Chapter 2. SME and entrepreneurship performance in Israel1
This chapter investigates SME and entrepreneurship characteristics and performance in Israel in comparison with other OECD countries. It presents the numbers of SMEs, their employment and value-added contributions to the economy, and their export and innovation levels and shows breakdowns by SME sectors and size bands. It also explores entrepreneurship behaviours and attitudes in Israel by population group. There are several clear areas of excellence in Israel’s SME and entrepreneurship activity, including a high business creation rate and a large share of high-impact enterprises. At the same time, there are relatively low numbers of SMEs and low levels of SME productivity, particularly in manufacturing. There is also a strong dualism whereby very productive high-technology SMEs and start-ups operate alongside a much less efficient and relatively underdeveloped traditional SME sector. Entrepreneurship rates are also much higher among men than women.
The size and structure of the SME sector2
The size analysis
Small and medium-sized enterprises (SMEs) constitute 99.8% of Israel’s business enterprises (Figure 2.1). Only 0.2% of Israeli employer businesses have more than 250 workers, i.e. around 500 companies. The predominance of SMEs in the business population is common to all OECD countries, although the proportion of enterprises that are SMEs in Israel is slightly above the OECD average. Micro-enterprises (1-9 employees) account for 92.3% of all businesses in Israel compared with an OECD average of 90.0%, small enterprises (10-49 employees) account for 6.3% of businesses compared with an OECD average of 8.3% and medium-sized enterprises (50-249 employees) account for 1.5% of businesses compared with an OECD average of 0.7%. Thus, compared to the OECD average, the Israeli SME economy is weighted towards the micro-enterprise segment.
Note: Countries are presented in descending order, from the country where SMEs (up to 249 employees) are the biggest share of the total business population to the country where they are the smallest share. All countries present information using the enterprise as the statistical unit except Korea and Mexico which use establishment. For Canada and the United States, data do not include non-employer enterprises. Data for Korea include financial services. Different size classes apply to Australia (1-19; 20-199; 200+), Korea (1-9; 10-49; 50-299; 300+), Mexico (1-10; 11-50; 51-250; 251+), Turkey (1-19; 20-49; 50-249; 250+).
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Some 69.3% of the business sector workforce is employed by an SME in Israel, which is slightly greater than the OECD average of 68.7% (Figure 1.1 reproduced below). Medium-sized firms (50-249 employees) account for 18.9% of national business employment compared with the OECD average of 17.7% and small companies (10-49 employees) account for 23.4% of the business workforce compared to an OECD average of 21.0%. On the other hand, only 27.0% of the employed labour force in the business economy is engaged in a micro-enterprise in Israel, which is below the OECD average of 29.1%. Given the above average share of micro enterprises in business numbers, this suggests that micro firms are relatively small in Israel compared with other OECD countries.
Note: Countries are presented in descending order, from the country where the SME sector as a whole (up to 249 employees) accounts for the largest share of national employment to the country where it explains the smallest share. All countries present information using the enterprise as the statistical unit except Korea and Mexico which use establishment. For Canada and the United States, data do not include non-employer enterprises. Data for Korea include financial services. Different size classes apply to Australia (1-19; 20-199; 200+), Korea (1-9; 10-49; 50-299; 300+), Mexico (1-10; 11-50; 51-250; 251+), Turkey (1-19; 20-49; 50-249; 250+). This Figure appears as Figure 1.1 in this report.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
SMEs make up the vast majority of enterprises in Israel in both manufacturing and services, but their share of total business employment is greater in services (69%) than in manufacturing (60%). The SME employment shares within these two sectors are slightly below the OECD averages, respectively 71% and 62%. Whereas the employment shares of micro and small firms in manufacturing and micro firms in services are smaller than the OECD averages, the employment shares of medium-sized firms in manufacturing and medium and small firms in services are greater than the OECD averages (Figure 2.2). These results stem from relatively small sizes of Israeli small manufacturing and micro services enterprises and a relative dearth in both numbers and employment in Israeli micro manufacturing firms.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, and OECD (2014), Entrepreneurship at a Glance 2014, OECD Publishing, Paris.
SMEs generate 62.3% of business economy value added in Israel, which is above the OECD average of 57.9%. Each of the main SME size bands in Israel contributes a greater share of national business value added than the OECD average (Figure 2.3).
Note: Countries are presented in descending order, from the country where the SME sector as a whole (up to 249 employees) accounts for the largest share of national employment to the country where it explains the smallest share. The same country-specific considerations of Figure 2.1 apply to Figure 2.4.
