Chapter 5. National programmes for SMEs and entrepreneurship in Israel1

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

  

Access to finance programmes

The State Credit Guarantee Programme

One of the government’s main programmes to improve credit flows to SMEs involves the provision of state loan guarantees. Its intervention in this area started in 2003 in order to ensure that SMEs had sufficient access to bank financing, including longer-term financing. However, the early actions were fraught with limitations, largely due to lack of co-ordination in training and technical assistance to the guarantee recipients, insufficient post-loan monitoring, and inconsistent underwriting standards and procedures (Yago and Zeldman, 2005).

During the period 2007-12, there were four government loan guarantee funds: the Small Business Fund; the Medium-Sized Business Fund (launched in 2009 in response to the economic crisis); the Exporters Fund; and the Self-Employed Immigrants Fund. In 2012, the first three of these funds merged into a single Small and Medium Businesses Fund (SMBF), managed by the SMBA and the Ministry of Finance. The Self-Employed Immigrant Fund continued operating alone through the Ministry of Immigrant Absorption. This continued separation could have costs in terms of unexploited economies of scale.

The merger of the three former funds into the SMBF was accompanied by a simplification of the application process for firms and of the reimbursement process for banks in case of default (i.e. the SMBF places a deposit in participating banks to cover guaranteed losses in case of defaults). The guarantee coverage for loans to new businesses was also increased to 85%, in order to reflect the more severe financing barriers faced by start-ups.

The first 4-year period of operation of the SMBF ran from March 2012 to March 2016. The scale of funding was boosted compared with the previous schemes, with an additional NIS 500 million allocated over the four years. This brought the fund to almost NIS 1 billion, with a target of leveraging up to NIS 4.38 billion of bank credit to SMEs. Banks were invited to tender to the Ministry of Finance and the SMBA for the provision of guaranteed loans. Banks competed on the basis of how much credit they would be willing to provide to SMEs for every NIS of government guarantee, with the range set between 5:1 and 10:1. Four banks were retained for the first round of the programme in 2012-16 – Bank Hapoalim, Bank Mizrahi, Mekantil Discount Bank, and Bank Otsar Ha-Hayal. A tender was also issued for companies to assist in the management of the programme, including the selection process for loans to be guaranteed.

A second 4-year round of the SMBF was introduced in March 2016. This aims to provide a total of NIS 6.6 billion of bank credit to SMEs, but could potentially extend to NIS 20 billion. Following the tender for the second round, one of the large banks, Bank Hapoalim, was replaced with another, Bank Leumi. Furthermore, rather than working solely with banks, as was the case in the first period, the second round involves providing state guarantees to consortia of banks and institutional investors. This works through four agreements with: Bank Leumi and Menora Mivtachim Holdings Ltd; Bank Mizrachi, Altshuler Shaham Group and Phoenix Investments and Finance Ltd; Bank Merkantil-Discount and Amitim Fund; and Bank Otsar Ha-Hayal and the Meitav-Dash Fund. The objective of this shift to consortia including institutional investors is to increase the experience of institutional investors in financing SMEs.

Certain other changes were introduced for the 2016-20 period of the SMBF compared with its first years of operation. First, there was a reduction in the government loan comprehensive guarantee (i.e. the government guarantee for the full portfolio of SMBF loans with banks and institutional investors) from 10% to 9%, which will lead to an increase in the leverage of the SMBF from 10 to 11.1. Second, the commission (i.e. the one-time administration fee) was increased from 0.5%-1.5% in 2012-16 to 1%-2% in 2016-20, depending on the size of the business. Third, an option has been introduced to guarantee loans for export activities (for loans of up to five years). Finally, an option has been introduced to guarantee longer term loans of up to 12 years for industrial capital, including R&D. These are welcome changes. They will help increase the self-sustainability of the SMBF without jeopardising its attractiveness to banks and SMEs. In addition, they will increase the ability of the programme to support exports and longer term investment loans, since the previous round of the scheme had no specific line for export loans and had been constrained by a maximum loan guarantee period of 5 years. The operational arrangements of the SMBF are presented in Box 5.1.

Box 5.1. The operation of the SMBF

Firms eligible for loan guarantees

To be eligible, SMEs must have no more than 70 workers and annual turnover of no more than NIS 25 million (small business) or NIS 100 million (medium business). They must also be current with their tax obligations and not have a restricted bank account.

Types of loans guaranteed

The SMBF supports four main types of loans: i) the New Business Loan (i.e. businesses that have not started operations yet); ii) the Investment Loan (i.e. investments in plant and buildings, renovation, equipment, information technology and means of production); iii) the Working Capital Loan (i.e. cash-flow management and cash shortfalls); and iv) the Export Loan (covering loans of up to 5 years for export activities).

Guarantee coverage

The SMBF guarantees up to 70% of the loan value to existing SMEs and 85% for loans to new businesses. In addition, it will guarantee up to 60% of second and third loans to the same SME. Banks, however, are allowed to request the SMEs to deposit up to 15-25% of the loan amount as collateral, leaving the bank exposed for only the remaining 5% in case of default in these cases.

Nature of loans guaranteed

The maximum size of a guaranteed loan depends on the turnover of the firm. For existing SMEs with turnover of up to NIS 3 million and new firms which have not started operations yet, the maximum guaranteed loan amount is NIS 100 000. For businesses with turnover of up to NIS 6.25 million, the maximum guaranteed loan is NIS 500 000, while for SMEs with turnover above that threshold to NIS 100 million, the maximum loan size is set at 8% of the business turnover. The guaranteed loans carry a six month grace period, are offered at market interest rates (mostly prime plus 3%), and can extend over a period of five years (Investment Loans can extend up to 12 years).

Application and selection process

One of the unique aspects of Israel’s guarantee programme is that the government outsources the implementation of the SMBF to two externally-contracted consulting firms, which act as co-ordinating bodies and intermediaries between the SME applicants and the banks. SMEs seeking guaranteed credit send their application to one of the consulting companies, which carry out a first assessment of the loan request based on an in-depth financial and operational analysis of the business. If the guarantee is considered warrantable, the file is transferred to one of the participating banks for approval. Final loan approval decisions are made by a Credit Committee in the bank consisting of representatives from the bank, the government and the Fund co-ordinating body. If the loan is approved, the SME can accept the loan from that bank or apply to a Credit Committee of another bank in order to obtain better terms. The whole review and approval process can take up to two months and takes six weeks on average.

Fees

The government’s application fee is 1%-2% according to the size of the business, payable to the Ministry of Finance. The risk premium on approved loans ranges from 0.5-1.5% of the guaranteed loan value (i.e. annual servicing fees), depending on the size of the firm.

Source: Information submitted by the SMBA to the OECD.

From April 2012 to December 2013, 11 535 SMEs submitted loan applications to the SMBF, of which some 55% were approved and 45% were rejected.2 This is a high rejection rate compared to many programmes in other OECD countries (OECD, 2013a), although the rejection rate decreases to 70% of applicants with larger turnover and more years in business (SMBA, 2014). The high overall rejection rate does not appear to reflect particularly high risks of default. The average default rate on SMBF-guaranteed loans is 5.2% (more precisely 4.2% for medium-sized businesses and 6.5% for small businesses). This is slightly below the average rate of 5.4% found by an analysis by the World Bank of 76 credit guarantee schemes across 46 developed and developing countries (Klapper et al., 2008).

Between April 2012 and June 2014, slightly more than 8 000 SMEs received SMBF-guaranteed loans. Table 5.1 shows the breakdown of the numbers of firms supported and their shares of the loan volume by firm size. Almost 80% of the supported firms are micro and small enterprises, although they account for only slightly more than 60% of the total loan volume. Fewer than 20% are medium enterprises (20-99 employees), but they have received nearly one-third of the total loan volume. Larger enterprises (with over 100 employees) make up a very small percentage of total clients and total loan volume. During the period, approximately one-half of the guaranteed loan volumes went to manufacturing SMEs and one-half to SMEs in other sectors, and approximately one-half went to SMEs that are less than five years old and one-half to older SMEs.

Table 5.1. SMBF-guaranteed loans, April 2012-June 2014

Firm size (employees)

Number of firms

Percentage of firms

Loan volume (NIS thousands)

Percentage of loan volume

1-4

2 732

 33.9

  852 254

 17.6

5-19

3 643

 45.2

2 105 475

 43.6

20-99

1 400

 17.9

1 537 011

 31.8

100+*

  236

  2.9

  339 241

  7.0

Total

8 051

100.0

4 833 981

100.0

* Even though these enterprises have more than 100 employees, their turnover might not be more than NIS 100 million, the threshold limit for obtaining the guarantee.

Source: Data provided to the OECD by the SMBA.

 http://dx.doi.org/10.1787/888933421898

The SMBF appears to be achieving its overall objective of increasing the flow of credit to SMEs. The volume of guaranteed credit to SMEs has increased significantly, more than doubling from 2011 to 2013 (Table 5.2). In 2013, SMBF-guaranteed loans added up to NIS 2 billion, more than 1% of total bank credit to businesses in this size class (Bank of Israel, 2014). Furthermore, the tendering approach appears to have created competition between banks, which has in turn resulted in improved marketing to SMEs and appears to have contributed to a slight reduction in the interest rates and collateral requirements applied to SMEs. However, results from an ongoing evaluation of the impact of the programme should help throw more light on the programme effects when they become available.

Table 5.2. Approved and executed loan guarantee credit volumes, 2007-13

2007

2008

2009

2010

2011

2012

2013

Total

Government loan guarantees to SMEs (in NIS millions)

170

109

757

1 028

890

1 412

2 025

6 391

Source: OECD (2014), Financing SMEs and Entrepreneurs 2014: An OECD Scoreboard, OECD Publishing, Paris.

 http://dx.doi.org/10.1787/888933421909

There are nonetheless some potential areas for improvement of the SMBF. First, consideration should be given to how to increase loan guarantee approval rates, and hence open up credit to more SMEs. An assessment should be made of where and why the applications for guarantees are being rejected, and particularly on whether the rejections are tending to come from the two companies contracted by the Ministry of Finance to co‐ordinate delivery of the programme (i.e. before consideration of applications by the banks), or by the Credit Committees of the banks themselves. If the main reason is inadequate proposals for the co-ordinators to forward to banks, then initiatives should be put into place to improve the ability of SME owners to develop bankable proposals, such as offering referrals to financial consultants in the MAOF centre database. However, if the rejections are occurring more at the second stage in the approval process, the cause could be risk aversion on the part of banks. This may call for an increase in the guarantee coverage ratios for certain types of businesses where risk is highest, although the overall coverage ratio is within the interval generally considered as appropriate for guarantee schemes (between 60% and 80%); i.e. high enough to encourage lender participation and yet low enough to limit moral hazard (OECD, 2010a).3 Another possibility would be to increase flexibility in the scheme to facilitate a more staged approach to lending whereby the loan size increases and the interest rate decreases as the bank and the SME client develop a relationship of mutual knowledge and trust over time.

Second, consideration should be given to augmenting the share of the SMBF that is allocated to loans for new businesses given the difficulty that new entrepreneurs face in obtaining credit from senior lending institutions, as identified by SMBA surveys. This might be achieved through introduction of quotas, adjustment of coverage ratios, and training and financial literacy work with SMEs and start-ups to increase the quality of their proposals.

Finally, the fees and risk premium on guaranteed loans seem to be relatively low. This is despite the recent increase in the one-off commission to 1%-2% of the loan (depending on size of the SME). Other schemes internationally typically operate with a registration fee of about 1% plus annual fees that could range from 1% to 4% of the outstanding guaranteed loan balance, depending on the risk (OECD, 2010a). Hence, given the lack of annual fees in Israel, the total fee is towards the lower end of the range. Table 5.3 compares the fees and commissions of the SMBF with those of loan guarantee programmes in five other OECD countries. The purpose of management fees and risk premiums in guarantee programmes is to recoup some of the credit default costs and administrative expenses and ensure financial sustainability, although it is generally considered unrealistic to achieve full cost-recovery on the basis of administration and servicing fees. In Israel, there may be room to raise overall fees to higher levels, hence increasing the sustainability of the scheme and its scope to support more firms, without undue discouragement of SMEs from applying. A sophisticated approach to working out appropriate guarantee fees by individual applicant is illustrated by the credit guarantee system of Japan (see Box 5.2).

Table 5.3. International practices in loan guarantee programme fees and commissions

Name and country of scheme

Upfront, one-time administration fee

Annual servicing fee

Small Medium Business Fund (SMBF), Israel

Application fee of 1%-2% of loan – payable by the borrower to the Accountant General (government)

Canada Small Business Financing Program (CSBFP)

2% of the total amount of the CSBF loan payable by the lender to the Receiver General of Canada with the loan registration. Can be financed by the borrower as part of the loan

1.25% on the end of month loan balance. Can be charged by the lender to the borrower as part of the interest rate on the loan.

Small Business Administration (SBA) 7(a) Loan Guaranty Program, United States

Lender fee is:

  • 0.25% for loans with a maturity of less than 12 months;

  • 2% of the guaranteed portion of loans of USD 150 000 or less with a maturity of more than 12 months;

  • 3% of guaranteed portion of loans exceeding USD 150 000 but not more than USD 700 000;

  • 3.5% on loans exceeding USD 700 000.

  • An additional 0.25% on the portion of any guaranteed loan that exceeds USD I million

The lender can charge the fees back to the borrower and must submit them to the SBA; allowed to retain 25% of the upfront guaranty fee on loans of USD 150 000 or less.

Cannot exceed 0.55% of the outstanding balance of the guaranteed portion of the loan; fee is borne by the lender to the SBA and cannot be charged to the borrower.

Enterprise Finance Guarantee (EGF), United Kingdom

None to the government

2% annual premium on outstanding loan balance; paid by borrower to the Department of Business, Innovation and Skills by direct debit.

Irish SME Credit Guarantee Scheme, Ireland

None to the government

2% annual premium based on the principal balance of the guaranteed loan amount; paid by the borrower to the Department of Jobs, Enterprise and Innovation

Japan Credit Guarantee Corporation (CGC)

None to the government

Ranges from 0.5-2.2% of value of the guaranteed loan, depending on the risk assessment.

Source: Information on the Irish Credit Guarantee Scheme: www.djei.ie/enterprise/smes/creditguarantee.htm; on the SBA 7(a) Loan Guaranty Programme: Digler (2013); on the Canada Small Business Financing Programme: www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/la03148.html#s10; on the Enterprise Finance Guarantee: http://british-business-bank.co.uk/understanding-enterprise-finance-guarantee/; on the Japan CGC: CGC (2012).

