The Road We've Traveled: From Jaffa Oranges to Apple Inc.
Growth in times of crisis?
In times of financial uncertainty investors tend to spend their funds where safety and confidence rule. Examining Israel's financial history, it is outstanding that the country's economy grew even during the startling years of 2008-2009, being one of the only economies in the world to do so. Taking Israel's problematic geo-political situation into account and the lack of natural resources that typically bless the middle-east region, it is almost a phenomenal abnormality that Israel managed to remain profitable in times like these. Remembering the importance of agriculture, such as Jaffa Oranges exports, to the Israeli economy up until the late 60's, the question we try to answer is simple: "how did Israel manage to change its economy into such a resilient one?", but the answer is more complex.
The fundamentals: higher education investments and a competitive business atmosphere
Looking at the fundamentals of the Israeli economy and declarations of government officials, one can note that the financial success story in the holy land is rooted in two main components: the human capital, derived from the growing investments in basic and tertiary education, and the business atmosphere created by the Ministry of Finance and other governmental entities. For instance, in 2011 the Israel government spent NIS 73.4 Billion on education, a total of 8.4% of its total GDP which mark a rise of 3.8% from 2010, as the sum per student grew drastically in the past years. Results are visible as three Israeli institutes were ranked amongst the top 100 universities in the prestigious "Shanghai Ranking" this year, while Israeli Nobel Prize laureates are declared frequently as a badge of honor for Israeli academic and scientific research.
Overviewing the business atmosphere created by the Israeli government, Israel's attitude towards corporations and business entities stands out and is reflected in the persistent cutting of the Israeli corporate tax. From a peak of 66.1% taxation on corporations in 1985, the country has been cutting taxes in order to attract foreign investors to the Israeli market in a well-planned governmental initiation. By 1996 the tax was set at 36%, and remained unchanged until 2003. Since then and up until 2012, the tax has been gradually lowered to today's current level of 25%. In addition the income tax in Israel was also lowered systematically since the 1980's to allow nationwide economic growth, while the total tax burden in Israel is similar to the one in most OECD countries.
Another development to be mentioned in this context was the decentralization process (known as "The Bachar Reform") which the Provident Funds and Advanced Education Funds have gone through in 2005: these vehicles which were controlled solely by the banks until then, were sold according to new regulations, and therefore created
a wide diversity and competition within the Institutional Investors, while creating an improved and better managed capital market.
One more remarkable government initiative that reformed the Israeli economy is the "Yozma Program" (Initiative in Hebrew). The program launched in 1993 offered attractive tax incentives to any kind of foreign venture-capital investments in Israel and offered the matching of any investment with government funds. This resulted in a boom in the venture capital industry that is still thriving today, playing an important role since the early 1990's in the booming growth of the high-tech industry. As result of the program, between 1991 and 2000 Israel’s annual venture-capital outlays rose nearly 60-fold and today Israel is ranked 1st in the world by the OECD in expenditure on R&D as a % of the GDP. This venture capital boom, as mentioned before, nurtured a prosperous high-tech industry in Israel. Today, Israel is a home to many high-tech companies which appreciate its cultural and economic benefits, as well as its innovative spirit. Firms such as Apple, Microsoft, HP, Intel and SAP chose Israel as a home for their R&D centers and offices, enjoying governmental support and benefits for R&D centers and educated and skilled local minds. Along with local Israeli corporations which became an international success, both global and local firms make Israel worthy of its portrayal as "The Silicon Wady".
Yet another interesting governmental program regarding the Israeli high-tech industry roots in the early 1990s when the Israeli government created a technological business incubator program to leverage the skills of hundreds of thousands of scientists, engineers and physicians who had made Aliya (immigrated) from the former USSR. Israel's Office of the Chief Scientist (OCS), a division of the Ministry of Industry, Trade and Labor, launched six
"Incubators" designed to nurture and seed early stage technological developments through entrepreneurship. Today there are 24 such incubators situated across the country, and 65 percent of the projects are science-related research and development. Currently, the OCS allocates approximately USD 40 million per year to incubators, and varied sums to other programs that encourage technology development. Nowadays, all incubators have been privatized thanks to their success. All of these are considered a result of past privatizations, the rise of the business sector, and the synergy between the business sector and government authorities in terms of encouraging capital investments, R&D incentives, employment grants and special supports making business-doing in Israel more accessible, simple and productive.
The added value
Those main principals of nurturing human resources and granting government support in order to navigate the free economy during times of change stationed the Israeli economy as resilient, dynamic, cutting edge and easy to do business in. By maintaining those principals and strengthening our commitment to those values the Ministry of Finance predicts further growth and prosperity to the economy even in times of world recession, making Israel a hot spot for any kind of investment.
With the IMD ranking Israel as the 19th most competitive economy in the world, as more Israeli companies are traded in the NASDAQ than any other country outside the USA accept for China, with Israel ranked 5th in strength of investor protection, 2nd in world VC availability, 1st in quality of scientific research and 4th in patents per person and with Israel spending more money on R&D as % of GDP than any other country, we know that we have a lot to improve, but we have no doubt that the added value one gets when investing in Israel is outstanding.