Source: OECD based on OECD (OECD, 2015a), OECD Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
High-impact SMEs
Israel performs quite well among OECD countries in generating high-impact SMEs in services, although its performance is not exceptional in manufacturing (Figure 2.4). High‐growth firms, i.e. firms that are able to grow rapidly over a short period of time, made up 3.1% of the total in industry, 4.4% in services and 5.0% in construction in Israel in 2013. Such firms tend to account for a substantial proportion of new job creation in a country, for example, Henrekson and Johansson (2010) found that around 4-6% of the fastest growing firms produced half-to-three quarters of new jobs across a range of OECD countries. In addition, high-impact SMEs tend to generate positive knowledge spillovers and often become role models for budding entrepreneurs.
Note: The OECD defines high-growth firms, from an employment point of view, as firms with average annualised growth in employees greater than 20% a year, over a three-year period, and with ten or more employees at the beginning of the observation period, while gazelles are high-growth firms which have been employers for a period up to five years.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing.
Gazelles are a sub-set of high-growth firms, in that they are high-growth firms that are start-ups or that have been recently established. Gazelles represent 0.3% of all firms in industry, 2.1% in services and 0.9% in construction, which, with the exception of industry, are values significantly higher than those in the other benchmarked countries. It is this type of performance that has given rise to the image of Israel as a “start-up nation” where growth-oriented entrepreneurship can thrive.3
Relative to 2008, the proportion of high-growth firms in the economy has decreased in manufacturing and services. This is partly related to lower economic growth rates in the period immediately following the global economic crisis but is also the statistical outcome of a continued surge in the total number of firms in the national economy, most of which do not achieve high-growth status.
Self-employment
On average, 51% of active businesses in Israel are run by solo entrepreneurs, which is slightly below the average in international terms (Figure 2.5), although the range of values is large and affected by the legal and statistical definitions of what constitutes a business enterprise across countries. Labour Force Survey information confirms the finding that the self-employment rate is comparatively low in Israel (Figure 2.6). Moreover it declined somewhat from 14.2% in 2000 to 12.6% in 2013.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Note: The self-employment rate is given by the number of employers, workers who work for themselves, members of producers’ cooperatives, and unpaid family workers out of the total employed population.
Source: OECD based on OECD Labour Force Statistics Database.
Informal economy
The scale of informal economic activities (i.e. the production of legal products and services in partial or total noncompliance with tax and labour regulations) has recently been estimated at 22% of Israeli GDP, five percentage points above the OECD average (Figure 2.7). In most countries informality is concentrated in micro firms, where it is often easier for business owners to hide part of their activities from government authorities. A large informal sector is a problem for the economy, not just because of the adverse impact on government tax revenues and spending capability, but also because informal enterprises tend to have lower average labour productivity, worker wages and growth rates than formal enterprises. This may be linked to more limited market opportunities for businesses that work informally and possible self-imposed restrictions on growth in order to limit exposure to control by public authorities.
Note: Estimates for most countries are based on the first article reported in the sources. For countries with (*), estimates are from the second article and refer to average values for the period 1999-2007.
Source: OECD based on Schneider F. (undated), “Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2012: Some New Facts”, www.econ.jku.at/schneider and Schneider, F., A. Buehn and C. Montenegro (2010), “New Estimates for the Shadow Economies all Over the World”, International Economic Journal, 24, 443-461.
Business demography
Business births and change in stock
Employer and non-employer enterprises
The number of businesses in the Israeli economy has grown steadily in recent years (Figure 1.3 reproduced below), which reflects sustained economic growth rates. Including both employer and non-employer businesses, there were nearly 500 000 private sector companies across all sectors of the economy in 2011. This represents an increase of one-quarter compared with 2003, and an annual growth rate of 3% in the number of businesses in this period, despite the global economic and financial crisis.
Note: Data also include non-employer firms. This Figure appears as Figure 1.3 in this report.
Source: OECD based on CBS (2013), Business Demography: A Collection of Statistical Data from the Business Register: 2003-2011, Publication No. 1541, Jerusalem.
This sustained net business creation has underpinned private sector employment growth and contributed to the decline of the official unemployment rate in the wider economy, which touched the low of 5.6% in 2011 from nearly twice that rate in 2003 (10.7%). The number of private sector jobs increased by nearly 30% from 2003 to 2011, from less than 2.5 million to nearly 3.2 million, an annual compounded growth rate of 3.4% (Figure 2.8).
Source: OECD based on CBS (2013), Business Demography: A Collection of Statistical Data from the Business Register: 2003-2011, Publication No. 1541, Jerusalem.
