Where is tech train going and who’s at the wheel?

The biggest shocks of Covid-19 might be behind us, but the pandemic will shape our society for decades to come. Future historians are likely to regard the post-COVID era as the real beginning of the “Digital Age”.

It has been more than a quarter of a century since the Internet entered our households (the connectivity revolution), and 15 years since the launch of the iPhone set the stage for the smartphone era (the mobility revolution). Yet the big shift from a way of life based on mostly physical interactions, to daily lives that are becoming increasingly virtual, started only in 2019 in the wet market of Wuhan. The pandemic accelerated the digitization and virtualization of many activities. Models of remote working became standard, e-commerce has been rising sharply, and remote medicine skyrocketed, with a recent report finding that in 2021 telehealth usage increased 38X from pre-COVID levels.

These changes will have a huge impact on the future of cities, work, and travel, and prompted new questions: Will we still pay a fortune to live in crowded metropolitan areas when remote work is an option? Will we fly across the globe for a board meeting when we can log on from our local office? But as a head of a think-tank that focuses on innovation, I will zoom in on the three biggest challenges for innovation policy in the post-COVID era:

The innovation race is on

Innovation is the greatest generator of wealth in the modern economy. Apple, Meta (previously Facebook), Alphabet (the parent company of Google), and Amazon became the most successful businesses in the history of capitalism. This was true even before COVID, but it became much more evident with the accelerated digitization we’re experiencing now. And it’s not just Big Tech. In Israel in the past two years, the leading companies in the tech sector were SMEs. From early-stage startups to growth companies, Israeli tech SMEs showed record breaking figures since COVID started: In 2021 they raised $27 billion in VC funding (more than double that of the previous year, see chart), as dozens of new unicorns were created and many went public.

This is a global trend. Whether we like it or not – Marc Andreessen’s prediction from 2011 that “software is eating the world” is becoming a reality in almost every sector. Artificial intelligence and big data are the engines behind disruptive solutions in agriculture, automotive, finance, health and many more, and this is just the beginning.

A thriving innovation ecosystem is a key to success. In Israel, the tech industry accounts for only 10% of the labor force but 30% of income tax revenues and 54% of exports. Yet governments that wish to harness technological innovations as powerful economic engines must compete over talent, companies and investments. This competition will become fiercer in the years to come.

Mind the tech gap

But even successful, innovative regions face challenges. The flip side of technology leadership is often rising inequality between “techies” and the rest. This applies to the Israeli case as OECD’s Secretary General Mathias Cormann stated in his visit to Israel in February 2022: “the remarkable productivity of Israel’s vibrant hi-tech sector stands in stark contrast to the lower productivity levels in more traditional lagging sectors.”

This sectoral inequality often drives inequality between regions, since innovation ecosystems tend to cluster in metropolitan areas. Tel Aviv, for instance, is home to 70% of the technological innovation activity in Israel. Without supporting innovation in lagging regions, the high-tech sector will keep concentrating in the center while pushing prices up. It is no surprise therefore that Tel Aviv is considered the most expensive city in the world to live in, while housing prices push non-tech employees to the suburbs. This inequality is exacerbated by the fact that the Israeli tech sector is rather homogenous –most employees are secular Jewish men – leading to a growing tension between the tech sector and the rest of the economy.

Tackling the real problems

The final challenge became clear once the pandemic hit. With all our gadgets, fast Internet, fancy apps and megapixels smartphones – a tiny virus managed to halt the entire world, bringing immeasurable death and suffering. Humanity’s reaction? Lock ourselves in our houses and put a piece of cloth on our faces. Compare the photos of the pandemic reality in 2020 and the Spanish Flu of 1918 and, besides the high-resolution color photos, they look awfully similar. Therefore, we must ask ourselves – are the world’s innovation ingredients going to the right places? Are the minds of the most brilliant people in the tech sphere focused on finding the next vaccine or the next killer app? Are they focused on technologies that will help tackle climate change, or on products that will addict us even more to social media? Are they focused on improving education through smart software or improving the battery life of smartphones?

Governments at all levels must play an important role in all three challenges. We know enough about how innovation ecosystems work to understand that the private sector cannot, on its own, develop a cutting-edge tech ecosystem, while reducing inequality – in terms of sectors, regions, and populations – and focusing on the big humanitarian challenges. Public Private Partnerships are essential for all the three aforementioned aspects of innovation policy. Addressing these big challenges will demand a much bolder and active approach than before, but the price of inaction is greater than we can sustain.

Read more on the OECD work on SME Digitalisation

CEO at Start-Up Nation Policy Institute (SNPI) | + posts

Uri Gabai is CEO at Start-Up Nation Policy Institute (SNPI).