R&D assets and innovation activities are concentrated in the centre of Israel whereas the periphery - the Galilee and the Negev - is characterised by low skill/low wage economy. The major challenge for Israel in terms of innovation is to break away from the dual economy with significant income gaps and uneven development. Building up an effective regional innovation system and investing in human capital development would help the Galilee to break out of the path dependency. The largest city Haifa has the scale of resources and institutions which can form the basis of an innovation system which could also reach out to the Galilee.