Chapter 8. Medium-sized enterprises in Israel1

This chapter provides an assessment of the performance of medium-sized enterprises2 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.


The relevance of MSEs

Israel’s economy benefits from high levels of business R&D and a very strong high-technology sector. However, at the same time it experiences relatively low levels of productivity and innovation among its medium-sized enterprises (MSEs), especially in traditional sectors. While productivity has increased in export-intensive high-technology industries such as medical equipment, optical equipment and metrology equipment, electronics and chemicals it has stood still or even decreased in traditional industries. Gaps in labour productivity compared to the OECD average in 2013 ranged from 50% to Israel’s disadvantage in the clothing sector and 30% to Israel’s disadvantage in the construction sector (Bank of Israel, 2014).

One of the key problems identified in this report and elsewhere (Ben-Nahum and Erez, 2012) is that Israel’s high-technology and traditional sectors operate as dual economies, with little bridge between them, an issue which is particularly relevant for MSEs. While MSEs in high-technology sectors receive considerable support including R&D funding and schemes for technology transfer, policy intervention for the much larger numbers of MSEs in traditional industries is limited. However, successful MSEs are key to boosting economic growth and are often part of the population of high-growth firms. They have established track records, comprise a stable part of the economy, and have in place organisational systems that can be built on in order for growth to take place. They can also be seen as being ‘anchor firms’, as cluster enablers, as a magnet for supply and service firms, as orchestrators of networks, and as generators of spillovers (Feldman, 2003; FRIDA, 2013). Appropriate policies and programmes for this segment of the enterprise population could therefore have important benefits.

The SMBA has a key role to play in supporting high-growth MSEs, whether in high-technology or traditional sectors. Interventions should be designed to foster and provide support for greater levels of innovation among high-growth MSEs through collaboration with a variety of kinds of organisations, to support exporting into international supply chains and increasing access to investment finance.

The targeted MSEs are considered here as those with between 20 and 99 employees, to correspond to the definition used by the SMBA. On this definition, MSEs made up 6.5% of the total number of employer enterprises and accounted for one-fifth of total private sector wage jobs in Israel in 2012 (Table 8.1). Most of these MSEs were in the lower end of the size band; 4.9% had between 20 and 49 employees (smaller MSEs) and accounted for more than half of wage jobs in this business segment (11.4%), while only 1.6% of total enterprises had between 50 and 100 employees (8.6% of total business sector jobs).

Table 8.1. Employer enterprises and employee jobs by business size class, 2012
Absolute numbers and percentage values

Micro (1-4 employees)

Small (5-19 employees)

Medium (20-99 employees)

Large (100+ employees)


Number of employer enterprises

172 792

54 227

16 105

3 582

246 706

Per cent






Number of employees

283 893

482 494

641 373

1 851 747

3 259 507

Per cent






Source: OECD based on data supplied by SMBA.

Ministries and agencies in various OECD countries have focused policies and programmes on MSEs, following their own definitions, reflecting recognition that the barriers faced by these enterprises differ in many ways from those of other enterprises. By way of comparison, the Confederation of British Industry (CBI, 2014) found that firms with a turnover in the range of GBP 10-100 million face particular challenges, which are partly the result of a policy gap. They are too large to benefit from policies tailored to small businesses but too small to win the attention that firms in the London Stock Exchange command. Moreover, there is a lack of demand for policies from this target group. In Finland, the government has observed that MSEs (50-249 employees) grow faster than all other size bands other than small firms and has designed targeted support in the form of business accelerators.

Productivity and innovation performance

Labour productivity

Figure 8.1 shows labour productivity by enterprise size in Israel and other OECD countries for the total business economy. It indicates that the value added per employee of large and medium firms in Israel is relatively low in Israel compared with other OECD averages, but that the gap in Israel between MSE productivity (on the OECD measure of 20-29 and 50-99 employees) and large firm productivity is small compared with most other OECD countries. This would tend to suggest that poor productivity performance is not just an issue for MSEs in Israel, but rather a feature of Israel that extends to larger firm sizes. However, these statistics are dominated by productivity performance in the service sector and disguise an important MSE-specific productivity issue in Israeli manufacturing.

Figure 8.1. Labour productivity by enterprise size, total economy
Value added per person employed, thousands of USD, current PPPs, 2013 or latest available year

Note: data for Mexico refer to 2014, data for Ireland refer to 2011, data for Israel refer to 2012. For the United States, labour productivity is constructed as value added per employee.

Source: OECD (2016), Entrepreneurship at a Glance 2016, based on OECD Structural and Demographic Business Statistics (database).

Figure 8.2 breaks down the statistics between services and manufacturing and focuses on the differences between MSE productivity and large firm productivity. It shows that while MSE productivity is higher than that of large firms in Israeli service industries, the gap between MSE productivity and large firm productivity is larger in Israel than in many other countries. This suggests that productivity upgrading for manufacturing MSEs should be the particular target of policy for this group of firms in Israel.

Figure 8.2. Labour productivity by enterprise size, manufacturing and services
Value added per person employed, index 250+ = 100, 2013 or latest available year

Note: For manufacturing, data for the United States on labour productivity is constructed as value added per employee. For manufacturing and services, data for Mexico refer to 2014, data for Ireland refer to 2011, and data for Israel refer to 2012. The size-class classification for Mexico is based on establishments.

Source: OECD (2016), Entrepreneurship at a Glance 2016, based on OECD Structural and Demographic Business Statistics (database).


One of the reasons for the productivity lag in manufacturing MSEs is limited innovation activity. Table 26 shows that the share of MSEs in R&D activity is low in manufacturing compared with the total business economy. MSEs accounted for only 9.2% of total manufacturing R&D compared with an MSE share of 22.5% across all business activity in the period 2010-2012.

Table 8.2. R&D expenditure by business size class and industry, 2010-12
NIS million and percentage values

5-9 employees

10-19 employees

20-49 employees

50-99 employees

100+ employees


Total manufacturing, NIS million






 9 508

(% contribution)







ICT, NIS million



2 113

1 780

7 141

11 835

(% contribution)







R&D centres*



1 855


8 462

12 455

(% contribution)







Total business sector


1 756

4 341

3 297

24 256

33 976

(% contribution)







Note: This category overlaps with what in the CSI are defined as “professional, scientific & technical activities”

Source: OECD based on data supplied by the Israeli CBS.

