Why did you write this book?

Dan Senor: Originally, the idea was not to do a book. When I was in my second year of Harvard Business School in 2001, I took a group of 30 students to Israel, three of them were Jewish, twenty-seven were not, and had no connection to Israel. The idea was to look at the economic opportunities in Israel and also study the history and the politics. It was at a pretty depressing time  — there was a good entrepreneurial economy story there — it was during the Second Intifada.

I took all these students — to their credit, none of them pulled out even though literally the day we were leaving, things were blowing up — and my classmates were all saying to me, “I get it. There’s huge economic opportunity here for people who are willing to invest here and do business here.” But, even more than that, I was struck by the question of how they pulled it off. It’s a very young country [and] a very difficult environment. There are no natural resources, no access to regional capital or regional markets. If you were to paint a picture of the circumstances under which you’re not going to have a successful economic developing country, it would be Israel.

Israel represents the highest concentration of innovation and entrepreneurship in the world today: the most start-ups per capita; the highest percentage of GDP invested in civilian R&D; more companies on NASDAQ than all of Europe, Korea, Japan, India, and China combined; and the biggest destination for global venture capital per capita. Israel raises 2.5 times as much global venture capital as the U.S., 30 times more than Europe, 80 times more than India, and 350 times more than China — and these numbers are from 2008, when the world was in the midst of an economic meltdown. Israel all but escaped the crisis that ripped through economies everywhere else. No one has told this story before of what makes Israel so economically successful.

What is in the Israeli DNA that makes them so entrepreneurial?

DS: Our book dives into many interacting factors, but one of the most important is the training and battlefield experience that most Israelis receive in the military. The military is where many Israelis learn to lead and manage people, improvise, become mission-oriented, work in teams, and contribute to their country. They tend to come out of their years of service — three for men, two for women — more mature and directed than their peers in other countries. They learn “the value of five minutes,” as one general told us. They even learn something more uniquely Israeli: to speak up — regardless of ranks and hierarchy — if they think things can be done better.

What is the difference between Israel’s entrepreneurial culture and the U.S.?

DS: It’s partly derived from the military, of course, but it’s also the result of “spin-offs” of military R&D and the companies created by Israeli engineers who have passed through the special military tech program. More than that, however, the military in Israel promotes innovation and entrepreneurship, it’s a country of immigrants who, by nature, are natural risk-takers and entrepreneurs.

While there has been a burst of clean-tech ventures in Israel, most exciting to us are the companies and sectors that one would least likely expect in Israel — from a world-class digital animation studio in Jerusalem to a next-generation asset management industry in Tel Aviv.

Israel itself is a start-up. While the book deals to some extent with elements of Jewish identity, it tends to focus more on exploring Israeli traits. But sometimes the two overlap. It’s very Israeli to be constantly questioning, arguing and not accepting, but challenging authority.” Israelis are not worrying about hierarchy and ranks. All these things are Israeli traits, but some of them have Jewish antecedents.

The Israeli emphasis on education is a Jewish trait and has also become an Israeli thing — Israel’s universities were founded in the 1920s before the state was founded. To extract the most basic elements from the recipe, Israel has a perfect balance between innovation and entrepreneurship, and it is this balance between the two that make it very competitive with other “smart” countries like Finland, Singapore and Ireland.

What are some of the great success stories to come out of Israel?

DS: The great irony of the Start-Up Nation story is that Israel has transformed the challenges it has faced into assets that form the cornerstones of its culture of innovation. Adversity of all kinds, such as being under attack, small, isolated, and lacking resources, have forced Israelis to be resourceful, to do more with less, to innovate, and to be global from day one. The fact that Israel specializes in adversity is most dramatically seen in downturns.

When the tech bubble burst and the peace process fizzled in 2000 to 2001, one might have expected the Israeli tech scene — then only a few years old — to evaporate. Instead, Israel garnered a larger market share of the global venture capital pie in 2005 than it did in 2000. Similarly, in the current downturn, Israel has been among the least affected and the first to recover among developed nations.

The tendency to tinker, question and improvise that often begins in the military leads to a particular Israeli specialty: technological “mashups.” Israel leads the world in medical device patents, partly because when Israelis discover a technology, they can’t help considering applications to solve unrelated problems. Just look at a company called Given Imaging, whose founder realized that the miniaturized sensing systems in the nose cone of a fighter jet could serve a medical purpose.

He adapted the sensor to produce a swallowable camera, the size of a pill, to beam out a movie from inside a patient’s intestines. This is making some highly invasive and painful diagnostic surgeries all but obsolete. As with so many Israeli start-ups, PillCam is now a major company and has spawned a new industry.

Do you think Israel’s entrepreneurial spirit changes people’s perceptions of the country from one that some feel is oppressive?

DS: People find it refreshing to have a discussion about Israel that is not conflict-centric. While so much of the debate is about the threats and the moral obligation that the world has to Israel, there’s another part of the narrative: what the world can learn from Israel.

Israel’s economic success has been a key component in convincing the Arab world that its existence is permanent in the region, which is the threshold incentive for the Arab world to end its attempts to destroy Israel. The moment the Arab world is ready for peace, the opportunities for economic cooperation are great, and Israel could play a pivotal role in helping regional economies advance.

What type of support does the government provide that other countries don’t?

