Business Climate

Israel: A Resilient Global Economy

Though it's a small country with limited resources, Israel stands out as one of the world's most competitive economies.  In fact, The World Economic Forum (WEF) ranked Israel as the 17^th (out of 125) most competitive economy in its 2007 Global Competitive Index.

The country's market economy can be characterized as resilient, global-oriented, and advanced technology-based.  Over the last two decades, Israel has become famous for its high-tech capacity, particularly in telecommunications, information technology, electronics and life sciences.  Its capacity for innovation and highly educated, skilled workforce have played a key role in its rating as a high-tech center next to Silicon Valley in California and the belt along Route 128 in the Boston area.

Outstanding Economic Performance

Despite security events that sometimes make world headlines, Israel's economy has been growing steadily. Its 2006 GDP was $140.5 billion at current prices, representing a continuation of the sustainable growth over the last few years: 4.3% in 2004, 5.2% in 2005, 5.1% in 2006 and a projected 5% for all of 2007. Furthermore in purchasing-power-parity (PPP) terms, Israel's GDP per capita is on par with developed countries such as Germany and Japan.   In fact, over the past 20 years, the country - with a population of only 7 million - has ranked as one of the world's five fasting-growing emerging markets.

The growth has been fueled by a steady increase in exports and foreign investment.  Exports have risen by an average of 13% over each of the past three years.  Foreigners show their recognition of Israel's economic potential by increasing their investments in the country. Overall foreign investment in 2006 was a record $25.8 billion, a 171% increase over 2005, including $14.2 billion in foreign direct investment.

Sound and coherent economic strategies also play a role in the success. Responsible fiscal and monetary policies (Israel's economic leadership has included some of the world's top professionals, including current Bank of Israel Governor Prof. Stanley Fischer and his predecessor, Prof. Jacob Frenkel, the former chairman of Merrill Lynch) have accompanied reforms that have liberalized the economy, accelerated the process of privatization and made the economy more competitive.  In recognition of these accomplishments, Israel was recently invited to participate in talks with the Organization for Economic Cooperation and Development (OECD) towards membership in that grouping of the world's 30 top industrialized nations.

The effectiveness of fiscal and monetary policy is reflected in performance. Government expenditure decreased from 51.5% in 2003 to 48.6% in 2006; over the same period, Gross Public Debt contracted from 102% to 87.7%, while unemployment declined and price stability was maintained.

Israel's Economic Indicators

Criteria	2004	2005	2006	2007F
GDP (current prices, B$)	128.9	129.7	140.5	155.9
GDP Real Growth Rate (%)	4.30	5.20	5.10	5.4
GDP per Capita (current prices,  thousands of $)	18	18.7	19.9	20.9
GDP per Capita (based on purchasing power parity)	27,289	29,044	30,464	31,767
Exports of Goods & Services (B$)	52.8	57.9	62.6	67
Imports of Goods & Services (B$)	52.3	57.5	61.7	67
Unemployment Rate (%)	10.40	9.00	8.4	7.5
Inflation Rate (CPI, end of year)	1.20	2.40	-0.1	2.4
Inward FDI (current prices in B$)	2.1	4.8	14.2	-
Current Account (% of GDP)	2.30	3.30	4.90	-

Sources: The Ministry of Finance (2007), International Monetary Fund (2007)

Exports Lead the Way

Exports ($62.6 billion in 2006) are the engine that drives the Israeli economy.  First and foremost is the high-tech sector, which accounts for 75% of all industrial exports, the highest percentage in the world. 

The increase in exports is supported and enabled by an extensive network of international trade and economic agreements, including investment-protection agreements and treaties for the avoidance of double taxation.  Israel is integrated into the global economy through free trade area agreements with the NAFTA countries (the U.S., Canada and Mexico), the European Union, EFTA, Jordan and Turkey. It also cooperates with neighboring Egypt and Jordan through Qualified Industrial Zone (QIZ) agreements with the United States, giving co-produced goods preferential access to U.S. markets; a similar arrangement of cumulation of origin exists also with the EU and is already operational with Jordan.

Constantly seeking to expand its network of trade cooperation through bilateral agreements, Israel has just concluded a free trade agreement with the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay). In addition, Israel has developed an extensive network of technical cooperation, through R&D accords with many countries.

An Ecosystem of Support

Through government agencies like the Ministry of Industry, Trade and Labor's Office of the Chief Scientist and Investment Center, a network of technology incubators for very-early-stage technologies and an active and alert private venture capital system, Israel provides extensive support for new ideas and technologies, as well as the refinement and further development of more traditional industries. Israel invests strongly in its educational system, the source of many of the new technologies for which it is famous, and in R&D, where the investment of 4.8% of GDP is the highest in the world. The investor-friendly environment is enhanced by government polices including favorable tax rates and investment benefits. 

It's hard to minimize the role of the Israeli venture capital industry, ranked second in the world (after the U.S.) by the World Economic Forum.  Venture capital continues to pump a steady stream of essential financial resources into the technology sector, channeling funds and knowledge into early-stage companies, especially in the technology sector.

This ecosystem of support has fostered what has become the world's highest percentage of high-tech production relative to GDP, and the second-highest concentration of high-tech companies, behind only California's Silicon Valley. The fact that Israel is the foreign country with the most companies listed on NASDAQ, the main stock exchange for technology companies, is testimony of its high-tech prowess.

