July 2006
No. 13
Executive Summary
Examining the Law for the
Encouragement of Capital Investment
in Israel - and Alternatives
Shelly Hasan
Koret-Milken Institute Fellow
About the Koret-Milken Institute Fellows Program
The Koret-Milken Institute Fellows Program accelerates Israel’s economic growth through innovative,
market-based solutions for long-term economic, social, and environmental issues. The program focuses
on connecting government, philanthropic, and business resources that are vital to national growth and
development.
Directed by the Milken Institute Israel Center, the Koret-Milken Institute Fellows Program awards
annual fellowships to outstanding graduates of Israeli and international institutes of higher education.
Fellows serve yearlong internships at the center of the nation’s decision-making—the Knesset,
government ministries, and other Israeli agencies—and aid policymakers by researching and
developing solutions for various economic and social challenges.
In addition, fellows craft their own policy studies aimed at identifying barriers to economic and
employment growth in Israel. The fellows’ studies, carried out under the guidance of an experienced
academic and professional staff, support legislators and regulators who shape the economic reality in
Israel. The program offers the ultimate educational exercise, combining real-life work experience with
applied research five days a week.
Throughout the year, fellows receive intensive training in economic policy, government processes, and
research methods. They acquire tools for writing memorandums, presentations, and policy papers, and
they develop management, marketing, and communication skills. The fellows participate in a weekly
workshop, where they meet senior economic and government professionals, business leaders, and top
academics from Israel and abroad. They also participate in an accredited MBA course that awards three
graduate-level academic credits that are transferable to other universities in Israel. The course, which
focuses on financial and economic innovations, is taught at the Hebrew University of Jerusalem’s
School of Business Administration by Professor Glenn Yago, Director of the Milken Institute Israel
Center and Director of Capital Studies at the Milken Institute in California.
Fellows Program alumni can be found in senior positions in the public and private sectors. Some
serve as advisers to government ministries while others work at private-sector companies or go on
to advanced studies at leading universities in Israel, the United States, and Great Britain. Within the
program’s framework, more than 80 research papers have been published, catalyzing reforms, reducing
barriers, bringing about economic growth, and improving the quality of life for Israeli citizens.
The Koret-Milken Institute Fellows Program is nonpolitical and nonpartisan. It is funded by the Koret
Foundation, the Milken Institute, and other leading philanthropic organizations and individuals in the
United States and Israel.
More about the program: www.kmifellows.org
Contact us: [email protected]
%XAMINING THE ,AW FOR THE
%NCOURAGEMENT OF #APITAL )NVESTMENTS
IN )SRAEL n AND !LTERNATIVES
3HELLY (ASAN
+)%$& +ORET &ELLOW
2ECOMMENDATIONS
4HE ,%#) HAS FAILED TO ACHIEVE ANY OF ITS INTENDED OBJECTIVES WHILE WASTING BILLIONS OF
SHEKELS OF TAXPAYER FUNDS )T SHOULD BE RESCINDED IMMEDIATELY
