Investment in Israel: Reliable or Risky?

Source: Financial Times, Israel Trade Commission, BeliefNet, Campus Watch, and The Jerusalem Post

Recently, investments in Israel have reached new highs. After a U.S. investor, Warren Buffet, invested approximately $4bn in Iscar, an Israeli toolmaking company, the country’s economy has received international attention. Since the state was created in 1948, economic investment has been for more religious and ideological reasons, rather than profit. However, new investors are now more motivated for capitalist reasons. In addition to the investment made by Mr. Buffet, Intel has currently invested over $5bn in Israel. Several other well-known international, high tech companies have followed in Mr. Buffet and Intel’s footsteps. Reasons for recent investment in Israel may be because of its innovative and entrepreneurial spirit, which can be of great value to international investors.

Some may consider the current investments surprising due to the violent outbreaks that have been occurring. In 2000, the lack of high tech investment and the violent outbreak between Palestinians caused a recession. However, over the past year, circumstances have shifted. The violence in Israel has begun to level off. In addition, Israel recently withdrew from the Gaza strip. This change of events may have caused the additional investment within the country. In fact, “these developments helped the economy to record 5.2 percent gross domestic growth in 2005.” This year, the Bank of Israel expects a 5% growth because of the improved exports, tourism, and consumer spending. Investors today are feeling more and more comfortable with the current situation in Israel. Companies are considering the benefits and the risk of possibly of making investment in high tech companies. Obviously, the benefits have begun to outweigh the risks.

Other reasons for the increase in confidence in investment in Israel may be last year’s appointment of Stanley Fischer, a former senior official of the IMF and internationally renowned economist, for the governor of the Bank of Israel. Recent reports in the Morgan Stanley report described the Israeli economy as “almost perfect.” More recently, Merill Lynch explained that the economic situation in Israel as “as good as it gets.” In the mean time, in the Swiss IMD business school rankings, Israel jumped from 42 to 20 in the 2006 world competitive rankings. The Israel Trade Commission has recognized certain areas that require improvement in order to continue competing for investors, such as export growth, job creation, and enforcement of proper trade enforcements.

Many groups have disagreed with the recent increase in investment in Israel. The Presbyterian Church cut off all investment in specific companies that did business with Israel. The Church does not agree with supporting Israel while they continue to use force and violence in the West Bank. Many Jewish groups were outraged and shocked. Other churches, including Episcopalian, have looked into to possibly making the same move towards cutting off companies invested in Israel. These protests may discourage investors from continuing to invest. The church protests have sparked additional tension between the Jewish and Protestant communities. Jewish communities may be more outraged because of the Presbyterian Church’s lack of communication. However, the Church felt that words were not enough.

Other groups have also expressed their disagreement with the continuing investments in Israel. Students protested on campus at the University of Michigan to pressure Israel in ending its occupation of Palestinian territories. “Students at the University of Michigan and about 50 other campuses across the country are petitioning their schools to divest themselves of stock holdings in companies with ties to Israel to protest the country’s treatment of Palestinians.”

Despite the protests, Israel has continued to prosper. The FTSE Group upgraded Israel’s status to developed. The change of status means that Israel may be facing the potential upside of inflow of investment funds. Since the Watch List in 2006, Israel “met all quality of markets criteria for a developed market.” There are four categories of criteria: “market and regulatory environment, custody and settlement, dealing landscape and derivatives market.” As a result, Israel has the potential to attract more of the approximately $2 trillion funds that “track the FTSE’s global benchmarks.”

For Discussion:
Will protests in the United States help in stopping investment in Israel? Is it fair for investors to ignore the continued violence in Israel for reasons of profit? Are huge sectors of the Israeli people left behind due to the investment in the high tech areas only?