Box 5.2. Determining guarantee fees in Japan’s Credit Guarantee Corporations

In Japan, Credit Guarantee Corporations (CGCs) are public institutions, which are established pursuant to the Credit Guarantee Corporation Law and support SMEs’ access to credit by serving as guarantors. Credit insurance provided by the state-owned Japan Finance Corporation serves the purposes of sharing the risks incurred by CGCs, giving rise to a system known in Japan as the credit supplementation system. There are 51 CGCs in Japan, basically one for each prefecture and, at the end of 2013, their total liabilities stood at approximately JPY 30 trillion.

What is particularly interesting about the Japanese guarantee scheme is the way that guarantee fees are established. Guarantee fees paid by applicant SMEs are determined using the Credit Risk Database (CRD). The CRD was established in March 2001 as a voluntary association mainly consisting of Japanese CGCs, with the objective of collecting and employing simple financial information (balance sheets, profits and losses, default records, etc.) to assess the financial conditions and credit worthiness of SMEs looking for loan guarantees. By using the CRD data and its risk-analysis model, it has now become faster and easier for each CGC to work out appropriate credit guarantee fees and for banks to screen loan applications. Credit guarantee fees are expressed as an annual percentage of the loan value and are used to pay credit insurance premiums, administrative expenses relating to the operation of the system, and losses when loans are defaulted.

Source: OECD based on information provided by the Japanese Delegation to the OECD, member of the Steering Group of the OECD Review of SME and Entrepreneurship Policy in Israel.

Micro-enterprise lending

The microfinance sector in Israel is active in providing small amounts of credit to individual entrepreneurs and smaller businesses. The sector is mainly driven by NGOs, but the government is active in supporting some of the microfinance institutions, principally through contributing to the funds available for business lending.

The major government contribution is to the Koret Israel Economic Development Fund (KIEDF), an initiative of the Koret Foundation of San Francisco, which is one of the largest players in the Israeli microfinance sector. It was established in 1994 as an NGO to stimulate economic development and employment opportunities in the private small business sector in Israel. One-half of its activity is funded by endowments and the other half by the government, notably by the SMBA and MEDA. In the area of entrepreneurship financing, KIEDF launched the Microenterprise Initiative in 2006 to help low-income populations, mainly women, develop income-generating activity through access to business training and financing on reasonable terms.

The KIEDF Microenterprise Initiative combines the Koret Micro Credit Fund and the SAWA Micro-Loan Fund. The Koret Micro Credit Fund operates by depositing money in Bank Hapoalim and using these deposits to guarantee bank loans to low-income entrepreneurs. The guaranteed loans can be up to USD 8 500, have a three-year term and are offered at below market interest rate. The loans support a wide variety of businesses, most of which are operated out of the home. Originally, started in Haifa, the Micro Credit Fund has now expanded across the country.

The SAWA Fund, governed by a steering committee headed by the SMBA and represented by MEDA, provides microloans direct to low-income Arab Israeli women who are interested in starting a microenterprise. From 2006-13, SAWA supported the creation and development of 4 500 microenterprises through 5 939 loans ranging from USD 500 to USD 5 500 and a total lending volume of USD 15.4 million, using the revolving solidarity-group lending model. The programme has a strong emphasis on providing training and business advice to beneficiaries alongside the credit. The microfinance services are delivered through a team of 20 female employees who travel to villages and neighbourhoods to recruit and meet with the clients. Each officer is limited to 100-120 clients so that they have the time needed to provide the “soft” support that includes guidance and advisory services. The administration costs of the SAWA programme are high, at 40% of total project costs, which reflects the scale of effort to provide the ancillary support services to the loan clients. Interest rates of 8-10% are applied to the loans and loan losses through defaults are only 2%.

KIEDF is making an important contribution to supporting microenterprise development by low-income women. Based on its successful experience in this market, there may be potential for the government to bolster the expansion of its activities to other target groups, such as marginalised youth, that are not well-served by existing financing programmes.

The government is also involved in supporting certain other specialist microfinance institutions, such as the Daroma-Tzafona Fund, which supports manufacturing enterprises in the Galilee and the Negev regions, and the Centre for Jewish-Arab Economic Development (CAEJD). However, the total lending by these institutions is relatively small. The government could seek to expand the total scale of microfinance lending either by increasing funding in order to foster the expansion of NGOs already in the market. Alternatively, it could create a government-run Microenterprise Loan Fund to offer concessional loans (with softer terms than the market – e.g. lower interest rates, longer repayment and grace periods, etc.) combined with training and business advice.

In Ireland, for example, since 2012, Microfinance Ireland (MFI), a not-for-profit lender, has been delivering the Government’s Microenterprise Loan Fund. MFI provides unsecured loans of EUR 2 000 up to EUR 25 000, for terms of 3 to 5 years, to all business sectors, to businesses with fewer than 10 employees and an annual turnover of less than EUR 2 million. These loans may be used to fund the purchase of stock, equipment, machinery and business vehicles, for both start-ups and established entities.

Venture capital

The Israeli government has played a proactive long-term role in developing the national venture capital industry to its strength today. The “big push” in the early 1990s was largely propelled by the realisation that competent scientists and engineers, especially the Soviet Jewish immigrants, were able to develop innovations but were weak on entrepreneurial skills. The solution was to stimulate a private sector venture capital industry that would bring “smart capital” to the table (not only investment capital but also management advice and mentoring) and develop strong ties with foreign financial markets, especially the commercially-savvy, technology-based venture capital industry in Silicon Valley (Senor and Singer, 2011).

The initial policy action was to develop a co-investment platform in order to attract foreign venture capital companies to invest in Israeli companies. The government launched the YOZMA Fund in 1993, which had raised just over USD 200 million by 1997, approximately one-half coming from the government. The Fund was then privatised and the public sector share of the funds declined to almost zero. By 2011, it managed nearly USD 3 billion of capital and was supporting hundreds of new companies (Senor and Singer, 2011). Further information is provided in Box 5.3. In addition, the government offered tax incentives to venture capital investors. These interventions have been influential in making venture capital supply in Israel the strongest in the OECD area.

Box 5.3. The YOZMA Venture Capital Fund, Israel

The origins of the Israeli venture capital industry lie in a government initiative in 1993 that created the YOZMA Venture Fund. Public investment in the Fund was used to leverage foreign investment in Israeli companies, primarily from the United States. Co-investors also included financiers from Germany and Japan. This was accompanied by equity guarantees for foreign investors, programmes to link Israeli firms with foreign business angels and to encourage exits of Israeli venture firms on foreign stock exchanges.

The Israeli government invested USD 100 million at the outset to launch the Fund, which was given the objective of investing in 10 new private venture capital funds. Each fund was required to have three partners: nascent Israeli venture capitalists, a foreign venture capital firm, and an Israeli investment company or bank. The objective was to attract financing in Israeli companies at the same time as nurturing a domestic private venture capital industry by offering matched co-financing at a rate of 50-50, with the obligation to invest in start-up and early-stage companies in Israel. The ten hybrid public/private funds were established over a three-year period, each capitalised with around USD 20 million. The government retained a 40% equity stake in the funds, which the private partners had the option to buy out after five years if the fund was successful. This was a particularly attractive deal for foreign venture capital firms and provided an exit strategy for the government. The buy-out option was exercised in most cases, leading to the privatisation of the venture capital funds. In parallel, the government created an additional fund of USD 20 million through which it could invest directly in Israeli technology ventures.

The funds were mainly invested in the ICT and life science/biotechnology sectors. Initial individual investments typically ranged between USD 1 million and USD 6 million, and additional capital was reserved for follow-on investments. With the backing of prominent American, European and Israeli investors, YOZMA launched its second fund in 1995. Investment decisions regarding where and how to invest were mainly taken by the international partners.

The YOZMA initiative also developed close working relationships with several of the leading academic institutions and technology incubators in Israel. Some of the most promising companies in the YOZMA portfolio have come directly from these institutions. As part of its efforts to involve senior executives and founders of successful enterprises in its activities, YOZMA created the YOZMA III CEO Club, which became a valuable source of deal flow.

By 2000, the Israeli venture capital industry had reached the stage whereby the private sector accounted for almost all of the venture capital investments. The government phased out both the YOZMA equity programmes and the equity guarantees in the late 1990s when the success of the pump-priming efforts was evident.

Source: Baygan (2003), “Venture capital policies in Israel”, STI Working Paper 2003/3, OECD.

Despite this success, venture capital in Israel is too strongly focused on high-technology enterprises, leaving other sectors with few opportunities for equity finance (SMBA, 2014). To seek to extend investment to high-potential enterprises in other sectors, the government could participate in the initial capitalisation of a new venture capital fund dedicated to non-high-technology sectors, calling on private sector investors to contribute on a matching basis, much in the way Yozma originally did for the high-technology sector. This type of approach has already been tested in the government’s initial capitalisation of the Al Bawader Private Investment Fund to stimulate private investments in Arab Israeli and other minority-owned businesses. Further, it is modelled in the development of two growth capital funds for medium-sized businesses (turnover of NIS 10-100 million) under way in 2016 by the SMBA and the Ministry of Finance that will see the government invest NIS 100 million in each fund that is expected to reach a size of NIS 300-450 million with private sector matching.4

Business angels

Across OECD countries, angel investors can perform an important role in bridging the seed and early-stage financing gap for high growth potential enterprises, and most of these countries operate policy measures to support angel investors, such as tax incentives, co‐investment (matching) funds, encouraging the formation of business angel networks (BANs), and building the knowledge capacity of both angel investors and entrepreneurs through professional training and investment-readiness offers (OECD, 2011).

In Israel, the government has mainly intervened through tax incentives. In 2010, it passed the Angel’s Law to provide tax incentives to individuals to invest in the R&D stage of Israeli companies. However, this law produced only 125 requests for investment approval and was subject to much criticism.5 First of all, under the 2010 version of the law, investors in innovative enterprises with the Office of the Chief Scientist (OCS) label of “target companies” (the OCS was evolved into the Israel Innovation Authority (IIA) in 2015) were allowed to deduct their investment in R&D expenses (up to NIS 5 million per invested company) from their taxable income over a period of three years, but only if the company had not emerged from its start-up status.6 Secondly, “target companies” had to prove later to tax authorities that they had been compliant with this definition for the whole duration of the benefit; had this not been the case, the investor’s tax deduction could have been retroactively denied. This created much uncertainty and discouraged participation by investors in the programme.

Significant amendments to the 2010 law were therefore passed in 2015. These amendments expanded the eligible investments to include the start-up and commercialisation stage of the company, allowed investors to write off 100% of their investment for tax purposes in the first year after the investment (up to NIS 5 million) and, most importantly, clarified the entitlement to benefits at the time of the investment. The cost of the amendments to the tax authorities is estimated at NIS 50 million annually but is expected to be partially offset by other indirect taxes paid by the investee companies. On the whole, this change to the law represents a positive development which should increase the amount of informal investment available to promising high-technology start-up companies.

At the same time, the Ministry of Economy and Industry could explore complementary actions such as to encourage the development of business angel networks in peripheral regions similar to those available in the Centre of the country (e.g. the Tel Aviv Angel Group, Angel Investment Network-Israel, Israel Angel Group) and to support the development of investment-readiness programmes for new entrepreneurs.

Alternative financial instruments

The G20/OECD High-Level Principles on SME Financing stress the importance of enabling SMEs to access diverse non-traditional financing instruments and channels. In this respect, the Israeli government is examining in particular new ways to increase capital flows to SMEs whose financial needs are in the range of NIS 5-50 million. Two main options are under consideration; the securitisation of SME loan portfolios and the creation of a business development company.

Securitisation of SME loan portfolios

Securitisation refers to the sale of a loan portfolio by a lending institution to a private sector company which will finance the purchase through the issue of bonds to institutional investors (e.g. pension funds and insurance companies) and the public. This may free up resources in the lending institutions for further lending. The scale of SME loan portfolio securitisation tends to be a very small proportion of SME lending, but in Israel it is virtually absent. This has prompted the government to set up a government committee to examine ways to galvanise this market.7 The main recommendations of the committee included setting an obligation for banks to retain 10% of the securitised portfolio to avoid the risks that only subprime loans are sold to the market, establishing a neutral taxation of securitisation transactions which will create neither incentives nor disincentives to securitisation companies and investors, and protecting the rights of borrowers whose loans are securitised. These moves are to be encouraged, although it may not be sufficient to stimulate an SME loan securitisation market, given that Israeli banks generally do not perceive a liquidity constraint with respect to their SME lending.

Business Development Company

Business Development Companies (BDCs) are publicly-traded companies that attract capital from institutional investors such as pension funds and insurance companies through the Stock Exchange to then lend or invest in SMEs. This may be an effective way of increasing debt and equity investment in medium-sized firms. Inspiration could be drawn for such a development from two experiences from the United States, described in Boxes 5.4and 5.5.

Box 5.4. Business Development Companies (BDCs), United States

Description of the approach

BDCs are a form of publicly registered company in the United States that invests in the debt and equity of privately-held American small and middle market businesses, and are often eligible for government tax incentives. They were created by Congress in 1980 as an amendment to the Investment Company Act of 1940, which stipulated that the securities of private equity and venture capital firms could not be beneficially owned by more than 100 persons. This restriction had the impact of blocking their capacity to provide financing to small and growing business. The Small Business Investment Incentive Act of 1980 created a new category of closed-end investment company – the Business Development Company – that could make investments in private companies (emerging growth or expansion stage) in the form of long-term debt or equity capital without some of the restrictions of the 1940 Act, and also make significant management assistance available to them.

BDCs occupy a useful niche by helping companies grow by borrowing at low rates and making money on the spread between their borrowing rates and the rates charged to less credit-worthy SME borrowers. In this respect, BDCs are often considered as sub-prime lenders to SMEs. BDCs can offer asset-based lines of credit, working capital loans, fixed asset loans, restructuring loans, senior short- or long-term debt, subordinated debt, and mezzanine or private equity financing. Their portfolio of loans can be traded publicly without restriction or back-end fees.

The number of BDCs has grown considerably in the past ten years. There are over 40 BDCs in operation, with total assets of more than USD 40 billion and market capitalisation in excess of USD 25 billion. Some of them are publicly traded on the stock exchange, while others are not. About one-half of the existing BDCs are managed by third party companies. However, all BDCs are subject to the provisions of the Investment Company Act, which limits how much debt they can incur (debt is not allowed to exceed equity), requires regulation by the Securities and Exchange Commission (SEC) and a code of ethics and compliance programme, and subjects them to regular examination as all mutual and closed-end funds. They are all required to file quarterly and annual reports and proxy statements with the SEC. In addition, they must comply with specific rules regarding the compensation of fund managers. BDCs must ensure that 70% of their assets are in private debt or equity investments in private or thinly-traded companies (below USD 250 million in market capitalisation). No more than 5% of the total BDC assets can be invested in any one investment and the investment size is limited to no more than 25% of any one portfolio company’s total assets. BDCs must also offer managerial assistance to the SMEs in which they invest and distribute 90% of their annual taxable income to shareholders.

