Innovation as a Growth Accelerator

Israel hi-tech sectors is one of the largest and most innovative in the world, accounting for around 10% of jobs in the country - but innovation to be limited to what is still a minority of the workforce.

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The State of Israel has one of the largest and most innovative hi-tech sectors in the world, accounting for around 10% of jobs in the country. However, the “start-up nation” cannot allow innovation to be limited to what is still a minority of the workforce. Rather, it is in the national interest that innovation also lead to increased productivity and income among the 90% of employees who work in other industries. This study is based on the approach that introducing innovation (both technological and non-technological) into traditional sectors of the economy will act as a catalyst for narrowing productivity gaps between Israel and other developed countries.

The OECD’s Oslo Manual defines innovation as “a new or improved product or process (or combination thereof) that differs significantly from the unit’s previous products or processes and that has been made available to potential users (product) or brought into use by the unit (process)” (OECD, 2018). Nevertheless, most policy discussion over innovation policy focus on maintaining Israel’s status as the “start-up nation,” and on research and innovation in the high-tech sector (see, for example, the recent efforts to “increase the number of employees in hi-tech”).

In this study, we sought to shed light on the broader concept of innovation as a strategic tool for narrowing gaps and promoting inclusive growth. For the purposes of the study, we defined technological innovation (digitization) as the implementation of existing technologies that are new to the company in question; and we use the term non-technological (organizational) innovation to refer to organizational innovations that do not focus on technology (relating to management, branding, design, and more). These types of innovation are suitable for all economic sectors, but particularly important for traditional industries.

In order to identify the main barriers facing the traditional sectors in Israel with regards to implementation of innovation, we carried out a survey among a representative sample of businesses in Israel, in the trade, industry, and services sectors; conducted a public consultation with researchers, innovation managers, and consultants; and held a roundtable session with representative organizations and key stakeholders from the business sector and the government. In addition, we conducted a broad international mapping of the various policy tools used by selected countries to encourage innovation in the business sector.

The study produced several interesting findings:

First, the main barriers to both technological innovation (digitization) and non-technological (organizational) innovation are a lack of skilled workers; of knowledge about existing solutions; and of access to funding sources. The public consultation also revealed the intra-organizational and behavioral-psychological challenges to implementing innovation of both kinds. The findings revealed that, in addition to the external challenges mentioned above, implementing innovation comes with dealing with uncertainty, letting go of conservative ideas and approaches, and eliminate opposition to change within the business itself.

Second, the two forms of innovation complement one another. Indeed, technological innovation can reach its full potential only if there is sufficient investment in non-technological innovation. This goes both ways: Digital transformation, like any technological change, requires not only the implementation of new technologies, but also complementary investment by firms in new processes—in management, organizational change, work policies, design, and new business models. Likewise, in order to reap the benefits of non-technological innovation, digital improvements, should be incorporated to support overall organizational change.

Third, developed countries have adopted a broad definition of innovation as part of their national strategies, and consequently they:

1. Measure innovation on a broad scale, by means of regular and official national surveys

2. Operate a range of support programs and incentives to encourage innovation in its broader sense (not just technological R&D). Some of these are directed at a specific kind of innovation, while others emphasize complementary aspects of the different types of innovation.

In order to leverage the advantages of innovation for facilitating more inclusive growth, and to address the main barriers identified in this study, we present a series of recommendations on three levels: Macro recommendations for changing the conceptual approach to the issue; operative recommendations for creating an innovation ecosystem for all economic sectors, including traditional industries; and recommendations for dealing with the specific barriers identified.

 

Strategy: Change of conceptual approach	Adopt a broad innovation strategy
	Develop systematic methods for measuring innovation in its broader sense
	Promote innovation in all economic sectors to reduce productivity gaps
Operational: Promoting broad innovation in all economic sectors	Formulate sector-specific plans for increasing productivity and promoting innovation
	Support bottom-up initiatives promoting innovation and productivity
	Establish an inter-ministerial forum to promote innovation in traditional sectors
	Eliminate the three main barriers to implementing innovation (as reported in our surveys)
	Develop incentives and local ecosystems in Israel’s periphery
	Increase government digitization
	Reduce the bureaucratic burden
Removing main barriers:	Lack of knowledge	Lack of skilled workers	Access to funding sources
	"Innovation communities" for traditional industries	Adapt training programs to a broader definition of innovation and to the needs of employers	Funding programs for “laggards”
	Establish centers for promoting innovation in low-productivity industries	Incentives for employers to invest in upgrading workers’ skills	Fund for “early adopters”
	Peer-to-peer support networks	Vouchers for innovation and digitization training	Vouchers to fund organizational-strategic change
	Online platforms for knowledge and self-assessment by businesses	Basic digital literacy courses
	Strengthen relations between academia and industry	Management practices improvement programs

Adv. Rita Golstein-Galperin is head of the Public Sector Reform program at the Israel Democracy Institute. Previously, she established Israel’s economic division to the OECD, and served as chair of an OECD working party on international trade. She later directed Israel’s national Civil Service Cadet training program. Currently, in addition to her role at IDI, Rita is a social entrepreneur and lectures in policy and social innovation at the University of Haifa.

Gilad Be’ery is the director of research in the Strategy and Policy Planning Division at the Ministry of Economy and Industry. His work in this capacity includes, among other things, technology and innovation, assessing the effectiveness of policy tools, and ongoing economic analysis in support of policy. He has held a series of research positions in government and in research institutes, in a range of economic and social fields. Gilad is a graduate of the bachelor’s degree program in PPE and holds a master’s degree in public policy (both of them cum laude) from the Hebrew University of Jerusalem.

Dr. Shaul Hartal is a researcher in the Public Sector Reform program at the Israel Democracy Institute’s Center for Governance and the Economy, and a lecturer in public policy at Ono Academic College. He holds a doctorate in management and public policy from the Ben-Gurion University of the Negev, and his main areas of research are the development of innovation in the periphery, internal migration of human capital, and institutional economics.

Ayelet Kol is senior area head for commerce and services in the Strategy and Policy Planning Division at the Ministry of Economy and Industry. In this capacity, among other responsibilities, she promotes the economic advancement and productivity of the commerce and service industry sectors. Ayelet holds a master’s degree in business administration and a bachelor’s degree in economics and business administration (cum laude), both from the Hebrew University of Jerusalem.

Lior Levi is a research assistant on the research team of the Public Sector Reform program at the Israel Democracy Institute’s Center for Governance and the Economy. She holds a master’s degree in public policy from the Hebrew University of Jerusalem.