, Israeli businessmen are urged to work more openly to attract more capital investment. Development efforts in Israel are highly dependent on innovation, where there is one start-up company established for every 1400 people on average. This number is much higher than many European countries.

Nevertheless, Israeli start-ups are often acquired by large companies due to their small domestic market. For instance, Israel’s GPS navigation software WAZE was acquired by Google with the price of US$ 13 billion, and unmanned vehicle technology leader MOBILEYE was acquired by Intel. Although it might seem that these acquisitions are losses to Israel, the acquisition brought in cash, that in turn could be used to create new companies in the country, as the funds still remained within the Israeli borders.

Israel’s long-term emphasis on knowledge and education, as well as institutions and mechanisms that encourage innovation has made them successful in their push for development in integrated innovation. It is true that China has established a national strategy of rejuvenating the country through science and education since 25 years ago, but the real implementation of this strategy is not particularly effective. After decades of rapid urbanization to developing trade resistance, we have found the direction in the road to innovation, technology, and high-end manufacturing. When globalization is hindered substantially, China must solve the problems in its development model and achieve growth momentum so as to establish a market-oriented mechanism that is conducive to innovation.

Final analysis conclusion

In summary, scientific technology and innovation is a very important aspect that China needs to look at in its future development and economy. The key to real innovation lies on the underlying knowledge and the mechanisms that encourage innovation. China needs to learn from Israel’s valuable experience in these aspects.

Founder of Anbound Think Tank in 1993, Chen Gong is now ANBOUND Chief Researcher. Chen Gong is one of China’s renowned experts in information analysis. Most of Chen Gong’s outstanding academic research activities are in economic information analysis, particularly in the area of public policy. 

Yu Zhongxin has a Ph.D. from the School of Economics, Renmin University of China and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.

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