"UDGETED ,%#) FUNDS SHOULD BE REDIRECTED TO
)NFRASTRUCTURE PROJECTS IMPROVING TRANSPORTATION BETWEEN THE PERIPHERY AND THE
MAJOR POPULATION CENTERS OF THE COUNTRY
2EDUCE CORPORATE TAX RATES RAPIDLY TO ATTRACT PRIVATE EQUITY FUND AND GLOBAL
INVESTMENTS TO SPUR ECONOMIC DEVELOPMENT THROUGHOUT )SRAEL AND
)NCREASE LEVERAGED CREDIT TO SMALL BUSINESS IN THE PERIPHERY THE ENGINE OF ECONOMIC
GROWTH AND JOBS INSTEAD OF CONTINUING TO SUPPORT ,%#)TYPE INDUSTRY FAILURES
)NTRODUCTION
4HE LEVEL OF CAPITAL INVESTMENTS IS ONE OF THE KEY INDICES IN MEASURING THE DEVELOPMENT
AND INTERNATIONAL POSITION OF A NATIONS ECONOMY 4HE LEGISLATION OF AN INCENTIVES POLICY
TO ENCOURAGE CAPITAL INVESTMENTS IN INDUSTRY IS COMMON PRACTICE IN MANY COUNTRIES 4HIS
POLICY HAS VARIOUS OBJECTIVES ATTRACTING FOREIGN INVESTMENT ADVANCING REGIONAL DEVELOPMENT
INCREASING EXPORTS ENCOURAGING EMPLOYMENT AND MORE1
)N )SRAEL THE ,AW FOR THE %NCOURAGEMENT OF #APITAL )NVESTMENT ,%#) WAS PASSED
IN 4HE LAW PROVIDES TAX BENElTS GRANTS AND OTHER INCENTIVES TO INVESTORS EITHER IN
GENERAL OR BASED ON AN INVESTMENT PROGRAM 4HE MAIN CRITERIA USED TO DETERMINE THE TYPE AND
AMOUNT OF BENElT OFFERED ARE THE TYPE OF COMPANY AMOUNT OF INVESTMENT AND THE REGION IN
WHICH THE INVESTMENT IS CARRIED OUT2 4HE BACKGROUND FOR THE ENACTMENT OF THE LAW IN THE
S WAS A SHORTAGE OF HUMAN AND PHYSICAL CAPITAL AND AN INTENSE NEED FOR FOREIGN CAPITAL
INVESTMENT3 )N ADDITION THE LAW WAS SUPPOSED TO HELP REDUCE SEVERE UNEMPLOYMENT IN THE
COUNTRYS PERIPHERAL REGIONS WHICH RESULTED FROM THE GOVERNMENTS POLICY AT THE TIME OF
SENDING MANY NEW IMMIGRANTS WITH NO PROFESSIONAL TRAINING TO THESE REGIONS4 'OVERNMENT
ASSISTANCE WAS THEREFORE PROVIDED VIA ,%#) FOR UNSKILLED LABORINTENSIVE INDUSTRIAL PLANTS IN
PERIPHERAL REGIONS5
4HE QUESTION OF THE EFFECTIVENESS OF GOVERNMENT INCENTIVES IN DEVELOPING AND ENCOURAGING
REGIONAL INDUSTRY HAS BEEN ADDRESSED IN MANY STUDIES IN )SRAEL AND ABROAD /NE OF THE
IMPORTANT CONCLUSIONS REACHED IS THAT SUCH GOVERNMENT POLICY TREATS THE SYMPTOMS BUT
DOES NOT PROVIDE A SOLUTION TO THE ESSENTIAL PROBLEMS OF THESE REGIONS &OR EXAMPLE THROUGH
LOCATIONRELATED INCENTIVES THE GOVERNMENT OFTEN ENCOURAGES INVESTMENTS IN ECONOMICALLY
[1]
INFERIOR AREAS WITHOUT TAKING INTO ACCOUNT THE SPECIlC CHARACTERISTICS OF EACH AREA6 4HE
CONSTRUCTION OF ANACHRONISTIC OR ECONOMICALLY UNSUSTAINABLE PLANTS IN SUCH AREAS HAS
PERPETUATED THEIR ECONOMIC BACKWARDNESS AND THE POVERTY OF THEIR INHABITANTS 4ODAY TOO
TRANSFERRING A HIGH TECHNOLOGY PLANT TO A DEVELOPMENT TOWN WITHOUT INFRASTRUCTURE A SUITABLE
LEVEL OF HUMAN CAPITAL AND A SUPPORTIVE BUSINESS ENVIRONMENT IS TANTAMOUNT TO GIVING ASPIRIN
TO A CANCER PATIENT 2ATHER THAN HAVING TAXPAYERS FUND FOOLISH INVESTMENTS THE CHARACTERISTICS
OF EACH REGION SHOULD DETERMINE THE APPROPRIATE INVESTMENTS AND INDUSTRIES AND ANY STRATEGY
OF ECONOMIC DEVELOPMENT NEEDS TO BE BASED ON THE INVOLVEMENT OF LOCAL ORGANIZATIONS AND
PARTICULARLY OF LOCAL RESIDENTS
)N ADDITION REGIONAL CRITERIA FOR GOVERNMENT AID PROGRAMS INmUENCES CONSIDERATIONS RELATED
TO THE FEASIBILITY OF INVESTMENTS AND BIASES DECISIONS REGARDING THE LOCATION OF PLANTS 4HIS MAY
RESULT IN REGIONAL DISCRIMINATION LEADING TO A COLLAPSE OF INDUSTRY IN AREAS SURROUNDING A REGION
GRANTED A BENElT &URTHERMORE SELECTIVE ENCOURAGEMENT ATTRACTS UNDESIRABLE INVESTMENTS SUCH
AS UNSTABLE PLANTS THAT REQUIRE ONGOING ASSISTANCE 4HE CONCLUSION IS THAT BIASING THE FEASIBILITY