As long as the BDC meets certain income, diversity and distribution requirements as set out in the Investment Company Act, it pays little or no corporate taxes (if it elects to be treated as a Regulated Investment Company for tax purposes).

BDCs are particularly geared to providing funding to early-stage companies that are too small to raise public funds, do not match the investment criteria of angel investors or venture capital providers and are unattractive to banks. BDC teams select the most promising companies in their fields and provide funds in return for a debt or equity stake. They generate gains from interest payments and capital gains when acquisitions occur. The ability to selectively lend money to the right start-up companies with the potential to repay the loan or go public is paramount. With limited available financing options, the clients of BDCs are often willing to pay a high interest rate and give the BDC senior-level status on the debt as well as warrants in many cases, which add to the upside potential for the BDC investors. In return for these sometimes stringent terms, the borrowing SME can access the funds needed to increase its cash reserve; accelerate product development; invest in land, plant, and equipment to produce and bring products to market; hire staff; and purchase licenses necessary to advance R&D, etc. Thus, BDC funding can lead to company growth and innovation activity as well as job creation.

Factors of success

Investors, including institutional investors, can purchase common stock of the BDCs. This provides capital to make investments, alongside borrowings. Unlike venture capital or private equity funds, BDCs allow anyone to purchase shares in the open market; however, most of the investors and lenders in the BDCs have historically been major financial institutions. The objective is to attract investors who are interested in “investing in America’s growth” on a longer-term basis and not in trading their securities on a regular basis. BDCs also often negotiate revolving lines of credit from banks at low interest rates to leverage their capacity to increase their flow of capital to target SMEs.

Investments in BDCs are attractive to investors because they have the ability to generate regular and predictable double-digit current income and moderate capital gains with lower than average risk. As of 31 October 2010, the average yield on the universe of BDCs’ currently-paying dividends was over 9%. The BDCs invest principally in debt that is secured by liens on the operating assets of the borrower, including current (receivables and inventory) and fixed assets (plant, equipment and property), and is repaid by borrowers monthly or quarterly, thus entailing lower risk. BDCs lend to and invest in a diversity ofindustry segments from traditional manufacturers to distributors, to ICT and energy producers, and provide to their investors the opportunity to participate in a diverse portfolio of established middle market private companies that is secured by company assets.

Obstacles and responses

The performance of BDCs depends heavily on the internal health of the economy. A rise in interest rates, for example, can have a significant impact on BDC activity. As a result, BDCs have structures to minimise their interest rate risk. Approximately 60% of their assets are in floating-rate investments – as interest rates rise, the income of the BDCs will also rise. On the other hand, the majority of their liabilities have fixed-term rates, so if interest rates rise, they are not affected.

The BDC industry also confronts regulatory and other challenges as the SEC and Congress continue to propose new and amended laws and regulations that affect them. To help present a unified voice of the BDC industry with legislators and regulators, the BDCs have therefore formed the National Association of Business Development Companies (NABDC).

Relevance for Israel

The Israeli Ministry of Economy and Industry, Ministry of Finance and Securities Authority are exploring options for attracting more investment funding from pension funds, insurance companies and other institutional investors for the purpose of investing in the SME sector, through both debt and equity instruments. The BDC approach could allow the government to achieve this objective.

Further information

Small Business Investment Incentive Act of 1980 and “BDC Primer”, BDC Reporter: http://bdcreporter.com/bdc-primer/.

Box 5.5. The Small Business Investment Company (SBIC) programme, United States

Description of the approach

The Small Business Investment Company (SBIC) programme was created by the United States Congress in 1958, and is administered by the Small Business Administration (SBA) Office of Investment and Innovation. Its aim is to help small businesses raise the patient long-term capital (equity capital and long-term loan funds) they need for business modernisation and growth, which is not generally in adequate supply through banks or other private capital sources.

SBICs are privately owned and managed investment funds, licensed and regulated by the SBA to make equity and debt investments (with maturities of at least five years) in qualifying “small” businesses with a net worth of USD 18 million or less and average after-tax net income for the prior two years not exceeding USD 6 million. However, SBICs must commit to making 25% of their investments in “smaller businesses” defined as those with tangible net worth of less than USD 6 million and an average of USD 2 million in net income over the previous two years. In the past, about 90% of SBIC financing has gone to businesses with less than USD 5 million in net income.

The SBIC programme increases the overall supply of debt and equity finance capital in two ways. Firstly, licensed SBICs are able to access additional low-cost debt funds from the SBA, which they can invest alongside their own capital. The borrowings come from the sale of 10-year maturity SBA-guaranteed debentures to private investors through periodic public offerings. The availability of these funds can typically increase the total capital available for investment by the SBIC by two times (but up to three times the private capital in some cases) to a maximum of USD 150 million for a single SBIC and USD 225 million for multiple SBICs under common control. This SBA leveraging provides an incentive for more individuals and/or institutions to set up investment capital funds. For example, the investor with USD 5 million might receive up to another USD 15 million through the SBA funding mechanism. In addition, many SBICs do not have to make interest payments to the SBA for the money they borrow during the first few years of operation. In lieu of regular interest, the SBA will take up to 10% of the profits as they are realised. This alleviates the burden of paying interest on the SBA guaranteed loans while the SBIC invests in long-term opportunities. Secondly, investors purchasing shares of an SBIC are eligible for tax breaks and rollovers which make it attractive for them to invest in the SBIC funds.

SBICs fill the gap for SME financing in the USD 250 000 to USD 5 million range, which is generally too small to be of interest to other private equity firms. They are also required by regulation to provide management assistance to their client companies. Most SBICs focus primarily on providing small businesses with debt or debt with equity features (60% of SBIC financing in 2013 was in the form of loans, about 24% in the form of debt with equity features, and about 16% in the form of equity). SBICs are allowed to charge interest rates to their small business clients of no more than 19% on loans and no more than 14% on debt securities. SBICs will typically focus on companies that are mature enough to make current interest payments on the investment so that, in turn, the SBIC can meet its interest obligations to the SBA. Most SBIC funds are structured as limited partnerships that surrender their license after the SBIC repays its SBA-guaranteed leverage, typically 10‐15 years after being licensed. The private capital is at risk in its entirety before any taxpayer money is at risk.

The SBA uses a three-phase application and approval process to license SBICs. This can take upwards of 24 months: 45 days for review of the initial application; up to 18 months for the applicant to raise its capital base; and six months for the final licensing decision. Before it receives a license, an SBIC must prove that its management and directors are experienced individuals with a broad range of business and professional talents. In addition, it must raise between USD 5 million and USD 10 million in private capital, most of which comes from private investors, such as pension funds, insurance companies, high net-worth individuals, state development funds, or even commercial banks. The private investment company pays a USD 10 000 fee to the SBA when filing a licensing application, and an additional USD 5 000 for licensees structured as limited partnerships. When approved, the SBIC also pays a one-time up-front commitment fee of 1%, a 2% draw down fee each time it issues an SBA-guarantee debenture and a variable annual charge of around 1% of the outstanding leverage, paid semi-annually. SBICs have flexibility in determining how to operate, such as defining the investment value ranges they will serve, the preferred size of the loan or investment they choose to make, and whether to focus on certain industries or types of businesses. Once licensed, each SBIC is subject to annual financial reporting and biennial onsite compliance examinations by the SBA, and is required to meet certain statutory and regulatory restrictions regarding approved investments and operating rules.

SMEs access SBIC funding by submitting a detailed business plan, indicating their financing requirements and how the financing will be used. After due diligence performed by the SBIC, the SBIC negotiates the appropriate financing structure with the SME owner(s). Because SBICs are often interested in generating capital gains, they may prefer to purchase stock in the company or advance funds through a loan with conversion privileges or rights to buy stock at a predetermined later date; however, SBICs are prohibited from taking control of the companies in which they invest. Therefore, the interests of the SBIC and their clients are compatible, both want to grow and prosper. If the SBIC financing is provided to the SME in a subordinated position, it will often allow leveraging of other financing. Industry averages show that for every SBIC dollar placed with a small business, two additional senior dollars become available from commercial banks or other sources.

The SBA also issues special provisions for the establishment of Specialized Small Business Investment Company (SSBICs), which can access additional government financial assistance for the financing of higher-risk disadvantaged small businesses or small businesses in disadvantaged areas. Furthermore, the programme can be adjusted to meet emerging needs. A recent example is the new Early-Stage SBIC programme, launched in 2012, which committed up to USD 1 billion in SBA-guaranteed leverage over a five-year period to selected early-stage investment funds using the SBA’s debenture programme authorisation. The aim of this programme is to address the general shortage of venture capital for early-stage growth companies seeking financing rounds of between USD 1 million to USD 4 million, particularly those without the necessary assets or cash flow to secure traditional bank funding. If licensed as an Early-stage SBIC, the SBIC may receive SBA-guaranteed debenture leverage of up to 100% of their Regulatory Capital, to a maximum of USD 50 million for 10 years, and must invest at least 50% of their investment dollars in early-stage small businesses, defined as those that have never achieved positive cash flow from operations in any fiscal year.

Factors of success

The SBIC model is proven to support jobs and growth, filling a gap in SMEs’ access to risk financing between USD 250 000 and USD 5 million and building the private equity market. Since 1958, SBICs have invested almost USD 60 billion in 107 000 “small enterprises”. The businesses financed by SBICs have far outperformed national averages in terms of increases in sales, profits, assets, and new job creation and benefited from the money and management counselling made available to them by the SBICs. At the end of fiscal year 2014, there were 294 SBICs (including 30 new licensees in 2014) holding USD 22.5 billion under capital management (52.5% of which was private capital and 47.5% was SBA-guaranteed capital or commitments). In 2014, these SBICs invested USD 5.4 billion in financing in 1 085 small businesses, creating an estimated 107 912 jobs. Private investor returns are commensurate with private equity industry metrics due to the SBA leveraging. The programme is delivered at no cost to taxpayers.

The four major factors in the success of the SBIC programme are: 1) the well-defined SBA licensing process with early milestones which help potential SBIC licensees assess their likelihood of eventual funding; 2) allowing SBICs to access leverage funds from the SBA at low interest rates, which reduces fundraising burden and administrative/reporting requirements; 3) requiring the SBICs to provide expert management assistance to the client businesses, which results in improved performance of the portfolio of companies; and 4) annual regulatory audits of the SBICs by the SBA to ensure compliance with the SBIC regulation and monitor their performance against original estimates.

Obstacles and responses

The application process for being approved as a SBA-licensed SBIC is somewhat rigorous. Efforts have been made to streamline the licensing process, while still maintaining high due diligence and licensing standards. The SBA can now process the initial applications within two months, at which point the applicant will be advised whether the SBA has given a green light to proceed with the capital raising phase. The SBA has also reduced the approval time for SBIC requests for SBA leveraging.

In spite of the overall success of the programme, some SBICs have performed poorly. The SBA experimentation with a SBIC structure that provided for the SBA to purchase a form of senior equity security called a “participating security” in the SBIC, produced significant losses and turned out to be much more expensive than the government projected. After a thorough SBA review of the Participating Securities SBICs, the SBA decided in 2004 to discontinue their licensing and wind-down the programme. The files of poorly performing SBICs (SBICs are deemed to be poor performers when the losses incurred by a fund relative to its Regulatory Capital exceeds the maximum allowable as per the SBIC regulations) are transferred to the SBA Office of SBIC Liquidations in order to recover the leverage and minimise losses. These recoveries are critical to keeping the programme at zero cost to the taxpayer. In 2013, 5.3% of the USD 9 billion in leverage was being managed by the Liquidations Office.

Monitoring of the financial health and performance of the SBICs is critical. To improve the monitoring process, the SBA launched a new web-based system in 2013 to improve the collection of financial data and reporting, and also transparency and accountability. The SBA undertakes formal SBIC evaluations on a 12-month cycle for leveraged SBICs and on an 18-month cycle for non-leveraged SBICs. To ensure that all SBIC principals are aware of the SBIC regulations, they must complete regulatory training classes before being licensed as an SBIC.

Relevance for Israel

Israel needs more long-term non-bank financing alternatives to channel investment capital into the SME sector, such as from pension and insurance funds, and particularly directed towards SMEs in traditional, non-technological sectors. A model similar to the SBIC approach might be one to bring a systematic approach to escalating the amount of debt and equity capital available to early-stage and growth-oriented SMEs. In implementing a similar programme in Israel, the Ministry of Economy and Industry would likely need to adjust the definition of a “qualifying small business” to be more compatible with the Israeli context. Since the incentive structure for the SBICs is based on leveraging the investment fund through government-guaranteed loans to the SBIC and tax breaks for investors in the SBIC, these policy issues would have to be examined by the Ministry of Economy and Industry.

Further information

US Small Business Administration (2013), The Small Business Investment Company (SBIC) Program, Annual Report For Fiscal Year Ending September 30, 2013, Office of Investment and Innovation, (www.sba.gov/inv/).

SBA Office of Investment and Innovation: www.sba.gov/content/sbic-program-overview-2.

Small Business Investors Alliance (SBIA): www.SBIA.org; for SBIC Policy Guidelines, see: www.sba.gov/content/sbicpolicy/.

Innovation programmes

Israel Innovation Authority (IIA) programmes

The primary innovation-related government support programmes in Israel are offered by the IIA. The IIA, which replaced the Office of the Chief Scientist (OCS) and the Israeli Industry Centre for R&D (MATIMOP) in January 2016, oversees more than 30 programmes covering five main areas of activity: technology start-ups, technological infrastructure, growing companies, international R&D activity, and innovative R&D projects with technological and commercial feasibility. These programmes are supported with an annual budget of approximately NIS 1.5 billion. Estimates suggest that every NIS one million of R&D grants has led to an additional NIS 1.28 million of R&D investment by the assisted firms (Lach et al., 2008). The major interventions include the R&D Fund, the Magnet programme for university-industry R&D collaboration, and the Technological Incubators Programme. The IIA also operates a number of smaller R&D support programmes. SMEs and new start-ups can benefit from all of these programmes.

The R&D Fund

The R&D Fund supports industrial R&D by offering companies conditional grants of 50% of approved R&D expenditure for product or process development (rising to 60% of approved expenditure in the peripheral regions and to 85% for R&D projects approved from early-stage companies and entrepreneurs from Arab Israeli and Jewish Ultraorthodox populations). If a project is successful, the company must repay the grant through royalty payments. The annual budget of the R&D Fund is approximately NIS 1 billion. This is used to support approximately 1 000 industrial projects selected from approximately 2 000 applications per year. Projects are funded for one year at a time and have to report twice a year on their progress. Supported companies can apply for further funding in subsequent years to take their projects to the next stage.