At sector level, net business creation has been positive across all sectors of the economy except manufacturing (Figure 2.9). The most dramatic increase in firm numbers was in real estate activities (+51.7%), while the greatest increase in job numbers has been in “accommodation services and restaurants” (+69.5%) and “community and personal services” (+39.6%). Jobs in low value-added services have, therefore, increased more proportionally than jobs in manufacturing, which has contributed to a structural change in the economy whereby labour productivity growth has not kept up with employment growth.
Note: Data also include non-employer firms.
Source: OECD based on Central Bureau of Statistics (2013), Business Demography: A Collection of Statistical Data from the Business Register: 2003-2011, Publication No. 1541, Jerusalem.
Employer enterprises
Data are also available on business birth rates and change in business stock for employer enterprises as a separate category. This is interesting because employer firms tend to make greater proportional contributions to output and employment and have higher productivity levels than sole self-employed enterprises. As shown in Figure 2.10, Israel’s employer business birth rates exceeded its employer business death rates in the period 2006-11, leading to growth in the stock of employer enterprises. This indicates that the positive net business creation rate in the range of 3% per year applies to employer as well as non-employer firms. The Figure also shows that there was a substantial increase in the business birth rate in Israel in 2012 and 2013, although data on the death rate in those years are not yet available.
A more disaggregated analysis (Figure 2.11) shows that business birth rates are higher in construction and services than manufacturing, a trend which is common to most other countries and which parallels higher business death rates in these sectors as well. The Figure also shows that business birth rates are higher in smaller enterprise size bands, with differences between smaller and larger size bands especially relevant in industry and services.
Note: The OECD average is calculated as the simple average of the OECD countries for which data is available. In the case of the birth rate, this varies between 14 and 24 countries, depending on the year, whereas in the case of the death rate it ranges between 14 and 18 countries.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Table 2.1 shows that during the time period 2005-09, job generation out of net creation of employer businesses was equally shared across the four business size classes for which national data were available, although the highest numbers are found in the smallest (1‐4 employees) and largest (+20 employees) size bands.
The rate of churn of employer enterprises
Although the stock of enterprises has been growing because of an excess of business births over business deaths, Israel’s rate of churn of employer enterprises (business births plus business deaths) is only average (Figure 1.4 reproduced below). The churn rate is important because it represents a proxy for the process of entrepreneurial creative destruction, which is in turn linked to productivity growth in the economy. The main cause of Israel’s low churn rate is its low business death rate, i.e. the low rate of firms which exit the market. This is generally the result of high protection of incumbents and is likely to lead to a high proportion of old SMEs which neither grow nor contract and whose contribution to growth is typically marginal. These findings suggest that there may be a weakness in Israel’s entrepreneurial economy related to low replacement of incumbents by young and dynamic firms. Reducing protection of long-established, low-productivity incumbents could stimulate the introduction of young and dynamic firms even further than is the case at present, and is likely to become an increasing concern in future years when the scope for business births to exceed deaths starts to dwindle.
Note: The business churn rate is the sum of the business birth rate and the business death rate. This Figure appears as Figure 1.4 in this report.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Share of young firms
Young firms are generally a major source of productivity growth and job creation in the economy. It has been shown, for example, that firms less than five years old made up about 20% of non-financial business sector employment over the past decade, and spawned nearly half of all new jobs (OECD, 2013a). In Israel, the share of young firms of up to three years old is 12% in industry and 35% in services, which are respectively below and significantly above the averages for the OECD countries for which data are available (Figure 2.12). This reflects sustained high business creation rates, particularly in services rather than manufacturing.
SME productivity, innovation and exporting
Productivity by size class
Labour productivity tends to be higher in larger companies thanks to greater investment and economies of scale. Figure 2.13 shows that this is also the case in Israel, at least in manufacturing sectors. Indeed, the labour productivity gap between SMEs and large firms is wider in Israel than for most other OECD countries. On the other hand, SME labour productivity levels in the Israeli services sector are fairly similar to large firm levels. This evidence points to particular scope for improving Israel’s SME productivity performance in the manufacturing sector, especially among firms in the 10-19 and 20-49 employee size classes in this sector, where the gap to large firm productivity is especially marked.
Note: Labour productivity is measured as the current price, gross value added per person employed. Data are presented for each country as percentage of labour productivity in large firms (i.e. index 250+ = 100). Financial services activities are not included in the services sector. Data are presented in descending order from the country where the gap between firms with 50-249 employees and large firms (250+) is the smallest.
Source: OECD, based on OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris.