Table 8.3 indicates that the small share of manufacturing R&D accounted for by MSEs is more the consequence of the majority of MSEs being in low and medium-low technology industries that undertake little R&D in general than a tendency of MSEs to undertake less R&D than other firms in these industries. The weak R&D performance of manufacturing MSEs is particularly a feature of smaller MSEs (20-49 employees). This is true across all segments of technology intensity, although the gap is especially pronounced in medium-low technology sectors such as plastic and metalworking.

Table 8.3. Manufacturing R&D expenditure by size class and technology intensity, 2010-12
NIS million and percentage values

10-19 employees

20-49 employees

50-99 employees

100+ employees


Total manufacturing




8 545.8

9 508.3

(% contribution)






Manufacturing by technological intensity:

High technology




6 597.7

7 276.9

(% contribution)






Medium-high technology




1 454

1 589.3

(% contribution)






Medium-low technology






(% contribution)






Low technology






(% contribution)






Source: OECD based on data supplied by the Israeli CBS.

The Community Innovation Survey provides information that covers different types of innovation in manufacturing. As shown in Table 8.4, there is a substantial gap in overall innovation activity between smaller (20-49 employees) and larger MSEs (50-99 employees) and large companies with more than 100 employees. The gap between manufacturing MSEs and large manufacturing firms is particularly large in the areas of new to market technological innovation and product innovation, as well as combined process and product innovation in the case of smaller manufacturing MSEs.

Table 8.4. Technological innovation in manufacturing by type and business size class, 2010-12
Percentage of enterprises

Innovation activity

Technological innovation

New to market technological innovation

Product innovation

Process innovation

Process and product innovation

10-19 employees







20-49 employees







50-99 employees







100+ employees














Source: OECD based on data supplied by the Israeli CBS.

MSEs are a more homogenous group in non-technological innovation, although the gap in innovation performance with larger companies is also wide with respect to organisational and marketing innovation (Table 8.5).

Table 8.5. Non-technological innovation in manufacturing by type and business size class, 2010-12
Percentage of enterprises

10-19 employees

20-49 employees

50-99 employees

100+ employees


Organisational innovation






Market innovation






Source: OECD based on data supplied by the Israeli CBS.

Policy levers for MSE development

Six main policy levers are typically used to improve the productivity, innovation and growth performance of MSEs: workforce skills development, improving management skills and practices, strengthening access to finance, supply chain development, targeted public procurement and innovation support. This section assesses current policy arrangements in Israel for each potential policy lever as they affect MSEs and potential areas for improvement.

Workforce skills development

Israel’s vocational education and training (VET) system is not working well for MSEs, which are more dependent on it than larger firms given their more limited levels of internal training activity. There are relatively small numbers of participants in engineering and technical training, limited sector-specific training and the mix of courses does not have a good match to key skill needs. At present no analysis has been carried out on a national scale on the training needs of MSEs to guide VET provision, in spite of the recognition of a serious shortage of skilled professionals like welders, metalworkers and electricians. In particular, Israel is yet to develop a holistic vision with regard to skills provision for growing firms spanning all parts of the education and learning system up to graduate level and continuing professional development. Such a vision is important for supply chain improvement and requires inputs from employers and industry associations. Such a training needs assessment should be used to develop more vocational-technical, skills and lifelong learning opportunities for MSE employees. This means not just a focus on technical skills but includes those developed in business schools, the humanities and social sciences (OECD, 2011).

The approach to upgrading VET provision should involve regionally-delivered programmes that include collaboration between local VET colleges and universities to tailor training to meet the needs of MSEs in the region. An example of an innovative way of taking this kind of approach forward is Coventry University in the United Kingdom. Coventry University was formerly a polytechnic specialising in engineering. It has brought into the university a college of further education, now named Coventry University College, in order to provide a more comprehensive skill set and training to local industry, including engineering and accountancy. The College draws on the excellence in teaching and learning and the extensive experience of Coventry University. It operates independently from the University, as a separate organisation, in its own building and with its own staff; all based on the Coventry University campus. All of the courses have been designed around the standards for professional body accreditation, which means that students are prepared and have the opportunity to secure an additional award from a professional body alongside normal studies. The College also runs stand-alone professional qualifications which provide an individual with industry-specific skills. This model could be adapted by Israel’s universities in order to leverage their particular research and teaching resources by creating in-house programmes that meet the needs both of MSEs and students from technical through to degree-level qualifications.

In addition, the MAOF centres are providing some relevant training support to MSEs in the form of specialist workshops and short courses where there is a demand for them from companies. This function could be encouraged further with more diagnostic analysis of MSE training needs by the MAOF centres accompanied by a targeted offer of subsidised courses and longer courses.

Improving management skills and practices

Support initiatives for improving management skills and practices are limited in Israel. However, there are examples of good practice. For example, Technion University runs a number of programmes targeted at high-level skills. Key features are that they cater for top management, have the effect of creating networks, and have a practical mentoring element. In particular, the following programmes are noteworthy:

  • The Managing Innovation Forum delivers courses for management in larger firms in both high-technology and traditional industries. It holds a series of monthly lectures and meetings presented to top management, research and development leaders, and CEOs.

  • The Moving Up programme is targeted specifically at senior executives in traditional industries. It is an outcome of collaboration between Technion University and the Ministry of Economy and Industry. The format consists of six workshops, one a month, lectures, case studies, guest lectures and mentor meetings. In the workshops, participants listen to lectures that focus on the theme of managing innovation in the organisation. Major subjects include innovation strategy, the journey of the idea, change management and leadership, teamwork, innovation in a global world, innovation marketing strategy and strategic human resources. The programme provides participants with a variety of tools focused on encouraging and implementing innovation processes in their organisations. Participants are guided by business mentors in project definition, planning and implementation.

