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

• Author: Erez Maggor
• Published date: 01 December 2021
• Date: 01 December 2021
• DOI: http://doi.org/10.1177/0032329220945527
• Subject Matter: Articles

https://doi.org/10.1177/0032329220945527

Politics & Society

2021, Vol. 49(4) 451 –487

© The Author(s) 2020

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DOI: 10.1177/0032329220945527

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Article

The Politics of Innovation

Policy: Building Israel’s

“Neo-developmental”

State

Erez Maggor

New York University

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.

Keywords

innovation, Israel, developmental state, policy, discipline

Corresponding Author:

Erez Maggor, New York University, 295 Lafayette St. 4th Floor, New York, NY 10012, USA.

Email: erez.maggor@nyu.edu

945527PASXXX10.1177/0032329220945527Politics & SocietyMaggor

research-article2020

452 Politics & Society 49(4)

Industrial policy is back on the political agenda. From Germany’s “Industrie 4.0”

to “Made in China 2025,” policymakers worldwide are advancing ambitious

innovation policies that aim to transform industry, foster the development of

cutting-edge technologies, and promote inclusive growth. These policies also seek

to harness innovation to address formidable social and global challenges, including

the demographic aging crisis, widening economic inequality, and adverse climate

change. Such policies call for a wide range of measures often identified with a

“neo” or “entrepreneurial” developmental state.1 They include targeted government

investment in R&D and training, support for marketing and exporting, networking

and brokerage services, and building of facilities and science parks. They follow a

period in which such proactive state targeting was avoided for fear it would encourage

rent-seeking behavior, waste taxpayer money, and distort market competition and

resource allocation. Yet a growing literature on innovation has found that, in contrast

to Washington Consensus policy prescriptions, such bold and transformative strategies

have in fact been essential for the economic success of some of the world’s most

innovative economies. That was the case not only for developing nations such as

Korea, Taiwan, Ireland, Finland, and most recently China2 but also for advanced

economies such as Germany and even the United States.3

This article finds evidence that supports the state-led account of innovation and

advances the literature by making two specific contributions. The first contribution is

to highlight a crucial, yet underappreciated, feature of contemporary industrial strat-

egy: the state’s capacity to condition public assistance on the fulfillment of specific

terms and obligations and enforce discipline when private firms do not adhere to gov-

ernment guidelines. I find that, much like the catch-up developmental state of the

postwar period, the effectiveness of innovation policies has depended on these specific

capacities. Whereas state assistance was historically tied to maintaining strict perfor-

mance standards, mainly in the realm of export promotion, contemporary innovation-

targeted strategies require conditioning assistance on the domestic commercialization

of state-sponsored innovation.4 As will be discussed at length below, these capacities

are necessary in order to guarantee that the social and economic “spillovers” produced

by the state’s investment in innovation are not appropriated by private actors but rather

distributed more broadly within the domestic economy.

The second contribution involves returning to the fundamental debate about the

role of politics—reflected in the relations between the state’s developmental agencies

and key societal actors—in development. With some notable exceptions, such as

recent work by Richard Doner and Ben Schneider on the political economy of devel-

opment, the scholarship on innovation has not paid much attention to how state action

is constrained (or enabled) by its relationship with various social groups.5 By incorpo-

rating an analysis of the politics of policy formation and institutional change, I high-

light that politics represents a key causal factor in both the implementation and

potential transformation of innovation policy. After all, the political sphere is where

the institutions that govern policy are formed and potentially reformed.

To illustrate these points, I offer a critical exploration of a crucial case,6 previ-

ously regarded as a “neo-developmental” state and commonly referenced in

Maggor 453

the literature on innovation policy: the state-led development of Israel’s high-tech

sector.7 First, I demonstrate the central role that conditionality and state discipline

played in the success of Israel’s thriving innovation economy. Next, I trace these

institutional capacities to the emergence of a political coalition that was formed by

Israel’s leading developmental agency and included key members of industry,

finance, and labor as well as former military elites and leading entrepreneurial sci-

entists and engineers. Whereas the failure to build similar upgrading coalitions

served as the main political obstacle to development efforts elsewhere, in Israel this

coalition underpinned the state’s efforts to restructure industry in the direction of a

knowledge-based economy and played a pivotal role in the successful implementa-

tion of the state’s innovation policies.8 Finally, I depict how changes within this

coalition due to the appearance of Israel’s venture capital industry—a powerful new

actor with distinctly different policy preferences—eventually eroded vital institu-

tional capacities and led to significantly fewer public rewards. Thus, in addition to

enhancing our understanding of the role of conditionality and discipline in contem-

porary industrial policy, this study also contributes to growing debates on the “polit-

ical economy of innovation,”9 as well as to the robust literature on the role of politics

in institutional change.10

The article begins with a review of the relevant literature. This section highlights

why innovation-led development brings about unique challenges requiring that the

state condition its assistance and gain the capacity to discipline uncooperative firms. I

follow with a historical illustration using the case of Israel. I begin with an outline of

the relevant historical background and then proceed to the main empirical sections.

Here, I outline the unique institutional capacities of Israel’s Office of the Chief

Scientist—a “Schumpeterian developmental agency” that has received international

acclaim for stimulating the growth of Israel’s thriving high-tech industry.11 Next, I

discuss the political origins of these capacities and outline how they have changed

over time. I do so by leveraging an in-case comparative analysis demonstrating how a

shift in the original upgrading coalition worked to erode the central pillars of Israel’s

original innovation policy and how those changes, in turn, have had a negative impact

on developmental outcomes.

From “Catch-Up” to “Innovation-Based” Development

The Catch-Up Developmental State: Goals, Strategies, and Capacities

Starting in the 1980s, investigations into the “miraculous” economic success of a

number of East Asian countries—first Japan, later South Korea, Taiwan, and

Singapore—challenged the widespread commonsense of the Washington

Consensus. That scholarship demonstrated that the unprecedented success of those

newly industrialized countries rested not in their commitment to free market prin-

ciples but rather in their reliance on a comprehensive industrial program imple-

mented by a developmental state. Such industrial policies generated an economic

transformation by targeting investment in select industrial sectors and fostering