Table 2.2 contrasts labour productivity in capital-intensive and labour-intensive sectors in Israel by size class. It shows that firms in capital-intensive sectors in Israel are more productive than firms in labour-intensive sectors only within larger enterprise size classes (starting from companies with at least 20 employees). It also shows that the productivity of firms with at least 100 employees is substantially higher than those with 20-99 employees in capital-intensive sectors. This may be revealing lack of capital investment and poor technologies among firms with less than 100 employees in capital-intensive sectors.
Export activity in SMEs
Israeli SMEs account for 42% of the national volume of exports, which is a median performance when compared with a range of other OECD countries (Figure 2.14). Israel has a small domestic market, which means that firms tend to be relatively reliant on accessing international markets for expansion and this is likely to be a driver of this export performance, as well as the slightly greater weight of SMEs in value added in Israel than the OECD as a whole. At the same time, however, only 15% of Israeli SMEs are involved in exporting, according to SMBA data, and micro-enterprises produce less than 10% of total export volumes, which is low by OECD standards. One of the obstacles is that Israel is surrounded by neighbouring countries with which trade relationships are limited, if not absent, and that firms therefore need the capacity and financial means to export to relatively far-off markets such as the EU and the USA, the two major destinations for Israeli exports.
Note: Data are presented in descending order from the country where the largest share of export is accounted for by SMEs (0-249) to the country with the smallest equivalent share. For seven countries, more than 10% of export volume cannot be securely ascribed to a specific firm size class. Countries where more than 20% of export volume could not be attributed to a specific firm size class have not been included in the graph.
Source: OECD based on OECD (2014), Entrepreneurship at a Glance 2014, OECD Publishing, Paris.
Innovation activity in SMEs
Israel has high levels of business innovation. Business Expenditure on R&D (BERD) amounts to 3.3% of national GDP, by far the highest value in the OECD area and more than twice the OECD average of 1.6% (Figure 2.15). Israel’s high BERD is influenced by its many R&D centres, often linked to foreign multinational enterprises, which are the result of the country’s success in generating a high-skilled labour force, but which are sometimes perceived to be disconnected from the rest of the economy. Nonetheless, even excluding foreign-affiliated R&D centres, Israel’s BERD is still 2% of the national GDP, higher than most other OECD countries.4
Note: For countries with (*), 2002 data refers to 2003. For countries with (**), 2002 data refers to 2004.
Source: OECD based on OECD Science, Technology and Industry Outlook 2014 Database.
Against this backdrop, 27% of national BERD is performed by SMEs employing less than 250 employees (Figure 2.16). This is below the OECD average (34.5%). However, this figure is also affected by the R&D intensity of the national large corporate sector, as shown by the fact that advanced economies such as the United States, Japan and Germany also feature very low proportions of BERD undertaken by SMEs.
Note: The figure for Israel (27%) has been supplied by the Israeli Central Bureau of Statistics (CBS) and, as such, might not be fully comparable with the other OECD countries for which data have been harmonised. The OECD average is the simple mean of the 30 OECD countries, excluded Israel, for which data is available.
Source: OECD based on OECD (2015b), OECD Science, Technology and Industry Scoreboard 2015, OECD Publishing, Paris and data supplied by the Israeli Central Bureau of Statistics.
Relatively weak SME innovation performance is also illustrated by evidence that less than one-half of Israeli SMEs engage in some form of innovation, whether this is of technological or non-technological nature. This is only the nineteenth highest value among OECD countries, nearly 30 percentage points less than the equivalent proportion of innovative large firms (Figure 1.5 reproduced below). In addition, only 20% have undertaken technological (i.e. product or process) and non-technological (i.e. marketing and organisational) innovation together, which may hinder the exploitation of complementarity between the two modes of innovation (e.g. new organisational methods could support the implementation of a new production process or new processes could call for new ways of organising work). Finally, Israel has both the highest share of SMEs that exclusively perform non-technological innovation and the lowest share of SMEs that only carry out technological innovation, which may point to ongoing diversification of innovation strategies among existing SMEs and a growing role of the services industry in innovation.
Note: International comparability may be limited due to differences in innovation survey methodologies and country-specific response patterns. This Figure appears as Figure 1.5 in the report.
Source: OECD based on OECD (2015b), OECD Science, Technology and Industry Scoreboard 2015, OECD Publishing, Paris.
