Andrew Leigh

Culture must foster the innovators of tomorrow, The Australian, 17 July 2015

Macgregor Duncan and Andrew Leigh

Like Jason and his famed Argonauts, the history of the Australian economy has been one long search for the Golden Fleece. Over time, we’ve successively found it in wool and gold, manufacturing and migrants, services and iron ore. But with Australian productivity growth in the doldrums, there has been much talk about the need for entrepreneurship to spawn jobs for the future. Today we’re seeking a new generation of Australian Argonauts in pursuit of a new Golden Fleece.

There are many things that Australia does well. We’ve enjoyed one of the longest spells of uninterrupted economic growth in world history, our life expectancy is among the longest in the world, and we currently hold the Ashes. But then there are the challenges. Australian innovation ranks high among those things that keep us awake at night.

What worries us is not that Australia lags behind the United States, it’s that we lag behind many other advanced countries as well. 

According to the OECD, Australia ranks in the bottom half of advanced countries for patent filings per person. Worse, the past decade has seen most advanced countries increase their patent filings. But the number of patents filed by Australians is down by at least one-fifth over the same period.

We also have too few world-beating ideas. In the latest year for which data were available, 1.5 per cent of Australian companies developed new-to-the-world innovations, compared to between 10 to 40 per cent in many other OECD countries. Summing it up, the Global Innovation Index ranks Australia 17^th, putting us between Korea and New Zealand.

One country with which Australia should be able to compete on the innovation stage is Israel, a nation with few natural resources, and a population one-third the size of ours.

Israel is home to some 100 companies on the NASDAQ stock exchange, second only to the United States, and more than all of Europe, Japan, Korea, India, Singapore and Australia combined. By comparison, Australia boasts just seven.

Israel’s tech successes have inspired a flood of articles and books, including the now famous Start-up Nation: The Story of Israel’s Economic Miracle.  Some of the obvious explanations include the remarkable intellectual tradition of Judaism and its respect for knowledge; a flood of Russian immigrants in the 1990s with a mastery of math and a penchant for cutting code; the role of the Israeli military in channelling vast sums into technology R&D; and the importance of mandatory military service in fostering technical problem-solving, leadership and teamwork. 

All these reasons make sense. And yet we don’t think they tell the full story. After traveling to Israel, and speaking with dozens of Israeli entrepreneurs and investors, we think there are a handful of additional reasons for Israel’s success. These additional reasons offer some hope that Australia can replicate Israel’s start-up economy.

The first is cultural. The Israeli national ethos has morphed from the “fair-go” of the kibbutz to the “have-a-go” of the entrepreneur. It seems like every Israeli has a start-up in their basement, perhaps with a cousin or uncle-in-law, or with high school friends, or army colleagues. They all share dreams of success, but none seem to fear failure. In part that’s because the Israelis have come to understand that innovation and failure go hand-in-hand. Most start-ups will fail. But for those who have walked the entrepreneurial tightrope and fallen, Israel’s tight-knit culture has developed not so much a “safety net” as a “safety network”, where those who fail are quickly absorbed into new start-ups or larger companies with no black marks against their name.

The second reason is that Israeli entrepreneurs are focused on innovating for global markets, right from the starter’s gun. This differs from the assumption some people make, that technology innovation takes place at universities or the CSIRO, and then needs to be “commercialized” for the marketplace. That may be how things worked thirty years ago. But today it’s mostly wrongheaded, putting the cart before the horse.

Entrepreneurship works best the other way around. You first identify a “problem” in a large global market. And only then do you engineer to solve that problem at a price people are willing to pay.

For small countries like Israel and Australia, this approach demands a deep appreciation of markets and competitive landscapes beyond the homeland. Israeli entrepreneurs typically focus on the US market, which they understand intuitively, mostly from past experience in Silicon Valley, but also from the near perpetual cultural exchange between the two countries. A common corporate structure among Israeli start-ups is to locate a commercial office in Silicon Valley, while the engineering teams are based in Tel Aviv or Haifa. The tight relationship between Israeli entrepreneurs and Silicon Valley provides valuable intelligence about developments in the large US market.

It’s hard to imagine how Australian technologists and entrepreneurs can be successful without emulating the Israeli approach to global markets. But there are encouraging signs. Today Australian entrepreneurs are looking to maintain satellite offices in California, while Silicon Valley investors are taking a more active interest in Australia. Early-stage Australian investors like Southern Cross Ventures, which has raised capital from the Australian Government and China’s SoftBank, have opened offices in Silicon Valley and China to promote better understanding of those global markets.

The experience of Israel is instructive for Australia. The bread-and-butter of an entrepreneurial economy remains, as always, a strong focus on technology R&D, fostering engineering and scientific talent, and good policy that reduces the regulatory drag on entrepreneurial activity. But Israel also teaches that culture is critical in supporting founders and investors to take risk, and that a rigorous focus on innovating for global markets is necessary for any start-up nation. If Australia can move in these directions, our entrepreneurial Argonauts will surely find those new Golden Fleeces.