  • Moving up North is an adaption of Moving Up to SMEs in traditional industries in Israel’s northern periphery. The goal is to encourage collaboration and innovative initiatives among the participating companies through a series of practical workshops on managing organisational innovation processes.

This type of programme could also be operated in a selection of other universities in the country and MSEs could be encouraged to participate in them and join the networks. In addition, a universal scheme could be rolled out to upgrade management skills and practices in high growth potential firms in Israel, for example by the SMBA. An example of such an approach is the Management 4 Growth programme run by Ireland’s SME and entrepreneurship agency (see Box 8.1). Another example is the Growth Accelerator in the Netherlands (Box 8.2).

Box 8.1. Management 4 Growth Programme, Ireland

Description of the approach

During recent years Enterprise Ireland operated Management 4 Growth, a subsidised programme for management and leadership development in manufacturing or internationally-traded services business with 10+ plus employees (including large firms).

The programme had three elements:

  1. Executive education learning modules specifically geared towards companies ready to make a more significant footprint in international markets. The content focused on management competence, practical tools and techniques and case studies and includes inputs from industry keynote speakers.

  2. Appointment of a business advisor/coach working directly with each participating management team to apply the tools and techniques to their own business challenges.

  3. Peer networks established to support participants from multi sector backgrounds. These peer networks focused on individual participant challenges and encouraged peer-to-peer learning during the programme with the ultimate aim of building networks that would be sustainable into the future.

The government subsidised 50% of the fee that the company paid to participate in the programme. The total amount depended on the number of people in the management team being trained. For a company with the CEO and one manager, the total programme cost would be approximately EUR 20 000 and the subsidised fee payable by company would be approximately EUR 10 000. For a CEO plus two managers, the costs of the programme would be approximately EUR 24 000 and the subsidised fee approximately EUR 12 000.

Enterprise Ireland updates its leadership and management development programmes to meet client demand. Its current offer includes “Excel at Growth” short programmes (involving a virtual classroom, a one-day face-to-face implementation workshop, and a follow-up two-hour in-company management team advisory sessions), Innovation 4 Growth (involving a business adviser coach to support the development of a company’s Innovation initiative), Leadership 4 Growth (involving coaching and mentoring of senior management teams by international executive education organizations) and Platform 4 Growth (combining cleaning and face-to-face delivery for management teams in SMEs seeking to scale up).

Factors of success

One of the factors behind the success of this type of intervention is the integration of educational modules with business advisory and coaching sessions. This ensures that learning is embedded in-company and therefore more than just the participant is benefitting from the programme experience. This has subsequent positive learning implications for other employees within the participating company and has led to the development of in-company learning cultures.

In addition the creation of multi-sector peer learning networks considers management practices and leadership challenges that are common to all industries. This means that participants can understand that many of the challenges that they face are not unique to their specific industry and helps them together to identify solutions to key difficulties that they face.

Obstacles and responses

It can be difficult to customise module elements considering the diverse audience in the room. The core educational team there seeks to deliver content that is directly relevant to the audience by designing ‘just-in-time’ material along with the support provided by business advisors and coaches. However, no matter how well planned, some of the material will inevitably be irrelevant to some participants during specific modules. Constant feedback and communication with the participants is the only way in which this issue can be minimised.

Relevance to Israel

A programme of this kind can help management in Israeli MSEs to understand and respond to issues their companies are facing in upgrading productivity, innovation, competitiveness and exporting. It can also help build networks among firms for management development and commercial collaborations. It also has the potential to build bridges between the dual economies of the traditional and high-technology sectors at senior levels in Israel companies.

Further information

Box 8.2. The Growth Accelerator, the Netherlands

Description of the approach

The rationale for the Netherlands Growth Accelerator programme, introduced in 2008, was that the country was lagging behind other countries in the number of fast-growing companies and their rate of growth. The objectives of the Growth Accelerator Programme are to support and facilitate the growth of two hundred MSEs from a turnover of approximately two million Euros to a turnover of twenty million Euros in a period of five years; and to ensure that each company has a Strategic Picture, a Growth Strategy and Growth Path, including milestones and a Personal Development Plan. The programme is run by the High Growth Stars Consortium: a joint-venture between PwC, AKD Advocaten & Notarissen, de Baak, Philips Innovation Services and the platform for growth businesses Port4Growth. The first companies entered the programme in 2009. The total budget for the first five years was EUR 5 million (2009-2014).

The average firm is aged 5 to 10 years at the beginning of the programme and has 15 employees, with an average EUR 3.6 million turnover in a fast-growth industry such as IT, services, high-technology and healthcare. It has a highly ambitious managing director who owns the company and is approximately 40 years old. By 2013, over 130 firms had joined the programme, with 25% in a high-technology sector (such as IT, telecoms, sensors), 25% in creative industries (fashion, digital printing), 15% in industrial design, 6% in agrifood and 5% in chemicals 5%, There were also several firms from other sectors such as recruiting, accounting and real estate.

The programme has four phases over five years. 1. Planning (year 1) including a working strategic picture and from this a growth strategy and pathway (Growth Path) and a personal development plan. The programme puts great emphasis on personal development of the participating company’s Director-Manager. 2. Realisation (years 2 and 3). The organisation and its surroundings are prepared for growth. 3. Growth Start (year 4). This begins with an assessment to identify any potential gaps that would inhibit growth. 4 Executing the Growth Plan and Personal Development Plan established in year 1. In addition each Director/manager will construct a new Strategic Picture and Growth Strategy/Path for the next five years.

Factors for success

A particular strength of the programme is its professional programme management, which focuses on continuous programme improvement, and its high-expertise impartial support service providers. It is also important that it delivers wide-ranging support across different aspects of MSE business development. The programme was evaluated in 2011, which showed that participants achieved an increase in turnover of 22 percentage points, an increase in number of employees of 8 percentage points, an increase in turnover in foreign countries of 55 percentage points and an increase in investment in innovation and product development of 45 percentage points compared with a control group.

Obstacles and responses

Two main weaknesses were identified in the programme. First is that there has been quite low take up of the programme by potential beneficiaries. This could reflect the fact that the programme lasts for 5 years, which is a relatively long period of time and could be a deterrent to companies. It could also reflect eligibility criteria and a lack of awareness by MSEs about the programme. The second is that the programme needs to be connected to other available programmes that are active in supporting entrepreneurs so as to enhance better value for money.