CONSIDERATIONS OF INVESTORS OFTEN CAUSES THE INEFlCIENT ALLOCATION OF INVESTMENTS AND LOSSES TO
THE INVESTORS THEMSELVES TO THE TAXPAYER AND ESPECIALLY TO RESIDENTS OF THE REGION7
!NOTHER lNDING OF RECENT INTERNATIONAL RESEARCH IS THAT DESPITE THE FACT THAT THE INCENTIVES
TARGET DISADVANTAGED AREAS THEY DO NOT TARGET WEAK POPULATION GROUPS8 3TUDIES FOUND THAT
COMPANIES IN DEVELOPMENT AREAS TEND TO HIRE EMPLOYEES FROM THE METROPOLITAN RATHER THAN
THE LOCAL LABOR MARKET9 )T WAS ALSO FOUND THAT PROGRAMS INTENDED FOR ECONOMICALLY INFERIOR
REGIONS ARE NOT EFFECTIVE UNLESS EXTENSIVE RESOURCES ARE INVESTED OVER A LONG PERIOD OF TIME10
'OVERNMENT TAX POLICY IS ANOTHER FACTOR INmUENCING REGIONAL DEVELOPMENT )T WAS FOUND
THAT A TAX REDUCTION WOULD INCREASE EMPLOYMENT AND BUSINESS ACTIVITY IN A METROPOLITAN
AREA IN THE LONG TERM BY TO OR FROM ANOTHER PERSPECTIVE INCREASE THE NUMBER OF NEW
COMPANIES IN THE AREA BY 11 &URTHERMORE THE PREVALENT VIEW DOES NOT SUPPORT SECTORAL
TAX BREAKS WHICH MAY RESULT IN MARKET FAILURES12 RATHER A COMPREHENSIVE TAX REDUCTION WILL
EXPAND THE ECONOMIC ACTIVITY OF THE ENTIRE PRIVATE SECTOR13
4HE ,AW FOR THE %NCOURAGEMENT OF #APITAL )NVESTMENT !S NOTED ABOVE THE ,%#) PROVIDES INVESTORS TAX BENElTS GRANTS AND ADDITIONAL INCENTIVES
WITH PRIORITY TO INVESTMENTS IN DEVELOPMENT AREAS14 &OR THE PURPOSE OF THE LAW THE BOUNDARIES
OF AREAS TO BENElT FROM THE LAW ARE MARKED AS 0RIORITY !REAS AND DETERMINED BY GOVERNMENT
DECREE -UNICIPALITIES IN THE *ERUSALEM 3OUTH .ORTH AND (AIFA REGIONS ARE CLASSIlED AS
0RIORITY ! !REAS IF THEY ARE RATED IN CLUSTERS TO THE LOWEST RATING OF THE 3OCIO%CONOMIC
)NDEX AND HAVE AN ANNUAL AVERAGE UNEMPLOYMENT RATE OF OR HIGHER OR AS 0RIORITY "
!REAS IF THEY ARE RATED AS CLUSTER AND HAVE AN ANNUAL AVERAGE UNEMPLOYMENT RATE OF OR
HIGHER15 4HE &INANCE -INISTER AND THE -INISTER OF )NDUSTRY 4RADE AND ,ABOR ARE RESPONSIBLE
FOR EXECUTING THE ,%#) WHILE THE )NVESTMENT #ENTER WITHIN THE -INISTRY OF )NDUSTRY 4RADE
AND ,ABOR ADMINISTERS IT16
3INCE THE ,%#)S ENACTMENT THE )SRAELI GOVERNMENT HAS GIVEN ,%#) GRANTS AMOUNTING TO
TENS OF BILLIONS OF SHEKELS 4HE COST OF THE TAX BENElTS GRANTED UNDER THE ,%#) IS ESTIMATED
AT ADDITIONAL BILLIONS )N THE LAST DECADE WITH THE EXCEPTION OF YEARS IN WHICH TAX BENElTS
AND GRANTS WERE GIVEN TO SPECIlC LARGE INVESTMENTS THERE WAS A DOWNWARD TREND IN SPENDING
[2]
AUTHORIZATION BUDGETS 'RAPH DESCRIBES THE UTILIZATION OF SPENDING AUTHORIZATION BUDGETS BY
THE )NVESTMENT #ENTER AS OF ONE YEAR AGO
'RAPH 5TILIZATION OF 3PENDING !UTHORIZATION "UDGETS IN .)3 THOUSANDS
3OURCES -INISTRY OF )NDUSTRY 4RADE AND ,ABOR )NVESTMENT #ENTER 2EPORT FOR *ERUSALEM
-INISTRY OF )NDUSTRY 4RADE AND ,ABOR P -INISTRY OF )NDUSTRY 4RADE AND ,ABOR )NVESTMENT
#ENTER 2EPORT FOR *ERUSALEM -INISTRY OF )NDUSTRY 4RADE AND ,ABOR P )TAY 9EHEZKELI
)NVESTMENT #ENTER ECONOMIST TELEPHONE INTERVIEW WITH AUTHOR -AY $ESPITE THE STRUCTURAL CHANGES THAT HAVE TAKEN PLACE IN )SRAELI INDUSTRY THE FORMAT OF
GOVERNMENT ASSISTANCE FOR INVESTMENTS WAS NOT ALTERED OVER THE YEARS17 4HIS SITUATION CHANGED
WITH THE PASSAGE OF THE %CONOMIC 0OLICY ,AW FOR THE &ISCAL 9EAR WHICH APPROVED THE MOST
COMPREHENSIVE AMENDMENT OF THE ,%#) SINCE ITS ENACTMENT18 /NE OF THE MOST SIGNIlCANT
CHANGES MADE WAS THE STIPULATION OF THE CONDITIONS FOR ENTITLEMENT TO GOVERNMENT BENElTS
WITH AN EMPHASIS ON THE EXPORT CRITERION WHILE THE EMPLOYMENT CRITERION WAS CANCELLED19
