Country Study: Israel - Research Paper Example

Country Study: Israel This study focuses on analyzing the business, social and economic environment of Israel. The country’s profound demographic, political and social transformation is strengthening the U.S-Israeli ties and other international relations. Over the past decades, The Israeli economy has grown strong and stable, and the country has managed to endure through some of the worst global financial and economic crisis while promoting economic growth. Country background Israel has been the home for most of the Jewish immigrants in the world since its independence in 1948. It has a population comprised of approximately 75.4% Jews, 20.6% Arabs, and others. Israel is a democratic nation where persons over 18 years are entitled to vote in the country’s elections. Israel uses the New Israel Shekel (NIS) as its monetary unit and is comprised of 100 agorot. It uses the representative dollar rate as the indicator of the exchange rate in the foreign markets. Israel provides a broad and solid infrastructure for investors, entrepreneurs, and businesses in all industries. It has a modern banking system that is automated, highly computerized and established in the international banking system. The country has an advanced international and domestic transport system with an ultramodern interurban highway network that enables safe mobility across the country (Zanotti, 2014). Business Structure in Israel Israeli businesses run under most on the legal entities registered by the Israeli law. These entities include partnerships, companies, cooperatives, and non-profit organizations. However, an individual may conduct their businesses without the need for establishing a separate legal entity. Israel’s High Tech Industry Over the past decade, the hi-tech industry has driven the nation’s economy and has played very important roles in is economic development. The hi-Tech industry has brought Israel to the sustainable growth path that has seen a boost in investments, a cutback in unemployment, corporate merger, capital employment and hi-tech exports. Israel’s venture capital market plays a fundamental role in the development of the high-tech industry by providing and allocating necessary funding. The funds are supplemented by international investors, private investors, public companies, and non-Israeli based funds. This industry has developed tremendously over the past few years. The growth is due to factors such as tax exemptions, funds established by international banks, and involvement with major international organizations (Oz-Salzberger, n.d.). International Trade in Israel As of 2014, Israel’s foreign trade had registered huge improvements reflected in the form of export of goods and a moderate increase in imported goods. The changes I distribution of good exported by industries brought change to the economy and the overall foreign demand. Total export for the country from industrial sectors contributed to 81.6% of the total exports while the agricultural sector contributed to only 2.4%. The industrial exports have mainly contributed by the technological intensity of the sectors (Israel, 2012). International trade agreements Israel has entered into various trade agreements to strengthen its hold on the international market. Some of the most significant agreements include the Free Trade Area Agreement, EU, the USA and the EFTA countries. This agreement places Israel in a good position to participate in the free trade partnership with the principal economies in the world. Israel also acts as an intermediary for those countries without mutual agreements by providing them with a product that complies with the various agreements (Zanotti, 2014). The Israel-European Union Free Trade Agreement Israel entered into this agreement in 1995 where a free trade zone was established with the EU for industrial products and some agricultural products. In these agreements, a majority of Israel’s products are exempted from various import duties. Israel, on the other hand, reduces its import duties on the EU countries products. Israel-USA Free Trade Agreement Israel and the United States entered into an agreement in 1985, where the agreement eliminates all import duties between Israel and the US. The agreement also eliminates some non-tariff barrier on some agricultural products. Israel-EFTA Free Trade Area Agreement This agreement became effective as of January 1983. In the agreement, Israel and the EFTA countries intended to eliminate some duties on industrial good while reducing some non-trade barriers. Israel-Canada Free Trade Agreement This agreement between Canada and Israel was enacted in July of 1996. The agreement eliminates duties on industrial good traded between the two nations. International Proprietor rights Israel is a member of some international treaties regarding intellectual rights on the property. Patents Israel adheres to the Patent Act, 1967 that regulates the protection of patents. Patents are issued either on the invention of a product or an innovative process, which has never been used previously. Trademarks The trademark protection under the Trademark Ordinance, 1972 regulates the granting, renewal and termination of trademarks. Copyrights Israel has a copyright law that ensures protection of originality of music artistic and dramatic works. This protection is granted for a lifetime of the owner for artistic and musical works, and 70 years for dramatic and literature works. Also, computer programs are protected as well. Investment incentives and other trade advantages Israel encourages investments from foreign and residents, by offering them with a range of benefits and incentives. The major goal being attracting foreign investments and boost the nation’s economy while developing human resources. Law for encouragement of investment This law is a government’s principal tool as a way of encouraging investment. The law offers two types of tax breaks to business enterprise promoters, he tax benefits track or the grants track. Under the tax benefits, the enterprise will enjoy a ‘beneficiary plant’, while Grant track offers an ‘approved plant’ status. This law applies to the diverse industrial enterprises. Depreciation The government allows approved beneficiaries an accelerated depreciation on tangible assets up to 400% of the standard depreciation rate on buildings and 2005 on equipment. Encouragement for investment in the tourism industry Under this law, investors wishing to establish businesses in tourism are entitled to an investment grant as well as a capital grant according the location of the business. Incentives of constructing rental housing Building of residential housing is an important social and economic objective, and it is, therefore, good to assess those who build and eligible for the diverse benefits offered through the tax system. This law intends to increase the inventory of residential