An Iron Cage or the Final Stage? Intensive Product R&D and the Evolution of the Israeli Software Industry

Abstract

The Israeli software industry has been an indisputable success since the 1990s. This paper micro-analyzes the industry and compares its unique historical development pattern with those of other emerging countries. It explains: (1) the rise of the industry as a part of the development of the entire IT industry in Israel; (2) the reasons behind the industry's ability to conduct and focus on intensive RD and (3) the industry's capability to become an integral part of the American financial and IT industrial sector. It argues that the state played a critical role in the development of the industry, that the state is one of the main reasons why the industry has focused almost entirely on product R&D activities and one of the reasons why the Israeli IT industry in general has developed a competitive advantage in R&D. In addition, it has been the state's policy that propelled the industry to its intimate relationship with the American financial sector. It further argues that this development model has also led to the industry's main weakness from a national policy point of view.