The Israeli SMEs which innovate are, on average, quite collaboration-oriented in the way they undertake innovation. This can facilitate their involvement in open innovation processes and help compensate for lack of internal innovation resources. About 17% of SMEs that undertake product or process innovation partake in innovative projects with suppliers, while 15% collaborate on innovation with clients. Moreover, approximately 10% of innovative SMEs collaborate with public research institutions, while 16% collaborate with international partners (Figure 2.17). These results suggest that there may be scope for even greater collaboration between SMEs and public research institutions, given the high levels of government investment in R&D, and to increase innovation collaboration with suppliers and clients, given the importance of integration in global and national supply chains for further SME development.
Note: International comparability may be limited due to differences in innovation survey methodologies and country-specific response patterns.
Source: OECD based on OECD (2015b), OECD Science, Technology and Industry Scoreboard 2015, OECD Publishing, Paris.
Larger SMEs are generally more likely than smaller ones to engage in innovation in general (Table 2.3) and technological innovation in particular (Table 2.4). High-technology SMEs are also more frequently involved in innovation than lower technology SMEs. However, only between 9% and 17% of Israeli SMEs, depending on the size class, have introduced “new-to-market” innovations, i.e. the most radical innovations with greatest impacts on productivity growth. There is scope for government measures to encourage more radical innovation to bridge labour productivity gaps, especially in manufacturing where the productivity gap is relatively large.
Entrepreneurship: attitudes and performance
Attitudes towards entrepreneurship
Data from the Global Entrepreneurship Monitor (GEM) suggest that attitudes to entrepreneurship are generally positive in Israel. As shown in Figure 2.18, 80% of the Israeli population believes that successful entrepreneurs receive high status in society and 60% consider that entrepreneurship is a desirable career choice, both of which compare favourably within the OECD area. Furthermore, nearly one-quarter of Israelis express an intention to set up a business within the next three years, ten percentage points above the OECD average. In addition, nearly one-half of Israelis (47%) see good opportunities to start up a business in the area where they live.
Note: The OECD average is the simple mean of the values of the OECD countries for which information is available (between 28 and 30 countries, depending on the indicator). Percentage values are out of the total adult population (18-64), except for “fear of failure” which is out of those who “perceive a market opportunity”. The exact definition for each indicator presented is: i) High status of successful entrepreneurship: Percentage of 18-64 population who agree with the statement that in their country, successful entrepreneurs receive high status; ii) Entrepreneurship as a desirable career choice: Percentage of 18-64 population who agree with the statement that in their country, most people consider starting a business as a desirable career choice; iii) Intention to start a business: Percentage of 18-64 population (individuals involved in any stage of entrepreneurial activity excluded) who intend to start a business within three years; iv) Perceived market opportunity: Percentage of 18-64 who see good opportunities to start a firm in the area where they live; v) Fear of failure: Percentage of 18-64 population with positive perceived opportunities who indicate that fear of failure would prevent them from setting up a business; vi) Perceived capabilities: Percentage of 18-64 population who believe to have the required skills and knowledge to start a business.
Source: OECD based on the Global Entrepreneurship Monitor (GEM) database, www.gemconsortium.org/key-indicators.
There are, however, two weak points in the picture. Firstly, more than one-half (52%) of those who perceive existing opportunities for entrepreneurship maintain that “fear of failure” could prevent them from taking concrete steps towards establishing an enterprise. This is high by international standards and may signal both a lack of risk-taking at the individual level and stigma of business failure at the societal level. The finding is confirmed by a Eurobarometer survey, which reveals that in comparative terms Israelis are more likely to be afraid of personal failures than in other countries when they ponder starting an enterprise (European Commission, 2013). Secondly, only 36% of Israelis report having the right skills set to succeed in business, which compares unfavourably with a large majority of OECD economies and points to a problem of lack of confidence or lack of adequate entrepreneurship and business management skills in the population.
As shown in Figure 2.19, attitudes to entrepreneurship have generally improved in Israel in recent years, and the proportion with entrepreneurial intentions has nearly doubled since 2007. However, as more Israelis have become interested in exploring a business opportunity, a greater number have also become afraid of failure (+8 percentage points) while there was a further small decline in the already low proportion of people who feel they have “adequate skills” to succeed in business. This evidence suggests the value of interventions to strengthen entrepreneurship and business management skills in the population.
Note: Percentage values are out of the total population, except for “fear of failure” which is out of those who “perceive a market opportunity”. Data for 2011 is not available for Israel.
Source: OECD based on the Global Entrepreneurship Monitor (GEM) database, www.gemconsortium.org/key-indicators.
From intentions to action: early-stage entrepreneurial activity
According to the GEM survey, one-in-ten working age adults are actively engaged in early-stage entrepreneurial activity in Israel (i.e. are involved in a start-up process or own a newly-established business). This compares favourably with many other OECD countries (Figure 1.2 reproduced below). Furthermore, Israel’s early-stage entrepreneurship rate has grown by more than three percentage points since 2004.