4HIS LEGISLATIVE CHANGE CONmICTS WITH THE OBJECTIVES OF THE NATIONAL %MPLOYMENT 'OALS
AND 2EGIONAL $EVELOPMENT ,AW WHILE THE MAIN PROBLEM FACING 0RIORITY !REAS IS SEVERE
UNEMPLOYMENT WHICH IS OF A HIGHER RATE THAN IN OTHER REGIONS OF )SRAEL &URTHER IT IS UNCLEAR
WHY THE ,%#) IS LIMITED TO CERTAIN INDUSTRIAL SECTORS BASED ON THE EXPORT CRITERION RATHER
THAN BEING APPLIED TO ANY ECONOMIC ACTIVITY THAT WOULD CONTRIBUTE TO REGIONAL GROWTH 4HIS
QUESTION IS ALL THE MORE RELEVANT CONSIDERING THE FACT THAT MOST INDUSTRIES IN 0RIORITY !REAS ARE
TRADITIONAL INDUSTRIES THAT DO NOT EXPORT20
%VEN BEFORE THE ,%#) WAS AMENDED THE "ANK OF )SRAEL ADDRESSED THE ANTICIPATED EFFECTS OF
THE LEGISLATIVE CHANGES ON EMPLOYMENT BASED ON THE PROPOSED LEGISLATION AND CONCLUDED
x3UBSIDIES OF CAPITAL FOR EXPORTING PLANTS ONLY GIVING THEM PRIORITY OVER PLANTS THAT
PRODUCE FOR THE DOMESTIC MARKET DISTORT THE ALLOCATION OF RESOURCES IN THE ECONOMY 4HE
ENCOURAGEMENT OF EMPLOYMENT IN THE PERIPHERY THROUGH CAPITAL INVESTMENTS ALONE AS IS
PRACTICED TODAY IS INEFlCIENT AS SUCH SUBSIDIES ENCOURAGE SURPLUS WASTEFUL USAGE OF CAPITAL
AND UNDERUSE OF LABOR21
4HE GOVERNMENT POLICY OF GRANTING BENElTS FOR INVESTMENTS IN PHYSICAL CAPITAL ENCOURAGED
CAPITALINTENSIVE INVESTMENTS NONUTILIZATION OF EXISTING CAPITAL AND A DISTORTION OF RESOURCE
ALLOCATION WHILE NEGLECTING HUMAN CAPITAL22 !S A RESULT NOT ONLY DID 0RIORITY !REA RESIDENTS
[3]
NOT ADVANCE OR MODERNIZE THEIR CAPABILITIES AS NEW TECHNOLOGICAL DEVELOPMENTS SWEPT THE
WORLD THEY EVEN LOST THEIR RELATIVE ADVANTAGE -ANY INDUSTRIAL PLANTS IN PERIPHERAL AREAS
HAVE TRANSFERRED THEIR ACTIVITY TO COUNTRIES WITH A CHEAPER WORKFORCE LEADING TO HIGHER
UNEMPLOYMENT AND A CONCENTRATION OF AN UNSKILLED WORKFORCE IN THE 0RIORITY !REAS
-OREOVER SUPPORT FOR PHYSICAL CAPITAL OVER HUMAN CAPITAL HAS NOT BEEN PROVED TO BE A
POLICY THAT SUPPORTS A COMPANYS STABILITY AND GROWTH 2ESEARCHERS WHO EXAMINED THE STABILITY
OF FACTORIES IN -IGDAL (A%MEQ -AALOT AND /FAKIM BETWEEN AND FOUND THAT IN
LARGE PLANTS WITH OVER EMPLOYEES REPEATED SUBSIDIZATION OCCURRED 4HUS FOR EXAMPLE
THE lVE LARGEST PLANTS IN -IGDAL (A%MEQ THAT RECEIVED GOVERNMENT ASSISTANCE OBTAINED A TOTAL
OF GRANTS WITH ONE OF THE PLANTS RECEIVING GOVERNMENT AID SIX TIMES WITHIN THAT PERIOD )T
WAS ALSO FOUND THAT BUSINESSES THAT CLOSED RECEIVED GOVERNMENT AID BEFORE CLOSING23
#ONSEQUENCES OF THE ,%#)
3TATE #OMPTROLLER 2EPORTS INDICATE THAT DESPITE THE ,%#)S HIGH COST THE )NVESTMENT
#ENTER HAS NOT CONDUCTED A COMPREHENSIVE EXAMINATION TO TEST WHETHER THE INVESTMENTS HAVE
ACHIEVED THE LAWS OBJECTIVES 4HE #OMPTROLLER THEREFORE CONDUCTED AN INVESTIGATION OF HIS OWN
TO DETERMINE WHETHER ENTERPRISES FOR WHICH PROGRAMS WERE APPROVED BETWEEN AND HAD FULlLLED THE EMPLOYMENT AND EXPORT FORECASTS BASED ON WHICH THEIR PROGRAMS WERE APPROVED
FOR GRANTS /NLY OF THE PLANTS THAT HAD RECEIVED LETTERS OF APPROVAL FOR GRANTS WERE FOUND
TO HAVE COMPLETED THEIR INVESTMENTS24 )T WAS ALSO FOUND THAT BASED ON EMPLOYMENT FORECASTS
OVER NEW JOBS SHOULD HAVE BEEN CREATED AS A RESULT OF THE BUSINESSES INVESTMENTS )N
REALITY THE NUMBER OF JOBS GREW BY ONLY 25 !T THE LARGEST PLANTS WHICH RECEIVED GRANTS
IN A TOTAL AMOUNT OF MILLION THE NUMBER OF EMPLOYEES SHOULD HAVE GROWN BY IN
FACT NOT ONLY DID THE NUMBER OF EMPLOYEES NOT GROW n IT DECLINED BY 26
3UBSEQUENT TO THE 3TATE #OMPTROLLER 2EPORTS THE )NVESTMENT #ENTER CARRIED OUT A h3URVEY
