Executive summary

Israel is one of the most successful economies in the world for technology-based enterprises, which account for approximately 10% of business sector employment. Israel has great foundations in fields such as Information and Communications Technologies (ICT) and biotechnologies, in which productivity, business start-up rates and high-growth entrepreneurship rates are all very high, reflecting some exceptionally strong framework conditions for high-technology industries. Israel has the largest share of early-stage and seed venture capital funding in GDP of OECD countries, a rate of adult participation in tertiary education that is fully 16 percentage points above the OECD average, the second highest ratio of R&D expenditure to GDP in the OECD and a large base of R&D-based inward foreign direct investments.

Alongside this high-technology success story there is a second economy consisting of SMEs and entrepreneurs operating in traditional sectors. These businesses and entrepreneurs are largely detached from the high-technology economy and in general do not enjoy the same high profile successes. While being extremely important in terms of numbers of jobs and contribution to value added, the productivity levels of typical Israeli SMEs are low compared with SMEs in other OECD countries, and most traditional SMEs do not engage in any innovation. There is also a productivity gap between medium-sized and large enterprises in manufacturing, which is larger than in most other OECD countries. The scale of informal entrepreneurship is high and Israeli women and Arab Israelis lag behind in high-value added entrepreneurship.

This report examines how government policies and programmes in Israel can start to address this dual economy challenge and harness the potential of SMEs and entrepreneurship for broader economic and social development.

Key findings

One of the remarkable strengths of SME and entrepreneurship activity in Israel over the medium-term has been its high rate of nascent entrepreneurship and new business ownership. In recent years, Israel’s stock of businesses has grown considerably, as business births have exceeded business deaths at a rate of approximately 3% per year. On the other hand, the growth has been weighted to lower value-added sectors such as construction and transport, and more needs to be done to raise rates of start-up success and SME productivity and innovation.

Among the strengths of the business environment for SMEs and entrepreneurship in Israel are the country’s strong recent economic growth, a flexible labour market, relatively low taxation and low administrative burdens for business start-up. On the other hand, a complex system of business licenses and permits, product market regulation constraints, and a lack of systematic entrepreneurship education hold back SME growth. Furthermore, innovation policy is mainly oriented to R&D support rather than broad innovation, tertiary education is favoured over vocational education, and whereas risk capital for technology projects is relatively abundant, debt finance for traditional SMEs is constrained.

The Small and Medium Business Agency (SMBA) is the government’s core agency for SME and entrepreneurship development. It plays an important role in strengthening business development services, access to finance, and guiding government regulation decisions for SMEs. However, the SMBA lacks some common supports that could help it co-ordinate and prioritise policy across government. It has no national SME and entrepreneurship policy strategy to refer to, no inter-ministerial SME and entrepreneurship policy co-ordination body, and few multi-annual budgets.

National government operates many successful programmes for SME financing, innovation, and exporting although there a few specific additional niche interventions that would be merited in these areas. Large strides have also been made in access to loan finance through the merger of three previous government-guaranteed loan funds into the Small and Medium Business Fund. Significant progress has also been made in business management advice through a new network of MAOF business centres. On the other hand, there are gaps in provision for SME workforce skills development, targeted public procurement, and support for social target groups. Furthermore, the resources for business management advice for non-high technology SMEs are well below those earmarked for technology support.

Although national government is the main player in SME and entrepreneurship policy in Israel, local authorities also have a role to play by ensuring an effective permit and licensing system and the availability of land and premises. They are often constrained in these tasks by small budgets and professional staffing capacities as well as by limited inter-municipality co-operations. More could also be done for the promotion of locally-specific supply chains and clusters by national enterprise and regional policies.

The Minorities Economic Development Authority (MEDA) is leading an impressive range of projects and programmes for the Arab Israeli minority population, which will be boosted by the implementation of the government-wide economic development plan for the Arab sector for 2016-20. These interventions should focus on improving finance, skills and premises in order to support Arab SME growth and diversification.

A further policy priority should be to address the productivity lag of traditional Israeli medium-sized manufacturing enterprises. A multi-pronged approach is needed for this group of firms that combines actions for workforce skills development, improving management skills and practices, access to finance, supply chain development, targeted public procurement and innovation.

Key recommendations

The report makes many detailed recommendations on how the Israeli government can pursue this agenda. Key recommended actions include the following:

  • Increase programme support such as innovation and consultancy for productivity growth in SMEs operating in traditional non-technology sectors.

  • Prepare a national SME and entrepreneurship strategic policy document.

  • Create new structures for SME and entrepreneurship policy development and co-ordination across government.

  • Create a national entrepreneurship education strategy and expand support for workforce development in SMEs.

  • Provide capacity-building support to local authorities on regulations, procurement policy, and site and premises development and encourage the creation of distinct local clusters and supply chains.

  • Boost financing, property and management capability support for Arab-owned businesses.

  • Develop a dedicated package of workforce skills, management development, investment facilitation, innovation and supplier development programmes for medium-sized enterprises.