Relevance for Israel

This national programme is designed to support high-growth MSEs, with a particular focus on established firms with the potential to grow. Targets addressed in the Netherlands Growth Accelerator include developing an enterprise culture, a greater sense of ambition and greater confidence in the ability to design growth strategies among managers as well as building networks and relationships. These are areas where MSEs in Israel also need support. The main parts of the model should be easily transferred to Israel since the programme’s approach and content is well described in manuals and workbooks. Specific subparts and work formats can be adapted to fit local learning cultures.

Further information

Another important avenue to provide management development support involves management consultancy programmes. The main initiative for delivering such support to MSEs in Israel is the MAOF business development centres. According to an SMBA survey, MSEs are often aware of this support but have a low level of satisfaction with it. This appears to reflect the greater demands of MSEs for specialised consulting as compared with smaller firms, and suggests the need for introduction of a special track for MSEs, potentially focusing specifically on high-growth potential SMEs, in MAOF consulting services.

Access to finance

The scale and terms of investment loans available to MSEs, particularly those in traditional sectors, suffer from a number of weaknesses present in the Israeli financial system related to a general under supply of credit, limited competition between banks, lack of long-term loans and long-term loan guarantees. Some 94% of MSEs (20-99 employees) use short-term bank credit lines (including credit cards), the largest proportion in the SME sector. On the other hand, only 30% access bank loans and only 7% of MSEs obtain bank loans through state guarantee funds, compared to 18% of firms with 6-10 employees and 9% with 11-20 employees. Furthermore, bank loans are generally limited to two year durations. This suggests that MSEs are overly focused on short-term financial fixes rather than longer-term investment finance models. One of the approaches available to address this problem is to expand the terms of loan guarantees that can be offered to MSEs under the SMBF, which are generally limited to 5-year maximum terms, although in 2016 an option was introduced to guarantee longer term loans for industrial capital.

MSEs also need working capital to finance the short-term costs of periods of growth and the opening up of export markets. Factoring can be a useful source of such working capital. It involves converting credit transactions (usually invoices) into cash by selling commercial debt. The threshold to enter the factoring market is an annual turnover of NIS 5 million, thus making it particularly appropriate for MSEs. Factoring is still relatively new but it is growing. In 2001, the company CLAL Factoring Ltd entered the market, followed by other companies. The total market had grown to NIS 6-7 billion by 2014, with some 500-600 companies using the service, mostly SMEs. Intervention to build the use of this form of credit could focus in particular on financial education initiatives for MSEs, to increase awareness of this financing option.

Venture capital and private equity is particularly appropriate for financing the growth of MSEs, but is limited for smaller investment amounts outside of high-technology sectors, despite the large volume of early-stage venture capital in Israel overall and the recent announcement of the establishment of two new growth capital funds for MSEs (turnover of NIS 10-100 million) to be operated by the SMBA and the Ministry of Finance. Tax incentives have existed in law since 2011 for business angels and offer substantial tax breaks. However, like venture capital, there is a lack of angel investment for MSEs in non-technological sectors. The UK’s Enterprise Investment Scheme is an example of an initiative designed to increase the flow of equity finance to MSEs as a way of stimulating innovation (see Box 8.3).

Box 8.3. The Enterprise Investment Scheme (EIS), United Kingdom

Description of the approach

EIS is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new full-risk ordinary shares in qualifying companies (HM Revenue and Customs 2013). The tax relief is intended to offset some of the risk for investors by offering tax relief proportional to the cost of shares they purchase through the scheme. If they make a loss when their EIS shares are sold, they can claim loss relief. The EIS offers both income tax and capital gains tax reliefs to investors.

The scheme is targeted at SMEs: the Gross Assets of the company – or of the whole group if it is the parent of a group – cannot exceed GBP 15 million immediately before any share issue and GBP 16 million immediately after that issue. The company must have fewer than 250 full-time employees (or their equivalents) at the time the shares are issued (500 for a knowledge-intensive company). Other rules include that:

  • Companies are not allowed to raise more than GBP 5 million of state aid risk finance including EIS in any 12-month period, or a total of GBP 12 million (GBP 20 million for a knowledge-intensive company).

  • Income Tax relief is available for investors at 30% of the cost of the shares, to be set against the individual’s Income Tax liability for the tax year in which the investment was made on a maximum annual investment of GBP 1 million.

  • Capital Gains Tax can be deferred if reinvested in EIS shares within a certain amount of time. Any profit on the sale of shares will be exempt from Capital Gains Tax if Income Tax relief is given and the shares are held for a qualifying period.

  • Losses from the disposal of shares can be offset against Income Tax (instead of Capital Gains Tax) if Income Tax relief has been given and not withdrawn.

  • Investors can also invest through an EIS Fund, which will invest on their behalf in a number of qualifying companies.

  • The SME must be an unquoted company at the time the shares are issued. That means it cannot be listed on the London Stock Exchange or any other recognised stock exchange. It can subsequently become a quoted company without the investors losing relief, but only if no arrangements for it to become quoted were in existence when the shares were issued.

  • For the EIS rules the Alternative Investment Market (AIM) and the PLUS Markets (with the exception of PLUS-listed) are not considered to be recognised exchanges, so a company listed on those markets can raise money under the EIS if it satisfies all the other conditions. The PLUS-listed market is regarded as a recognised stock exchange and shares listed on that market at the time of issue do not qualify for EIS.

  • HMRC offers ‘Advance Assurance’, a free service, to companies that intend to raise money under EIS.

Factors of success

The scheme was evaluated in 2008 (Cowling et al., 2008). The evaluation indicated that across all companies EIS led to increased fixed asset formation, sales, employment and productivity and reduced gearing. This results from the increased investments in the participant firms. Underlying this increased investment is the award of tax relief to investors in SMEs under less restrictive conditions than general legislation (e.g. with no requirement for a lead investor) and with lower reporting requirements for SMEs seeking to raise funds in this way compared with public listing. According to the British Business Bank (2015) it underpins the majority of business angel finance in the UK and therefore plays a pivotal role in supporting a vibrant early-stage equity culture. In 2012-13, GBP 1 016 million was invested in almost 2 400 businesses.

