A paradox

A paradox: Israelis chase away needed American investors?

See the introductory blog post for more information about Israel Win Win. The post below summarizes recent market conditions in Israel and discusses why Israel needs to find ways to encourage new and expanded American investment. The next blog post will explore USA trends and how they will affect Israeli investors who are streaming to America, particularly for investments in US real estate.

There’s a story told about the Chinese student who when asked to mention the largest countries in the world answered China, America, Russia and Israel. When asked why he included Israel in the list of world powers, he answered it was based on how often it was mentioned in the press. In fact, in most physically measurable terms, Israel is a small country.

In the last two weeks on twitter posts, I provided links to news reports which highlight the positive business momentum in Israel, including the recent rises in the Tel Aviv Stock Exchange and the Israeli Government’s ability to raise money at cheaper rates due to Israel’s relatively strong economy. At the same time, venture capital funding into Israel was reported to be down by 40%.

Israel’s socialist roots:

For the first fifty plus years of its modern existence, the State of Israel was largely socialist with a completely insular and protectionist approach to its economics. The country was famous for its often astronomical rates of inflation, currency devaluation, government controlled businesses, lack of efficiency in the provision of services of all kinds, labor strikes and the like. Institutional investments were largely mandated to be directed into Israeli government securities.

Israel becomes a market driven nation:

Within the last decade, Israel embraced globalization and has been completely transforming into a market driven economy. This, in combination with other factors like the huge success of its high tech industry, has brought prosperity. During the current worldwide recession, Israel has fared better than most countries and is showing signs of an early recovery. The New Israeli Shekel strengthened vis-à-vis the dollar, although it has given back a good portion of those gains based in large part on an Israeli central bank program to buy US dollars. Nevertheless, the Shekel is still trading some 20% stronger against the dollar than it was at the initial reporting of the US sub-prime mortgage crises in early 2007.

In recent years, Israeli companies and institutions invested tens of billions of dollars outside of Israel. One of the reasons for this turn-around is that the Israeli government no longer needs Israeli institutional money to be invested in its bonds. With greatly improved credit ratings, Israel can borrow abroad at lower rates. Also, as a small country, there are relatively limited options for local investment and the competition for the better investments often means lower rates of return. As a country constantly in a state of aggression with the many enemies surrounding her, investing all of its wealth internally is not the most secure strategy either. For these reasons and others, Israeli institutional and private investors have been encouraged to and opted to diversify their holdings globally.

However, one market where many Israeli investors have suffered significant loses over the last two years is in the global real estate market, including heavy losses in US based real estate. This will be explored on the next follow-up blog post relating to Israeli opportunities to invest in the USA.

Israelis chase away needed American investors:

As stated in the last blog post, in my “American” way of looking at things, Israeli’s should be bending over backwards to attract American and other foreign investment. Through the years, foreign Jewish business people have been the most likely and motivated investors in Israel. However, my sense from speaking with many such people is that a good percentage of those who have done so regret their investments and refuse to even try again because of their experiences. Language differences can be overcome as most Israeli professionals and business people can communicate well in English. Also, there are some governmental programs and incentives in place to encourage foreign investment. For sure, there have been high profile investments in recent years like those by many of the American high tech companies and Warren Buffet, for example.

However, there are cultural differences and a different approach to doing business that are often harder to overcome. In dealing with foreign investors, Israeli’s often first display an undercurrent of mistrust and suspicion and can be opinionated and blunt. All of these characteristics are not necessarily bad for doing business, but they don’t always work well with American’s who base their business relationships on mutual best interest, mutual trust and respect and who may often be more diplomatic than blunt.

The Israel Win Win Answer:

Jewish and other Americans should be greatly encouraged to invest in Israel. Of course, this is good for the Israeli economy. However, successful investment in Israeli assets and ventures by Americans is great for Israel politically; in building its global reputation and in expanding the number of Israeli stakeholders and supporters. Fortunately, there are many Americans and other Anglo Israelis who have made aliya and now live and work in Israel. Many Israelis have also lived in the USA for a period of time or have worked for or done business with American companies and are more atuned to an American Win-Win approach. There are also Israeli companies managed by Americans. So the options for American businessman to invest in Israel with those that understand the Win-Win philosophy are expanding, especially among the younger Israeli generation. The future is brite for the Israel Win Win approach to take root and grow.