Approximately 500 companies benefit from this programme per year, mainly in the fields of ICT and biotechnologies. In total, approximately 80% of the expenditure goes to SMEs. Approximately 50-60% of total funds go to companies with up to NIS 1 million in turnover (generally early-stage companies with limited revenue streams); a cumulative 70‐75% of expenditures go to businesses with annual turnover of up to NIS 20 million; and the remaining 18% to larger firms. The emphasis on SME support represents a change since the 1990s, when most of the funding was allocated to large firms.

Furthermore, the Manufacturer’s Association of Israel (MAI) reports that smaller firms find the R&D Fund application process quite difficult due to the time and knowledge required to apply, or the cost of hiring external consultants to assist with the application. Between 2006 and 2012, only 14% of industrial enterprises with 20-100 employees applied for R&D funding, compared to 53% of industrial enterprises with more than 100 employees (MAI, 2014). A special track of the R&D Fund has recently been established for “traditional industries (i.e. industries characterised by low investment in R&D), where consultation support is offered to companies applying for R&D funding for the first time. This type of assistance or a simplification of the application process from SMEs could also be considered for the mainstream funding.

It should be recognised that the R&D Fund is very much a programme for a selected group of R&D-intensive SMEs rather than for the larger numbers of less R&D-oriented SMEs that nonetheless have innovation potential. This target is captured in the definition of the eligible expenditures stipulated by the R&D Law (amended in 2016), which governs the activity of the IIA. This excludes the R&D Fund from investing in non-technological innovation (e.g. innovation in business, organisational and marketing models), support services or projects dealing with the management of innovation. Consequently, most of the innovation support goes to high-technology projects and businesses and largely excludes the development of innovation in traditional SMEs, except for the Traditional Industries Programme described under “smaller-scale programmes” below.

Today, there is growing recognition that business innovation goes beyond R&D and includes non-technological forms of innovation such as marketing and organisational innovations. For example, the OECD/Eurostat Oslo Manual defines innovation as “the implementation of a new or significantly improved product (good or service) or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (OECD/Eurostat, 2005). In this context, there is scope for the Israeli government to support non-technological innovation more proactively. The SMBA could be a key player implementing relevant non-R&D based innovation policies. Indeed, it already manages a few small-scale initiatives through the network of MAOF centres that promote design innovation in SMEs and consulting for SME innovation.

Magnet university-business co-operation programmes

University-business co-operation primarily falls within the responsibility of the Magnet programme of the IIA, which has an annual budget allocation of NIS 200 million across all its sub-programmes. The major part of the expenditure goes to the Magnet Consortia sub-programme, which supports pre-competitive collaborative R&D projects by consortia of Israeli firms working with researchers from at least one academic or research institution for joint projects on generic technologies potentially leading to new advanced projects. Magnet provides conditional grants to firms of up to 66% of the approved costs and to academic institutions of up to 80% of their approved costs, with the remaining 20% covered by the industrial partners. The projects have a life of 3-5 years. Many of the projects are run with the Technion-Israel Institute for Technology, a public university based in Haifa (see Box 5.6).

Box 5.6. Technion-Israel Institute for Technology, Israel

The existence of the Technion-Israel Institute for Technology, with its strong R&D and technological programmes, Knowledge Center for Innovation, and technological incubators, is a major contributor to Israel’s technological innovation performance. Technion has become a globally-significant centre of technology research and teaching with over 12 500 students and 80 graduate programmes and is a global pioneer in biotechnology, satellite research, computer science, nanotechnology, aerospace, and energy. The large number of graduates from Technion is one of the engines driving Israel’s high technology economy. Technion graduates account for over 70% of the founders and managers of high-technology companies in Israel, including almost half of those listed on the NASDAQ stock market (59 of the 121). Furthermore, 74% of managers in Israel’s electronic industries hold Technion degrees; 17% of Technion graduates work in (or worked in) start-ups; and a 25%, at one time, has initiated a business (Frenkel and Maital, 2012).

Source: Frenkel and Maital, 2012; American Technion Society, “Technion Global Impact”, www.ats.org/wp-content/uploads/2014/03/1.29.14Technion_Global_Impact.pdf; American Technion Society, “Technion Business Connection”, www.ats.org/wp-content/uploads/2014/03/8.30.13Technion-Business-Connection.pdf; www.technion.ac.il/en/fast-facts/.

Alongside the Magnet Consortia, there are a range of smaller programmes under the heading of Magnet. Magneton provides a grant of up to 66% of the R&D costs of an already existing relationship between a single industrial company and an academic institution. The Noffar programme provides a grant of up to 90% of the development costs to industrial companies for the transfer of academic research to an industrial application, especially in biotechnology and nanotechnology.

Overall, Magnet is an excellent example of industry-driven R&D support programmes based on fostering linkages between industry partners and academic research institutions and, although not specifically targeting SMEs, there is potential for SMEs to be involved in consortia projects.

Technological Incubator Programme

Another NIS 200 million is allocated to the Technological Incubators Programme. This was initiated by the Ministry of Economy and Industry in 1991 with the launch of 24 technology incubators. The initial impetus for the programme was to offer immigrants with scientific, engineering or technical backgrounds from Soviet countries the resources and financing they needed to develop early-stage R&D-based innovations and determine their commercial applications and market viability.

There are now 18 technological incubators in the network, spread across Israel, including 8 in peripheral regions.8 Their goal is to support new entrepreneurs at the earliest stages of technological entrepreneurship by providing assistance in determining the technical and marketing applications of their ideas, developing a business plan, organising a team, raising capital, and preparing to enter the market with commercially-viable ventures.

The technology incubators are now all privately-owned (since 2012) but in the context of public-private partnership arrangements. Through a call for tenders, the IIA issues incubator licenses to private operator companies that, once selected, receive a license for eight years to establish and operate an incubator. The incubator operators (largely technology development companies, and venture capital funds) provide advice, mentoring by industry experts (both from within Israel and globally), and networking opportunity to the start-ups that they host. In addition, they can submit grant applications to the IIA to co‐fund innovative projects in new start-up companies. Projects approved by the Incubators Committee can receive grants of between USD 500 000 and USD 800 000 (85% of this from the IIA and 15% from the incubator licensee). In exchange for investing 15% of the project funding, the licensee company can take up to 50% ownership of the incubated company, which is a great incentive for ensuring its success. Successful companies are required to repay the grant to the government (with interest) in the form of royalties of between 3% and 5% of the generated revenue. To encourage location of technological incubators in peripheral regions, the IIA offers the private sector licensees an additional USD 150 000 towards the operational costs of the incubator, and the incubated enterprises are eligible for extra financial support of USD 125 000.

The incubators are structured to accommodate 10-15 projects at a time with an incubation term for a project of about two years. Collectively, they host approximately 180 companies at any given time. In the past, as many as 40% of them have been medical device companies, 30% in ICT, 15% in clean technologies, 10% in biotechnology and pharmaceutics, and 5% in other areas such as machinery and materials.

From 1991 to the end of 2013, over 1 900 companies were admitted to the incubation programme, with 1 600 maturing and graduating from the incubators, 60% of which successfully raised venture capital. By the end of 2013, 35% of the incubator graduates were still in operation. The government investment over the 22 years totalled about USD 730 million and the amount of private investment in graduated companies exceeded USD 4 billion, i.e. for every dollar invested by the government in a tenant company, the company attracted another USD 5 from the private sector.

The Technological Incubator Programme is a success of Israeli innovation policy. Nonetheless, its incubators are primarily focused on high-technology start-ups and not on promising start-ups in non-technological sectors. The gap in provision of stimulating start-up environments for non-technology firms should be addressed by establishing a number of incubators for more traditional start-ups in the manufacturing and service sectors that are not necessarily high-technology driven, but which are nonetheless innovative in other ways. Incubation support provided to start-ups in traditional sectors can help advance their business models, improve their entrepreneurial and business management skills, and increase their growth potential. This is an area of work which could be taken up by the SMBA given adequate additional resources. The precise scale and nature of provision should be based on an assessment of the demand and the impact of the support on the economy.

Smaller-scale programmes

Another NIS 100 million is dedicated by the IIA to smaller-scale programmes. The Tnufa Programme is a pre-seed fund which assists individual inventors and nascent start-up companies in evaluating the technological and commercial potential of their innovation, preparing patent applications, building a prototype, preparing a business plan, etc. It provides grants of up to 85% of approved expenses up to a maximum of USD 65 000 per project. The Upgrade Programme covers 75% of the cost of up to 250 hours of consultancy to perform a diagnostic of the R&D possibilities for companies. The Mumad Programme encourages the transfer of technology from the defence sector through support to start-ups spinning out of large defence companies. Finally, the Traditional Industries Programme is a line of the R&D Fund created in 2005 to back continuous technological improvement projects in firms in typically low-technology sectors, such as textiles, plastics, auto parts, etc. It offers grants of up to 50% of R&D costs (e.g. for designing and introducing new products or production processes). In parallel, it can provide professional advice and parallel grants for activities such as foreign marketing, training and acquiring intellectual property.

The Traditional Industry Programme and the Upgrade Programme are particularly relevant to SMEs in non-high-technology sectors that could benefit from a diagnostic assessment of their innovation potential and assistance with implementing continuous improvement projects. Such additional support is needed because smaller and traditional businesses are often less equipped to manage the process of innovation. This often has to do with a lack of knowledge and skills of owners and senior managers to identify opportunities to improve the performance of their businesses (e.g. productivity, expansion, diversification) through innovation in products, processes and services. Classical, non-technology SMEs need a proactive nurturing approach to stimulate them to follow an innovation path and undertake R&D projects. Efforts of the Kibbutz Industries Association provide a good example of a successful initiative to build the capacity of traditional SMEs to engage in innovation activities and to meet the requirements for R&D support from the IIA (Box 5.7). A similar programme, working through a SME consortia approach and facilitated by the MAOF centres in partnership with industry and sector associations, could play an important role in helping SMEs develop an innovation mind-set and identify projects that could be supported by the IIA R&D programmes.

Box 5.7. The Kibbutz Industries Association – building capacity to manage the innovation process

The Kibbutz Industries Association (KIA) represents about 250 industrial companies, ranging from 20 to 2 000 employees, which operate on Israel’s kibbutzim1 and collective moshavim, mostly in peripheral areas. Kibbutz industry focuses predominantly on traditional manufacturing (e.g. agri-food, plastics, metal and machinery, rubber goods, chemicals for agriculture, textiles and leather, etc.). A decade ago the KIA resolved to encourage more proactively R&D activities among its members when it found that only 5 of its members were recipients of government-funded R&D grants. KIA’s member companies were first encouraged to identify their product improvement needs and then to apply to the Upgrade Programme offered by the Office of the Chief Scientist in the Ministry of Economy and Industry, where they could receive a subsidy of 75% to cover the costs of 250 hours of consulting time to perform a diagnostic of their R&D possibilities. Many of the KIA members that completed the Upgrade Programme continued by applying for the R&D Fund for funding to implement their R&D projects. Finally, the KIA provided networking opportunities for its members to share challenges and solutions related to their own innovation processes. Thanks to these efforts, approximately one-half of the KIA members are today engaged in innovation activity, mostly R&D-based.

The Kibbutz Industries Association (KIA) is also active in backing technology-based start-ups via a Fund aimed at start-ups which have gone through one of the Technological Incubators but are finding it difficult to become financially self-sustainable. The KIA Fund provides NIS 2-3 million to each start-up, with a target to support five per year. Finally, in 2014 the KIA launched another new Fund to encourage the development and use of advanced technology in kibbutz companies, including in agriculture. This new fund will support the creation of partnerships and the integration of businesses with innovative advanced technology that can be tailored to particular kibbutz businesses.

1. Kibbutz is a Hebrew word for “group” and refers to a voluntary democratic community in Israel where people live and work together on a non-competitive basis, founded on the principles of communal ownership of property, social justice, and equality. In 2010, there were 270 kibbutzim in Israel, their factories and farms accounting for 9% of Israel’s industrial output.

Source: OECD based on information provided by Kibbutz Industries Association (KIA) during the OECD study mission.

Start-up accelerators

Israel also has a growing number of start-up accelerators, totalling more than 200 in 2016, mostly focused on technology innovations. They are located in various parts of the country, but tend to be more prevalent in and around Tel Aviv, due to the high concentration of start-ups and venture capital funds, and areas with more concentrated innovation eco-systems. These accelerators target both start-ups at the idea stage and start-ups that have passed the proof-of-concept stage and can demonstrate a working prototype. They aim to fast-track entrepreneurs from idea to viable business plan or to fast-track their “market ready” product development. The assistance is generally provided over a period of three to six months depending on the accelerator. During their time on the programme, the participating entrepreneurial teams have access to co-working spaces, some seed-capital, business consulting, coaching and mentoring, opportunities to meet with potential investors, and linkages to markets. Some of the accelerators are initiated or funded by local authorities (e.g. the Create Tel Aviv accelerator is partially funded by the Tel Aviv Municipality and housed at a city-funded start-up work space), while others are driven by the private sector (e.g. the Microsoft Ventures Accelerator in Tel Aviv, the Citi accelerator for fintech start-ups, the IBM Alpha Zone accelerator, and the Sushi Venture Partners “Startupbootcamp” in Haifa) and higher education institutions (e.g. StartHub at the Academic College of Tel Aviv-Yaffo, Q-start accelerator at Al-Qasemi College in Baqa al‐Gharbiyye, and Zell Entrepreneurship Programme at the Interdisciplinary Center Herzliya). These developments are relatively recent but expanding rapidly, and building excitement and momentum around new innovative start-ups in a variety of locations.

The Israel Investment Centre

The Israel Investment Centre operates under the aegis of the national Law for the Encouragement of Capital Investment with the aim of increasing economic activity in peripheral regions by supporting capital investment (mainly plants and machinery) in the establishment or expansion of enterprises, creating jobs, and promoting innovation and productivity in these regions. The Investment Centre is an important player in the Israeli policy landscape, but its grants (up to 20-24% of the total investment cost) and tax incentives (reduced corporate tax of up to 12.5% depending on the priority of the peripheral region) for investing in the peripheral regions are primarily targeted at large companies rather than SMEs. In 2014, it invested NIS 1.33 billion in large companies (more than 100 employees), NIS 184.3 million in medium-sized companies (20-99 employees), and NIS 28.5 million in small companies (5-19 employees). Nonetheless, the Investment Centre has tried to reach out to SMEs more proactively in its programmes aimed at the integration of socially disadvantaged groups (Jewish Ultraorthodox, minorities, disabled people and single parents) in the workforce through the offer of generous wage subsidies in the range of 20%-27.5% of the total wage costs. It could also consider adjusting its selection criteria for investment projects in the peripheral regions to increase the emphasis on entrepreneurial and innovative projects and projects carried out by SMEs. In fact, in 2014, a particular emphasis was placed on support for investment projects demonstrating productivity-enhancing innovation and creation of higher-paying jobs. In the future, increasing emphasis should be placed on innovation as an eligibility criterion for this investment support.