Obstacles and responses

While results indicate that EIS investments have a positive effect on capacity building (fixed asset formation, sales growth etc.) in recipient companies, these effects are relatively small. However, the scheme appears to be associated with differentials in impact depending on the size, age and sector of the recipient company. Adjustments could therefore be made to focus the scheme on the types of companies for which the impacts are greatest. A recent assessment of the availability of finance to SMEs by the British Business Bank (2015) identified that despite the increasing use of equity finance, there are several weaknesses in the finance market: the persistence of the equity gap, especially at the venture stage; a lack of institutional investment; lack of awareness of finance options on the part of small businesses; and insufficient data for more detailed analysis of market trends.

Relevance to Israel

EIS is relevant as a way of increasing the flow of equity investment to Israeli MSEs that have not been publicly listed. This approach might be possible for Israel because it increases the flow of finance to companies and could also contribute to the building of a strong and visible set of complementary investment mechanisms targeted at MSEs. In order for Israel to start up an EIS approach it would need to identify target groups of investors and types of investee MSEs. Key to the scheme would be agreement by the SMBA and Ministry of Finance on the best fit within existing arrangements as to where the scheme and availability of advice to both firms and investors would be supported.

Further information

Finally, there is significant untapped potential in Israel to stimulate the flow of equity and debt finance to MSEs through the development of crowdfunding. Crowdfunding is important for MSEs because of the shortage of smart investment. An advantage of crowdfunding is that platforms reach a wide variety of knowledgeable investors who are able to identify the kinds of viable opportunities offered by MSEs rather than by SMEs in general. However, further regulatory change will be necessary to make equity and debt crowdfunding more accessible to non-high-technology MSEs in Israel.

As indicated in the OECD/G20 High-Level Principles on SME Financing, it is important to design regulation that supports a range of financing instruments for SMEs, while ensuring financial stability and investor protection. In Israel, the balance of regulation concerning crowdfunding is more strongly towards investor protection than supporting the development of a new financing instrument for MSEs. There are examples of crowdfunding companies in Israel, e.g. OurCrowd, as outlined in Box 8.4. However, the existing crowdfunding legislation requires companies wishing to access crowdfunding to obtain approval from the IIA. This is normally only given for R&D-based companies. In addition, only equity-based crowdfunding is permitted; crowdfunding loans are not permitted by the legislation (Shenhav & Co, 2013).

Box 8.4. The “OurCrowd” crowdfunding platform, Israel

OurCrowd is an equity-based crowdfunding platform, built exclusively for a select group of accredited investors to provide venture capital funding for Israeli venture capital start-ups. Membership in the community is vetted and offered only to people who meet the stringent accreditation criteria. Accredited investors who are accepted into the community can make minimum investments of USD 10 000 per deal. The initial focus of OurCrowd will be the dynamic early stage funding market in Israel and only companies that have passed a rigorous due diligence process will be added to the platform.

Source: OurCrowd website,

There are also important regulatory requirements placed on crowdfunding organisations and platforms and on MSEs seeking to raise funds in terms of the information that has to be provided to investors and the types of investors that are allowed to make investments. In Israel, any offer of shares to more than 35 offerees is considered an offer to the public and requires a prospectus to be issued. This is a burden on the MSE and the crowdfunding organisation. Exceptions are private placements under the 1968 Securities Law, which allows a company to offer securities to an unlimited number of accredited investors and can offer securities to foreign investors. Pure business crowdfunding (i.e. an offer to a large number of non-accredited investors) is not yet available. In several OECD countries, such as the USA, crowdfunding investments by retail (non-accredited) investors are now allowed without requiring issue of a prospectus. Accompanying restrictions on the total amount of investments that can be made or on the proportion of personal wealth that can be invested by individuals help to keep this in line with the need for appropriate investor protection. Furthermore, in Israel, there is also no official guideline to distinguish between an offer and publication. Hence each offer has to be reviewed and evaluated. While these regulations may originally have been conceived with investor protection interests in mind, they are far more restrictive than the leading countries in the development of crowdfunding, and do not take up the option of using thresholds for investment values by individual retail investors below which restrictions are more limited to obtain a different trade-off between developing a new financing instrument and ensuring investor protection.

New crowdfunding laws were introduced at the end of 2015 by the Israel Securities Authority, in recognition of the promise of new trends in financing to respond to the obstacles faced by small start-ups when approaching banks, institutional investors and venture capital funds. The new law is an amendment to the Securities Law and the Joint Investment Trust Law (The Law for the Encouragement of Investment in High-Technology Companies). The new law provides an exemption for small companies (not just in the field of high-technology) from the need to issue a prospectus when crowdfunding and raising small amounts of financing from various investors. These amended regulations aim to make it easier for firms to raise capital by selling shares to the public (see Box 8.5). However, Barnea & Co (2016) point out that the applicable regulations that will determine the parameters of the exemption have yet to be published so that how lenient the Securities Authority will be is yet to be made clear. Whether Shenhav & Co’s (2014) verdict on the proposed legislation (that it would be still too restrictive) proves to be correct remains to be seen.

Box 8.5. Main principles of new crowdfunding regulation in Israel
  • At the beginning of 2016 it was expected that investments of up to NIS 10 000 (i.e. approximately USD 2 500) per investor for each investment, and NIS 20 000 per investor in the aggregate per annum (i.e. approximately USD 5 000) will be exempt.

  • In addition, the relevant company will be limited in the aggregate amount it can raise through crowdfunding per annum, and the expectation is that the cap will be several million NIS.

  • In the interest of protecting the public, the regulations will require that at least one accredited investor participates in the crowdfunding and that such crowdfunding is executed through an internet portal regulated by the Securities Authority.

  • Following laws already adopted in the United States and England, the new law also provides for the establishment of high-technology funds. These funds are to be traded on a new index on the Tel Aviv Stock Exchange (TASE).