housing available for rent. It grants benefits only to companies by enabling accelerated depreciation and offering full exemption from appreciation tax. Other incentives include small business loan funding offered by commercial banks. These loans are meant for use solely on new activities such as establishing a business or expanding an existing one. Also, the state offered state-guaranteed loans to medium-sized businesses to support their operations. Special Free Zones The government has declared some trade regions as free zones. These regions include the free processing zones, free port zones, and eilat free trade zones. The major benefits of these regions are as follows Lower corporate taxes Lower withholding taxes Property tax exemption Unrestricted foreign currency use. Employer’s reimbursement for some part of the labor cost incurred Capital gains on share sales are exempted from capital gain tax if reinvested within six months. No import restrictions or custom duties All this benefits are intended to attract more investors, mostly foreign investors who wish to establish their businesses in Israel. International cooperation The government of Israel has entered into some research and development cooperation agreement with other foreign nations as well as the EU, to foster the ties between them and facilitate joint ventures in the researchers and development. The government offers cash grants of up to 60% of the approved R&D expenses An example of an international corporation is the US-Israel Science and Technology Commission that aims to fund long-term R&D project with substantial technological impact as well as overcoming restriction such as Food and Drug Administration regulations. The Eureka agreement signed with European Eureka secretarial allows companies in Israel to join the program for industrial co-operation on R&D topics. The Canada-Israel industry and Research Development Foundation fund 50% of joint projects between Canadian and Israeli businesses. Foreign exchange control and money laundering prevention The controller of foreign currency regulates the use of foreign currency both by Israeli abroad and also the foreign residents. The prohibition of money laundering in the Israeli law sets certain identification and obligations to report on financial institutions, stock exchanges, money changers, and banks. These institutions should identify anyone, individual or corporation, requesting services such as account opening, change of account ownership, or certain transactions execution. The institution should also report money laundering cases to the authorities. Such case includes transactions whose size exceeds their defined amounts, unusual transactions such as those that seem to avoid reporting requirements. The banking system Israel’s banking system is characterized by a high market concentration degree; with two major banks occupy nearly 60% of the total commercial banks asset in the country. These banks are Bank Hapoalim and Bank Leumi. The system has a high level of international financial activities and interactions with other major foreign banks. The Israeli Central Bank has the governing powers of the Banking system in the country. It acts as the government’s fiscal agent and banker and as the public sector’s dealer in the local financial markets. The bank maintains the sole right to currency issuance and has the responsibility of devising and implementing the country’s monetary policy. Commercial banking in Israel provides all the retail and customer wholesale banking services. It also provides merchant banking, portfolio management, and underwriting. These banks also offer short term financing. Israeli banks make International transactions for both private and business purposes. These banks have subsidiaries abroad and have the full range of international connectivity. Israel’ major exports The European Union is Israel’s largest trade partner, with approximately 27% of the country’s export destined for the EU region. An analysis shows that the exports to the EU consist mainly of manufacture of chemicals and chemical products, pharmaceutical products and the export of diamonds. Agricultural exports only consist of 5.5% of the entire EU exports. Importation of goods Israel’s major import commodities are fuels and other consumer goods such as motor vehicles and manufacturing equipment. The government levies customs duties on some commodities imported into the country. Customs clearance for these goods must be obtained before they are imported. How Israel can boost its international trade The overall economic performance for Israel over the past decade has been impressive. However, the global competition from new economies is catching up quick, and the favorable circumstances will not last long. Furthermore, not all industries in Israel’s economy have performed well. It is there recommendable that a strategy be set for the future. The following issues are what Israel has to address to keep up with the rising international competition. First, while the hi-tech sector is strong, the Israeli economy is not utilizing this opportunity. Many hi-tech investors are focusing on exit strategies rather that improving their businesses. There are very few jobs available, too little of exports, and limited investment in the future capacity (Un.org, 2015). Second, Israel should improve the labor force participation rate. The low participation rate causes the high level of poverty and widens the inequalities in the society (Brown, 2015). Third, the Israeli service sector has not attained its potential regarding increased productivity growth, efficient services provisioning, or rising employment. Fourth, the public sector should improve on transparency and efficiency. The cases of corruption scandals have become too frequent in Israel and are inhibiting the growth of the business sector (Un.org, 2015). Fifth, should continue the efforts of reforming the labor area. Lastly, the country’s infrastructure is inadequate and requires long investment to improve its ports, railways, roads, and telecommunication infrastructure to reach world class standards. References Brown, K. (2015). Israel 2020: A Strategic Vision for Economic Development. Econstrat.org. Retrieved 4 October 2015, from http://www.econstrat.org/research/country-and-area-studies/354-israel-2020-a-strategic-vision-for-economic-development Israel. (2012). International Trade By Commodity Statistics, 2011(5). http://dx.doi.org/10.1787/itcs-v2011-5-4-en Oz-Salzberger, F. Israel: How is it Really Doing Today?. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1291450 Un.org. (2015). Agenda 21 - Israel: ECONOMIC ASPECTS OF SUSTAINABLE DEVELOPMENT IN ISRAEL. Retrieved 4 October 2015, from http://www.un.org/esa/agenda21/natlinfo/countr/israel/eco.htm Zanotti, J. (2014, July). Israel: Background and US Relations. LIBRARY OF CONGRESS WASHINGTON DC CONGRESSIONAL RESEARCH SERVICE. Read More