OF 3URVEYSv WITH THE AIM OF COMPARING ACTUAL PERFORMANCE TO FORECASTS AT ENTERPRISES THAT HAD
RECEIVED !PPROVED %NTERPRISE STATUS BETWEEN AND 4HE SURVEYS lNDINGS INDICATED
THAT THE ACTUAL OUTPUT OF THE PLANTS EXAMINED WAS OF FORECASTS THE RATE OF EXPORTS WAS
OF FORECASTS AND THE NUMBER OF EMPLOYEES WAS OF FORECASTS27 4HE FOLLOWING TABLE
SUMMARIZES THE lNDINGS OF THE 3TATE #OMPTROLLER AND OF THE 3URVEY OF 3URVEYS
4ABLE %XAMINATION OF THE ,%#)S &ULlLLMENT OF ITS /BJECTIVES
#RITERION
#OMPLETION OF INVESTMENT
/UTPUT
%XPORTS
.UMBER OF EMPLOYEES
2ATE OF PERFORMANCE VS FORECAST
!PPROXIMATELY ACCORDING TO #OMPTROLLER
ACCORDING TO 3URVEY OF 3URVEYS
3OURCES 3TATE #OMPTROLLER 3TATE #OMPTROLLER 2EPORT *ERUSALEM 3TATE #OMPTROLLER PP
3TATE #OMPTROLLER 3TATE #OMPTROLLER 2EPORT " *ERUSALEM 3TATE #OMPTROLLER PP
[4]
4HESE RESULTS INDICATE UNEQUIVOCALLY THAT THE ,%#) HAS BEEN A FAILURE 4HE LAWS OBJECTIVES
OF REGIONAL DEVELOPMENT AND ENCOURAGEMENT OF EMPLOYMENT WERE NOT ACHIEVED AND DESPITE
THE GREAT EFFORTS OF )SRAELI GOVERNMENTS OVER THE YEARS THE PROBLEMS OF DEVELOPMENT TOWNS AND
0RIORITY !REAS HAVE NOT ALLEVIATED
7HY !RE $EVELOPMENT 4OWNS 3TILL $EVELOPMENT 4OWNS
4HE FORM OF STATE AID WAS NOT ADAPTED OVER THE YEARS TO DEVELOPMENTS IN THE )SRAELI
ECONOMY AND THROUGHOUT THE WORLD SUCH AS THE TRANSITION FROM CAPITALINTENSIVE INDUSTRIES
TO KNOWLEDGEBASED INDUSTRIES INNOVATIONS AND THE DEVELOPMENT OF CAPITAL MARKETS !S A
RESULT AND AS A DIRECT CONSEQUENCE OF GOVERNMENT AID 0RIORITY !REAS BECAME ENTRENCHED IN
TRADITIONAL INDUSTRIES FAILING TO ADAPT THEIR BUSINESS ENVIRONMENTS AND THE CAPABILITIES OF THEIR
RESIDENTS TO THE REQUIREMENTS OF ADVANCED TECHNOLOGICAL INDUSTRIES #ONTRAST THIS WITH THE
DEVELOPMENTS IN OTHER AREAS THAT RECEIVED NO GOVERNMENT AID SUCH AS 4EL !VIV AND (AIFA )N
FACT THE RATE OF PERSONS EMPLOYED IN INDUSTRY IN (AIFA 4EL !VIV AND THE #ENTRAL REGION OF
)SRAEL OUT OF TOTAL EMPLOYEES IN INDUSTRY IN )SRAEL IN STOOD AT AND RESPECTIVELY WHEREAS IN THE .ORTHERN AND 3OUTHERN REGIONS THIS RATE STOOD AT AND
RESPECTIVELY28
4HE QUALITY AND CAPABILITIES OF EMPLOYEES IN 0RIORITY !REAS WERE ALSO DIRECTLY INmUENCED
BY GOVERNMENT POLICY &OR EXAMPLE THE PERCENTAGE OF PERSONS WITH AN OCCUPATION REQUIRING
HIGHER EDUCATION OUT OF TOTAL EMPLOYED PERSONS IN THE 3OUTHERN AND .ORTHERN REGIONS STANDS
AT AND RESPECTIVELY VERSUS IN 4EL !VIV AND IN *ERUSALEM29 4HE
DIFFERENCES IN THE LEVEL OF HUMAN CAPITAL AND THE LOW DEMAND FOR SKILLED WORKERS AFFECT
THE INCOME LEVELS OF MEMBERS OF SIMILAR PROFESSIONS IN THE DIFFERENT REGIONS LEADING TO A
MIGRATION OF STRONG POPULATIONS TO THE CENTER OF )SRAEL AND A WIDENING OF SOCIAL AND ECONOMIC
INEQUALITIES 4HE lNDINGS OF A STUDY BY THE "ANK OF )SRAEL WHICH ASSESSED THE CONTRIBUTION OF
HUMAN CAPITAL TO PRODUCTIVITY AND GROWTH IN THE )SRAELI ECONOMY BETWEEN AND INDICATE THAT INVESTMENTS IN HUMAN CAPITAL HAVE A HIGHER RATE OF RETURN THAN INVESTMENTS IN
PHYSICAL CAPITAL30
4HE CONSEQUENCES OF THE GOVERNMENTS POLICY CAN BE DISCERNED NOT ONLY FROM A COMPARISON
OF REGIONS DISTANT FROM ONE ANOTHER BUT ALSO FROM A COMPARISON BETWEEN ADJACENT TOWNS )N
THE S .AHARIYA WAS DECLARED A 0RIORITY ! !REA AND ENTERPRISES WITHIN ITS BORDERS WERE
GRANTED LARGE TAX BENElTS -EANWHILE !CCO KILOMETERS AWAY DID NOT RECEIVE SUCH BENElTS
AS A RESULT IT SUFFERED FROM NEGATIVE MIGRATION OF ITS WORKING POPULATION TO NEARBY .AHARIYA
