A Comparative Approach is Required to Evaluate the Level of Investments in Israel

An index published by UNCTAD highlights the gap between the potential inward Foreign Direct Investment in Israel versus actual investments. This gap is likely to hinder improvement of quality of life in Israel.

UNCTAD's annual report reveals the gap between the potential for investment in Israel and the actual level of investment through mergers and acquisitions. According to UNCTAD's 2006 Inward FDI Potential Index, Israel was ranked 26th out of X countries. However, according to the 2006 actual Performance Index, Israel was ranked 42nd.

Underinvestment implies that Israel is not realizing its potential to allocate resources towards improvement of productivity. To achieve the Top 15 Vision, a real increase in GDP will be required.

Decision makers in the private and public sphere in Israel predict an increase in foreign direct investments. Foreign investors perceive Israel to be a knowledge economy and a leader in technology. Furthermore, the Bachar reforms have succeeded in creating a competitive and advanced capital market structure in Israel.

However, more than passive optimism is needed from investors and decision makers - a comparative approach must be adopted in order to realize the potential of capital flow to Israel. While 2006 was a peak investment year in Israel's history ($13.5B), it is vital to examine the extent of investments in countries with whom Israel competes.

It is also imperative to examine the causes for the gap between investment potential and investment performance in Israel as reflected by the UNCTAD report. Among the factors that impede the realization of investment potential in Israel:

  • Private and public sector's competitiveness: There is an imbalance between the Israel's underperforming public sphere competitiveness and the efficient and innovative private sector. Thus, the potential for an increase in investment performance, as well as a significant socio-economic development leap, lies in improving the performance of the public sector, and by reducing its size.
  • Rule of Law and Ethics: The relationships firms have with each other and the enforcement of contract law reflect Israeli payment ethics. Poor payment ethics discourages investors from choosing Israel.