Green innovation programmes

Israel has a long tradition in innovation related to natural resources, primarily water and solar energy, owing to the arid nature of large swathes of its land. A number of policy interventions can support SME innovation in this area. The Investment Centre, in collaboration with the Ministry of Environmental Protection, provides grants of 20% of the costs of investment projects directed towards cutting greenhouse gas emissions and improving energy efficiency. SMEs are eligible but not explicitly targeted. It also offers grants of between NIS 250 000 and NIS 750 000 (depending on the size of the company) to encourage manufacturers to connect to the natural gas grid as a source of energy diversification. The IIA earmarks some of its incentives to environmental-related R&D. It has also recently launched two technology centres devoted to water management and renewable energies in the Negev region. These centres bolster long-term collaborative research between industry and research organisations and have five-year budgets of NIS 35 million (the water management centre) and NIS 57 million (the renewable energy centre). Finally, the SMBA, in collaboration with the Ministry of Environmental Protection, carries out energy surveys of small enterprises consuming high energy inputs with the objective of identifying energy inefficiencies in the production process and proposing alternative solutions to lower costs and emissions.

Non-technological innovation programmes

Innovation policy in OECD countries increasingly stresses the importance of non-technological forms of innovation, such as marketing, design, organisational and managerial changes, alongside more traditional R&D-based policies. While Israel is a leader in R&D support for science-based sectors such as ICT, biotechnologies and nanotechnologies, it lags in its support for non-technological innovation, which holds the potential to embrace a wider group of firms and sectors. Non-technological innovation programmes are particularly relevant for diversifying traditional SMEs and increasing their productivity. Rather than focusing on supporting R&D projects to find path-breaking, new-to-market innovations, the emphasis of this type of programme is in supporting the typical SME to adopt new-to-firm technologies and managerial practices in areas such as marketing, e-commerce and workforce development, as well as to orient these SMEs to the concept of innovation management.

One of the two key actors in support for non-technological innovation in Israel is the Technion Knowledge Centre for Innovation. It offers training and consultancy to encourage managerial innovation in traditional industries through three main programmes: Moving Up, Moving Up-North and the Managing Innovation Forum. The first supports innovation in traditional larger SMEs through the establishment of groups of 7-10 managers who participate in a six-month programme that includes lectures on innovation, meetings to share experiences, and assistance from business mentors to plan and implement the innovation projects that they design for their companies. The second programme offers similar assistance targeted to smaller traditional SMEs in the north of the country. The third programme targets managers from both high-technology and non-high-technology SMEs who come together on a monthly basis to hear industry experts on the topic of innovation. In the forum, managers are exposed to models of innovation that have already been implemented in other Israeli companies and advised on how to orchestrate innovative processes in their own organisations.

The other key actor pursuing non-technological innovation is the SMBA. It has recently launched a tender process for the establishment of a social impact business accelerator aimed at encouraging innovation in traditional SMEs to be operated by a private-sector company with experience in business management support. The accelerator is expected to cater for promising companies with less than 20 employees, to last for five years, accommodate 10-20 enterprises per year, and be based on the principle of co-funding by the private-sector organisation winning the tender. The extension of business accelerator support in the country from its current focus on high-technology start-ups to support for existing SMEs with growth potential is in line with business accelerator practices in other OECD countries and responds to evidence that fast-growing firms can be found in any sector of the economy, including low-technology ones, with stronger proportional incidence in the services industry (OECD, 2013b). Further investment in business accelerators for existing non-R&D based SMEs with growth potential would help to improve SME productivity and growth in Israel more generally.

The SMBA also runs a small-scale programme (with an annual budget of NIS 2 million) to promote the use of industrial design in SMEs by providing consultancy and grants for new design and packaging (up to NIS 200 000 per firm and up to 60% of development costs). The SMBA also provides advice on innovation management to SMEs through its network of MAOF centres. It could strengthen its work in this respect by hiring specialised innovation agents, as done in Denmark, who should in principle be better able to provide innovation-oriented support than existing MAOF local officers who are not specifically recruited or trained for their innovation expertise but rather for their management consultancy capability more generally. Box 5.8 offers the example of the Innovation Agents programme in Denmark, which provides specialised innovation diagnostics and referrals to SMEs.

Box 5.8. Innovation Agents, Denmark

Description of the approach

The Innovation Agent programme was launched in 2007 as a pilot project in selected regions of Denmark and expanded to the whole country in 2010. Its aim is to strengthen innovation in SMEs through linkages with research organisations. In particular, a total of thirty trained Innovation Agents carry out a free innovation diagnostic analysis (the “innovation check”) of Danish SMEs and provide support towards the implementation of the proposed actions.

The basic approach of the Innovation Agent scheme is as follows:

  • SMEs are identified and contacted by the Innovation Agents, although SMEs can also request assistance from the programme directly or be referred to it by other business advisory services.

  • An Innovation Agent carries out an in-depth innovation diagnostic analysis of the small business based on a standard methodology and field visits with managers and relevant workers.

  • The Innovation Agent then submits a short report to the participant SME which summarises the main innovation-related challenges and opportunities and proposes possible solutions, including a list of relevant research organisations, external experts and public innovation support schemes which can contribute to the future innovation endeavours of the company.

  • The Innovation Agent can further support the implementation of the suggested actions by directly establishing contacts with relevant knowledge institutions or experts or by helping SMEs to apply for public support schemes.

  • Finally, the Innovation Agent carries out an assessment of the innovation diagnostic analysis to which participating SMEs are required to provide feedbacks.

Companies recruited in the scheme should fit with at least two of the following three criteria: 1) have at least 10 employees; 2) be at least two years old and have positive financial accounts; 3) have expressed an interest for knowledge-based support and show some innovation potential.

The Innovation Agent scheme is a joint project involving nine independent Danish research and technology organisations, with the Danish Technological Institute acting as the leader organisation. Funding comes from the Danish Council of Technology and Innovation.

Factors for success

The programme addresses many of the barriers to innovation experienced by SMEs, such as lack of knowledge about the innovation process, lack of capacity to undertake innovation, and limited awareness of external innovation services. Evaluations suggest that it has been successful in boosting innovation activities in Danish SMEs. Since 2010, more than 2 300 innovation checks have been carried out; more than 60%of participating SMEs have subsequently launched technological and non-technological innovation projects; almost 60% have established relationships with private or public innovation actors such as cluster organisations, private consultants, and universities; and as many as 85% state that they would recommend the scheme to other small enterprises.

A further key success factor has been the professional profile of the Innovation Agents, who are selected based on their ability to combine understanding of technology with knowledge of the small business modus operandi. This ensures that innovation checks and recommendations focus on delivering business value to SMEs in the form of improved competitiveness and increased sales/exports. Also, the formal association of the “Innovation Agents” programme with the highly respected GTS “Advanced Technology Group” (a network of nine independent Danish research and technology organisations) contributes to the programme’s credibility and attractiveness.

Obstacles and responses

A critical factor for the success of such a programme is the active participation of top-level managers in the innovation checks and their commitment to implementation of the recommended actions. This is why the Innovation Agent programme has a strong focus on ensuring that top-level management is sufficiently involved and supportive of the process, for instance by formally requiring the participation of SME managers throughout the whole process of the programme.

Relevance to Israel

A similar programme in Israel could promote innovation activities among non-R&D based SMEs as long as the innovation agents explore both the technological and non-technological innovation potential of participating SMEs. Moreover, the existence of MAOF centres already provides a platform from which innovation agents would be able to operate throughout the country.

Further information

Further information available at:

Source: OECD based on information provided by the Danish Delegation to the OECD, member of the Steering Group of the OECD Review of SME and Entrepreneurship Policy in Israel.

Alongside these initiatives, it would be appropriate to expand support for collaborative innovation in small non-high-technology firms, since these rarely have the resources to invest in long-term uncertain innovation projects on their own. The Innovation Networks programme from Denmark offers a good example of a network-based approach to innovation in SMEs (see Box 5.9).

Box 5.9. Innovation Networks, Denmark

Description of the approach

Innovation networks are defined by the Danish legislation as “a framework for cooperation, knowledge sharing and knowledge development between companies, knowledge institutions and other relevant players within a sector or a professional or technological area”. The programme was established in 2008, and there are currently 22 government-funded innovation networks covering fields such as medical technologies, energy, ICT, robotics, food processing, offshore oil, and the services industry.

A key feature of the innovation networks is that they provide both technological and non-technological innovation support to companies, i.e. they address managerial and organisational issues as well as product and process development. Furthermore, some of the networks are focused on sectors that are largely based on non-technological innovation. For example, one of the networks is entitled “Service Cluster Denmark”. It has 1 100 members and provides member companies with access to the latest knowledge in the field of innovation in services.

The approach to establishing the networks is as follows:

  • An open competition for funding is launched by the government;

  • National partnerships are formed and submit applications for government funding. The partnerships consist of research organisations, knowledge institutions and key actors such as leading companies, industry organisations, trade unions and regional or national authorities;

  • The winners of the competition are selected by the Danish Ministry of Higher Education and Science. Partnerships are chosen to be innovation networks only if there is considerable growth potential within the selected focus area. Moreover, there must be a significant target group of companies, and Danish knowledge institutions need to have substantial expertise in the area concerned;

  • The selected partnerships establish the secretariats of the innovation networks and launch their activities.

The main responsibilities of the networks are to implement knowledge dissemination activities, kick-start joint development projects and provide innovation services to SMEs, for example by helping them with applications for funding and support from other public innovation programmes.

The 22 existing innovation networks receive government co-financing (up to a maximum 50% of the total budget) for the period 2014-2018, while the rest of the funding comes from private companies, regional funds, etc. Companies also have to finance their own participation in the activities of the innovation networks and, in some cases, are expected to pay a membership fee. Public funding is therefore mainly used to cover the management costs of the networks.

Factors for success

In 2013, approximately 6 000 companies participated in activities organised by the innovation networks; two-thirds of them were SMEs. The 22 networks contributed to the introduction of innovations in 780 companies, a large majority of which (563) were small companies with less than 50 employees. The positive contribution of the innovation networks is also supported by an evaluation of cluster policy in Denmark, which showed how the probability to introduce innovations by “network companies” is four times higher than in similar firms which do not participate in networks (DASTI, 2011).

A key success factor has been the ability of the innovation networks to connect actors in highly specialised areas across different regions and clusters of Denmark. This makes it possible to exploit innovation and growth potential in areas where there is no critical mass of knowledge at the regional level. Moreover, the innovation networks have helped create a one-stop-shop for access to commercially-relevant knowledge in very specific focus areas, thus improving the functioning of the national innovation system.

Obstacles and responses

One of the main challenges has been increasing the internationalisation of participant companies and, in particular, establishing strategic collaborations between the Danish members of the networks and relevant companies or research institutions abroad. To do this, a separate organisation has been established to support the innovation networks with their internationalisation efforts, namely Cluster Excellence Denmark.

Relevance to Israel

In Israel there is a need to increase innovation support for the typical non-high-technology SME, in particular with regard to non-technological innovation. The innovation networks in Denmark support a broad range of SME innovation activities with networks focused on a range of specific technologies, industries or cross-cutting innovation themes such as service innovation. This broad and yet structured approach to innovation support ensures that Danish SMEs have access to technological as well as non-technological innovation.

Further information

Further information available at:

Source: OECD based on information provided by the Danish Delegation to the OECD, member of the Steering Group of the OECD Review of SME and Entrepreneurship Policy in Israel.

Another concern in Israel is that the domestic market is not benefiting enough from the high-technology development that is occurring in Israel. Israel’s high-technology enterprises focus almost exclusively on international markets and interactions with multinational corporations. Innovation support is not being used to promote productivity increases that could arise across a range of domestic sectors through the integration of new technologies and ICTs developed by these high technology enterprises within the country, for example, in the commercial and retail sectors. Greater emphasis on promoting the integration of these innovations in traditional enterprises would help address the productivity gap in the SME sector. For example, exchange forums could be organised to share knowledge on the high-technology developments coming out of Israel and their application in traditional SMEs. Consultants could be engaged to work with traditional SMEs in sector clusters to examine how these relevant new technologies could improve their production, operational and managerial processes.

SME internationalisation programmes

The Israeli government has developed a number of programmes that aim to address the barriers that SMEs tend to face in accessing international markets and supply chains in Israel and other OECD countries, including lack of staff skills, lack of knowledge of foreign market opportunities and foreign laws and regulations, and lack of working capital to finance export development activity (OECD, 2008, Adalya Economic Consulting, 2011). The Foreign Trade Administration (FTA) is the main government body responsible, complemented by the Israel Export Institute (IEI) and some export finance initiatives.

Foreign Trade Administration

The FTA, in the Ministry of Economy and Industry, runs programmes to develop linkages with foreign buyers, promote the participation of Israeli companies in international trade fairs, and foster international opportunities for Israel companies through trade agreements with other countries. It currently has a particular focus on the diversification of export products (to increase non high-technology exports) and of export markets (to increase sales outside of the tradition partners of the United States and the European Union). It assists approximately 1 500 companies a year, 90% of which are SMEs as defined by an annual turnover of less than NIS 100 million.

The FTA programme most relevant to SMEs is the “Smart Money” Programme, an initiative launched in 2014 to foster export growth of Israeli companies in international markets, with preference for entering China, India and Japan. This programme provides financial assistance and subsidised professional consultancy services to support companies in implementing their targeted marketing programmes, up to 50% of eligible costs, such as for market research, promotional materials, marketing activities in the target country(ies), and legal services. Funding is granted in collaboration with the Israel Export Institute (IEI), which provides coaching and mentoring support to the assisted SMEs.

On the other hand, one of the deficiencies of the “Smart Money” Programme is that travel costs of SMEs to attend international trade fairs, explore international markets or meet international buyers are not considered eligible for grant support. In many OECD countries, a common practice is for governments to offer a cost-sharing grant to SMEs to cover some of the travel expenses incurred for these purposes. This serves as an incentive for SMEs that may otherwise forgo the opportunity to explore and develop export markets. The FTA could consider amending its list of eligible expenses to include travel costs, which are a barrier especially to new and small exporters.

Two other significant FTA programmes for SMEs are the India-China Fund and the International Projects and Tenders Fund. The India–China Fund (budget of NIS 100 million) seeks to foster growth in Chinese and Indian markets by offering funding support of up to NIS 2.5 million over three years to help qualifying Israeli companies (with at least NIS 15 million in turnover) develop new marketing activities. Eligible costs include staff salaries, local consultancies, office space and the adaptation of products to the local market. If the company succeeds in the new market, it must pay back 100% of the funding support granted for marketing activities. From September 2011 to mid-June 2014, 63 of the 160 submitted applications had been approved, mainly from sectors such as medical devices, agriculture, software, telecommunications, water and energy. The International Projects and Tenders Fund provides grants of up to half of the costs related to preparing tender applications by Israeli companies in international projects. Grants cover eligible costs associated with conducting the project feasibility study and preparing the tendering documents and become repayable if the project succeeds (i.e. the grant converts to a loan).