AND LOCAL INDUSTRY DWINDLED %VEN TODAY WHEN CONDITIONS FOR THE NEIGHBORING TOWNS HAVE
BEEN EQUALIZED !CCO STILL LAGS BEHIND .AHARIYA IN MANY RESPECTS AND THE GOVERNMENT IS
INVESTING MILLIONS OF SHEKELS EACH YEAR IN ATTEMPTS TO TURN BACK THE WHEEL31
!LTERNATIVE -EANS OF %NCOURAGING #APITAL )NVESTMENTS AND 2EGIONAL $EVELOPMENT
4HE S REPRESENT A TURNING POINT IN THE )SRAELI ECONOMY 4HE OPENING OF THE ECONOMY
TO IMPORTS INTERNATIONAL TRADE AGREEMENTS AND THE IMPLEMENTATION OF REFORMS IN THE CAPITAL
MARKET AND IN BANKING LED TO THE GROWTH OF ADVANCED INDUSTRIES SUCH AS 2$ AND VENTURE
CAPITAL FUNDS32 !S A RESULT THE )SRAELI CAPITAL MARKET IS CURRENTLY CONSIDERED AN ADVANCED
DEVELOPED MARKET WITH lNANCIAL ACTIVITY AT AN INTERNATIONAL GRADE33 'IVEN THIS AND IN LIGHT
[5]
OF THE ALTERNATIVE MEANS TO BE PRESENTED BELOW IT SEEMS THAT GOVERNMENT INVOLVEMENT IN
ENCOURAGING REGIONAL AND NATIONWIDE DEVELOPMENT IS LESS NEEDED
0RIVATE %QUITY &UNDS ! &INANCING !LTERNATIVE
0RIVATE EQUITY FUNDS ARE A COMMON lNANCIAL INSTRUMENT WORLDWIDE AND IN RECENT YEARS IN
)SRAEL AS WELL )N CONTRAST TO VENTURE CAPITAL FUNDS THESE FUNDS INVEST IN TRADITIONAL SECTORS SUCH
AS BANKING AND COMMUNICATIONS THOUGH NOT NECESSARILY INDUSTRIAL ONES -ORE THAN TEN FUNDS
CURRENTLY OPERATE IN )SRAEL AND THE VALUE OF CAPITAL RAISED BY THE FUNDS IS ESTIMATED CUMULATIVELY
AT MORE THAN .)3 BILLION34 4HIS NEW SECTOR IS MARKED BY A GROWTH TREND ACCOUNTED FOR
BY THE SHORTAGE OF lNANCING SOURCES A NICHE lLLED BY BANKS AND THE GOVERNMENT OVER THE
YEARS AND DIMINISHED DURING THE RECESSION YEARS35 )N ADDITION INVESTMENT OPPORTUNITIES ARE
ALSO FACILITATED BY TURNAROUND FUNDS WHICH ARE A SUBSET OF PRIVATE EQUITY FUNDS THAT FOCUS
THEIR INVESTMENTS ON COMPANIES IN DISTRESS WITH A STRATEGY OF CONTROLLING THE COMPANY AND
INCREASING ITS VALUE36 0RIVATE EQUITY FUNDS ARE EVIDENCE THAT TODAY GOVERNMENT GRANTS ARE
NOT NECESSARY THE PRIVATE MARKET IS ABLE AND IN ANY CASE IS WILLING TO INVEST IN THE EXISTING
TRADITIONAL INDUSTRIES ALLOWING THE GOVERNMENT TO DIRECT ITS EFFORTS TOWARD THE ADVANCEMENT
AND DEVELOPMENT OF NEW INVESTMENT OPPORTUNITIES INSTEAD OF WORKING TO PRESERVE EXISTING
INDUSTRIES
,OCAL /RGANIZATIONS AND 3MALL "USINESSES
! CORRECT REGIONAL DEVELOPMENT STRATEGY IS DETERMINED BY REGIONAL CHARACTERISTICS 4HUS
AS NOTED THE INVOLVEMENT OF LOCAL ORGANIZATIONS PARTICULARLY OF THE RESIDENTS THEMSELVES IS
IMPORTANT TO ANY ECONOMIC DEVELOPMENT STRATEGY 4HERE IS EVIDENCE THAT SERVICES PROVIDED BY
LOCAL ORGANIZATIONS ARE MORE EFlCIENT THAN SERVICES UNDER GOVERNMENT AUSPICES37 4HE SMALL
BUSINESS SECTOR CONSTITUTES AN IMPORTANT COMPONENT OF INDUSTRIAL AND EMPLOYMENT ACTIVITY
IN )SRAEL AND ITS GROWTH WILL HAVE POSITIVE CONSEQUENCES FOR THE ECONOMY AS A WHOLE AND FOR
0RIORITY !REAS IN PARTICULAR ! GOVERNMENT POLICY UNDER WHICH INCENTIVES ARE OFFERED ACCORDING
TO THE CHARACTERISTICS OF EACH REGION WOULD BRING WORTHWHILE INVESTMENTS TO EACH AREA AS WELL
AS MANY SOCIETAL BENElTS SUCH AS EMPLOYMENT APPROPRIATE TO THE SKILLS OF THE LOCAL RESIDENTS38
)N FACT IN DEVELOPED ECONOMIES THERE IS A CLEAR TREND OF FORMULATING POLICY TO ENCOURAGE SMALL
BUSINESSES BASED ON A RECOGNITION OF THEIR IMPORTANCE TO THE DEVELOPMENT OF A COMPETITIVE
ECONOMY THE CREATION OF JOBS AND REGIONAL ECONOMIC ADVANCEMENT
)N OF INDUSTRIAL PLANTS IN )SRAEL WERE SMALL AND MEDIUMSIZED PLANTS WITH
UP TO EMPLOYEES EMPLOYING OF ALL EMPLOYEES IN INDUSTRY !T PLANTS WITH TO EMPLOYEES THE ANNUAL REVENUE PER EMPLOYEE WAS .)3 WHILE THE INDUSTRY AVERAGE
