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Ryuichi Shinzato
Professor Robert Patterson
International Finance 435
3rd December, 2015
Single country research paper
Israel: The Child of Hope and Home of The Brave
Israel was first officially recognized as a country by the United States in 1948 under
President Harry Truman. Since then the United States has been providing support to Israel and
building a robust relationship. An example includes becoming the largest supplier of Foreign
Direct Investment for Israel. Israel has the been most reliable partner for the U.S. in the Middle
East as the only true democracy in the Middle East. The nations rapid growth, relative to its
small size, can be explained by the number of Israeli companies trading in the NASDAQ, which
is more than any other
countries outside of North America.

Current political leadership and stability

The current Prime Minister of Israel is Benjamin Netanyahu, who is the first Prime
Minister of Israel originally born there after the establishment of the country. He is also a leader
of the center-right-wing political party, Likud, which is the largest political party in Israel. His
view serves as being rigorous against Iran and Islamist militants that have been threatening the
state of Israel as well as its citizens. Likud focuses on national security policy based on a strong
military force. Netanyahu also has hostility against Palestine since Palestine is turning over its
land to be used as an attacking ground by militant Islamic groups, who have been endangering
the State of Israel. The Prime Minister has given speeches at the United Nation and a joint
meeting of Congress this year to strengthen unity with the U.S. as well as among other countries
against the threats Israel is facing today in the Middle East.

Government policies and attitude towards foreign investments

Israel is known as a great start-up nation that provides supportive conditions for
companies looking to invest. The supportive conditions include reduced tax rates, tax
exemptions, and other tax-related benefits. The country actively invests in education and
scientific research, and many leading Multinational Companies have built research and
development centers in Israel.
Trends of FDI include healthcare, information technology, and other capital-intensive
industries. This is backed by the fact that Israel offers extensive support for new ideas and
technologies as well as development of existing industries. Low inflation, low interest rate,
relatively low unemployment, and fiscal deficits have generally met targets, which results in its
strong, and yet flexible economy. However, there are some regulated industries with regard to
foreign investments, including banking and insurance that both require prior government
approval. The Israeli government does not conduct screening of foreign investment and there are

no regulations with respect to acquisitions, mergers, and takeovers. There are no limitations or
delays in the remittance of profits, debts, services and capital gains;all of which are attractive
factors for foreign investors.
U.S direct investment in Israel is mainly in the manufacturing sector, yet major
technology companies, such as Google, Microsoft, Cisco, Intel, IBM and Motorola have
established their Research and development centers in Israel. Israel has the highest rate of
Research & Development investment per GDP in the world.
Israel belongs to some international organizations, including the United Nations
Organization for Economic Cooperation and Development, International Monetary Fund, and
World Trade Organization. The country observes the Organization of American States as well as
a partner for cooperation with the Organization for Security and Cooperation in Europe.

Demographic trends
Today, Israel has population of 7,935,149 of which around 75% are Jewish that can be
separated into three groups. The Ashkenazim Jews, comprise of those who came to Israel mainly
from Europe, North and South America, South Africa and Australia. The Sephardim consists of
those who trace their origin to Spain, Portugal and North Africa. Eastern or Oriental Jews are
descended from ancient communities in Islamic lands.
Around 40 percent of Jews in Israel today were originally born in Europe and America,
26 percent in Israel, 19 in percent Africa, and 16 percent in Asia. For the non-Jewish population
approximately 17% are Muslim - which accounts for more than 80 % of the non-Jewish
population - 2% are Christian, and 1.6% are Druze and others. The population growth rate is
1.2%. The non-Jewish population grows at an average rate of 4.9% whereas Jewish population
has the growth rate of more than 27% due to enormous immigration from the republics of the

former Soviet Union, from which approximately 840,000 immigrants came making them the
biggest immigration to the country.
With respect to language, Hebrew is spoken as the official language of Israel. English is
the most common foreign language that most people can speak, and Arabic is used among the
minority. The Literacy rate in Israel is very high; it is at 97.1% in total (98.5% for males and
95.9% for females). The fact that education is free and obligatory between the age of five and
sixteen accounts for this high rate of literacy.

