Nov. 3 (Bloomberg) — Americans think of war or religion when they think of Israel. But Israel is also an unusual high-tech success story.

A survey last May of non-American companies on the Nasdaq counted three Korean companies, five Irish businesses, five from the U.K. and six from Japan. Israel had 64.

In 2008, Israel drew more than twice the venture capital per citizen than the United States. It drew 30 times as much VC cash as continental Europe, and 350 times more than India.

There are some pretty familiar ethnic explanations for the Israeli tech miracle. Jews are supposed to be smart. Jews from overseas will fund Israeli companies regardless of quality. And so on.

But those explanations don't suffice, as Dan Senor and Saul Singer point out in "Start Up Nation." (Senor is my colleague at the Council on Foreign Relations). The Israeli record of innovation has less to do with tribe and more with policy. The Israeli military has also played a surprising role in the process.

The story starts with the old Israel, its suspicion of capitalism and its counterproductive affection for trade unions and communal farming. A decade and a half ago the Israeli government established a tech fund that it dubbed Yozma. Yozma's goal was to lure venture capital to join it in creating Israeli projects. The very signal that Yozma's creation sent changed Israeli attitudes about business dramatically. One executive paraphrased John Lennon on Elvis to describe the shift. "Before Yozma, there was nothing."

Education, Women

But other forces contributed. The high level of education for both men and women meant new companies had someone to hire. During his tenure as finance minister earlier this decade, Benjamin Netanyahu pulled his own Margaret Thatcher by cutting taxes and government jobs and privatizing El Al, the national airline, and the Bezeq, the state-owned telecom company. Netanyahu phased out high-return government bonds, thereby forcing domestic capital to find an alternate place to invest. Financial reforms made the marketplace relatively transparent.

The authors identify several less-intuitive factors. One is Israeli tolerance for failure — bankruptcy isn't the end of a career. Another is immigration. Sure, the immigrants from the former Soviet Union had degrees, but what mattered as much was the immigrant personality, that of the self-selected risk-taker willing to start over, and therefore, also "start up." It also helped that academic and business doors were open to the immigrants.

Soldiers of Commerce

Yet the secret weapon of Israeli innovation is the Israeli military. The Israeli draft doesn't merely ask male soldiers to serve for three years and women for two years; they serve for much of their adulthood, returning each year. This sounds like a career disrupter. But the Israel Defense Forces' elite units end up functioning as the sort of fruitful techno clusters that Michael Porter of Harvard University identified as so hospitable to innovation.

The advantage of being associated with an Israeli elite unit — two famous names are Talpiot and 8200 — is like the advantage of going to Harvard Business School, only greater, says Israeli Tal Keinan.

Keinan is an Israeli investor and a 2001 graduate of Harvard Business School, so he's able to put in American terms what the Israeli network does. He points out that a Harvard Business School reunion happens only every few years, and it is among people who shared only spreadsheets, not tents or rifles. Says Keinan of the IDF bond: "Imagine a reunion every year, and that it lasts two to four weeks." Israelis are that much closer and more likely to help each other on projects.

Democratic Authority

Beyond the advantage of networking are a flatter hierarchy and the democratic habits of the Israeli military. The challenges of war on the house-to-house level have forced the Israeli military to hand authority down the chain. The skills even junior officers garner get them civilian jobs from people who themselves have served, and therefore know how to read a military resume.

An example of the military-high tech dynamic came when the president of PayPal Inc., Scott Thompson, was on the hunt for software to detect fraud, something American innovators believe they produce better than anyone else.

As a favor to an investor, Thompson met with Shvat Shaked, a co-founder of the Israeli company Fraud Sciences. To Thompson's astonishment, Fraud Sciences was able to predict the likelihood of fraud better than any mechanism PayPal or others had developed. While at 8200 tracking terrorists, Shaked and fellow 8200 veteran Saar Wilf had discovered a special characteristic of those doing something wrong — they try to hide their traces. The innocent, by contrast, don't. They had used that knowledge to write the most competitive software.

Muslim Opportunity

Soon investors nurturing projects in Muslim-majority countries will have their own Yozma, the new Global Technology and Innovation Fund that President Obama is touting.

But the Israeli record suggests that such public-sector funds, while exciting, aren't the most important reason for high-tech innovation. "Most of these countries," Senor says of the Middle East, "are not behind because they lack money."

Senor suggests that strengthening the talent pool by allowing women in the workforce, strengthening the right to question and vote out officials within the military or outside it, capitalizing on the value of immigration, and voting in a government that encourages experiments all matter more.

The second message here is for U.S. companies, which tend to value veteran officer candidates less than their Israeli counterparts. U.S. veterans' time in combat may translate into an ability to make the difference at some of our own start-ups.

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2009 Bloomberg