  • Public and institutional investors can now invest in funds, which in turn invest in a wide variety of Israeli high-technology companies; reducing investors’ exposure when compared to investing in lone ventures. This new model provides an alternative for high risk high-technology companies seeking financing and/or looking to be traded on TASE.

  • The Securities Authority is seeking legislative approval regarding new regulations to provide additional concessions to high-technology companies. Such concessions include the right to submit annual reports and prospectuses in English (as supposed to Hebrew) and to prepare financial reports according to the principals of US GAAP (rather than IFRS).

  • These proposed changes will save Israeli high-technology companies significant expenditures when registering on TASE, and allow them to attract investments from US investors, without having to turn to the NASDAQ.

Source: Barnea & Co (2016).

Israel could draw on recent international models of new crowdfunding regulation. The United States has been the forerunner by passing a law in 2012 governing equity-based crowdfunding (Box 8.6). Canada is following suit through a proposed new set of rules that will make it easier for SMEs to raise capital up to CDN 1.5 million through approved and regulated equity crowdfunding portals without issuing a prospectus. In order to protect investors, equity investments by individuals would be limited to no more than CDN 2 500. In the United Kingdom, crowdfunding is regulated by the Financial Conduct Authority (FCA), which in 2014 introduced new rules which allow for equity and peer-to-peer lending crowdfunding. The principles include a cap on investment of 10% of “net investible assets” for inexperienced investors, which does not apply to sophisticated investors (based on self-declaration). Platforms need to be authorised by the FCA, to which they have to report, and are only allowed to approach investors who have signed the required declarations and passed an examination. They must also clearly communicate investment risks and, in the case of peer-to-peer lending, must maintain adequate capital buffers (Shenhav & Co, 2014).

Box 8.6. The Crowdfund Act under the JOBS Act, USA

The Jumpstart Our Business Startups Act (JOBS Act) was passed by the US Congress and signed into law in April 2012. The JOBS Act removed a Securities and Exchange Commission (SEC) regulation preventing small businesses from solicitation of investors to obtain capital, thereby enabling them to solicit securities-based funding from the general public through the Internet, social media or elsewhere – known as “business crowdfunding”.

Securities-based crowdfunding allows investors to receive a financial return through the purchase of equity, debt, or revenue-based securities. The JOBS Act expands these investment opportunities to non-accredited investors, who have been historically excluded from this process. This dramatic institutionalisation of crowdfunding as a form of start-up financing has been alluded to as an important step towards the “democratisation of access to investment”.

Key points of the Crowdfund Act include:

  • A company will be able to crowdfund up to USD 1 million over a 12-month period without the requirement to register the shares for public trading with the SEC. The fewer rigorous compliance requirements for start-ups mean lower costs, although the company must still file some basic information with the SEC.

  • Companies that seek to crowdfund a securities-based round must have background checks undertaken on all principals with 10% or greater ownership in the company and provide full and adequate disclosures with a business plan and a full description of their ownership and capital structure. Companies seeking to raise up to USD 100 000 must provide tax returns and a financial statement, while those raising up to USD 500 000 must provide financial statements reviewed by an independent public accountant. If the amount is over USD 500 000, the company must provide audited financial statements.

  • Crowdfunding portals must, alongside the legally-required background checks, do a full review of the company, disclosures, and the raise in order to approve a company prior to fundraising.

  • Intermediaries seeking to help companies raise capital through crowdfunding are required to register with the SEC, make sure investors are advised of the risks, and take measures to avoid fraud. The Crowdfund Intermediary Regulatory Association has formed as a self-regulating organisation representing the crowdfunding industry.

  • Individuals with annual income or net worth of less than USD 100 000 may invest up to USD 2 000 or 5% of their annual income or net worth, whichever is greater, over a 12-month period. Individuals with annual income or a net worth of USD 100 000 or more may invest up to 10% of their annual income or net worth, capped at USD 100 000 maximum aggregate amount, over a 12 month period. Investors can fund one company or several companies as long as they remain within these annual limits.

  • An investor must wait a minimum of 12 months before selling her/his securities unless the sale is to a family member, the issuing company, or an accredited investor, in addition to other restrictions normally placed on the transfer of securities.

  • A crowdfunding round does not prevent a company from raising capital through other legal channels.

  • Companies crowdfunding are also exempt from the 500 shareholder cap pursuant to rules and regulations of the SEC and can increase that number to 2 000 before being required to register with the SEC. This allows companies to grow with greater flexibility before choosing to go public or selling out to a larger company.


Supply chain development

A supply chain is a set of organisations directly linked by one or more upstream and downstream flows of products, services, finances, or information from a source to a customer. Participation by traditional manufacturing MSEs in supply chains can play an important role in supporting their competitiveness, innovation, and growth, for example by providing new markets, supporting collaborative innovation, and improving their responsiveness to changing market conditions and customer needs. In Israel, stronger supply chains could also help bridge the gap between traditional and high-technology sectors and promote growth and technology development in traditional manufacturing. Furthermore, it could play a role in developing innovative clusters in new sectors for Israel such as water, energy, health and biotechnology, in which there are nascent R&D and start-up activities but not full cluster ecosystems.

Some actions have been undertaken in Israel to support supply chain development, but primarily in the private sector. For example, Intel, the US electronics multinational, has a wide circle of suppliers in Israel. It also creates opportunities for service companies, provides science and engineering education, and undertakes R&D in the Computational Intelligence Institute that it founded in 2011. At the beginning of 2012, Intel signed a memorandum with the Ministry of Education to help with the Ministry’s flagship strategic programmes to advance science and technology education. However, Israel lost out to Ireland in the race to set up the new Intel fabrication plant. Since then, in 2014, the Israeli government agreed to give Intel a NIS 1.5 billion grant towards the USD 6 billion it will invest in its next generation fabrication plant in Kiryat Gat. The plant will employ an additional 1 000 people and possibly contribute to new buyer-supplier relationships in the local economy. The example of Intel suggests that multinational enterprises can be harnessed as a driver for productivity growth and innovation in MSEs.