Note: TEA rate: Percentage of 18-64 population who are either a nascent entrepreneur (i.e. actively involved in setting up a business he/she will own or co-own; this business has not paid salaries, wages, or any other payments to the owners for more than three months) or owner-manager of a new business (i.e. owning and managing a running business that has paid salaries, wages, or any other payments to the owners for more than three months, but not more than 42 months). This Figure appears as Figure 1.2 in this report.
Source: OECD based on the Global Entrepreneurship Monitor (GEM) database, www.gemconsortium.org/key-indicators.
Both the proportion of early-stage entrepreneurs with rapid growth expectations (i.e. new entrepreneurs who plan to hire at least five workers in the following five years) and with international orientations are above the OECD averages, although both have fallen substantially since the global economic and financial crisis, from 47% and 32% respectively in 2007 to 30% and 24% respectively in 2013. This suggests there is room for public intervention to refuel growth-oriented entrepreneurship as economic conditions improve.
The information on the motivations for early-stage entrepreneurship in Israel is ambivalent (Figure 2.20). On the one hand, the proportion of Israeli early-stage entrepreneurial activity that is opportunity driven (i.e. driven by existing market opportunities and the entrepreneur’s desire to improve one’s own income and/or independence) is less than in most other OECD countries. On the other hand, the proportion of necessity-driven entrepreneurship is also relatively low. Correspondingly, the proportion of Israeli entrepreneurs stating neither opportunity nor necessity motivations is relatively high.
Note: i) Opportunity-driven TEA: Percentage of those involved in TEA who i) claim to be driven by opportunity as opposed to finding no other option for work; and ii) who indicate the main driver for being involved in this opportunity is being independent or increasing their income, rather than just maintaining their income; ii) Necessity-driven TEA: Percentage of those involved in TEA who are involved in entrepreneurship because they had no other option for work; iii) Growth expectations: Percentage of TEA who expects to employ at least five employees five years from now; iv) International orientations: Percentage of TEA who indicates that at least 25% of the customers come from other countries. The OECD average is the simple mean of the values of the OECD countries for which information is available (32-33 countries, depending on the indicator).
Source: OECD based on the Global Entrepreneurship Monitor (GEM) database, www.gemconsortium.org/key-indicators.
Social target groups
It is generally the case across OECD countries that business creation and business ownership are not equally distributed across the population. Women tend to be less likely than men to start a business, young people, immigrants and ethnic minorities often set up businesses with lower growth and survival prospects than the average, and although seniors often remain active through entrepreneurship many more inactive seniors could benefit. All of these social groups face a number of specific or heightened obstacles to entrepreneurship compared to the rest of the population (OECD/European Union, 2015).
Israel is a very heterogeneous country where divisions along the traditional gender and age lines are crossed by country-specific divisions which reflect the ethnic and religious backgrounds of the population. Two segments of the Israeli society are often reported to be on the edge of the labour market, including entrepreneurship and self-employment: Arab Israeli women and Jewish Ultraorthodox (i.e. Haredi) men, who together make up approximately 15% of the total population. In addition, in the early 1990s, Israel became the new home for nearly one million new Jewish immigrants who migrated from a range of countries, notably countries that were part of the former Soviet Union, which makes foreign-born entrepreneurship a substantial phenomenon in the country.
Female entrepreneurship
Israel’s female total early-stage entrepreneurship rate is relatively high and places the country in the top half of a comparative international ranking on this measure (Figure 2.21). At the same time, however, the gender gap between men and women early-stage entrepreneurs is the second-highest among OECD members, given the high rate of male early-stage entrepreneurship in Israel. This gender gap points to an untapped entrepreneurial potential in the female population. A further disaggregation shows that the total early-stage entrepreneurship rate in the period 2009-10 was especially low in the subgroup of female Russian immigrants (2.1%), compared to Jewish females (3.6%) and Arab Israeli females (5.7%) (Menipaz et al., 2011).
Note: The female early-stage entrepreneurship rate is the proportion of adult women (18-64 years) who are either starting a business or have managed one for less than three-and-a-half years. More specifically, the proportion of adult women who are either a nascent entrepreneur (i.e. actively involved in setting up a business she will own or co‐own; this business has not paid salaries, wages, or any other payments to the owners for more than three months) or owner-manager of a new business (i.e. owning and managing a running business that has paid salaries, wages, or any other payments to the owners for more than three months, but not more than 42 months).
Source: OECD based on the Global Entrepreneurship Monitor (GEM) database, www.gemconsortium.org/key-indicators.
