This publication presents the OECD country review of small and medium-sized enterprise (SME) and entrepreneurship policy in Israel. It forms part of the programme of work of the OECD’s Working Party on SMEs and Entrepreneurship, served by the Secretariat of the Centre for Entrepreneurship, SMEs and Local Development. The report is part of a series of country reviews of SME and entrepreneurship policies undertaken by the OECD in countries that express an interest in co-operating on an external assessment of their policy challenges. Recently reviewed countries include Canada, Italy, Mexico, Poland, the Russian Federation and Thailand. The present review was requested by the Israeli Small and Medium Business Authority on behalf of the Israeli government.

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.

This chapter summarises the main findings of the OECD’s review of SME and entrepreneurship policies in Israel. It identifies high start-up rates and a successful high technology sector but low productivity and innovation in traditional SMEs and uneven participation in entrepreneurship across social groups. Policy challenges and recommendations are presented on improving the business environment, the strategic framework for policy, national SME and entrepreneurship programmes, the local SME and entrepreneurship policies, SMEs and entrepreneurship in the Arab Israeli population, and strengthening medium-sized enterprises.

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.

This chapter examines the framework conditions influencing SME and entrepreneurship development in Israel. It covers macroeconomic conditions, product market regulations and the ease of doing business, human resources, the innovation system, access to finance, business taxation and foreign direct investment. Israel has experienced strong economic growth in recent years thanks to major assets such as high rates of participation in tertiary education, strong R&D expenditure, well-developed equity finance, and favourable business taxation. This has offered favourable conditions for Israel’s successful high-technology entrepreneurial ecosystem. Nonetheless, improvements can still be made to framework conditions for SME and entrepreneurship development more generally, including addressing barriers to product market competition, inadequate vocational skills and training, limited access to loan finance, limited support for non-R&D based innovation and limited FDI‐SME linkages. Tackling these issues can help reduce the dualism of the Israeli economy between an internationally advanced high-technology sector and a lagging traditional manufacturing and services sector.

This chapter examines the strategic framework and delivery arrangements for SME and entrepreneurship policies in Israel. Although many ministries and agencies have relevant policy interventions, there is no integrated, government-wide SME and entrepreneurship policy strategy. The government should craft a single strategic policy document which lays out the vision, objectives, target groups, policy measures and budgets dedicated to the support of SMEs and entrepreneurs in Israel. The SMBA is tasked with policy coordination across the government. It could be strengthened in this role by creation of an inter-ministerial committee and an inter-ministerial working group together with more adequate resources for policy coordination. The SMBA’s network of MAOF business development centres is a critical part of the delivery infrastructure for SME and entrepreneurship policy in Israel. They could play a greater role in the future by delivering additional services and reaching out to more SMEs and entrepreneurs. This should be accompanied by strengthened performance monitoring and staff development in the MAOF Centres.

This chapter assesses programmes supported by the national government to promote the development of SMEs and entrepreneurship in Israel. It covers programmes in the areas of financing, innovation, internationalisation, entrepreneurial culture and skills, workforce skills, business advice and assistance, public procurement from SMEs and dedicated initiatives for particular social target groups. The chapter discusses many successful programmes, including SME loan guarantees, R&D grants and business advice and consultancy services. It also identifies a number of areas for potential improvement. These include extending the duration of loan guarantees, expanding support for non-technological innovation in SMEs, increasing the emphasis of export programmes on new exporters, and expanding support for workforce training in SMEs.

This chapter considers the extent to which SME and entrepreneurship policy actions are adapted to differing local conditions in Israel and the role of regional policy and local government authorities in SME and entrepreneurship development. The national government’s regional policy offers capital investment incentives to encourage mobile industrial investment to locate in the under-developed northern and southern regions of the country, but could do more to support entrepreneurship and innovation and to build local supply chains and clusters. Local government authorities in Israel have an influence on SME and entrepreneurship development through supporting the availability of appropriate sites and premises, simplifying local business regulations and supporting SME access to local public procurement. However, most are very small, and lack budgets and professional capacities for SME and entrepreneurship development. Government can support the local level through capacity-building activities in these areas and by encouraging inter-municipality co-operation.

Arab Israelis account for approximately 20% of the country’s population but their incomes and labour market participation are much lower than the national average. Stronger SME and entrepreneurship development in the Arab Israeli community could promote national growth and help address inequality. Although the overall business start-up rate for Arab Israelis appears to be similar to the population as a whole, it is less likely to be opportunity-driven and start-up rates for Arab Israeli women are low. Existing Arab-owned SMEs are relatively small and heavily concentrated in low productivity sectors. The barriers that need to be addressed include reliance on constrained local market demand, limited workforce and management skills, poor access to finance, and difficulties finding appropriate business premises. The government has taken important steps forward with the creation of a dedicated Authority for Economic Development of the Minorities Sector (MEDA) and the introduction of a new 5-year economic development plan for the Arab sector to be implemented across all government ministries and agencies. However, a larger-scale effort is needed, with greater emphasis on the use of public procurement, improving business management and supporting access to finance for Arab Israeli SMEs and entrepreneurs. Enhanced resources are also needed for policy co-ordination and outreach by MEDA.

This chapter provides an assessment of the performance of medium-sized enterprisesMedium-sized enterprises are defined in this chapter according to the definition followed by the Israeli Small and Medium Business Agency (SMBA), i.e. “companies with between 20 and 99 employees”. in Israel with respect to number of firms and employment, labour productivity and innovation. It identifies a significant productivity gap affecting traditional medium-sized enterprises in traditional manufacturing. It then examines Israel’s policy framework in six main areas relevant to improving growth, productivity and innovation in medium-sized enterprises: workforce skills development, improving management skills and practices, access to finance, supply chain development, public procurement and innovation. A particular focus is on developing programmes to support medium-sized enterprises in traditional manufacturing sectors.