No Place for Small Businesses

Known as a world leader in high-tech startups, Israel is a decidedly inhospitable place when it comes to starting and building small enterprises of the non-tech persuasion.

Startup nation we are, but only if you did a turn in the army’s elite technology and communications unit 8200 or have a facility for developing apps. Despite years of supposedly free-market economics, Israel remains a very unfriendly place to start a business.

That may seem counterintuitive. If you stroll down any main street in Tel Aviv once a week, you’ll see a continuous cycle of new businesses opening and closing − restaurants, boutiques, groceries and the like. But that’s not a good indicator for the health of small business. With the exception of a few places like North Korea, Cuba and Antarctica, everywhere you go there are small businesses of one kind or another, street vendors, farmers and itinerant repairmen. Even in places where private enterprise is banned, small businesses operate in hiding. The making and selling of goods and services seems to be as fundamental a human drive as making love, even if it gets less attention.

Over the centuries, the Jews have been practitioners par excellence of small business, but back in the home of their forefathers after 2,000 years of exile, they have been forced to sublimate their deep entrepreneurial impulses into establishing startups. Between 2005 and 2011, Israelis set up 540 to 670 new high-tech companies annually, according to figures from IVC Research, a firm that monitors the tech industry. In all likelihood the figures wildly understate the extent of the phenomenon, especially when you consider the plethora of apps developers who have emerged in the last few years. But even the IVC numbers put to shame Europe’s aspirations to be an Old World Silicon Valley and give the real Silicon Valley a run for its money.

But why should founding a high-tech startup be regarded − to put the question into Freudian terms − as a diversion of the psychic energy derived from entrepreneurial impulses into something that isn’t really business? After all, a startup is just as much a business as a falafel stand or a reflexology practice.

But startups are different. The typical Israel startup is incorporated as a business. It has a CEO, shareholders, auditors, offices, espresso machines and company outings. But its founders have no intention of making it into a going business concern. The idea is to raise money, develop a product, maybe take it for a spin around the market and then sell the whole thing − patents, engineers and product, if there is one − to someone else who will then make it into a business. They don’t need to develop a long-term business strategy or to create an organization that can support it.

If you have no aspirations to form a high-tech startup, the odds are you won’t even try to start a new business. The Global Entrepreneurship Monitor, which surveys attitudes toward small business around the world, found in 2010 that only 5% of Israel’s adult population was engaged in a newly established enterprise. That put it in 47th place among the 60 countries surveyed.

Living in a relatively developed and wealthy economy that provides more and better opportunities for salaried employment and career advancement than in poorer countries, Israelis should be less inclined to trouble themselves by going into business for themselves. But Israel is supposed to be an innovation-driven economy, where new business opportunities are created by rapidly changing technology and consumer habits, and easy access to finance and market knowledge. But among the 23 countries GEM defined as innovation-driven, Israel’s 5% rate placed it last on the list.

It’s not surprising that Israelis are not chomping at the bit to start their own enterprises. The supposedly business-friendly reforms over the last decade that began when Benjamin Netanyahu was finance minister haven’t been nearly as amicable as they were made out to be.

Indeed, if anything, Bibi-nomics have discouraged small businesses. According to a Bank of Israel study released this month, their share of the country’s employment actually declined slightly from 46.5% in 2003 to 45.5% in 2010. The average number of salaried positions in small businesses grew by an annual average of 3.1%, lagging behind the 3.9% rate for large businesses and 3.3% for medium-sized ones.

Israel’s startup companies and the rest of the country’s small businesses live in different worlds. An Israeli startup entrepreneur inhabits a global industry, dynamic and competitive, where new technologies rapidly supplant old ones and businesses are born and die at a breakneck pace. If he has anything at all to do with the government, it’s maybe to seek a grant from the Chief Scientist’s Office. He’ll never have to meet a tycoon on the slanted playing field that is the local market.

On the other hand, an entrepreneur with no more aspirations than to serve his neighborhood or perhaps develop a product or service for the domestic market faces a raft of government regulations and bureaucracy that impose lengthy and time-consuming procedures and rules that frequently change and are often unpredictable.

The World Bank’s 2012 Doing Business report, which assessed the business environment in 183 global economies, ranked Israel 34th, below all the major developed economies of Western Europe, North America and Asia. Only Spain ‏(44‏), Italy ‏(87‏) and Greece ‏(101‏) − all of them business basket cases − scored lower.

Bibi-nomics was more about helping big business. But now that Netanyahu is forming a new government with Yair Lapid and Naftali Bennett, maybe Lapidonomics could be something different − free-market reforms that would help the great mass of Israel’s people. Making the country hospitable to real small business would be one good way to do that.
 

Reuters