Business associations also undertake many activities to support supply chain development. In many cases, their membership encompasses enterprises of different sizes and different activities across an industry’s supply chain, which makes them well placed to identify the main challenges for different sectors and to suggest specific policies for better MSE integration in supply chains. Supply chain management has also become the focus of support in colleges and universities. For example, the Galilee International Management Centre organises study programmes on supply chain management and procurement. It provides training on such topics as the role of outsourcing in the supply chain system, supply chain and quality control management, monitoring and evaluation in the international and global arena and negotiation and communication skills.

The SMBA could develop a programme in collaboration with multinational anchor firms and universities and colleges, guided by information and contacts from business associations that would seek to build supply chain linkages with manufacturing MSEs through a range of brokering activities combined with training, consultancy and financing for potential MSE suppliers. Specific actions that could be taken by the SMBA to support existing initiatives include paying consultants to provide a diagnostic service to MSEs to help them identify strengths, weaknesses, opportunities and threats in the supply chains within which they operate. The service could also help MSEs develop an explicit supply chain business strategy. The SMBA could also provide a portal for existing/potential subcontractors to broker new business opportunities in the supply chain giving better visibility of the routes available to gain access to them. It should do this in conjunction with business associations as well as colleges and universities.

Targeted public procurement

Public procurement represents a viable growth mechanism for MSEs, given both the scale of public procurement, which accounts for between 9% and 25% of GDP in OECD countries, and the potential for scalability that MSEs normally have in place in comparison with smaller enterprises. A number of OECD countries have established rules public procurement rules that are intended to act as a driver for SME innovation and growth. For example, in 2005 the UK’s Department of Environment, Food, and Rural Affairs set up the Sustainable Procurement Task Force, followed by the Local Government Sustainable Procurement Strategy, to increase the access of SMEs to public procurement. Similarly procurement laws in Finland have been designed to facilitate SME participation by establishing two key principles: all contracts should be subject to an open bid and all bidders should be treated impartially.

In Israel, information on tendering has been centralised at national level and made available on-line to all businesses through recent reforms and the country is in the process of setting up an e-procurement portal to increase access to procurement. In principle the new processes should make it more feasible for MSEs to win contracts. However, in practice this seldom happens. Thus an SMBA survey in 2013 found that 70% of MSEs had not attempted to participate in public tenders in the past year. The explanation was that this resulted from a lack of knowledge on how to apply and the complexity of the process. Preparing for submitting a tender requires management attention, skill and time commitment. Professional advisors are available for large firms and institutional tenderers, and many use a professional team, but such practices are not available to MSEs. What is needed is a subsidised unified, advanced and focused training system for MSEs, with local support where possible and online more generally (Adalya Economic Consulting, 2011). Defence spending could also be more actively utilised to encourage innovation in MSEs.

Innovation support

OECD (2014) concluded that Israel is one of the top performers in developing pro-innovation policies and generating innovations, especially in the ICT fields. There is a challenge, however, in supporting innovation in MSEs in traditional manufacturing. Only 4% of government support for R&D in 2004 was directed to traditional sectors (OECD 2011b). Public support for academic R&D is low and funds need to be funnelled towards research linked with long-term priorities – water, energy and health – sectors where there are opportunities for MSEs. Moreover, traditional Israeli industries spend about one third of the R&D budget of comparable firms in the US and one-half of the budget of comparable European firms. As such, support for innovation in traditional Israeli industries potentially has a high yield.

MSEs are eligible for a range of IIA R&D support programmes (Box 8.7). Furthermore, the IIA has recently created a special track of the R&D Law dedicated to subsidising R&D in Traditional Industries (industries characterised by relatively low investment in R&D). This track offers separate evaluation and discussion for projects. Private consultation is also offered to firms applying to the track for the first time. The IIA also supports several R&D centres and technological incubators. However, the support is still strongly focused on R&D funding, whereas broader support for innovation is needed for many traditional manufacturing MSEs.

Box 8.7. A selection of Israeli R&D programmes catering to MSEs

MAGNET: This supports pre-competitive R&D within a consortium that includes a number of commercial companies together with research personnel from at least one academic or research institution. The R&D focuses on new generic technologies that will lead to new generation advanced products. The industrial partners can receive a grant of 66% of approved R&D costs and the academic partner can receive 80% of approved R&D costs. A foreign company may be included in the consortium if it can bring a unique contribution to the relationship.

Mini-MAGNET: This provides further support to an already existing relationship between industry and an academic institution. The grant in this case amounts to 66% of the approved R&D costs.

NOFAR: This supports applied academic research that has aroused business interest but is not yet directed to a specific product. The objective is to advance the research to a point where it is ready for a cooperative venture with a commercial partner. A minimum requirement of this programme is for a company or incubator to invest 10% of the development costs complementing the 90% grant given by the government.

Technology Dissemination Through Users Groups: This is designed for the dissemination and adaptation of new generic technologies that were developed in Israel or abroad and are useful to any group of industries organised as a user group.

Source: Website of the IIA.

One approach that can stimulate innovation in MSEs without being solely focused on R&D is to develop partnerships between MSEs, college-based researchers, and college graduates to work together on project development in MSEs. An example of such an approach in the UK is provided in Box 8.8. This could provide a good model for a new type of MSE innovation programme in Israel.

Box 8.8. Knowledge Transfer Partnerships (KTP), United Kingdom

Description of the approach

The KTP scheme supports UK businesses wanting to improve their competitiveness, productivity and performance by accessing the knowledge and expertise available within UK universities and colleges. It is run by Innovate UK, formerly the Technology Strategy Board. A KTP is a relationship formed between a company and a university or college of further education (the ‘Knowledge Base’ partner) aimed at facilitating the transfer of knowledge, technology and skills to a company partner that formerly had no access to them. Companies and organisations from a broad range of industrial and commercial sectors are eligible to participate. The scheme includes a wide range of technical and professional skills that are important for innovation and improvements in the whole of a sector’s supply chain.

The more specific aims of KTPs are to: facilitate the transfer of knowledge through projects undertaken by high-caliber, recently-qualified people under joint supervision from a company and an academic institution; provide company-based training for recently-qualified people to enhance their business and specialist skills; stimulate and enhance business-relevant training and research undertaken by the academic institutions; increase the interaction between businesses and academic institutions, and awareness of the contribution academia can make to business development and growth.