On the measure of self-employment, Israel’s women’s self-employment rate is nearly three percentage points below the OECD average, i.e. 7.6% versus 10.4%, while there is also an Israeli gender gap in self-employment participation, which is similar in scale to that of the OECD as a whole (around 8 percentage points) (Figure 2.22).5
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance, 2015, OECD Publishing, Paris.
The gender gap in entrepreneurship and self-employment in Israel appears to be related to women’s lower interest and self-confidence in this career option. For example, only 29% of Israeli women say that they have the skills needed to start a business compared with 49% of Israeli men (Menipaz et al., 2011). One area for possible government intervention therefore concerns the development of the skills and competences to a start and run a business among the female population in Israel.
Youth and senior entrepreneurship
Israel’s youth self-employment rates (people aged 15-24 years) for both men (5%) and women (2%) are significantly below the OECD averages (respectively, 7% and 4%). While these values are similar to those in economies such as Ireland, Germany and Austria, it should be taken into account that young people in Israel generally serve in the army for periods of two years for women and three years for men, which delays their entry into the labour market (Figure 2.23).
Source: OECD based on OECD (2015a), Entrepreneurship at a Glance, 2015, OECD Publishing, Paris.
The self-employment rate for seniors (aged 65 or more) is also relatively low compared with the equivalent age group in other OECD countries (Figure 2.24). In the context of an Israeli society in which the elderly population is growing fast (OECD, 2013a), greater participation in self-employment could be encouraged among older people to help those who wish to remain socially and economically active.
Source: OECD based on OECD (2013b), Entrepreneurship at a Glance, 2013, OECD Publishing, Paris.
Despite relatively low levels of youth self-employment, total early-stage entrepreneurial activity, i.e. the rate of nascent and new business ownership, is high for youth (Figure 2.25). Indeed the highest rates of total entrepreneurial activity are in the age bracket of 25‐34 years old both for men and for women (20% and 12% respectively). On the other hand, total early-stage entrepreneurial activity is very low for senior women (55 to 64 years old).
Source: Menipaz, E. et al. (2011), GEM 2010 Israel National Entrepreneurship Report, Ben Gurion University of the Nagev, Beer Sheva, www.gemconsortium.org/docs/2290/gem-israel-2010-report.
Entrepreneurship by religious and ethnic background
As shown in Table 1.1 (reproduced below), GEM data for the period 2009-10 suggest that total early-stage entrepreneurship is highest among Arab Israelis (6.9%), followed by the Jewish Israelis (5.6%) and Russian Jewish immigrants (3.5%). Russian immigrants are also the most sceptical about a possible future career as entrepreneurs. Only 21% of them see a “market opportunity” to set up an enterprise within the next six months compared with an average of approximately 34% in Israel as a whole.
Although Arab Israelis are the most actively involved in early-stage entrepreneurship, their growth expectations are extremely low. Only 8% of those who are starting a business or have owned one for less than three-and-a-half years expected to employ at least five workers in the following five years, as against 15% of Israeli Jews and 25% of Jewish Russian immigrants.
Within the Jewish population, Ultraorthodox Jews have labour market participation rates that are far lower than the rest of the population, and this is also reflected in low participation in entrepreneurship. In 2010, they only accounted for 6.1% of total early stage entrepreneurial activity, far from the 11% of the total Israeli population that they represent.
Conclusions and policy recommendations
This chapter highlights several features of the structure and performance of SMEs and entrepreneurship in Israel that have important implications for public policy objectives in the country.
Among the key characteristics of SMEs and entrepreneurship that need to be taken into account are the large weight of SMEs in the economy and their positive growth and development trends. SMEs represent a large share of all enterprises, employment and value added in the Israeli business economy, in line with many other OECD countries. The stock of businesses in the economy has been growing significantly, at a rate of approximately 3% per year, which has also contributed to strong private sector employment growth. There is a high rate of early-stage entrepreneurial activity, and a high proportion of new entrepreneurs with high growth aspirations, although growth ambitions have fallen since the crisis. Israel’s performance in high-impact entrepreneurship is also strong in international terms, in the sense of generating high-growth SMEs and gazelles, especially in the services and construction sectors.
On the other hand, Israel has a relatively large proportion of enterprises and entrepreneurs that operate in the informal economy, a low rate of entrepreneurial churning, and a growth in business numbers that has been weighted to lower value-added sectors such as construction and transport. All these features of the economy tend to be associated with poor productivity performance. Moreover, there appears to be a significant productivity gap between SMEs and large firms in the manufacturing sector in Israel. There is reasonable SME export performance, although only 15% of SMEs export, while SME innovation performance could be stronger.
