ALTLOOK: The Alternative Investments Podcast

How has Israel become a hub for innovation? Kroll Institute Fellow and Senior Advisor Dr. Efraim Chalamish and Start-Up Nation Policy Institute Co-Chairman and Start-Up Nation Central Ex-CEO Eugene Kandel discuss the current state of Israel's tech and innovation ecosystem and how it is relevant to current challenges companies and governments are facing around the world, including the COVID-19 pandemic.

Passages From the Episode

“How is the current state of Israel's tech and innovation ecosystem actually relevant to the current challenges and companies and governments facing around the world?” – Efi Chalamish

“Well, we can look backwards or we can look post-corona. So, in the last five years we have basically hosted over 230 large corporates, another about 80 governments and NGOs, that are definitely interested. Some of them due to our efforts of explaining why they should be interested and some of them just on their own. Because Israel has a variety of strengths in technological, and especially in deep tech and life sciences, that address challenges that face the entire world. Some of these challenges, like shortage of water, shortage of arable land, the cyber security and others, are endemic to Israel. I mean, these are the challenges that Israel had to figure out how to survive with innovation”.– Eugene Kandel

“Now, looking forward, in September, we published a report called the new digital age where we argue that several trends post-corona [will stay]. One of them is remote everything. Corona basically broke all the psychological and operational barriers to remote work, remote study, remote everything, remote leisure. Remote health, very importantly. And so that creates a demand for enormous number of technologies that can facilitate remote everything,and then it make it safe. The second trend is that the countries realized that the global supply chains, which looked cool about a year ago and were possibly growing, don't look as cool as one country suddenly closes its borders. And basically, everybody's stuck without essential ingredients. So the countries are onshoring some of the essential parts. That creates huge demand for technology, because the way you organize a plan for manufacturing plant in China, you cannot organize it the same way in Nebraska, in the US. And so, that creates a need for flexible and adaptable and the very sustainable technology that can be resilient to various shocks.” – Eugene Kandel 

Abraham Accords

“I'm sure that many of you have heard of the Abraham Accords recently, which brought the Arab world and Israel even closer together, whether it's Bahrain, UAE and other parts of the region, What do you think really triggered these new developments? There are all types of misunderstandings in the market. What really brought the parties together? What's the future of the region as a one cohesive economic region? But if you can share with us briefly, what do you think, what are the real economic triggers behind it?” – Efraim Chalamish

“Well, I think that we have to look at the previous peace agreements and really contrast these ones from the previous ones. The first peace agreement that was signed with Israel was in early 80s with Egypt.. And the second one in the late 80s with Jordan. Now, these two agreements were driven by political and international relations drivers, but unfortunately, they never came to bring the economic benefits that could have been brought, apart from the gas that recently started, [Israel] first buying gas from Egypt, and now we are selling gas to Egypt and to Jordan. But other than that, there's very, very little economic benefits.” – Eugene Kandel

“There are two reasons for that. One is that the economies, the Israeli economy and Egypt and Jordan economy, are very, very different in terms of GDP per capita, in terms of the level of technology, in terms of the main challenges. But also, the second reason is that the society in those two countries were not ready to accept the normalized relationship on the economic level. There were a lot of objections from unions, from business groups, et cetera. We have cold peace, which is infinitely better than the war, but there's no benefit.” – Eugene Kandel 

Israel’s Response to COVID-19

“Israel used this ecosystem that you described to us so well in the context of vaccination, innovation, vaccination distributions, et cetera. In a few words, what was the key? Why the historical innovation and ecosystem that you described to us was so relevant to the COVID-19 treatment and vaccination distribution?” – Efraim Chalamish

“Well, I think here a bit, humility also goes a long way. I think, first of all, people need to understand how Israeli healthcare system works. We have national payment for healthcare, which is allocated among four large HMOs. Two largest Israeli HMOs are the second or third largest HMOs in the world. And they compete among themselves. So, these are systems that are very, very efficient. Some of them have been around for 120 years. And these systems are very, very well organized. One of the best systems in the world in terms of community care. However, when the Israeli government started the COVID approach without a clear technological playbook or even... And it had to improvise. And here, the ability to improvise combined with these HMOs that are highly efficient, in some cases led to not so good results in terms of two or three rounds of infections.” – Eugene Kandel

“But at the same time, when time came to vaccinate, the vaccination was done almost perfectly. And the reason is that Israel has electronic medical records for the last over 20 years. With single ID, everybody can pull the entire medical record while keeping privacy. So we have data, we have systems to use it very efficiently. They are very secure and private. And there is a communication system that allow you to communicate with the citizens over several venues. So, that combined with the logistical ability of HMOs that exists, and the partnership between the HMOs and the government, allowed us to basically vaccinate over 60% of the population in the first three months.” – Eugene Kandel

“But in the process, you need to understand we were talking about the ability to improvise and where the ecosystem is important. We mapped COVID-related the solutions in March. There were about 70 in Israel. In August, there were over 300. So a lot of companies pivoted very, very quickly. Some companies were established and started marketing already by October, started marketing when they didn't exist in March. So this ability to really quickly bring solutions to Israel, but also to the entire world, a bunch of Israeli companies really grew throughout the COVID because they were delivering such good solutions. That ability is incredibly important.” – Eugene Kandel 

Governance Challenges

“What do you think is the most important challenge for governance today?” – Efraim Chalamish

“I think there are a couple of things. One thing, the most important in my opinion, in terms of governance, is how to deal with algorithms. And it's relevant, both for governments and for corporates. For governments, it's much more relevant in terms of regulation. How do you regulate algorithms? And how you do not kill the algorithmic nature, big data insights by basically looking at algorithms and regulating them as you regulate people? They're just not going to work. And countries that are going to try to do that, will be in the back of the queue. And countries that would be taking certain risks, but being open to really regulating algorithms, will benefit enormously. For corporates, you can do a lot of things with algorithms. But you can even run boards with algorithms. To what extent you going to... If you remove all kinds of personal issues and all kinds of bad incentives, et cetera, and replace part of the decision-making of the board with algorithms, there is some evidence that it may actually improve. So, this is, in my opinion, the biggest thing.” – Eugene Kandel

“The second biggest thing is that this ESG is a good thing in terms of that we start to look at the overall impact of the corporates and the governments on everything they do, rather than looking at one parameter. That is a plus. However, in some cases, this becomes an ideology. And the same way, the ideology of “the only number for a corporate that matters is the profit”, is probably not the right thing, but at least it's a clear thing that you can understand. The ideology of ESG when it becomes really dogmatic, could bring us to very, very poor performance, because we're going to be ticking the boxes instead of creating value. Value in all kinds of ways. We just need to be careful that we don't throw the baby with the water.” – Eugene Kandel