Each partnership employs one or more recently-qualified people (known as an Associate) to work in a company on a project of strategic importance to the business, whilst also being supervised by the Knowledge Base Partner. Projects vary in length between 6 and 36 months. The Associates are either postgraduate researchers – university graduates – or individuals qualified to at least NVQ Level 4 or equivalent.

Factors for success

The success factors lie in the benefits for each partner. The scheme offers benefits to the research associates, companies, and the universities and colleges. A recent evaluation of the programme by Regeneris Consulting Ltd showed that the benefits to Associates include higher salaries, a professional management qualification and, for three-quarters of them, employment in the host company. The company benefits from an increase in the overall value of the business (over half), an increase in sales (nearly two thirds), increased profits, and new jobs created.

KTPs provide academic institutions with the potential to apply knowledge and expertise to important business problems; develop business-relevant teaching and research materials; identify new research themes and undergraduate and postgraduate projects; publish high-quality research papers; gain a relevant and improved understanding of business requirements and operations; lead rewarding collaborations with innovative businesses; assist strategic change in businesses, and supervise and act as mentors for postgraduates working on company-based projects. Failure rates are low.

Obstacles and responses

The level of commitment from each participating business is high, which means that companies need to be aware of what is expected of them. Furthermore, overall satisfaction levels among beneficiaries of the programme could be higher, especially among supported businesses. Some KTP activities are seen to offer less value than others, timescales for recruiting the right Associate are seen to be long, and the KTP portal is not well regarded or designed. Mandatory training provided to the associate is inflexible and does not always add value to the project being undertaken. Finally, arrangements for promoting the KTP scheme are unclear and there are uncertainties and overlaps in the roles of the KTP Advisor and KTP offices in generating partnerships and proposals.

The policy responses that could be taken to help address these problems include better targeting of partnerships to identify where the biggest impacts and returns can be made and reducing the complexity and bureaucracy associated with the timescale for the recruitment of the Associate. The programme could also make better use of existing skills and capacity as well increase the number of companies and universities and colleges involved.

Sources of further information

Conclusions and policy recommendations

A key policy challenge for Israel is to overcome important weaknesses in productivity and innovation in MSEs in traditional manufacturing sectors. Israel has not yet developed a specific strategy for this group of firms, but it is a priority. When developing an overall strategic document for SME and entrepreneurship policy in Israel, the SMBA should pay particular attention to this group of firms. A multi-pronged approach will be needed that combines actions for workforce skills development, improving management skills and practices, access to finance, supply chain development, targeted public procurement and innovation. New programmes in these areas focused on traditional manufacturing MSEs will help both to increase national productivity and inclusion and help bridge the gap between the dual economies of traditional and high-technology sectors. Formalised cooperation between government ministries and agencies, universities and colleges and representatives of MSEs will be critical to designing effective policies.

The following key recommendations are offered for future policy development in this area:

Key recommendations on medium-sized enterprises
  • Develop a specific MSE component in the new national strategy document proposed in this report for SME and entrepreneurship policy.

  • Undertake a national training needs analysis for MSEs in collaboration with the Ministry of Education, the Ministry of Economy and Industry, universities, colleges, unions and MSE employers and adapt VET programmes and MAOF centre short courses in line with the findings.

  • Introduce additional management development programmes for MSEs in selected universities based on good practices developed by Technion University, including a management and leadership programme for existing high-potential MSEs.

  • Introduce a dedicated consultancy track for MSEs in MAOF centres with more specialised consultants and more intensive diagnosis, consultancy and mentoring.

  • Extend the maximum term of SMBF loan guarantees to repayment periods of 10-15 years and ensure that MSEs have the same access to these guarantees as smaller enterprises, introduce tax incentives for angel investments in non-R&D based MSEs, and make further improvements to the regulatory environment for crowdfunding.

  • Introduce a national supply chain development programme for MSEs involving brokering relationships among potential supply chain partners, developing marketing and marketing platforms, targeted training and mentoring, and support for introduction of supply chain management software and management procedures.

  • Open up defence procurement to MSEs in traditional industries and set up an information portal where details of how to apply are placed and other support offered to potential bidders in co-operation between the Ministry of Defence and the Ministry of Economy and Industry.

  • Introduce a programme to stimulate non-R&D based innovation in traditional manufacturing MSEs involving knowledge transfer partnerships between MSEs, college-based researchers, and college graduates.


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Barnea & Co (2016), Finally, Crowd Funding Comes to Israel,

Ben-Nahum, Y. and M. Erez (2012), Accelerating Innovation in Israeli Industry, Ivey Business Journal, March/April 2012,

British Business Bank (2015), Small Business Finance Market 2015-2106,

Confederation of British Industry (CBI) (2014), Stuck in the Middle: Addressing the Tax Burden for Medium-Sized Businesses,, accessed 19 August 2014.

Cowling M., P. Bates, N. Jagger and G. Murray (2008), Study of the Impact of Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) on Company Performance, HM Revenues & Customs Research Report 44.

Feldman, M.P. (2003), “The Locational Dynamics of the US Biotech Industry: Knowledge Externalities and the Anchor Hypothesis”, Industry and Innovation, 10(3), 311-328.

FRIDA (2013), Fostering Regional Innovation and Development through Anchors and Networks, Final Report Summary: A Cross Regional Comparison in an Evolving International Context,

OECD (2016), Entrepreneurship at a Glance 2016 (forthcoming), OECD Publishing, Paris.

OECD (2016), Financing SMEs and Entrepreneurs 2016: An OECD Scoreboard, OECD Publishing, Paris,

OECD (2013), An International Benchmarking Analysis of Public Programmes for High-Growth Firms, OECD LEED Programme, Paris,

OECD (2011), Higher Education in Regional and City Development: The Galilee, Israel, OECD, Paris,

Shenhav & Co (2013), Crowd funding – legal and other issues,

Shenhav & Co (2014), Crowdfunding – Current Status and Proposed Changes


← 1. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

← 2. Medium-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”.