Getting out from an economic slowdown and into growth

A recently published article placed Spain in the group of the top ten countries around the world (from 144 countries) regarding developed infrastructure. When considering the current economic situation in Spain and comparing to the economic situation on the other countries in the top ten (Honk-Kong, Singapore, Switzerland, Germany, France etc.) none of which has had a down grading in their national credit rating lately, this achievement is most remarkable.

In view of the recent slowdown and the downgrading of the national credit rating, one has to ask is that a way to get out of the slowdown?

It has long been known that one of the ways to get out of a slowdown is to increase government spending. Government spending fuels the economy, increases the GDP, and helps to increase the available cash in private hand thus leading in many cases for increased private spending and a further growth of the GDP.

The downside is of course that increased government spending will lead to increase in the national budget deficit, an increase in the national debt and later on inflation and other negative influences, and unwanted results.

An interesting solution would be to increase government spending in a way that will increase Government income so the budget deficit is short term and therefore most of the negative results can be avoided.

The Israeli case could be an interesting case. The current solution of getting out of the slowdown is a reduced budget, cut across the board, combined with increased taxation – just the opposite than what is needed in order to increase the DGP and create growth. However, we may be saved by luck. We are entering an election year, in which even with threatening budgetary cuts it is normal to have an increase both in government spending and in private sector spending, which may be our way out of the slowdown, but as it will not generate government income the long term results could be problematic. But is there another way?

How about increasing government spending in a way that will allow more companies to generate sales and market share, grow, and increase the number of their employees (a good result by itself), thus generating more taxes both from the employees and from the firms. as the Israeli economy is fueled by the high-tech industry, if the growth could be in that sector it could pull up the rest of the economy as it has been doing since the mid 1990’s.

So, we are looking for increasing government spending by investing in the high-tech sector in a way that will allow it to grow and increase its sales and market share in the world, is there such a way?

Could the Spanish solution be the answer? Not in the case of Israel, as investment in infrastructure would take too long to bear the relevant fruits in terms of economic growth, especially for the high-tech sector. There is already a significant infrastructure regarding communications, wireless and other high-tech relevant infrastructure, and investment in transportation and other “hard” infrastructure would have little impact on the high-tech sector in Israel.

There is another solution in the case of Israel. The Ministry of Industry, Trade and Labor has supported the high-tech sector for decades via the Office of the ChiefScientist (OCS) . The support has been given as R&D loans and grants. This mechanism could provide the desired income to government in several stages. The R&D support, would allow the high-tech sector to increase its competitiveness, as it has been doing for many years, thus increasing employment and tax income. It would also allow recuperation of some of the funds via the repayment of the loans back to the OCS – allowing for the funds to be reused, but also for the governmental section of the OCS budget to be reduced while keeping the overall OCS budget intact.

The increased government spending in this way, would allow the generation of the wished for results, and would allow the increase of government spending without the negative implications. This would be a better way of getting out of the slowdown than just election spending.

TTC models the agglomerate or single companies?

In my last post regarding the Israeli Technology Transfer Company (TTC) and the potential change due to the recent call for tender for a TTC to attend the needs of the colleges in Israel, the discussion ended with the question regarding the universities’ TTCs, should they unite or not.

In order to discuss this point in a meaningful way one has to consider the following points regarding academy- industry commercialization:

·         Academic knowledge is seldom “ready for use” for the intended industrial purposes and requires additional development and sometime complementing technologies.

·         Due to the nature of academic competition, competing technologies will be found at different research groups. That knowledge if packaged together could present a valuable IP block for the industry.

·         Locating the required academic knowledge can be problematic as a result of the complexity of research interests that do not necessarily fit faculty division. A single point of contact could help the industry locate the knowledge faster and easier.

·         Ethics – all research center technologies should get an even chance to be protected and marketed – there should be not preference to competing technologies, unless from the market side.  Different institutes may demand preferences.

·         Centralizing the activity would reduce overhead, duplication and infrastructural cost (e.g. annual accountant audit, administration etc.).

·         In Israel the TTCs are funded by university funds which are public funds, so the organizational structure of the TTCs in all universities is a matter of public interest. Same applies to the revenues gathered by the TTCs on behalf of the universities using the knowledge developed by university trained and paid for personnel and using university infra-structure.

The points regarding distances, distribution of expertise etc. are very general and in any case would not have a big influence in specific regions or small countries.