Israeli Export Institute (IEI)

The IEI is an important partner of the FTA in providing assistance to export-oriented clients and collaborating in the organisation of international exhibitions for Israeli companies. Its activities include intelligence on foreign markets, market research, marketing counselling, courses and training on international marketing, assistance with meeting international standards and identifying local agents and distributors, and advice on trade agreements and logistics. In addition, the IEI Small Exporters Assistance Centre offers training, consulting and guidance for first-time and small exporters.

On the other hand, although the IEI offers export training, it tends to be in the form of one-off courses and seminars. A more comprehensive approach would consist in the development of activities along the different stages of export promotion, from awareness-raising events among groups of companies potentially interested in exporting, to export-readiness courses to instruct new and occasional exporters on how to export for the first time or expand export volumes, and advanced bespoke training for more experienced exporters. Consultancy and mentoring are common types of support for high-growth potential SMEs across a range of OECD countries such as Canada, the United Kingdom and Denmark (OECD, 2013b). Enterprise Ireland, the main government SME and entrepreneurship support agency, illustrates a good practice in addressing the export development needs of SMEs through a range of activities tailored to the different stages of export activity (see Box 5.10).

Box 5.10. SME Exporting Assistance: the case of Enterprise Ireland Programmes

Description of the approach

Enterprise Ireland runs a number of programmes to assist SMEs in developing export and internationalisation activity. To be eligible, SMEs should have 10-249 employees, be operating in the manufacturing and internationally traded services sectors, and have an established trading record. Funding awards are determined by the need for financial support for the project, potential employment and sales growth, previous funding provided to the company, and the company’s regional location.

The support offered spans the stages of regular Export Awareness seminars for potential exporters, Exploring Export workshops for pre-exporters, building the export skills and capacity of new and currently exporting SMEs, and supporting new and existing exporters to undertake market research on new export markets. Overall, there is a suite of programme support available with specific activities aimed at particular types of exporters and potential exporters. Some of the main programmes are discussed below.

Get Export Ready Programme

In 2011, Enterprise Ireland established a Potential Exporters Division and launched the “Get Export Ready” programme aimed at pre-export and early-stage exporting companies. The programme provides practical measures for new and early exporters focusing on export readiness, the importance of research, developing a value proposition and the skills of export selling. It offers workshops, seminars and training; mentoring support; access to market information; online access to “how to” guides, links to relevant information, and self-assessment tools and templates; access to a Get Ready to Export helpdesk; access to advice from successful exporting companies; and help with preparing an export plan, as well as access to a range of Enterprise Ireland financial supports. To promote the programme and encourage SMEs to explore an export path to growth, Enterprise Ireland also regularly conducts export awareness seminars in locations around the country.

First Flight Programme

First Flight helps first-time exporters and currently exporting SMEs manage the risk of entering new markets. The programme offers a systematic market-readiness assessment to help SMEs research, prepare and develop an export strategy. This programme is specifically targeted to high-growth potential start-ups that want to learn about the key factors that will contribute to the success of exporting activity and build their export development skills and capacity. Participating enterprises attend a full-day introductory workshop and are then matched to an experienced business mentor who will assist them in undertaking an export readiness assessment and the development of a First Flight Action Plan (i.e. export strategy). The workshops are offered at no charge, and Enterprise Ireland covers 100% of the mentor cost.

Market Access Grant

The Market Access Grant provides up to 50% of EUR 150 000 of eligible costs met by an SME to undertake an intensive six-month market research project to examine a new export market or the potential for introducing a new product or service into an existing export market. Eligible costs include salary costs of an employee placed in the market for up to six months, in-market consultancy fees and rent, and marketing costs up to the time of market launch.

Relevance for Israel

Israel does not have a cohesive array of programme support to proactively identify SMEs with export potential or with the potential to expand their existing export activity and provide them with the appropriate assistance. Based on the more systematic and programmatic approach of Enterprise Ireland, this could be achieved by delivering export awareness sessions on a regular basis to interest potential exporters, offering opportunities for SMEs to identify their export potential and develop their export-readiness, investing in the development of exporting skills and human resources within SMEs, followed by the grant support to develop their export plans and strategy, including the necessary market research, and to defray some of the costs for travel to international fairs and exploratory visits to targeted countries. Such an approach would enable Israel to better build a pipeline of new SME exporters.

For further information:

Export financing

Governments often offer loan guarantees to banks to stimulate lending to SMEs for foreign trade activities, given the high risks involved. Before 2012, Israel operated a loan guarantee fund specifically dedicated to exporting firms but, together with other two funds, this was merged into the SMBF as part of a strengthening of Israel’s loan guarantee activity in general. The SMBF no longer explicitly specifies that the guarantee can be used to cover export development activity, although it might qualify under the Working Capital Loan provisions. The issue of inadequate export financing for Israeli firms was fully explored by Horowitz-Reshef (2014) who recommended that the government implement a state guarantee programme for exporting activity. In lieu of another guarantee programme, the Ministry of Finance and the SMBA should designate “export financing” as one of the loan categories to be covered under the existing SMBF so that it is very clear to SMEs and programme managers that this is one of the intentions of the programme and so that take up for this purpose can be monitored.

Another policy tool that is important for the support of SME exporting is insurance to cover the risk of export transactions, especially with respect to payment defaults by foreign customers. In Israel, this is available through both public and private providers. The government is involved through the Israel Foreign Trade Risks Insurance Corporation (ASHRA). This is a government-owned company, backed by a state guarantee, which insures medium- and long-term export credit transactions (one to ten years) and investments abroad. The involvement of AHSRA helps to minimise political and commercial risks and increases the credibility of the exporter in dealing with its foreign customers. In addition to offering export insurance, ASHRA supplies exporters with professional information on the credit-worthiness of foreign customers and assists them with obtaining financing for transactions through the transfer of insurance policies to banks or by issuing guarantees directly to the banks. Private sector providers include the Israel Credit Insurance Company. However, there is no available data on the extent to which these providers meet the needs of new and small exporters.

SME workforce skills development programmes

Work-based learning is critical for developing initial occupational skills and deepening workforce skills, knowledge and abilities. However, while large firms tend to make use of a range of internally-organised training activities for their employees such as job rotation, learning and quality circles, self-learning and learning at work stations, the use of these approaches is generally much lower in SMEs, as is the frequency of apprenticeship placements in SMEs (OECD, 2013c).

In OECD countries, governments have typically sought to encourage workforce training in SMEs by offering financial subsidies to help cover the costs of training (e.g. in the form of grants or tax subsidies), offering publicly-funded advisory services aimed at identifying training needs and developing training plans and referring SMEs to appropriate training providers, and promoting national training standards that recognise the continuing professional development undertaken by employees. However, Israel offers little support for workforce skills development within SMEs. Examples of countries with important workforce skills development programmes of this kind include Korea, France and Ireland. This is an important potential area for expanded government support in Israel.

As a first step, developing a more formal framework for recognising workplace learning, with a common and unified set of qualifications has obvious advantages in upskilling the SME workforce because workers learn more and at a quicker speed if their training is workplace based. The workplace is the best place to gain exposure to soft skills development (e.g. dealing with customers) and working in peer groups and with mentors (Lerman, 2014). The benefits for SME employers are also clear. Workplace training allows employers to directly observe the capabilities and potential of workers, thereby easing recruitment decisions. It further eases information asymmetries because recognised qualifications can provide a high level of assurance about the skill levels.

A second step would involve providing advisory services to help SMEs understand the benefits of workforce training for their businesses and recognise their training needs. There is increasing policy emphasis internationally on peer learning for SME managers, often as part of broader SME development interventions. Box 5.11 provides the example of a local approach to workforce development in the United States which mixes financial assistance for apprenticeships in SMEs with the use of business advisors to help SMEs identify their training needs and adapt the provision of apprenticeship training by local colleges to SME needs.

Box 5.11. Apprenticeship Carolina

South Carolina has seen a dramatic increase in the involvement of its SMEs in apprenticeship programmes, with an increase of 652% in numbers of firms involved and a 600% increase in apprentice numbers between 2007 and 2014. By 2014 the 16 technical colleges in South Carolina have worked with more than 10 000 apprentices. The entry point for ApprenticeshipCarolina is often the offer of an annual USD 1 000 tax credit (for up to four years) for each registered apprentice taken on by the firm. In addition, an outreach programme has been critical to the success of the approach. This has sought to actively engage with the business community through a state-focused website (www.apprenticeshipcarolina.com) and the use of trained staff with a business background to connect with employers. The business advisors actively work with firms to help them diagnose their workforce development needs and help define ways that they can upskill their workforce. At the same time they work with teachers and lecturers in the technical colleges to help develop the content of traditional apprenticeship programmes (4 years) or for programmes that may only require a one year apprenticeship taking into the account of needs of local employers. Overall, ApprenticeshipCarolina shows that a small tax incentive and a proactive approach to engaging with firms can help increase the level of training in SMEs.

Source: Website of the South Carolina Technical College System: www.apprenticeshipcarolina.com.

The MAOF centres could trial a peer-learning programme for SMEs in Israel, in combination with a new financial subsidy programme, with a particular focus on favouring exchange of information on improving managerial practices in SMEs in low and medium technology industries. This would involve it in setting up private-led “communities of practice” in groups of SMEs for mutual learning and development. This could be self-standing or attached to other interventions.

A third step would be to support networking and clustering arrangements to allow SMEs to collaboratively work with suppliers, customers, training providers and the public sector in developing and implementing appropriate training provision. One example of this is the CME Manitoba consortia programme in Canada, which brings networks of 10-12 non-competing companies together to achieve improvements in business performance. Key to the process is SME learning circles, which involve participants in mentoring peers from other SMEs in the learning circle through presentations, discussions and site visits. CME Manitoba further supports these activities by training the mentors and acting as a broker between different learning circles to encourage the sharing of best practice.

Business diagnosis, advice and consultancy programmes

The main government business advice and consultancy support for SMEs in Israel is provided by the SMBA’s local MAOF centre network, although certain other government programmes include advice and consultancy for specific types of SMEs, for example exporters or firms hosted in technological incubators.

The first stage of the MAOF centre advice and consultancy support involves an in-house diagnostic analysis of client SMEs to identify their business development needs. Subsequently, firms are matched with an appropriate consultant in the SMBA database of approximately 850 external consultants across the country who can offer support on subjects ranging from starting a business through to exporting and environmental regulatory compliance. Firms can claim up to 60% of the consultancy costs. The amount of consultancy support that can be offered varies with the type of firm. Nascent entrepreneurs receive up to 10 hours of assistance, micro firms (1-4 employees) receive up to 20 hours, small firms (11‐50 employees) receive up to 100 hours, and medium-sized firms are eligible for up to 150 hours of consultancy support. The MAOF centres also provide signposting of SMEs to other government programmes that are relevant to their situation as identified by the business diagnosis and the request of clients.

The business advice and consultancy services available from the MAOF centres is nonetheless still fairly limited in scale and scope, despite recent growth in budget. The MAOF centre operational budget was NIS 200 million in 2015. This is substantially below the annual budget of NIS 354 million for capital investment in manufacturing for example (Bank of Israel, 2013). From July 2014-June 2015, the 35 MAOF centres nationwide provided business advice and support services to 25 000 businesses, including 11 500 self-employed entrepreneurs, 9 600 very small businesses, 1 900 small businesses, and 2 000 medium-sized businesses. A scaling up of the MAOF support should be considered, which could be based on an evaluation of the impact of the support provided on key objectives such as SME productivity, exporting and growth.

In addition, there is a need for greater diversity in the MAOF programmes. In particular, two additional advice and consultancy activities would be useful additions to the MAOF programme portfolio given appropriate budget provision. These are initiatives that are commonly provided in other OECD countries but not currently offered in a substantial way in Israel and that would sit best in the MAOF centre framework.

First, the MAOF centres could introduce coaching and consultancy services that are dedicated to growth-orientated businesses. This type of programme is increasingly offered in other OECD countries, based on evidence that high growth potential businesses – which are found in all sectors – are more likely than firms in general to create jobs and foster productivity growth (Storey and Greene, 2010; OECD, 2010). For example, five Danish “growth houses” were set up in 2007, one for each of the Danish regions. The aim of these growth houses is to target growth potential firms, regardless of age, sector, and ownership structure. Another example of the increased orientation in targeting support to growth businesses is given in Box 5.12.

Box 5.12. The Single Business Service and Entrepreneurs’ Infrastructure Programme, Australia

In 2014, the Australian government embarked on an AUD 484 million programme to target public support towards growth-oriented businesses. This is part of its wider AUD 1.4 billion programme to improve Australian business competitiveness. Support is in two forms: a Single Business Service which is a universal service available to all Australian businesses; and an Entrepreneurs’ Infrastructure Programme (EIP) designed to offer tailored and targeted services to growth-orientated businesses.

Description of the approach

Australian SMEs and entrepreneurs can access the Single Business Service through web-chat, by telephone or via an on-line form. The aim is to make information simple and easy for SMEs and entrepreneurs to use. Services offered include easy to access information on business relevant topics (e.g. start-up, finance, counselling for small businesses in difficulties, IT, licencing and regulation), signposting to other sources of support (e.g. training support through the Industry Skills Fund, a grant and loan finder, sources of financial counselling support) and a referral service that seeks to signpost eligible firms to the EIP.

The EIP focuses on three integrated streams:

  • Business management. This is available for established firms (three years old) that have a willingness to engage with change and have growth potential. Those that are successful are able to benefit from business growth evaluations from a network of more than 100 advisers from senior private sector management roles. These evaluations are conducted at the firm’s premises and result in a detailed report and recommendations for future improvements. Businesses can use these reports to aid applying for Business Growth grants (up to AUD 20 000 of matched funding) and access to dedicated workshops and learning events.

  • Research connections. Eligible SMEs (those that can demonstrate a need for research support from a research institution and can match government funding) can receive a brokerage services designed to foster links with research institutions. This can lead to up to AUD 50 000 of financial assistance to bring in outside research capabilities to the SME.

  • Commercialising ideas. New and existing businesses with a novel product or service that can be commercialised can apply for support designed to increase the visibility of their innovation, provide critical networking capabilities and facilitate the use of experienced and independent advisers. Such services may include coaching to develop presentation skills, facilitated and qualified introductions, linkages to markets and investors and the availability of matched funding of up to AUD 250 000.

