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This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building theMicroeconomic Foundations of Competitiveness,” in The Global Competitiveness Report (World Economic Forum), “Clusters and the New Competitive Agenda forCompanies and Governments” in On Competition (Harvard Business School Press, 2008), and ongoing research on clusters and competitiveness. No part of this publicationmay be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without thepermission of Michael E. Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu

Israel Competitiveness Snapshot

Professor Michael E. PorterHarvard Business School

December 6, 2012

20121206—Israel Competitiveness Snapshot—FINAL Copyright 2012 © Professor Michael E. Porter2

Note: Luxembourg ExcludedSource: EIU (2012), authors calculations

Prosperity PerformanceOECD Countries

AustraliaAustria

BelgiumCanada

Chile

Czech Republic

Denmark

Estonia

FinlandFrance

Germany

Greece

Hungary

Iceland

Ireland

IsraelItaly

Japan

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal Slovakia

SloveniaSouth Korea

Spain

Sweden

Switzerland

Turkey

United Kingdom

United States

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5%

PPP-Adjusted GDP per Capita, 2011 ($USD)

Growth in Real GDP per Capita (PPP-adjusted), CAGR, 2001-2011

OECD Average: 4.06%

OECD Average: $33,432


Labor Productivity Level and GrowthOECD Countries

Note: Luxembourg omitted.Source: Groningen Growth and Development Centre, Total Economy Database (January 2012). GDP calculated using Geary Khamis calculation methodology.

Australia

Austria

Belgium

Canada

Chile

Czech Republic

Denmark

Estonia

FinlandFrance

Germany

Greece

Hungary

Iceland

Ireland

IsraelItaly

Japan

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Slovakia

Slovenia

South Korea

Spain

Sweden

Switzerland

Turkey

U.K.

United States

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

Real GDP per Employee (1990 GK$),

2011

Growth in Real GDP per Employee, CAGR, 2001-2011

OECD Average: 1.20%

OECD Average: $39,773


Labor Productivity Growth vs. GDP GrowthOECD Countries

Note: Luxembourg omitted.Source: Groningen Growth and Development Centre, Total Economy Database (January 2012); EIU Data (2012).

AustraliaAustriaBelgium

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

FranceGermany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Slovakia

Slovenia

South Korea

Spain

Sweden

Switzerland

Turkey

U.K.

U.S.

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5%

Growth in Real GDP per Employee , CAGR,

2001-2011

Growth in Real GDP per Capita (PPP-adjusted), CAGR, 2001-2011

OECD Average: 4.06%

OECD Average: 1.20%


Note: Luxembourg omitted. Source: EIU (2012), authors calculations

Workforce ParticipationOECD Countries

Australia

Austria

Belgium

Canada

Chile

Czech RepublicDenmark

Estonia

Finland

France

Germany

GreeceHungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New ZealandNorway

Poland

Portugal

Slovakia

Slovenia

South Korea Spain

Sweden

Switzerland

Turkey

United Kingdom

United States

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

-3.5% -2.5% -1.5% -0.5% 0.5% 1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5%

Labor Force Participation (2011)

Change in Labor Force Participation Rate, 2001-2011

OECD Average: 1.59%

OECD Average: 49.09%

Improving ParticipationDeclining Participation


Unemployment PerformanceOECD Countries

Note: Luxembourg omitted. Source: EIU (2012), authors calculations

Australia Austria

Belgium

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

Norway

PolandPortugal

Slovakia

Slovenia

South Korea

Sweden

Switzerland

Turkey

United Kingdom

United States

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Unemployment Rate, 2011 (%)

Change in Unemployment Rate in Percentage Points, 2001-2011

OECD Average: 1.41%

OECD Average: 8.52%

Worsening Unemployment

Improving Unemployment

Spain (11.10%, 21.65%)


Note: Luxembourg omitted.Source: Groningen Growth and Development Centre and The Conference Board, 2012

Working HoursOECD Countries

AustraliaAustria

Belgium

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Slovakia

SloveniaSpainSweden

Switzerland

Turkey

United Kingdom

United States

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

-0.9% -0.8% -0.7% -0.6% -0.5% -0.4% -0.3% -0.2% -0.1% 0.0% 0.1% 0.2%

Hours Worked per Employee, 2011

Change in Hours Worked per Employee, CAGR, 2001-2011

OECD Average: -0.34%

OECD Average: 1,750

Declining Working Hours

Longer Working Hours

South Korea (-1.28%; 2,204)