DS: A key lesson from Israel is that innovation is not just something that goes on inside companies; it comes from a wider culture that fosters both innovation and entrepreneurship. Israel is a country of immigrants — there are over 70 nationalities represented in this tiny country. Two out of every three Israelis are newcomers, or the children or grandchildren of newcomers. The Israeli battery-operated car grid company Better Place was founded by the son of an Iraqi immigrant. The Israeli company Koolanoo, the third-largest social networking site in China, was founded by the child of an Iranian immigrant. The Internet music start-up FoxyTunes, which was recently sold to Yahoo for tens of millions of dollars, was founded by a young Ukrainian immigrant. Walk around Israeli neighborhoods, and you’ll find yourself dealing with Israelis from Ethiopia, Poland, Yemen, Russia, and Australia, to name a few.

Immigrants are natural risk takers since they were willing to uproot themselves and start over. In particular, the great wave of immigrants from the former Soviet Union in 1990 to 2000 brought to Israel a tremendous boost in engineering talent just as the tech sector began to take off. Israel is also the most pro-immigration country; politicians there actually compete with each other with campaign promises to bring in more immigrants, not fewer.

Another key lesson is to learn to leverage the business talents of young people with military experience. In Israel, employers look for and value the leadership skills of young officers who have already received tremendous management skills by age 21. By age 25, they have both military experience and a university degree. In the U.S., by contrast, too many corporate executives are illiterate when it comes to reading a military resume. We heard one story about an Iraq-war vet being interviewed by a corporate recruiter. The vet walked through all his incredible leadership experience from the battlefield. But, at the end of the interview, the interviewer said, “that’s all very interesting, but have you ever had a real job?”

American businesses need to embrace, not spurn, this incredible reservoir of ex-military talent. This does not mean that other countries need the military conscription model that Israel has been forced to take to become entrepreneurial. Other frameworks, such as national service programs, could also provide the management and maturation experience that Israelis get, but in a civilian context. Finally, the Israeli experience shows that countries that want to be more entrepreneurial should welcome immigrants as a great resource for rebooting their economies.

Has Israel become a mature technology power or is there still a lot of upside?

DS: Israeli entrepreneurs have been too busy building their start-up companies and their start-up country to step back and piece together exactly how they pulled it off and, even more importantly, what others can learn from their experience. We thought that this was the right moment for this kind of book because western countries are desperately looking for ways to re-boot their own innovation economies. The world needs innovation; Israel’s got it. There’s no better time to look at the Israeli model. The next phase for Israel’s economy is not just building start-ups that are quick to exit, but building self-contained, stand-alone institutions more in the mold of Teva.

What could Israel do to leverage their entrepreneurial success to possibly bring peace to the Middle East?

DS: Israel’s economic success has been a key component in convincing the Arab world that its existence is permanent in the region, which is the threshold incentive for the Arab world to end its attempts to destroy Israel. The moment the Arab world is ready for peace, the opportunities for economic cooperation are great, and Israel could play a pivotal role in helping regional economies advance.

What is the biggest misconception of the Israel “economic” miracle?

DS: Many people conjecture that there is something specifically Jewish at work. The notion that Jews are “smart” has become deeply embedded in the Western psyche. We saw this ourselves; when we told people we were writing a book about why Israel is so innovative, many reacted by saying, “It’s simple — Jews are smart, so it’s no surprise that Israel is innovative.” But pinning Israel’s success on a stereotype obscures more than it reveals.

For starters, the idea of a unitary Jewishness — whether genetic or cultural — would seem to have little applicability to a nation that, though small, is among the most heterogeneous in the world. Israel’s tiny population is made up of some 70 different nationalities. A Jewish refugee from Iraq and one from Poland or Ethiopia did not share a language, education, culture, or history — at least not for the two previous millennia. As Irish economist David McWilliams explains, “Israel is quite the opposite of a uni-dimensional, Jewish country. . . . It is a monotheistic melting pot of a Diaspora that brought back with it the culture, language, and customs of the four corners of the earth.”

While a common prayer book and a shared legacy of persecution count for something, it was far from clear that this disparate group could form a functioning country at all, let alone one that would excel at — of all things — teamwork and innovation.

Indeed, Israel’s secret seems to lie in something more than just the talent of individuals. There are lots of places with talented people, certainly with many times the number of engineers that Israel has to offer. Singaporean students, for example, lead the world in science and mathematics test scores. Multinationals have set up shop in places like India and Ireland, too. “But we don’t set up our mission-critical work in those countries,” an American executive from eBay told us. “Google, Cisco, Microsoft, Intel, eBay ... the list goes on. The best-kept secret is that we all live and die by the work of our Israeli teams. It’s much more than just outsourcing call centers to India or setting up IT services in Ireland. What we do in Israel is unlike what we do anywhere else in the world.”

What does Israel need to do to continue to foster entrepreneurship?

DS: For the global economy to recover and thrive, it is not enough for individual companies to cultivate innovation. What is needed is for countries to build a comprehensive culture of innovation that welcomes risk-takers from all over the world; encourage young people to improvise, to be mission oriented, question established business models; and institute sensible regulations and monetary policies that do not create perverse “easy money” proxies for growth.

While Israel has much to learn from the world, other countries need to look at how Israel has produced the world’s most innovative start-up economy. The non-tech portion of the Israeli economy is over-concentrated, overregulated, and overtaxed, and has, consequently, performed at a mediocre level. If the conditions that have allowed the high-tech sector to flourish were applied to the rest of the economy, Israel could grow even faster. If Israel also were to address the low labor-force-participation rates in certain demographics, we agree with Prime Minister Netanyahu that Israel could become one of the top ten largest economies in the world.