Innovative Entrepreneurship: Why Israel succeeds and Cyprus fails?

10 mins read


By Theodore Panayotou
Cyprus International Institute of Management

The twins of innovation and entrepreneurship, expressed in innovative enterprise, are the only tools that could sustainably get us out of the economic recession and set us on the road to recovery and growth. The technological and business innovation is the ultimate source of productivity growth and competitiveness. Israel has a fraction of the resources per capita we have and fewer than almost any other country in the world and yet it has managed to become the start-up nation of the world; it thrives in the midst of economic crises, while we wander about aimlessly unable to pay even people’s wages.
Israel, with its technological sophistication and business acumen, has not only survived in an area surrounded by enemies that threatened it's very existence, but also became the envy of the developed countries of Europe and America. Israel has more companies listed on the NASDAQ, the second largest stock exchange in the world. In per capita terms, Israel has more startups than any other country and attracts 30 times more venture capital than the whole of Europe.
The Israelis attribute their tremendous technological, business and economic success to the lack of natural resources and to the 300 mln Arabs and Iranians that threaten their very existence. Cyprus is facing similar threats to its national survival but we do not see such dedication and effort to raise our international competitiveness through research, innovation and entrepreneurship.

Now that we both have discovered natural gas, we celebrate wildly for our luck, while the Israelis are worried that the discovery might undermine what they have achieved through hard work, research, innovation and entrepreneurship. They fear that it may lead them to new adventures. Could it kill the incentive for continued progress and distort the economy? Could it bring easy riches, complacency and corruption, as happened with their Arab neighbours? They are debating ways to handle this double-edged sword in order to make it more of a blessing than a curse. They are not prepared to sacrifice even 10% of their research, technology, innovation and entrepreneurship at the altar of natural gas. If anything, they plan to invest much of heir gas revenues in redoubling their research and technological innovation efforts.
Thus, in Israel necessity and adversity gave birth to creativity and entrepreneurial culture, but not so in Cyprus, despite the proximity and similarities of the two. Why Israel did it while we did not.
The reasons are many but almost all have to do with the different mentality and culture which has developed in the two nations since gaining their statehood, basically the past half century.
In Israel, an insatiable questioning of authority and an anti-hierarchical ethos dominates political and economic life. In Cyprus, the 'deification' of power and hierarchy dominates all aspects of life. In Israel, a man is defined by what he can do and how well he does it. In Cyprus a man is defined by title or position, and based on whom you know rather than what you know. In Israel, the teacher acquires appreciation for the student and the manager for the employee. In Cyprus, the opposite: the student owes respect and allegiance to the teacher, the employee to the manager, and the soldier to the officer regardless of ability, competence and performance.
From infancy, the Israelis are trained to challenge the obvious, to ask many questions, and to debate and criticize everything, to think creatively and to innovate. In Cyprus, children are trained to accept what the grown ups (parents and teachers) say and not to question it.
When I teach in Israel, 80% of the students ask questions; they challenge everything, I say. In Cyprus, if you're lucky 20% rarely ask questions and hardly anyone challenges the teacher. Our centralised education system is investing in routine, extrinsic incentives, standardisation and conformity, while in Israel it promotes diversity, intrinsic motivation and spontaneous creativity and imagination, just those skills required by the connected and globalised international economy.

In Israel, if you're the manager your authority will be constantly challenged: why should you be the manager of me and not me the manager of you and, therefore, you must be constantly proving by your decisions and actions that you deserve the position you hold. Even army officers are being challenged by their soldiers. Blind obedience is not required; actually it is frowned upon.
In Cyprus the opposite is true. Many of the officers of security forces and managers in the wider public sector and even the private sector, have obtained their position by political favour and connection or based on the number of years of service and not through their own merit. It is, then, not surprising that they impose their authority by discipline rather than earn it with their performance. Their subordinates know that the only way to climb the ladder is to follow their example, buttering up their superiors and investing in personal and party connections and not in performance and creativity.
In contrast to the usual practice in Cyprus, in Israel subordinates do not run to their superiors to solve problems, but they assume the risk and the responsibility to invent imaginative solutions in real time and on the go. Textbook answers are discouraged and imaginative solutions are sought. Thus, most innovations are bottom-up, not top-down.
In Israel, military service has become an incubator of innovative companies (start-ups). Those who haven’t served in the army have a hard time finding work in government and business because they are considered to be "problematic" and immature, having lost the opportunity of technological training and operational experience offered by the military service. In Cyprus, the military service is considered a necessary evil and a waste of time since neither technological training nor professional development of soldiers takes place, while exemption from service can be achieved with the right connections.

Another important factor in creating innovative enterprises in Israel is the willingness to take risks and an accepting attitude towards failure which entices failed entrepreneurs to use their experience and try again instead of stigmatising and marginalising them. Without tolerating a large number of failures it is impossible to achieve real innovation.
But the failures should be "smart failures". We must distinguish between a well-planned experiment and a Russian roulette. Risks undertaken intelligently and not recklessly result in useful lessons, even if the enterprise fails.
Studies have shown that entrepreneurs who failed in their previous company are twice as likely to succeed the next time around compared to those who are starting their first business, and almost the same chance with those who succeeded the first time. Whether they succeed or fail, entrepreneurs make their contribution to the economy. If they succeed, they create new valuable products and services; if they fail, they keep the established entrepreneurs under constant pressure to innovate.
Unfortunately, in Cyprus failure is stigmatised and the unsuccessful businessman is marginalised. The bankruptcy law is unforgiving and works proactively as a deterrent against any attempt for innovation and entrepreneurship. When profit from success is demonised and failure stigmatised, it is not surprising that high-risk, high-return innovative entrepreneurship is rare in Cyprus while in Israel it is commonplace and produces miracles.