The Investors Keep Coming

In recent years, Israel has become a magnet for foreign investors.  Almost every day, someone else discovers the opportunities that Israel has to offer - and takes advantage of them by setting up a new plant or development center, or joining into partnership with an Israeli firm.  The list of those who have taken advantage of Israel's unique assets - among them the skilled, educated workforce and cutting-edge R&D capabilities - by establishing subsidiaries, production lines or R&D centers include some of the top international companies, names like Intel, Microsoft, Motorola, Google and many more.

Israel’s Business Climate

Why have so many major multi-nationals - Microsoft, Berkshire-Hathaway, Motorola, Intel, HP, Siemens, GE, IBM, Philips, Lucent, AOL, Cisco, Applied Materials, IBM, J&J and more - chosen to invest in Israel? Listed below are highlights of the record, resources and support that make Israel a smart investment today and tomorrow.

Israel's large concentration of talented and innovative people makes it an ideal place for investment. Characterized by groundbreaking entrepreneurship, Israel yields pioneering technologies, profitable business opportunities and high investment returns.

The Record

The World Economic Forum calls Israel one of the leading countries in the world in technological innovation. In the 2006-2007 WEF Global Competitive Index Report, Israel jumped eight places and received an overall rank as the 15th most competitive country - ahead of Canada, France and the Republic of Korea. Highlights from the report include:

• 1st in availability of scientists and engineers.
• 2nd for venture capital.
• 3rd for quality of competition in the ISP sector.
• 4th for technological readiness and for quality of scientific research institutions.
• 5th for utility patents.
• 6th for university and industry collaboration.
• 7th for innovation and for company spending on R&D.

In the IMD 2007 World Competitiveness Yearbook, Israel was ranked for the second consecutive year as the country with the largest percentage of GDP devoted to R&D – 4.8%. Israel also ranked first for having the highest percentage of skilled engineers employed in its work force and second for the amount of funds raised by start-up companies. After a new record in FDI in 2006, Israel climbed 29 places to rank sixth for direct foreign investment in proportion to its GDP.

The Resources

With the world's highest percentage of engineers and scientists, Israel's greatest natural resource is its skilled workforce - highly motivated, resourceful and independent - that enables Israel to stay ahead of the competition. 

Israel’s workforce is particularly competitive because of the informal but effective get-down-to-business culture, exceptional ingenuity and entrepreneurial spirit. The combination of culture, skill and initiative creates a flexible, working system that allows for great adaptability while producing breakthrough technologies and quick time-to-market solutions.

The Support

The State of Israel encourages local and foreign investment by offering grants of up to 24% of tangible fixed assets, reduced tax rates, tax exemptions and other tax related benefits through the Law for the Encouragement of Capital Investments. The Law for the Encouragement of Industrial R&D offers conditional grants of up to 50% of approved programs.

Israel offers one of the world's most advanced infrastructures and services required to conduct business efficiently and effectively. Ranked fourth in the world for its technological readiness by the WEF, Israel boasts a sophisticated communications system; reliable energy infrastructure; well-developed transportation system with modern international gateways; protection of trademarks, patents and other intellectual property; and a highly developed and transparent financial system and a legal system based on common and corporate law.

Israel's Competitive Edge

First in R&D investments

Israel invests 4.8% of its GDP in R&D, which is the highest ratio in the world (IMD World Competitiveness Yearbook 2006).

Preferred choice of leading global players

Microsoft, Berkshire- Hathaway, Motorola, Intel, HP, Siemens, Samsung, GE, Philips, Lucent, AOL, Cisco, Applied Materials, Winbond, IBM and J&J, are just a few examples of multinationals that run core activities in Israel.

Profit-driving innovations

Disk-on-Key technology, IP Telephony, Zip compression, the ingestible pill size camera, modern drip-irrigation technology, ICQ Instant Messenger and many more were all Israeli breakthroughs.

Highly-educated available workforce

Being first in the world for availability of qualified scientists and engineers, Israel provides multinationals with a professional and skilled labor market (2006-7 WEF Global Competitiveness Yearbook).

Flourishing start-up and VC industries

Ranked 2nd in the world for Venture Capital availability, Israel provides its entrepreneurs with the necessary backing to turn their innovative ideas into profitable businesses (2006-7 WEF Global Competitiveness Yearbook).

Deeply integrated into the world economy

Israel has the largest number of companies listed on NASDAQ outside of the United States and approximately 70 Israeli companies are traded on various European exchanges.

Nobel laureates

Four Israelis have won Nobel Prizes within the last five years in the fields of chemistry and economics.

Sophisticated and comprehensive infrastructure

Ranked third in the world for technological readiness, Israel provides multinationals an environment suitable for the most demanding business requirements (2006-7 WEF Global Competitiveness Yearbook).

Attentive government support

The Israeli government offers investment grants, R&D grants and tax benefits, as well as guidance throughout the decision making process.

Israel's Ranking in Global Competitiveness Reports

With top scores in leading competitiveness indexes in 2007, Israel continues to demonstrate that it is a major player in the international business arena.

Source: Invest in Israel-Investment Promotion Center (www.investinisrael.gov.il)