Furthermore, although there are positive attitudes and activity rates overall in the population with respect to entrepreneurship, there are also certain weaknesses. There are relatively high proportions of adults who express a fear of failure in entrepreneurship and a lack of the necessary skills and competences. There are also lower rates of entrepreneurship activity among women, seniors and Russian Jewish immigrants than the population as a whole, and very low growth aspirations among Arab Israeli entrepreneurs.
There is also an important dualism in the Israeli economy between a narrow but very strong export-oriented high-technology sector and a broad traditional SME economy where informality is common and average labour productivity is low.
These characteristics of SMEs and entrepreneurship in Israel suggest that there are four major challenges for Israeli SME and entrepreneurship policy, namely to:
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Increase the rate of SME productivity and innovation, particularly among low-technology firms and SMEs in manufacturing.
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Increase the rate of entrepreneurial churn in the economy and the share of young firms, by continuing to generate start-up companies and improving their success in the early years.
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Increase entrepreneurial skills and competences in the population.
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Address weaknesses in entrepreneurship activity among women, seniors, recent immigrants and Arab Israeli entrepreneurs.
The following specific recommendations are offered to address this agenda:
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Adopt measures aimed at increasing the sustainability and growth of small businesses and young businesses.
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Take measures to increase the innovation activities of the bulk of SMEs in services and traditional non-R&D based manufacturing.
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Increase policy attention to productivity upgrading in medium-sized manufacturing enterprises.
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Reduce the scale of the informal economy through a review of tax and regulatory measures that may discourage formality.
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Expand entrepreneurship training for new and potential entrepreneurs, particularly among under-represented groups in growth-oriented entrepreneurship, including women, seniors, recent immigrants and Arab Israelis.
References
Central Bureau of Statistics (2013), Business Demography: A Collection of Statistical Data from the Business Register, 2003-2011, Publication No. 1541, Jerusalem.
European Commission (2013), Entrepreneurship in the EU and Beyond, Flash Eurobarometer No. 354, Brussels.
Menipaz E., Y. Avrahami and M. Lerner (2011), GEM 2010 Israel National Entrepreneurship Report, Ben Gurion University of the Nagev, Beer Sheva, www.gemconsortium.org/docs/2290/gem-israel-2010-report.
OECD (2015a), Entrepreneurship at a Glance 2015, OECD Publishing, Paris, https://doi.org/10.1787/entrepreneur_aag-2015-en.
OECD (2015b), OECD Science, Technology and Industry Scoreboard 2015, OECD Publishing, Paris, https://doi.org/10.1787/sti_scoreboard-2015-en.
OECD (2014), Entrepreneurship at a Glance 2014, OECD Publishing, Paris, https://doi.org/10.1787/entrepreneur_aag-2014-en.
OECD (2013a), OECD Economic Surveys: Israel, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-isr-2013-en.
OECD (2013b), Entrepreneurship at a Glance 2013, OECD Publishing, Paris, https://doi.org/10.1787/entrepreneur_aag-2013-en.
OECD (2011), OECD Economic Surveys: Israel, December 2011, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-isr-2011-en.
OECD/European Union (2015), The Missing Entrepreneurs 2015: Policies for Self-Employment and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/9789264226418-en.
Schneider F. (undated), Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2012: Some New Facts, www.econ.jku.at/schneider.
Schneider, F., A. Buehn and C. Montenegro (2010), “New Estimates for the Shadow Economies all Over the World”, International Economic Journal, 24, 443-461.
Notes
← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
← 2. In this chapter, unless otherwise specified, the OECD definition of micro (1-9 employees), small (10-49 employees) and medium (50-249 employees) enterprises is used. The category of small enterprises is also sometimes split into two further groups: lower-small enterprises (10‐19 employees) and upper-small enterprises (20-49 employees). In Israel, there is not a standard definition of SMEs, although the Small and Medium Business Agency (SMBA) considers micro enterprises those with between 1 and 4 employees, small those with 5-20 employees, and medium enterprises those with 21-99 employees.
← 3. “The Start-up Nation” is the title of a bestseller narrative book dedicated to the innovation-driven growth of Israel since its foundation.
← 4. Data on BERD undertaken by research centres were supplied by the Israeli Central Bureau of Statistics (CBS).
← 5. While covering business owners who employ themselves, self-employment measures tend to exclude business owners and managers who are employees of their own businesses. They include people who see themselves as workers who employ themselves rather than entrepreneurs and people operating business that have been operating for some time.