Reviewing the points above it would seem that the universities in Israel would only benefit from the merger of their TTCs. The administrative, management and general costs would be reduced, the knowledge could be packaged containing complementary knowledge from several universities, and the management and ethical questions could be resolved (e.g. TLB solution, or the French SATT). The main benefit would not be the saving in my opinion, as there would be travels and offices etc. in each campus, but the ability to form a joint commercialization strategy and package the knowledge better.

The main obstacle would be the sunk cost each university has in its TTC and the complex agreements and exclusivity issues stemming from about 50 years of activity.

Changing the Technology Transfer model?

The Technology Transfer operating model in Israel for the last decades has been that of a Technology Transfer Company (TTC) a commercial separate legal entity – a company limited by share, fully owned by a single university.

That model has shown a good fit for the special circumstances in Israel. The universities have managed to support their TTC and allow them to evolve to the stage of financial independence, to employ personal outside the limitation of public institutions and to act as business oriented entities with certain academic limitations.

However, a few months ago a new idea appeared on stage with potential interesting circumstances. The Council for Higher Education  (CHE) has published a call for proposal (tender) for forming a TTC for the colleges it sponsors. The CHE was responding to a recommendation of the prime minister to do something for the colleges.

That move signaled two interesting points; the first being that the CHE recognizes the need of the colleges to enhance their research activities and to become more than just teaching institutes. The second, by suggesting a single firm for several colleges, they were introducing a new model for TTC operation in Israel.

The first point will be referred to at another time. However the introduction of the new model of TTC operation in Israel may have interesting implications. Israel has at the moment seven research universities, each with its own TTC. The justification of that model has been based on the direct support that each university gave to its TTC in its formation stages, and on the claim that a TTC of two universities may be presented with a conflict of interests when having to decide between competing technologies originating from different universities regarding their protection and commercialization.

However, both these arguments loose a lot of their credibility when looked into in depth. The first claim regarding the financial backing, the universities have been supported in their budget by the government (through the financial arm of the CHE) since each was established by law (or in the case off these preceding the state since its formation). Therefore the "internal funds" in most cases came from the public, and therefore could in theory be managed jointly….

The second argument may seem both practical and ethical but in fact that chances that in a single university with a strong research center focused on a sector (e.g. nano-science) there would be several research groups working on closely related topics that would from time to time come up with competing technologies for protection and commercialization, and the TTCs have evolved an internal system to overcome that in-house conflict of interests. Furthermore the German model seems to have found some solutions for such problems (TLB). A  center for renewable energies as recently formed in Tel Aviv University boasting some 55 different research groups would certainly come with competing solutions to similar "hot" problems in that area. Would anyone expect a TTC to be formed for each competing solution?

The real bastion against the unified model has been the success of the existing model. The revenues accrued by the TTC of the Weitzman Institute (Yeda) and the Hebrew university TTC (Yissum) as well as the others supported the existing model – if it works do not change it…

The new model for TTC operation in Israel, however, if successful and with the support of the German model, to remove the claim for the difference due to universities versus colleges, could lead to a strong pressure to unify the universities TTC. After all Israel is not such a big place, and a single company could cover the whole country. Since we are dealing with public funding, such a move could be regarded by decision makers as interesting and certainly as warranting a closer look.

Will the new model be successful?  Should the university TTCs unite? 

Life Long Learning

I have come upon an interesting article in Forbs titled: “Five Leadership lessons from James T. Kirk”. This is not a sci-fi article, but it derives leadership lessons from the character as portrayed in the series and reflects on their application in management / leadership.
The first lesson is “Never Stop Learning” and it goes deeper than just gathering information in your line of work. The example given in the article relates to information appearing useless that helped Kirk survive and beat his opponent. But it has a deeper meaning for me. You can never know what you may need one day or what will happen to you, you cannot rely on the availability of information sources external to yourself to provide the answer when you need it. While this may seem trivial, it would appear that we are not teaching our children that important lesson.
In today’s world, with the information highway, when data is available, knowledge, intrinsic has become neglected. The children are required less and less to know, and increasingly to know where to find the information. Why learn the multiplication table by heart when you can calculate it fast enough? Why learn to formulas, data, chemistry and historical facts when you can find them if you need them?
The problem arises when you cannot easily define the question required to solve a specific situation, or to evaluate which of the multiple choices is best for you. In fact by trusting information supplied by others, we lose a part of our independence, our freedom of choice. If you look at the example given in the Forbes article Kirk could have chosen other solutions, it was his knowledge that helped him choose the specific solution which brought him out alive.
Knowledge that was once revered and appreciated is much de-preciated because it is so easy to obtain information. But the knowledge, being the internalization of the information, is ever more important and will become more important in the future. The answer in education would be to instill the thirst for knowledge, the wish to learn more and not for grades and for better pay, advancement etc. but rather for the joy of knowing more. We embarked on the journey towards Knowledge by trying to understand the world around us, that voyage is not over – so we should keep seeking knowledge.

