Analysis |

Israel, the Start-up Nation, Is Failing Most of Its Entrepreneurs

OECD report finds that Israel has a poor record on fostering small and medium-sized enterprises that aren’t high-tech – and that’s coming at a cost to consumers as well as to the business sector.

Ora Coren
Ora Coren
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Israeli high-tech workers. Rare is the Ethiopian-Israeli among them.
Israeli high-tech workers. Rare is the Ethiopian-Israeli among them.Credit: Alon Ron
Ora Coren
Ora Coren

Israel may be home to thousands of successful high-tech startup companies, but for other small and medium-sized businesses, Israel is a wasteland.

That’s the conclusion of a study conducted by the Organization for Economic Cooperation and Development, which not only documents Israel’s poor record in encouraging entrepreneurship that’s not high-tech but also presents a series of recommendations about how to change this situation.

Israel, the OECD said in a November 21 report, has the largest share of early-stage venture capital funds as a percentage of gross domestic product of any OECD country, spends more on research and development that any country except Korea and attracts billions of dollar annually in tech investments.

“Alongside this high-technology success story there is a second economy consisting of SMEs [small and medium-sized enterprises] and entrepreneurs operating in traditional sectors. These businesses and enterprises are largely detached from the high-technology economy and in general do not enjoy the same high-profile successes,” the study concluded.

SMEs generate a lot of jobs and added value to the Israeli economy, but productivity levels in smaller Israeli companies are low compared to other OECD countries and they do little in the way of innovation. In manufacturing small companies lag far behind their bigger peers on productivity, the OECD found.

SMEs account for 99.8% of all businesses in Israel, encompassing everything from small manufacturers to the grocery store on your street who employ fewer than 500 people. Just over half the businesses are self-employed people. They account for 68.7% of all the business sector labor force, nearly seven times the percentage employed in high-tech.

For the most part they are businesses in industries like food and beverages, printing, simple plastic products and the like whose role in the economy is important, but taken for granted. The government doesn’t provide any financial incentives or gear educational programs toward their needs.

And it’s not just the businesses that lose out from the inattention. Because their productivity levels are so low, it means the products and services they produce are more expensive and lower quality than they could be.

Israeli labor productivity – the value of a good or service produced by a worker in a given amount of time – is low by developed-country standards to begin with, although in high-tech the gap is much smaller. But in Israel the gap between big and small companies is especially pronounced.

The OECD’s recommendations for fixing the problem of neglected SMEs include initiatives to improve access to long-term capital, improved professional training for the workforce, better management, and support for small businesses to adopt innovation and export.

The vast majority of businesses in Israel are small or medium-size, such as this grocery store in Jerusalem. Credit: Emil Salman

Israel’s one strong point vis a vis SMEs is the high rate of new businesses founded every year. The OECD report estimated that Israel was home to around 500,000 small business in 2011, which represented a 25% increase from eight years earlier, or a 3% increase annually. Israel’s high rate of economic growth, flexible labor market and relatively low taxes all contributed to the growth, the OECD said. It also cited an improvement in Israel’s notorious red tape.

The OECD faulted the Israeli government’s R&D policies, which it said were too geared toward the needs of high-tech and not toward innovation for older industries. To solve this problem it recommended that the Israel Innovation Authority (formerly the Office of the Chief Scientist) create a fast-track funding program to support innovation at non-tech companies.

Since only 15% of all of Israel’s SMEs do any exporting, the OECD also suggested that the quasigovernmental Israel Export Institute come to their help with programs designed to help companies with exports under $1 million a year.

The report also urged Israel to ease up on its focus on academic education in favor of vocational and technical education, and to revise tax policies that favor big, export-oriented businesses. Tax benefits, it said, should be allocated more equitably between big and small companies.

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