Israel still tops in innovation, but dragged down by red tape and education flaws

Israel still tops in innovation, but dragged down by red tape and education flaws

Competitiveness survey ranks Israel 26th — 1st for science research institutions, 3rd in access to venture capital, 4th in innovation, but 109th for bureaucracy

Prime Minister Binyamin Netanyahu on a visit to the Technion earlier this year (Photo credit: Moshe Milner/GPO/FLASH90)
Prime Minister Binyamin Netanyahu on a visit to the Technion earlier this year (Photo credit: Moshe Milner/GPO/FLASH90)

Israel is still a world leader in innovation and a great place to hatch a new idea or technology. But if you want to build a business based on that technology, you’ll have to contend with high startup costs, an economy in which a small number of companies dominate many industries, and a lengthy application and approval process for your business. On the other hand, if it’s high-level high-tech research you seek, there is no better place to find it than in Israel’s universities, ranked the best in the world.

These are the findings of a new report by the World Economic Forum, the Swiss foundation that crunches economic data from around the world and issues recommendations on how to address economic problems. The group, best known for its annual meeting of top government and financial officials in Davos, released its Global Competitiveness Report on Wednesday. The report ranks 144 countries for over 100 variables, including business-friendliness, efficiency, innovation, educational resources, institutions — everything that goes into measuring what the group terms “competitiveness,” an indication of where businesses, and which economies, are most likely to thrive.

The information in the report is organized around 14 “pillars,” including quality of infrastructure, health and education, access to financial services, state of technology, and makeup of the labor force. Some of the information comes from publicly available government databases and UN data, but much of it is gleaned from a global survey of top business executives in each country, about 14,000 worldwide (the number per country varies; in 2011, about 100 responded to the survey in Israel). Questions range across a variety of topics, such as the protection of property rights and intellectual property, how common bribery is in business, how reliable law enforcement is, how much the government encourages innovation, and many more.

With all factors taken into account, the report said, Israel fell four slots from last year, from 22nd most competitive to 26th. Innovation, as measured by the number of patents filed per capita (4th in the world) and ease of access to venture capital (3rd), is still Israel’s strong point, with the country coming in third overall for innovation.

What drags Israel down, the report said, is the unspectacular state of Israel’s high school math and science education (Israel ranks 89th in this area, between Pakistan and Cambodia), bureaucracy (it takes more time to file documents and follow procedures to open a business in Israel than it does in 108 other countries), and a rather high level of redundancy costs (compensation for workers who are laid off). While workers might not consider that latter statistic to be a negative, the report reflects the responses of business leaders.

Israel could stand a more competitive business environment, too; corporate activity in the country, said respondents, is dominated by too few business groups, with Israel ranking poorly (124th) in this area.

Israel is not the worst offender in the category of excess bureaucracy, and indeed, comes off better than many would expect in some areas. For example, Israel comes in about halfway down the scale, ranking 90th for “burdensomeness” in government regulations, licenses and reporting. The report called this a drag on the Israeli economy, which in recent years had turned into an innovation-driven, technologically elite economy.

One of the questions addresses the added expense of doing business in light of terrorism, and as expected, Israel ranks high in this area, at 128. But those costs are even higher in Turkey, Lebanon, and Egypt — and not much lower in the US, which came in at number 124 in this area. (Countries where terrorism costs are not much of a concern include Austria, Finland, Iceland, Hungary, and Slovenia).

The technology section is, perhaps as would be expected, where Israel shines. Israel ranks high for utilizing new technologies (5th) and importing technology via investment (14th). However, for high-speed Internet bandwidth availability, Israel is in 80th place, barely beating out the Dominican Republic, Libya, Thailand, and Vietnam. On the other hand, Israel ranked high (9th) for the number of scientists and researchers in the country, as did, perhaps surprisingly to many Israelis, Jordan (11th). Israel also ranked high in company R&D spending (6th), the ability to innovate (6th), and the level of cooperation and collaboration between business and universities (8th).

And, Israel, according to the report, has the best scientific research institutions in the world, beating out Switzerland, the UK, and the US — and Qatar, which ranked fifth in this area. But that educational prowess does not filter down to the high schools; besides the aforementioned poor showing in secondary math and science education, Israel’s high schools are not particularly impressive, ranking only number 53 in the world.

The report also ranked macroeconomic indicators, and here, too, there were some surprises — such as the total tax rate. Israel’s rate (a combination of tax on profits, labor tax, and other taxes) is a relatively mild 31.2%, far better than most of Europe and even better than the US, where the total tax rate was 46.7%.

And in more good news for Israelis, the chances that Israel will go bankrupt is much lower than in many other place, including Iran. Israel has a 29% chance of defaulting on its debt, the report said, compared to Iran, where likelihood of that happening is 71%.

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