The longer time to exit and its impact on VC

Recently a founding manager of one of the Leading VCs in Israelannounced he will not be part of the next round of funds, but will continue with his efforts in the existing funds. He mentions that the economic developments have made the time to exit longer than it used to be 10-12 years ago. That in time has made the investment in start-ups more problematic. The funds themselves are designed for 10-12 years duration, but the time for growing firms from small start-ups to companies that can be used for exit has lengthened and that made the VC try to capitalize either too early (less return on the investment) or invest in less risky firms.
In the second cycle, the institutional investors have moved towards investment in larger VCs due to managerial pressure – not related directly to risk management.
The investment in many small firms requires a managerial effort in tracking (board memberships and reports) many firms. If you want to keep the management load at a low enough level you would show a preference to a smaller number of investment of a larger size. That preference for larger VCs, is creating a push in the sector for larger VCs, - an artificial size advantage.
To sum, it would seem that the world economic crisis has created not only a reduction in available funds that has created a problem for the VCs. If that were the only problem it could have been remediated when the slow-down was over. The other effects such as the lengthened maturing process of Start-Ups, is more difficult to overcome and is creating a more complicated problem for the VC sector.

A rose by any other name would smell as sweet

The title here is taken from the Shakespearian tragedy Romeo and Juliette. But is relates to a more obscure tragedy in the making. Recently, 15th December 2011 the Israeli government has decided to change the name of two ministries. The former ministry for national infrastructure would become the Water and Energy Ministry, and the former ministry of transportation would become the ministry for transportation, national infrastructure and road safety.
The second part of the change is intended to place all the design and executive organs regarding land water and air transportation, including safety and infrastructure investment in one place. But look at the following ironic scenario:
In order to save on land use (Israel is a small crowded country) a suggestion to place communication lines next to the train tracks, and to similarly provide a venue for electrical power conductance is presented. Such a suggestion would have to be approved by the ministry for transportation (blab la bla), the Public Utility Authority (energy) which is part of the Water and Energy ministry, the national planning committee (belongs to the ministry of the Interior), the Land Management Bureau belonging to the Housing ministry and the ministry of communications. All of which would fit, in a sane place under the heading of Infrastructure.
The reality is, that if such a suggestion would be tabled it would require the Finance ministry as well, but that would probably be the only one with a comprehensive look at the project. Sadly the list of agencies (perhaps justified) and ministries (probably not justified) is the reason so many projects are discarded mid-way in Israel. The different ministries, under ministers from different parties, with conflicting social agendas, would find it hard to cooperate. Further to that, in the lack of valid policy, every such project suggestion would require each ministry /agency to make a separate decision approving the project. It is enough for one to disapprove for the project to be rejected.
Unfortunately our lives are not mono-disciplinary or mono-ministerial, but moe complex than that.
Instead of changing the name, how about merging the ministries and agencies, into a real national infrastructure ministry and placing the responsibility for the management of national infrastructure there?
At least create a body to coordinate the decision making of all the infrastructure bodies.

Increasing Government Investment in Economic Development

It would seem that Israel is attempting to increase its economic growth in the current difficult world-wide economic situation.
In a recent publication it was announced that the ministry of industry trade and labor received an increase in budget (even that can happen) for 2012 of 1.5 billion NIS (about 300 million euros). That funding will go towards more R&D financing, training and other supportive measures for the local industry- to increase the competitive advantage of Israeli firms, and create / preserve jobs. This comes after an increase in funding from 2010 to 2011.
It seems that the money will not be left un-used as the Israeli high-tech industry is used to identifying such support opportunities and sizing them up. It comes also on top of the activities of the three years old agency for SME support operating under the funding and directions of the ministry.
It would seem that these attempts to shore up the economic development in 2012 come after the bleak announcement by the governor of the Israeli central bank, that 2012 will be a difficult year economically. Although we are entering an election period such steps seem real enough as they escape the notice of the general population, and will bear at best noticeable fruits after the 2013 elections.