According to a recent Wall Street Journal headline, "Even Syrian Merchants Are Now Ready to Do Business With Israel."(1) This headline reflects a significant reversal of attitudes from previous decades of hate and fighting. In the past few years the world has seen the disintegration of many geopolitical rivalries, and this momentum has finally reached the Middle East. The signing of the Declaration of Principles on Interim Self Government Arrangements Between the Government of Israel and the Palestine Liberation Organization in September 1993 stimulated visions not only of a different political world, but also of economic activity and economic interdependence in the Middle East. With 200 million Arab consumers in close proximity, the opportunity for Israel is unfathomable.
As a result of the changes, both Arab and Israeli businessmen are beginning to explore new business opportunities. For example, Jordanians are enrolling in Hebrew classes, making visits to meet with Israeli businesses, and executing agreements with Israelis. As the Wall Street Journal remarked, "businessmen are poised for peace, waiting for the politicians to catch up."(2) Israel, which is at the center of this furor both politically and geographically, has the most to gain from these recent developments. With its advanced infrastructure, developed economy, political stability, developed capital markets, and skilled work force, Israel is a natural choice for companies seeking to establish headquarters or distribution centers in the region.
A review of Israel and its resources elucidates why Israel is an ideal location for an international export hub to the United States, Europe, and (in the future) Arab countries. This essay will support this conclusion with surveys of foreign investors and foreign businesses in Israel. It will review Israel's investment climate by evaluating the country through an investor model, which includes three important criteria for a foreign investor. First, the essay analyzes institutional factors such as Israel's economy, its trade agreements with major markets, and its foreign investor incentive programs. Second, the essay critiques Israel's infrastructure, focusing on the cost and quality of the labor force and Israel's infamous bureaucracy. Third, the essay considers the legal aspects of investing in Israel, such as currency exchange controls, treatment of foreigners, and taxes. Through this discussion investors will gain an understanding of why Israel should be considered an excellent location for an entire business, a branch office, or for direct or indirect capital investment.
In recent years, the worldwide investment community has become much more interested in investing in Israel. The Tel Aviv stock market had a record year in 1991 and rose another ninety percent in 1992. Although growth was disappointing through most of 1993, the stock market has had strong gains since the signing of the Declaration of Principles, with the expectation that, if peace arrives, a torrent of investment will follow.(3) These gains have been lost recently due to declines in the market; however, expectations are that the market will recover in the near future. As a consequence of the Tel Aviv Stock Exchange's meteoric climb, the First Israel Fund was established in 1992 - the first time a U.S. mutual fund was established solely for investment in Israel. Meanwhile, Israeli companies have flooded the U.S. financial markets. Forty-six Israeli companies now trade on U.S. stock exchanges, more than any other foreign country except for Canada, and another twenty initial public offerings will probably be placed in 1994.(4) Multinational companies such as IBM, Intel, National Semiconductor, and Motorola have established research or production facilities, or both, in Israel. In the last year, several large institutional investors have begun investing in Israel, such as Advent International, Oxton, and Walden.
Although great excitement surrounds the idea of investing in Israel, the question still arises of whether the emotion fits a logical framework and sound business judgment. …