Key economic indicators and trends

Israeli currency called Shekel became available in the foreign exchange market on
January 1st, 2003. Since then, the Israeli currency is a freely convertible currency that has an
intervention from The Bank of Israel just like any other currencies. The Tel Aviv Stock Exchange
is the public stock exchange located in Tel Aviv, Israel. As the International Monetary Fund
released its latest forecast for economic growth around the world, Israel was one of the only
three countries that did not face a negative impact of the global financial crisis. IMFs forecast
indicates that Israel will have 3.3% of growth, which is the highest growth rate among all the
developed countries.

As the chart above shows, Israels economy has doubled since 1996 whereas the U.S.
economy has risen 50% and the average of developed countries economy has increased 40%. A
stimulus for the economic development was mainly triggered by the nations strong support to
the Israel Defense Force on work ethic, entrepreneurship, and social network.
Other key factors include a strong modern infrastructure and excellent educational system
as well as tax burden lower than the most OECD (the Organization for Economic Cooperation
and Development) affiliated countries. However, there is a negative economic development in
Israel, An increase in the corporate tax rate is the major adverse factor for domestic corporations
and investors seeking to expand in Israel. OECD data indicates that that FDI into Israel fell by

almost half from 2013 to 2014.

The chart above represents the performance of USD/ILS exchange rates over the last five
years. Looking at the jump in the middle of 2014, this was driven by a drop in economic growth
reported by the Israeli government. Since exports accounts for about 40% of the countrys
economic activity, the depreciation in ILS caused further damages to Israels economy. The
decline in exports was caused by volatility of the countrys main export, which is pharmaceutical
product. In addition, Gaza war unexpectedly occurred between Israel and Palestine, which left

Israel with huge financial damages with sudden expenses and concerns that dropped the demand
among investors around the world. The conflict also hurt Israel in terms of tourism, which
accounts for about 7% of the nations economy.

Unique historical, cultural, and religious influence

Israels Independence day is May 14th. Although the State of Israel declared
independence on 14 May 1948, the holiday may occur in April or May due to the fact that the
Jewish calendar is lunar. Women and men are both required serving in the armed forces. In
terms of marriages, Jewish society has restrictive rules. It is illegal for a Jew to marry a non-Jew
in Israel. Those wishing to do so have to go abroad. Men have the power to prevent their exwives from remarrying. Even if a woman enters into another relationship, the courts will not
recognize and any children from the mother are not authorized in Israel.
The prohibitions on theft and covetousness have important religious influence because
they assist in conducting business in an orderly manner. The State of Israel is surrounded by the
Arabs that have a different religious and cultural view while Israelis share collectivism, which is
similar to Western culture. Though, Hierarchy does not exist unlike most of western countries
and the Arabs. Israel is also well known as a Hi-tech hub also known as Silicon Wadi, second
in world importance in technology sector. Except orthodox Israelis, non-observant Israelis tend
to have similar view as Americans. An interesting joke in Hebrew says, What is the dream of
every Israeli? Answer is to fulfill the American dream.

Geographic advantage and disadvantage

The size of Israel is slightly larger than the state of New Jersey. There are many historical
locations, which attracts tourists. The current geographical issues include, limited cultivable land

and natural freshwater resources, desertification, and air pollution mainly from industrial and
vehicle emissions. Due to the limited natural resources, the country put the focuses on
developing high-technology industry including electronics, telecommunications, and computer
and information technology. To sustain self-sufficiency in food production, the country also tries
to improve agricultural efficiency and the use of the land to meet rapid growth of population. The
Gulf of Aqaba helps Israels international trades.

Other major factors that may impact financial risk

Current situation in the Middle East expose Israel with a threat of war. For instance,
conflict among ISIS, Iran, the State of Palestine and some other Middle Eastern countries
intimidate the country everyday. The prime minister's view of willingness to fight back to defend
the country and the citizen is seen as an aggressive approach among foreign countries; however
as the Arabs do not put down their weapons, it is Israels best strategy since the country could not
exist if it would not even own tools to defend itself. An argument over Irans plot of Tehrans
nuclear program and its support for terrorism has been a main subject between the U.S. and
Israel to promote peace not only in the Middle East, but also for the entire world since Iran has
officially signaled the murder of Israeli especially the Jewish people.
As mentioned earlier, the conflict with Palestine also has been costing the nation. The
impending crisis has been reducing production near the area affected by the conflict and
confidence in global market as well as tourism.

