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What Israel can teach about fostering business innovation

There is a lot of reluctance about giving governments the power to pick winners as they dispense research cash to businesses.

The worry is that choices are inevitably guided by politics, rather than merit. Critics also point out that governments have a poor track record of identifying good business opportunities. The result is that too often money is wasted.

Don't tell that to Avi Hasson, chief scientist of Israel's ministry of industry and trade.

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Picking winners is his job. And by all indications the 43-year-old former military intelligence specialist, venture capitalist and entrepreneur is very good at it.

"Regardless of your economic beliefs, in this world, government plays a key role," Mr. Hasson explained in an interview. "You can argue over how and to what extent, but this is a classic market failure."

The chief scientist's $450-million (U.S.) budget spawns $1-billion worth of R&D investment every year, a key piece of the model that has made Israel the runaway leader in civilian R&D spending with the Organization for Economic Co-operation and Development club of wealthy countries.

Canada is well back in the pack, a chronic laggard in business R&D spending.

Tiny Israel's success at harnessing and commercializing innovation is well documented, detailed in the bestseller Start-up Nation, the Story of Israel's Economic Miracle by Dan Senor and Saul Singer.

Less well-known is the critical part the government plays in filling gaps in the innovation funding pipeline.

Governments may not be particularly good at mentoring entrepreneurs or growing companies. But they are uniquely able to shoulder risks, particularly over the longer haul, that private investors won't touch, Mr. Hasson suggested.

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"The word 'risk' in the Office of the Chief Scientist is a good word," said Mr. Hasson. "We like to fund risky projects because industry won't."

Unlike private investors, Mr. Hasson is less concerned about whether projects fail, as long as the expertise and the technology survives.

The trick is not to crowd out private investment or carry the full load, but to fill gaps – particularly early on, before products reach commercial scale, according to Mr. Hasson.

The Israeli model also hinges on keeping politics out of the mix, while leveraging private money and expertise. The chief scientist's independence is enshrined in a special law and he's appointed for a non-renewable six-year term.

Success also comes from the highly structured way that he selects a small number of suitable projects from the multitude of proposals.

Mr. Hasson uses a network of 120 evaluators – private contractors, often drawn from the ranks of former entrepreneurs. They visit companies, interview employees and then make recommendations. A second evaluation is conducted by sector specialists, and both are reviewed by independent committees, all chaired by Mr. Hasson, who in spite of his title, is not a scientist.

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The Israeli government's investments range anywhere from $40,000 to several million dollars a year, and they're typically repayable from future royalties. It usually takes on less than 50 per cent of a project's cost.

The question, of course, is whether the Israeli model is relevant in Canada, where the bulk of the government's business R&D effort is delivered through tax credits.

In 2012, Ottawa issued $3.6-billion (Canadian) in tax credits to more than 20,000 companies through its flagship Scientific Research and Experimental Development program. On the other hand, the government's largest grant program – the Industrial Research Assistance Program – spent just $110-million on roughly 1,100 companies.

Some experts have been pushing for the creation of a Canadian chief scientist to take charge of the array of innovation programs and agencies, spread across several ministries. It was a key recommendation of a 2011 federally appointed panel, headed by Open Text Corp. chairman Tom Jenkins.

But Ottawa has so far ignored the suggestion, perhaps reluctant to cede control of such a significant chunk of spending.

Mr. Hasson said other countries would be wrong to simply "copy-paste" the Israeli model. "You have to match the policies to the culture, to the capabilities, to the assets, otherwise it doesn't work," he said.

But the lesson in Israel's success is that the government's active and strategic involvement in business R&D is essential to driving innovation.

Writing tax credit cheques and hoping for the best isn't enough.

To read an edited transcript of the Avi Hasson interview, visit here.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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