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.

Both the classic literature on the developmental state and more recent accounts of rapid-innovation-based (RIB) development highlight the importance of the state's capacity to discipline underperforming firms. Although long acknowledged, the sources of this capacity remain relatively understudied, and existing knowledge draws almost exclusively on the East Asian experience. To address this lacuna, I examine the successful industrialization experience of Israel in the two and a half decades following its independence (1948–1973). Drawing on archival materials and other original sources, I identify a novel path to state discipline. Whereas East Asian developmental states became disciplinarian through their engagement with export competition, in Israel, state elites generated discipline by leveraging their embedded relations with collectively owned enterprises to foster a competitive domestic market. In the conclusion, I explore the relevance of this model for more contemporary cases of RIB development in both developed and late-developing economies.

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