Industrial R&D as a national policy: Horizontal technology policies and industry-state co-evolution in the growth of the Israeli software industry

The Israeli software industry has been an indisputable success since the 1990s. This paper utilizes the development of the Israeli industry to empirically explore the argument of the horizontal technology policies (HTP) framework on the impact of neutral science and technology policies on industrial development. The paper micro-analyzes the Israeli software industry and compares its unique historical development pattern with other emerging countries. It describes (1) the rise of this industry as one outcome of the development of the entire IT industry in Israel; (2) the reasons behind the industry's ability to conduct and focus on intensive R&D activities; (3) the industry's success in becoming an integral part of the American financial and IT industrial sector. It argues that only by understanding the intricate co-evolution of state-industry relations and the specific HTP regime employed in Israel can we understand the current behavior, conditions, business models, and capability of the industry. Therefore, the argument is that Israel's industrial science and technology developmental agencies did not aim at creating a software industry, but rather at the development of novel products R&D-based industry. However, the software industry has been significantly influenced throughout its development by the specific system of innovation which these policies fostered. Thus, the paper argues that public policy is one of the main reasons why the industry has focused almost entirely on product R&D activities. In addition, the paper suggests that the state's science and technology industrial policy has propelled the industry into its intimate relationship with the American financial sector.