Obstacles and responses

As with any new system of business support, there are obvious challenges in making growth-oriented SMEs aware of the Single Business Service and EIP. It is likely, at least initially, that these new pathways will have limited up-take. Another challenge is that the triaging system is dependent on the experience and training of the business advisers. UK experience of the Business Link service showed that poor quality of business advisers contributed to negative perceptions of the service and its ultimate closure (Sear and Agar, 1996).

Relevance to Israel

The EIP is an example of an intervention that targets growth-potential SMEs with a tailored package of coaching and consultancy services, matched finance and leveraging-in of outside business support. This type of intervention would support much needed growth and productivity increase in SMEs outside of high-technology sectors where such support is difficult to access in Israel. The EIP approach is particularly valuable because it focuses on providing an integrated pathway for growth-potential businesses, one that recognises that SMEs often require a mix of financial and business assistance services if it is to work.

Further information

Australian Department of Industry (2014a, b).

Second, the MAOF centres do not have an explicit objective or intervention for providing management advice for business restructuring situations, for example when a business is facing difficulties as a result of changing technologies, markets and competition or sudden shocks and needs to make quick changes to turn around. The Early Warning programme in Denmark is a good example of how the MAOF centres could help companies facing economic hardships to turn around and renew with growth or to close down in a managed way that minimises social and economic costs for business and its customers and other stakeholders (Box 5.13).

Box 5.13. The Early Warning programme, Denmark

Description of the approach

Early Warning is a national programme providing free, impartial and confidential counselling to Danish SMEs facing the risk of bankruptcy. Since 2007, the Early Warning programme has helped over 4 000 Danish SMEs to deal with severe economic challenges and helped keep alive about two thirds of these companies.

The purpose of Early Warning is: i) to help viable companies survive a severe slump and renew with growth; ii) to reduce economic losses for society, creditors and entrepreneurs by helping non-viable companies to close down quickly; iii) to promote an entrepreneurial culture and help recognise failure as a natural part of entrepreneurial endeavours; iv) to give bankrupt entrepreneurs a second chance by helping them to avoid unmanageable debt and loss of self-esteem so that they may start a new company within a foreseeable future.

The Early Warning organisation comprises 10 specially trained consultants collaborating with 15-20 insolvency lawyers and a group of approximately 100 voluntary advisers consisting of current and former directors of large corporations, owners of smaller companies, board members and chairpersons as well as a few professionals (accountants, lawyers, financial advisers, psychologists, coaches etc.).

The overall approach of Early Warning is as follows:

  1. The Early Warning organisation receives a request for help from a company owner facing a severe economic crisis.

  2. A consultant undertakes an initial screening of the company and provides an assessment of the economic situation and the future prospects of the company.

  3. If the company can be saved, one of the voluntary advisers will be assigned to the company to support a turn-around of the company.

  4. In case the future prospects are unclear or negative, Early Warning will organise a meeting with an insolvency lawyer to determine if the company can be fully or partially reconstructed, or if the company shall be closed/declared bankrupt.

  5. A voluntary adviser can be assigned to assist a bankrupt entrepreneur with economic and personal advice following a declaration of bankruptcy.

Factors for success

The experience with the Early Warning programme in Denmark is extremely positive. Two impact evaluation studies comparing participants in the Early Warning programme with a control group show that Early Warning companies that survive are capable of maintaining or increasing their turnover, employment and export. Moreover, the Early Warning companies that are declared bankrupt do so with less debt to the public sector such as unpaid income tax and VAT than the corresponding control group. Both evaluations find that the economic benefits of the Early Warning programme outweigh its economic costs (social considerations are not part of the evaluation studies).

The key success factor for the Early Warning programme is the group of voluntary advisers that bring with them the experience and skills needed to turn around companies going through a moment of difficulty. Furthermore, there is a strong focus in the Early Warning organisation on facilitating exchange of experiences and the joint development and testing of methodologies to assist in the best possible way the viable and non-viable companies in the programme

Obstacles and responses

One of the main challenges facing the Early Warning programme is that company owners facing difficulties often resolve to come only when problems have become almost unmanageable. As a result, many of the companies that could have been saved end up being closed down. Early Warning is currently exploring different approaches to getting in contact with companies at an early stage when their crisis is still relatively manageable. These efforts are expected to increase the future success rate of the Early Warning programme in Denmark.

Relevance to Israel

The MAOF centres do not currently advise on business restructuring for SMEs which are faced with economic hardships. However, this service could practically be provided by the same staff members responsible for the early diagnostic analysis of the strengths and weaknesses of client firms. In this case, however, before signposting to existing public programmes, firms which approach the MAOF centres with already-identified problems should be helped to find a path to long-term economic recovery, if necessary with the help of government-supported external consultants. Once back on their feet, these firms could then be signposted like any other firm to standard SME support programmes to help them renew with growth. This type of programme could also help reduce “fear of failure” in the Israeli population by showing that business failure is socially accepted and that bankrupt entrepreneurs are entitled to a second chance in their professional life.

Further information

Further information available at:

Source: OECD based on information provided by the Danish Delegation to the OECD, member of the Steering Group of the OECD Review of SME and Entrepreneurship Policy in Israel.

Alongside this more diverse programme offer, the MAOF centres should seek to better link their managerial support with the financial assistance available from other public programmes. In particular, the MAOF centres currently do not systematically link into the national loan guarantee scheme. Offering management support alongside finance would be beneficial, as shown for example by the evaluation of New Zealand Growth Services Range Programme where a combination of financial and business advice support led to higher sales growth in the targeted companies (Morris and Stevens, 2010). In addition, those SMEs that do not receive loan guarantee assistance from the SMBF could be automatically re-directed towards the business consulting and signposting services offered by MAOF for alternative support.

SME public procurement programmes

Government support for the access of SMEs to public procurement contracts has the potential to increase public sector supplier diversity, enhance competition and generate economic development benefits, including encouraging large firm led supply chain firms to work with their smaller suppliers. Public procurement programmes generally aim to help SMEs overcome specific barriers that they often face in accessing and winning public procurement contracts, namely obtaining information about tender opportunities, developing skills to write tender bids, meeting eligibility criteria if public tenders specify requirements in terms of business size or experience, meeting proportionally higher fixed-costs in relation to the preparation of tender bids, and in some cases meeting the quantity and quality requirements of the tendered contract.

The OECD estimates the scale of government procurement in Israel at 15% of GDP, compared with an OECD average of 12% (OECD, 2013d). Central government purchasing is led by the Accountant General, but there are more than 300 procurement units in government departments at the national and local level, around 160 000 suppliers and 700 000 procurement activities conducted each year in Israel (Bezalel, 2013a). SMEs in Israel have free access to information on public tenders either from newspapers or online websites, while the existence of provisions for the cutting of bids into smaller lots reinforce the chances of SMEs winning public contracts (Bezalel, 2013b). However, Israeli SMEs suffer from most of the other barriers motivating SME public procurement programmes in other countries. These include requirements in the Mandatory Tender law (5752-1992) that often stipulate that the tenderer must be of a certain minimum size or have particular experience in an industry.

One approach to increasing public procurement from SMEs is the use of set-asides, i.e. policies that earmark a certain volume of public procurement contracts to SMEs. Israel does not operate set asides for small businesses or new businesses. This is in contrast to various other OECD countries (e.g. the United States, the Netherlands, Mexico and Slovenia) where there are clear targets for the involvement of SMEs in public tenders. In the USA, for example, the Small Business Administration has set-asides that reserve 23% of direct contracts and 40% of subcontracts to SMEs whilst in Mexico there is a set aside of 50% of the volume of low-value contracts (OECD, 2013d). In Europe, such set-aside quotas are not permitted by competition regulation but some governments have set explicit targets. Set-asides or targets for the value or volume of contracts from SMEs or new and young firms could be introduced as an important part of the public procurement policy framework in Israel.

Another potential policy tool that is currently lacking in Israel is a well-developed system of e-procurement. This would facilitate the access of SMEs to procurement opportunities by reducing the bureaucracy and fixed costs associated with the public tendering process. The case of Korea (Box 5.14) illustrates how the complexity of the tendering process can be reduced to support SMEs. International evidence also suggests that small enterprises are more likely to apply for and win small-sized contracts (PwC et al., 2014), and these are often tendered by local municipalities. Thus, there is scope for the national government to set the example by launching an e-procurement system which can subsequently be integrated by local authorities posting their own tenders.

Box 5.14. The Korean On-line Procurement System (KONEPS)

The KONEPS is an integrated e-commerce marketplace that has given Korean SMEs increased access to public procurement. All public tender notices are published on KONEPS, which uses an integrated system of e-bidding, e-ordering, e-contracting and e-payment. It is used by 45 000 government agencies and 244 000 registered businesses. In 2012, 66% of all Korea’s public procurement budget of USD 100 billion went through KONEPS. The advantages of the system to Korean SMEs is that it allows information to be swiftly accessed, eases searching of tender opportunities and reduces administrative transaction costs. To support awareness of KONEPS, the government runs nationwide training sessions, has a web-based call centre and markets the service to both government departments and SMEs. This has led to an estimated USD 6.6 billion in transaction cost savings to the private sector. Because the system offers end-to-end functionality and an online market place where sellers and buyers can come together, the number of SMEs involved in KONEPS doubled over the last decade and the SME share of the online market place for government goods increased from around one-quarter in 2006 to three-quarters by 2010.

Source: Seo, K. (2013).

Additional components of an effective system to promote public procurement from SMEs may include training and support to government procurement officers in how to ensure that their procurement processes are open to SMEs and on-line guidance for SMEs in the form of a step-by-step guide for contracting with the government.

Support for social target groups9

The main Israeli programme in support of entrepreneurship by disadvantaged and under-represented groups is the Initiating a Business programme, which is managed by the SMBA and delivered through the MAOF centres. The programme was inherited from the MATI system, which saw the participation of 7 000 individuals from groups such as the unemployed, seniors (older than 45 years old), Ultraorthodox Jews, the disabled and new immigrants in 2013. Activities in the programme include 56 hours of theoretical and practical training in how to set up a new business followed by up to 20 hours of external consultancy support to help make the business sustainable. Although not formally evaluated, SMBA survey evidence suggests that 30% of participants have gone on to open a business after they have completed the course. In addition, the SMBA works with the Joint Distribution Committee of Israel to deliver workshops for Ultraorthodox Jews and disabled people in order to prepare them for entry into the “Initiating a Business” programme.

Other Israeli ministries also offer small-scale targeted support. The Ministry of Immigrant Absorption offers new immigrant entrepreneurs training and access to a loan of up to NIS 125 000 to start a business. The IIA has launched a dedicated scheme for Ultraorthodox Jews looking to develop a high-technology business that offers up to 200 hours of subsidised mentoring together with an underwritten loan of up to NIS 2 million. There are also examples of relevant programmes from non-governmental actors. These include for example the “We Dream” programme of StarTau, the entrepreneurship centre at Tel Aviv University, which delivers training and provides network opportunities for women techno-entrepreneurs, or the Sunbeam programme for young entrepreneurs (see Box 5.15).

Box 5.15. The Sunbeam programme, Israel

Supported by the Safra Foundation, the Sunbeam programme offers young people (20‐35 years old) support to set up a business or develop a young business (under one year old). The programme provides training support to help them with their business plan; consultancy support to develop their business; and workshops and seminars to improve their business network. In addition, Sunbeam has 400 voluntary mentors who provide advice and assistance to young entrepreneurs and guidance and support on accessing financial loans from organisations such as the KIEDF micro loan fund. Young entrepreneurs are able to access cheap loans of up to 90 000 NIS, repayable over a five year period. Data collected by Sunbeam suggests that it has supported the development of more than 1 000 new businesses in Israel which has led to the creation of 3 000 new jobs, largely in Israel’s peripheral regions.

Source: www.edmondjsafra.org/general-philanthropy/keren-shemesh-israel; www.ksh.org.il, http://en.ksh.org.il/entrepeneurs/become-a-keren-shemesh-entrepeneur/.

Although these are good examples of inclusive entrepreneurship programmes, there are still challenges in increasing the scale and uptake of the services. For example, specialised support for Ultraorthodox Jews is still in its infancy. This is likely to require an increased emphasis in the future given both the challenge of increasing the labour market participation of this group in appropriate ways, including entrepreneurship, and the increasing weight of Ultraorthodox Jews as a proportion of the Israeli population. Another pressure stems from ageing of the Israeli society, which is likely to make senior entrepreneurship more relevant in the future given that older people have a stronger tendency than other population groups to participate in the labour market through running their own businesses. Many OECD countries have already launched programmes which equip seniors with the skills and knowledge to launch second careers in entrepreneurship that could provide models for Israel (see OECD/European Commission, 2012; OECD/European Union, 2016). For instance, in Belgium the non-profit organisation NEOS runs a Start50+ programme with financial support from the Flemish regional government that offers free coaching to seniors interested in launching their own business.

More could also be done in Israel to strengthen the sustainability of businesses started by people from disadvantaged and under-represented groups in entrepreneurship by integrating business advice with financial support (OECD/European Union, 2015). Business advice and assistance alone, in fact, are unlikely to be sufficient to solve undercapitalisation problems commonly affecting businesses run by entrepreneurs from deprived social groups, who are often financially constrained. Under-capitalised businesses are more likely to fail. This has made the combination of soft loans and grants with training and advice a common approach to supporting entrepreneurship for social target groups (Botti and Corsi, 2011). In addition, the sustainability of supported businesses can be increased by continuing support provision after the immediate start-up event. Box 5.16 gives the example of an integrated approach to backing youth entrepreneurship in France. In the case of Israel, a financing component could be integrated into the Initiating a Business programme.

Box 5.16. Créajeunes, France

Description of the approach

In response to youth unemployment in France, Adie (the Association pour le droit à l’initiative Economique [Association for the right to economic initiative]) set up CréaJeunes to meet the entrepreneurial aspirations of young people from poorer backgrounds. The initiative is designed to help young (18 to 32 year old) disadvantaged people in France to set up a sustainable business.

CréaJeunes recognises that unemployed and disadvantaged young people often have ideas and commitment but lack experience, business skills and finance to be able to set up their own businesses. To support these ambitions, an integral part of the programme is six weeks of group training (for groups of 5-10 young people) that consists of: a personal development module designed to develop personal skills (e.g. public speaking, confidence building, time management, IT skills); a business start-up module (e.g. market research, selling); and three other modules that focus on the legal, accountancy and finance issues involved in business start-up and development. Subsequently, participants are offered the support of a volunteer coach who is available to meet with them (usually once a week) for two to four months to discuss their business ideas and to deal with issues that may arise over the start-up period. CréaJeunes participants are also offered the potential to access financial support through a EUR 1 000 bonus, the micro-loans available from Adie and financial support from other funders. This post start-up support can last for up to 18 months.