IS .)3 39 )N THE -INISTRY OF &INANCE EXAMINED THE EFFECT OF THE GRANTS SYSTEM
ON THE BUDGET AND FOUND THAT THE RETURN TO THE 4REASURY WAS GREATER FROM RELATIVELY SMALL
COMPANIES )N OTHER WORDS THE lNANCIAL WORTHWHILENESS OF BENElTS FOR LARGESCALE INVESTMENTS
IS LOWER40
(OWEVER LOCAL ORGANIZATIONS AND SMALL BUSINESSES DO NOT HAVE THE RESOURCES TO INVEST IN
CREATING THE CONDITIONS TO ATTRACT POTENTIAL INVESTORS SUCH AS IMPROVEMENTS IN INFRASTRUCTURE
OR ASSISTANCE IN OBTAINING INTERNATIONAL INFORMATION IN ORDER TO ENCOURAGE EXPORTS41 4HE
GOVERNMENT ON THE OTHER HAND HAS BOTH THE MEANS AND THE INCENTIVE TO INVEST IN THE
[6]
DEVELOPMENT OF ALTERNATE lNANCIAL PROGRAMS !S A NATIONAL LEGISLATIVE ENTITY THE GOVERNMENT
SHOULD USE ITS RELATIVE ADVANTAGES TO CREATE A SUCCESSFUL DEVELOPMENT POLICY
4HE &UND FOR 0ROMOTING 3MALL "USINESS
4HE )SRAEL 3MALL AND -EDIUM %NTERPRISE !UTHORITY WAS ESTABLISHED IN WITH THE ROLE
OF DEVELOPING lNANCING TOOLS CULTIVATING ENTERPRISE AND MORE42 4HE STATE GRANTS lNANCIAL
AID TO SMALL BUSINESSES THROUGH THE &UND FOR 0ROMOTING 3MALL "USINESS 3INCE ITS INCEPTION
THE FUND HAS GRANTED LOANS IN A TOTAL AMOUNT OF .)3 MILLION43 h"ASED ON 4AVORS
OWN UNAUDITED SURVEY OF OUT OF THE BUSINESSES RECEIVING LOANS DURING THE lRST TWO
YEARS OF FUND ACTIVITY THE NUMBER OF JOBS GREW BY WITH AN AVERAGE OF NEW JOBS PER
BUSINESS 4HE ACTUAL STATE INVESTMENT INCLUDING OVERHEAD COSTS FOR THE FUND .)3 MILLION
IN THE PERIOD SURVEYED AND GUARANTEES FROM LOAN LOSSES .)3 MILLION FOR THE CREATION OF
EACH NEW JOB AVERAGES OUT TO .)3 v44 7HILE THE NUMBER OF JOBS CREATED HAS NOT BEEN
CONlRMED AND THESE lGURES RELATE ONLY TO THE lRST TWO YEARS OF THE FUNDS OPERATION EVEN IF
THE ACTUAL COST OF CREATING A JOB WERE DOUBLE OR TRIPLE THIS lGURE IT WOULD STILL BE CLEAR THAT
INVESTING ,%#) FUNDS IN THIS METHOD OF JOB CREATION IS FAR MORE COST EFFECTIVE THAN THE CURRENT
,%#) !CCORDING TO THE 3URVEY OF 3URVEYS THE COST OF CREATING ONE JOB UNDER THE ,%#) IS
ESTIMATED AT ABOUT .)3 MILLION45
2ECOMMENDATIONS
'OVERNMENT AND LOCAL POLICIES SHOULD PROVIDE A SUPPORTIVE BUSINESS ENVIRONMENT !S PART
OF A REGIONAL DEVELOPMENT POLICY BUSINESS ACTIVITY SHOULD BE ENCOURAGED THROUGH THE REMOVAL
OF BUREAUCRATIC BARRIERS ASSISTANCE IN OBTAINING INFORMATION ABOUT BUSINESS OPPORTUNITIES AND
ABOUT THE CHARACTERISTICS OF THE REGION ASSISTANCE IN CONDUCTING MARKET SURVEYS AND GUIDANCE
IN OBTAINING MEANS OF lNANCING
! SUITABLE GOVERNMENT POLICY IS LIKELY TO ATTAIN THE OBJECTIVES OF THE ,%#) MORE EFlCIENTLY
AND SUCCESSFULLY AND AT LOWER COST 4HE FOLLOWING RECOMMENDATIONS FOCUS ON THE ACHIEVEMENT
OF THE ,%#)S OBJECTIVES REGIONAL DEVELOPMENT ENCOURAGEMENT OF CAPITAL INVESTMENTS EXPORTS
AND EMPLOYMENT UNDER THE GUIDANCE OF BOTH NATIONAL AND LOCAL POLICIES
)NVESTMENT IN )NFRASTRUCTURES
4HE ACHIEVEMENT OF LASTING GROWTH IN 0RIORITY !REAS IS SUPPORTED BY THE CREATION OF
INDEPENDENT ECONOMIC CAPABILITIES RATHER THAN BY AID IN THE FORM OF GRANTS WHICH CREATES
DEPENDENCE ON THE GOVERNMENT 2EGIONAL DEVELOPMENT THAT RECOGNIZES THE COMPETITIVE
ABILITIES OF THE REGION AS AN ECONOMIC UNIT WILL LEAD TO THE GROWTH OF INDUSTRIAL CLUSTERS AND OF
THE REGION IN GENERAL
#ONNECTING THE DISTANT PERIPHERY TO BUSINESS CENTERS IN )SRAEL IS ESSENTIAL TO ANY POLICY OF
REGIONAL DEVELOPMENT AND ENCOURAGEMENT OF INDUSTRY AND EMPLOYMENT IN THAT IT WILL INCREASE
