The Politics of Innovation Policy: Building Israel’s “Neo-developmental” State

Abstract

This article contributes to an emerging literature on the “neo” or “entrepreneurial” developmental state that emphasizes the role of innovation policy in promoting the structural transformation of industry. It finds further evidence that supports this approach and advances it by making two unique contributions. First, it highlights an essential yet underappreciated feature of contemporary innovation policy: the state’s capacity to condition public assistance and discipline private firms that do not adhere to government guidelines. These capacities are necessary to guarantee that the benefits of public investment in innovation—the social and economic spillovers—are not appropriated by private actors but shared more broadly within society. Second, it highlights that politics—reflected in the relations between innovation agencies and key social actors—represents an important causal factor in both the formation and subsequent transformation of these institutional capacities. These points are illustrated through a historical analysis of a crucial case: the state-led development of Israel’s thriving high-tech sector.

Industrial policy and comparative political economy: A literature review and research agenda

“…Their global reach gives MNEs the possibility to follow a “divide and rule” strategy putting states, regions and cities in competition with each other to attract investment and leading to the awarding of ever-more generous subsidies and tax exemptions (Cowling and Tomlinson, 2005: 44–45), in a dynamic that is further accentuated by the process of transnational market integration in the EU. As it will be argued in the concluding section, the fundamentally unbalanced nature of this relationship calls for a serious engagement with the issue of conditionality, that is to say the establishment and enforcement of rules to reduce the conflict of interest between corporate and state actors (Maggor, 2021).…”

“…There is by now widespread consensus in the literature about the fact that effective industrial policy hinges upon the capacity of state actors to condition the awarding of financial support or tax advantages to large corporate investors to the respect of a series of previously agreed conditions. Conditionality comes in the form of rules, governance structures, benchmarks and ownership agreements that align the preferences of state and corporate actors thereby limiting the scope for rent-seeking behavior and strategic failures (Bailey et al, 2015: 176–177; Barca, 2012: 148; Block, 2008: 172; Cowling and Tomlinson, 2011: 847; Maggor, 2021; Mazzucato, 2015; Oqubay, 2020; Schrank and Kurtz, 2005). Crucially, these rules should establish mechanisms to enforce discipline when corporate actors fail to meet performance benchmarks (Maggor, 2021).…”

“…Conditionality comes in the form of rules, governance structures, benchmarks and ownership agreements that align the preferences of state and corporate actors thereby limiting the scope for rent-seeking behavior and strategic failures (Bailey et al, 2015: 176–177; Barca, 2012: 148; Block, 2008: 172; Cowling and Tomlinson, 2011: 847; Maggor, 2021; Mazzucato, 2015; Oqubay, 2020; Schrank and Kurtz, 2005). Crucially, these rules should establish mechanisms to enforce discipline when corporate actors fail to meet performance benchmarks (Maggor, 2021). The intrinsically unbalanced power relationship between governments and large corporations means that success stories of biting conditionality and effective enforcement (Maggor, 2021) will be less frequent than instances in which corporate short-termism prevails due to bad policy design (Bailey and Tomlinson, 2017).…”

“…While the heterodox economics literature focuses mainly on how to design effective conditionality measures, a promising avenue for CPE scholars would be to focus on the political conditions leading to the establishment, and enforcement, of strong conditionality (Oqubay, 2020). For instance, Maggor shows how the establishment and enforcement of strict conditionality in the Israeli context depends upon the political support from a broad coalition spanning state agencies, corporate actors, banks, organized labor and the military (Maggor, 2021). Similar studies should try to identify the political conditions underpinning the establishment of strong conditionality, or lack thereof, in the European context.…”

What makes a developmental network state durable?

“…Here again, it was a relatively obscure government office-the Office of the Chief Scientist (OCS) -that provided key funding and support that fueled developmental successes. However, Maggor (2020) shows that OCS grants required recipients to keep the resulting intellectual property in Israel. This meant that Israeli start-ups could not sell themselves to foreign firms or even contract with them to organize production overseas.…”