Some 58% of participants are under 26 years old and 46% are women. Many are also in receipt of unemployment benefits or other social security payments. The programme has expanded since 2007 to over 20 French cities. Survey evidence collected by Adie shows that CréaJeunes has helped more than 5 000 young people, with a third going onto create a new business, a third finding employment and the rest either in training or continuing with their business project.

Factors for success

One of the key success factors of CréaJeunes is that it provides an integrated package of support combining business advice, training, life skills coaching and support in accessing start up finance. Another important feature is that CréaJeunes support is available over up to 18 months after business set-up. This longer-term support is designed to tackle the problem of early failures from under-resourced start-ups. The design of CréaJeunes benefits from the Adie NGO’s previous experience of operating a suite of similar programmes to support micro businesses (0-9 employees) in rural communities and deprived urban areas and among unemployed adults. Cost efficiency is also achieved by providing a proportion of financing as quasi-equity loans (“loans of honour”) and reimbursable advances alongside straight start-up grants.

Obstacles and responses

One of the challenges addressed by the CréaJeunes programme is that it seeks to provide business advice and assistance to young people from “hard-to-reach” populations where experiences of multiple disadvantage are common. It may be very difficult for disadvantaged young people to access relevant other sources of support. CréaJeunes seeks to support young people with business advice and assistance but this may not be enough without access to other social services support.

Relevance to Israel

There is a need to support entrepreneurial aspirations amongst entrepreneurs from socially disadvantaged groups in Israel to increase labour market participation and deal with demographic challenges. CréaJeunes shows that an offer of business and life-skills training and microfinance can support disadvantaged young people to successfully enter the labour market by starting businesses. CréaJeunes is also notable because it offers support over a longer time period. While such support can be costly, there is evidence that such interventions can increase the chances of disadvantaged entrepreneurs such as the unemployed being able to create wealth and jobs in their own community (Caliendo and Kritikos, 2010).

Source: www.adie.org/sites/default/files/links/Dossier_presse_campagne_jeunes_2013.pdf, Buron (2011), Crépon et al. (2014).

Conclusions and policy recommendations

Israel has many examples of successful national support programmes for SMEs and entrepreneurship. However, there is also significant variation across the SME and entrepreneurship programme areas in the extent to which programmes exist that would be relevant to meeting SME and entrepreneurship development needs and there are some significant programme gaps to fill.

There are particular strengths in existing programme interventions for entrepreneurial financing, innovation, and internationalisation, although there are nevertheless some potential areas for improvement even in these intervention areas.

In financing support, the loan guarantee programme, the SMBF, has been revamped with expanded resources and streamlined management, the government is active in supporting microfinance institutions and it also played the decisive role in triggering the creation of Israel’s venture capital industry. The interventions could nevertheless be strengthened in certain ways to reach more entrepreneurs and fill gaps in the types of financing offered, including increasing the numbers of businesses reached by the loan guarantee scheme (including start-ups), expanding the coverage of microfinance initiatives to other needy parts of the population alongside women, expanding venture capital and business angel activity to sectors outside of high technology and R&D-based activity, promoting appropriate finance sector innovations (e.g. loan securitisation, crowdfunding and special vehicles to attract institutional investors into SME financing), and providing related training and business development services to clients supported or rejected by public finance initiatives.

Innovation support is a widely recognised success story of Israel thanks to its comprehensive support of business R&D across the different stages of the business lifecycle. The IIA in particular offers several high-quality programmes, which include a range of grants to R&D and R&D collaboration and a technology incubator programme. However, to some extent, Israel has been victim of its own success in R&D support and has neglected the potential of non-technological innovation for productivity gains in traditional SMEs. This could be addressed by supporting innovation grants, external knowledge inputs and collaborative innovation, and incubator and accelerator services for non-technological SMEs and start-ups and by increasing the focus of the investment centre subsidies on entrepreneurship and innovation.

In the area of support for internationalisation, the FTA and IEI run exporting programmes that are open to SMEs, including funding for export development, coaching and mentoring and export training. On the other hand, it is not always easy for first-time exporters and small exporters to access this support.

While, overall, programme support is relatively strong in the areas of financing, innovation and internationalisation, there are some bigger gaps in programme provision in the areas of workforce skills development, advice and consultancy, public procurement and support for needy social target groups.

One of the most important gaps is in the area of workforce skills development. The main issues concern the lack of a uniform qualification framework for recognising workplace-based learning, limited advice to SMEs on their training needs, and limited financial subsidies for SMEs for training purposes.

In the area of business advice and consultancy, the new MAOF centre network provides important support to SME management through its company diagnostics and its specialised consultants. The budget for these activities is nonetheless low compared with other areas of programme intervention and it remains a modest programme following its revamp, with a very restricted number of SMEs that can be reached compared with the vast SME population. In addition, there are certain relevant types of advice and consultancy that are not provided by the MAOF centres, such as peer learning, and dedicated support for high-growth companies, or support for business restructuring. There is also scope for increasing the integration between MAOF services and financial support programmes, which would provide a way of reinforcing the funding and take up of MAOF services as well as better supporting SMEs. Finally, the MAOF approach is essentially one that focuses on counselling services rather than direct consultancy intervention, and there is a need in the long run to consider whether a shift towards consulting services targeted at business development and growth could provide better benefits to the taxpayer.

There is also potential for increased action to promote SME procurement. Unlike many other OECD countries, Israel does not make significant use of SME set-asides or targets in terms of the value of purchases that should come from SMEs, and there is not a well-developed e-procurement system. Furthermore, there is not yet a programme of training for public procurement officials in making their systems and approaches SME‐friendly.

Support for needy social target groups is relatively small in scale. It is also relatively focused on combatting social exclusion by helping potential entrepreneurs to start businesses rather than helping entrepreneurs to sustain or grow their business. In particular, there are opportunities to upscale support to people from disadvantaged and under-represented groups in entrepreneurship, by expanding existing programmes and replicating them for other groups, and by creating pathways by which they can better access mainstream financial support and advice.

Based on the analysis brought forward in this chapter, the following policy recommendations are offered to strengthen the existing offer of SME and entrepreneurship support programmes:

Key recommendations on national SME and entrepreneurship support programmes

Finance programmes

  • Increase the share of the SMBF resources allocated to loans for new businesses through introduction of quotas, adjustment of coverage ratios for new businesses and training and financial literacy work with start-ups to increase the quality of their proposals.

  • Introduce greater flexibility in the SMBF to facilitate a more staged approach to lending whereby the loan size increases and the interest rate decreases as the bank and the SME client develop a relationship of mutual knowledge and trust.

  • Reinforce the provision of microfinance and associated soft support such as training and business advice by fostering the expansion of NGOs currently active in this market and/or creating a government micro-enterprise loan fund combined with training and business advice.

  • Provide additional incentives for venture capital funds and private equity firms to invest in non-high-technology growth-oriented enterprises or, alternatively, supply the initial capitalisation for a new seed/venture fund for this purpose based on the principle of matching public and private sector funding. The two private equity funds that will start operations in 2016 are good models for a broader intervention.

  • Encourage business angel investment through the development of regional business angel networks, support of investment-readiness programmes for new entrepreneurs who could benefit from angel investment, and launching a state matching fund to stimulate angel investment in non-R&D based start-ups and early-stage SMEs.

  • Support the diversification of finance sources and instruments for SMEs and entrepreneurship, including through setting up alternative finance mechanisms such as Business Development Companies and legal and support frameworks for SME loan securitisation by which institutional actors such as pension funds and insurance companies can invest in SMEs. Design incentives so that institutional investments are channelled to SMEs in traditional industries as well as high-technology enterprises.

  • Boost MAOF centre activities for strengthening the financial literacy skills of SME owners, such as offering referrals to financial consultants in the MAOF centre database, focusing on their ability to prepare bankable proposals and understand credit access practices.

Innovation programmes

  • Facilitate the transfer of technology developed by Israeli high-technology companies and R&D centres to domestic SMEs to improve their productivity. This could be achieved by the creation of intermediate technology institutes that make technical expertise and facilities available to SMEs that do not have the resources to develop in-house R&D, creating exchange forums to share knowledge on the high-technology developments coming out of Israel and their application in traditional SMEs, or engaging consultants to work with traditional SMEs in sector clusters to examine how these relevant new technologies could improve their production, operational and managerial processes.

  • Create a fast-track lane in the IIA R&D Fund to simplify the application process for SMEs with smaller R&D projects.

  • Establish closer co-operation between the IIA and the SMBA so that the MAOF centres, which are managed by the SMBA, can become local entry-points for SMEs interested in using the R&D incentives of the IIA. This could include MAOF support to SME consortia to develop an innovation mind set and identify projects that could be supported by the IIA R&D Fund.

  • Encourage the Israel Investment Centre to increase the share of its budget for capital investment in SME-led projects by reducing eligibility requirements as to export and turnover thresholds for its subsidies.

  • Establish incubators and accelerators for more traditional start-ups and existing SMEs in the manufacturing and service sectors that are not necessarily R&D-driven, but which are nonetheless innovative in other ways.

  • Provide more funding and technical assistance (awareness raising, mentoring, counselling, etc.) for non-technological innovation (e.g. design, marketing, organisational approaches, and innovation management) in SMEs.

  • Strengthen the MAOF centre advice on innovation management to SMEs by hiring specialised innovation agents.

  • Expand support for collaborative innovation in small non R&D-based firms by supporting networks of SMEs for innovation activity.

  • Continue support for the greening of the economy by encouraging more SMEs to join the natural gas grid and re-launching the Investment Centre’s greenhouse gas reduction programmes.

Internationalisation programmes

  • Design a more comprehensive approach to export training and advice for SMEs including awareness-raising events among SMEs potentially interested in exporting, export-readiness courses to instruct new and occasional exporters on how to export for the first time or expand export volumes, and advanced tailored advice for more experienced exporters.

  • Adjust eligibility criteria for export programmes to facilitate participation by new and small firms with exports worth less than NIS 1 million (approximately USD 250 000) and make travel costs eligible for new and young firms to attend international trade fairs, explore international markets or meet international buyers.

  • Launch a new dedicated programme for SME export promotion combining financial support with advice on exporting, export logistics management and adoption of digital infrastructures conducive to e-commerce.

  • Keep the MAOF centres up-to-date about the various export promotion tools that the government provides through the FTA and the IEI and ensure that MAOF centres hire experts in exporting among their consultants and mentors.

  • Introduce a more formal approach to backing the creation, operation and expansion of export consortia in Israel in order to spread the benefits of government funding among larger numbers of exporting firms and to foster the transfer of export-related knowledge among consortia members.

  • Designate “export financing” as a specific loan category under the SMBF to ensure that firms can use state-backed loan guarantees when applying for bank loans to finance their export activity.

Workforce skills development programmes

  • Set up a publicly-funded advice and brokerage service to increase the awareness of SME managers about the advantages of workforce training, develop training plans for SMEs, and refer SMEs to appropriate training providers, potentially as part of MAOF centre activities.

  • Pilot a financial incentive scheme (such as a voucher, grant or tax subsidy) to assist SMEs in engaging professional training providers for workplace-based training.

  • Expand the support offered by MAOF centres to include organisation of in-company workforce training packages for SMEs.

  • Promote national training standards that recognise the continuing professional development undertaken by employees.

  • Support networking and clustering arrangements to allow SMEs to work collaboratively with suppliers, customers, training providers and the public sector in developing and implementing appropriate training provision.

  • Pilot an approach to peer learning in SME management development by setting up private-led “communities of practice” brokered and supported by MAOF centres, based on the idea of SME learning circles through which SME managers can advise and mentor peers.

Business diagnosis, advice and consultancy programmes

  • Scale up the budget and activities of the MAOF centres for business diagnosis, advice and consultancy services with a particular emphasis on providing more support to SMEs with strong growth potential and expanding the range of services offered to cover significant niche areas that do not get adequate attention.

  • Introduce dedicated and tailored coaching and consultancy services for growth-orientated businesses in MAOF centre activities.

  • Introduce a management advice and support programme to help companies requiring business restructuring either to turn around or to close down in a way that reduces social and economic costs for the entrepreneurs and their customers.

  • Consider strengthening the specialisation of MAOF staff by creating two tracks, one for manufacturing and one for services firms, reflecting the different development challenges of these two types of SMEs.

  • Better link the managerial support of the MAOF centres with the financial assistance available from other public programmes. As part of this, ensure that those SMEs that do not receive loan guarantee assistance from the SMBF are automatically re-directed towards alternative support from the business consulting and signposting services offered by MAOF centres.

Public procurement programmes

  • Develop online guidelines for SMEs in the form of a step-by-step guide for contracting with the government.

  • Implement a national e-procurement system in order to simplify administrative procedures for businesses to reduce the comparative disadvantage of SMEs in accessing procurement opportunities.

  • Collect data on the number and volume of public procurement contracts awarded to SMEs to ascertain whether SMEs have fair access to public procurement, making use of set-aside quotas or targets for the value of contracts from SMEs if they are found to experience discrimination.

  • Provide training and support to government procurement officers in how to ensure that their procurement processes are open to SMEs.

Programmes to support entrepreneurship in specific social target groups

  • Launch additional specialised support programmes for self-employment and entrepreneurship for people from disadvantaged and under-represented social groups in entrepreneurship, including youth, women, Arab Israelis, and Ultraorthodox Jews.

  • Develop more comprehensive interventions for these groups, which integrate training and business advice with financial assistance and offer some follow-on support after the immediate start-up event.

References

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Notes

← 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. Data provided by the SMBA. 95% of the applicants were small businesses with less than 20 employees.

← 3. The median coverage rate among 76 schemes studied by the World Bank was 80% (Klapper et al., 2008).

← 4. “Cognito Capital and Peninsula Chosen to Establish Growth Capital Funds for Investment in Small and Medium-Sized Businesses: Total Investment NIS 1 billion”, Press Release, 1/4/2016, Ministry of Economy and Industry.

← 5. “Bennett: New angels law is world’s most daring”, GLOBES, 16 July 2014. Online at: http://globes.co.il/en/article-bennett-new-angels-law-is-worlds-most-daring-1000955499.

← 6. Target companies are Israeli private companies in which 75% of the investment amount must be used for R&D expenses, the R&D expenses must in each year covered by the investment comprise 70% of the overall expenses of the company, at least 75% of the R&D expenses must be expended in Israel, and the company’s revenue cannot exceed 50% of the amount of its R&D expenses in the year of the investment and in the following tax year (Ministry of Finance, 2012).

← 7. The Committee included the Bank of Israel, the Israel Securities Authorities, the Ministry of Finance, the Ministry of Justice and the Israel Tax Authority.

← 8. Dataon Israeli incubators Israeli incubators are from www.science.co.il/Technology-Incubators.asp/.

← 9. Programmes for the Israeli Arab minority are discussed at length in the specifically dedicated chapter of this report.