THE MOBILITY OF BOTH COMMODITIES AND MANPOWER !S PART OF A lVEYEAR PLAN FOR RAILROAD
DEVELOPMENT THE GOVERNMENT DECIDED ON CONSTRUCTION OF TWO RAILWAY TRACKS THE (A%MEK
6ALLEY ,INE AT A COST OF .)3 MILLION AND THE !CCO#ARMIEL ,INE AT A COST OF .)3 MILLION BUT THIS SECOND LINE HAS BEEN DELAYED BECAUSE OF BUDGET PROBLEMS46 &OR COMPARISON
THE TAX BENElTS FORECAST FOR UNDER THE ,%#) ARE ESTIMATED AT .)3 BILLION47 )NSTEAD
[7]
OF SPENDING THIS MONEY ON THE ,%#) ENTAILING ALL OF THE ADVERSE CONSEQUENCES DESCRIBED
ABOVE IT WOULD BE PREFERABLE TO TRANSFER THE ENTIRE AMOUNT TO INFRASTRUCTURE CONNECTING THE
PERIPHERY HALF THE ,%#) BENElTS FOR WOULD COVER THE ENTIRE COST OF THE !CCO#ARMIEL
,INE THEREBY CONTRIBUTING IN A PRACTICAL MANNER TO EMPLOYMENT AND GROWTH
! GOVERNMENT POLICY OF INVESTING IN THE IMPROVEMENT OF PHYSICAL INFRASTRUCTURES AND IN
HUMAN CAPITAL HAS BEEN PROVEN TO BE A MORE EFlCIENT MEANS OF ATTRACTING CAPITAL INVESTMENTS
)NVESTMENTS IN INFRASTRUCTURES IN IMPROVING ORGANIZATIONAL CAPABILITIES AND IN INTEGRATION
BETWEEN VARIOUS INSTITUTIONS WILL INCREASE THE COMPETITIVE ABILITY OF THESE REGIONS RELATIVE TO
THE #ENTRAL REGION OF )SRAEL48
%NCOURAGING #APITAL )NVESTMENTS
4HE CORPORATE TAX RATE IN )SRAEL IS CURRENTLY AND IS SCHEDULED TO DECREASE GRADUALLY
TO IN 49 4HIS RATE IS SIGNIlCANTLY HIGHER THAN TAX RATES IN OTHER COUNTRIES SUCH AS
)RELAND AND #YPRUS 50 )N THE CORPORATE TAX RATE WAS AND STATE
REVENUES WERE .)3 BILLION 4HE SIGNIlCANCE OF A ONE PERCENT REDUCTION IN THE TAX RATE IS
AN .)3 MILLION DECREASE IN STATE REVENUES51 %XPENSES RELATED TO THE ,%#) IN WERE
APPROXIMATELY .)3 BILLION52 ! STUDY PERFORMED BY THE -ANUFACTURERS !SSOCIATION OF
)SRAEL INDICATES THAT AN ACCELERATION OF THE TAX REDUCTION TO BY IN OTHER WORDS
SPENDING THE ,%#)S BILLIONS ON AN EXTRA CORPORATE TAX REDUCTION WOULD LEAD TO ADDED
FOREIGN AND LOCAL INVESTMENTS IN THE AMOUNT OF APPROXIMATELY BILLION BY AND AN
ADDITIONAL BILLION DOLLARS FOR EVERY SUBSEQUENT YEAR53
)T SHOULD BE NOTED THAT CAPITAL INVESTMENTS CAN ALSO BE ENCOURAGED BY SUPPORTING
ENTREPRENEURIAL AND EMPLOYEE TRAINING PROJECTS AND BY EASING COSTS FOR EMPLOYERS
%NCOURAGING %XPORTS
)NTERNATIONAL CONTACTS ARE AMONG THE GOVERNMENTS COMPETITIVE ADVANTAGES 'OVERNMENT
AID IN THE FORM OF COUNTRYWIDE PUBLIC SERVICES SUCH AS INFORMATION ABOUT INTERNATIONAL
MARKETS AND THEIR DEVELOPMENT TREATIES AND EXPORT AGREEMENTS ETC COULD SERVE AN INCENTIVE
NOT ONLY FOR SPECIlC EXPORTERS WHO APPLY AND RECEIVE GRANTS BUT ALSO FOR NEW EXPORTERS TO ARISE
THROUGHOUT THE ECONOMY !SSISTANCE OF THIS TYPE ENCOURAGES THE DISCOVERY OF NEW INTERNATIONAL
MARKETS AND INTERNATIONAL BUSINESS OPPORTUNITIES FOR LOCAL BUSINESSES
#ONCLUSION
4ODAY THE )SRAELI ECONOMY CAN REPLACE THE GOVERNMENT MORE EFlCIENTLY AND EFFECTIVELY
IN PROVIDING AID TO ENTERPRISES AND IN ATTRACTING LOCAL AND FOREIGN CAPITAL INVESTMENTS )N
ORDER TO HELP THE ECONOMY AS A WHOLE AND DISTRESSED AREAS IN PARTICULAR DEVELOP AND CREATE
SUSTAINABLE GROWTH AND JOBS THE GOVERNMENT SHOULD REDUCE ITS INVOLVEMENT AND INSTEAD CREATE
CONDITIONS THAT WILL PROMOTE REGIONAL ACTIVITY ENCOURAGE THE BUSINESS SECTOR INTERACTION WITH
LOCAL INSTITUTIONS AND POPULATIONS AND SUPPORT SMALL BUSINESS DEVELOPMENT
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[ 10 ]
FELLOWS Koret
PROGRAM Milken Institute
‫תוכנית עמיתי קורת — מכון מילקן‬
13 ‫ רחוב תל חי‬,‫בית מילקן‬
97102 ,‫ירושלים‬
[email protected]
www.kmifellows.org