Major imports and exports

This year is the 30th anniversary of the signing the U.S. and Israel Free Trade Agreement,
which is the first such commitment for both countries. Israel depends on imports of crude oil,

raw materials, and military equipment. Although natural resources are limited, the country has
intensively developed its agricultural products, such as fruits and vegetables, which are actually
leading exports. Israel generally has trade deficits, but they are covered by large transfer
payments from abroad and by foreign loans.

Israel's major trading partners are the United States and EU. Exports accounts for
around 45%. For the United States, Israel is the 23rd largest goods exports in 2013. Major
exports categories include precious stones (mainly diamonds), electrical machinery, machinery,
aircraft, and optic and medical instruments. Other U.S. exports are agricultural products, like tree
nuts, soybeans, and wheat.
As the U.S. is the 21st largest importer to Israel, which accounts for 1% of total U.S.
imports in 2013, The U.S. imported precious stones (mostly diamonds), pharmaceutical products,
electrical machinery, and optic and medical instruments as well as snack foods (including
chocolate) and planting seeds. The U.S. and Israel Free Trade Agreement has not only helped
encourage the expansion of trade and investment between the two countries, but also reduced
barriers and provided regulatory transparency.

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Reduced government monitoring is a big advantage of importing Israel. Moreover, taxfree rough and polished diamonds imports secure competitive prices. Because the Israel
Diamond Exchange is the largest diamond trading floor in the world, it enable buyers to find
variety of diamonds that meets their needs within the Israeli market.
Disadvantage of importing from Israel is mainly on exchange rate risk since the nation is
under volatile political situation due to its surrounding countries that has hostile view against
Israel. Also, there are some issues related to transparency and the administration of Israels tariffrate quotas. A lack of data on quota and difficulties in obtaining licenses for in-quota imports are
still major issues in importing Israel although the country has improved those issues, there still
needs to be some improvement.
The future demand for the importing products from Israel seem stable because Israel has
one of the most developed Information Technology system in the world and IT sector would
have more demand in the future since the technology help improve the society as it has done
over the last decade.

Key financial risks related to investing in Israel

Israeli government does not allow bribery and other forms of corruptions under several
Israeli laws and Civil rights regulations. The international NGO Transparency International also
monitors corruption in Israel to ensure the countrys economic situation.

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The chart above indicates Israels interest rate over the last five years. the trends has been
downward since the end of 2011 to stimulate its economy, making firms and consumers available
to borrow at low interest results in more spending. The central bank of Israel has not changed
interest rates for a nine straight meeting; targeting inflation to rise from current negative figures
to 1-3%. However, policymakers are careful about increasing its interest rate since the economy
growth has not been quite well recently and rising it could have a negative effect as well as a risk
on current financial stability.

Israels negative inflation is set to help consumer purchasing power since recent conflicts
with the Arabs have been damaging its economic growth; forcing the nation to lower both

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interest rate and inflation to offset the loss. Lower global energy prices also have the reason not
to raise inflation to help reduce the cost of living. The central bank of Israel indicates that its
target is to increase exports by depreciating its currency with the effect of lower interest rate and
inflation to accelerate current economic growth.

Conclusion
Overall, Israel has potential to still grow its economy even more. The nations openness
to foreign investment with incentives will be able to attract more foreign investor along with an
expected economic growth in the future as its economic growth has been increasing although
global natural gas prices plunged and the country is facing political risks from other Middle
Eastern country.
The risks against Israel are relatively small. As mentioned earlier, in terms of financial
risks, it has low inflation and low interest rate that keeps its currency low, which help its exports.
Even though there could be a concern for deflation, the nation has low unemployment rate,
which proves that the economy is sound. Israeli government infrastructure assure that political
risks that may concern foreign investors generated within the countrys duty at lowest, which
leaves them with an only concern for war in terms of Political risk.
The only democratic country in the Middle East will continue to add values to the world
with its developed technology system and entrepreneurship as well as help advance the global
economy.

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Works Cited
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