Productivity

Country Competitive Environment

Domestic investment Imports

Outboundforeign direct

investment

Domesticinnovation

Inboundforeign direct

investmentExports

Intermediate Indicators and Enablers of Productivity


Domestic Investment PerformanceOECD Countries

Note: Includes inbound FDI; excludes Luxembourg.Source: EIU, 2012

Australia

AustriaBelgium

CanadaChile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Iceland

IsraelItaly

Japan

Mexico

NetherlandsNew Zealand

NorwayPoland

Portugal

Slovakia

Slovenia

South Korea

Spain

Sweden

Switzerland

Turkey

United Kingdom

United States

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

Gross Fixed Investment (% of GDP),

2011

Change in Gross Fixed Investment (% of GDP), 2001-2011

OECD Average: -2.34%


Ireland (-12.27%, 10.09%)


Export PerformanceOECD Countries

Note: Luxembourg omittedSource: EIU (2012), authors calculations

Australia

Austria

Belgium

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

NorwayPoland

Portugal

Slovakia

Slovenia

South Korea

Spain

Sweden Switzerland

TurkeyU.K.

United States

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Exports of Goods and Services (% of GDP),

2011

Change in Exports of Goods and Services (% of GDP), 2001-2011

OECD Average: 6.81%



Import PerformanceOECD Countries

Note: Luxembourg omittedSource: EIU (2012), authors calculations

Australia

Austria

Belgium

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

Norway

PolandPortugal

Slovakia

Slovenia

South Korea

Spain

SwedenSwitzerland

TurkeyU.K.

United States

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Imports of Goods and Services (% of GDP),

2011

Change in Imports of Goods and Services (% of GDP), 2001-2011

OECD Average: 5.68%


20121206—Israel Competitiveness Snapshot—FINAL Copyright 2012 © Professor Michael E. Porter12Source: USPTO (2010), Groningen Growth and Development Centre, Total Economy Database (2010)

Average U.S. patents per 1 million population, 2007-2009

CAGR of US-registered patents, 1999-2009

Innovative OutputSelected Countries

10,000 patents =

United States

Japan

Germany

UK

France

Taiwan

Canada

South Korea

Italy

Switzerland

Sweden

Netherlands

Australia

IsraelFinland

BelgiumAustria

DenmarkHong Kong

China (30.78%)Spain

Norway

Singapore

IndiaSouth AfricaNew Zealand Ireland

RussiaHungary Brazil

0

50

100

150

200

250

300

350

400

-5% 0% 5% 10% 15% 20% 25%


Inbound Foreign Investment PerformanceStocks and Flows, OECD Countries

Note: Luxembourg omittedSource: UNCTAD, World Investment Report (2012)

Australia

Austria

Canada

Chile

Czech RepublicDenmark

Estonia

Finland

France

GermanyGreece

Hungary

Israel

Italy

Japan

South Korea

Mexico

Netherlands

New Zealand

NorwayPoland

Portugal

Slovakia

Slovenia

Spain

Sweden

Switzerland

Turkey

United Kingdom

United States

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Inward FDI Stocks as % of GDP, Average 2000-

2010

FDI Inflows as % of Gross Fixed Capital Formation, Average 2000-2010



Iceland(32.39%, 134.45%)

Belgium (94.53%, 132.93%)

Ireland(39.24%, 107.90%)


Outbound Foreign Investment PerformanceStocks and Flows, OECD Countries

Note: Luxembourg omitted.Source: UNCTAD, World Investment Report (2012)

Australia

Austria

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

IsraelItaly

JapanSouth Korea

Mexico

New Zealand

Norway

Poland

Portugal

Slovakia

Slovenia

Spain

Sweden

Turkey

United Kingdom

United States

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Outward FDI Stocks as % of GDP, Average

2000-2010

FDI Outflows as % of Gross Fixed Capital Formation, Average 2000-2010



Belgium (87.81%, 127.83%)Iceland (43.13%, 186.83%)

Netherlands (50.66%, 104.05%)Switzerland (46.33%, 127.16%)


• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition revealed at the level of regions and clusters

• Macroeconomic competitiveness sets the economy-wide context for productivity to emerge, but is not sufficient to ensure productivity

• Endowments, including natural resources, geographical location, population, and country size, create a foundation for prosperity, but true prosperity arises from productivity in the use of endowments

Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the Business

Environment

State of Cluster Development

Endowments

What Determines Competitiveness?

Human Development and Effective

Political Institutions

Sound Monetary and Fiscal Policies


ISC Competitiveness ModelIsrael’s Competitiveness Profile, 2012

Israel’s GDP per capita rank is 25th

versus 128 countries

Note: Rank versus 128 countries; *Color coding based on comparison relative to income; Source: Institute for Strategy and Competitiveness, Harvard University (2012), based in part on survey data from the World Economic Forum; analysis prepared based on research findings by Scott Stern, Mercedes Delgado, and Christian Ketels.

Macroeconomic Competitiveness

30

Political Institutions 48

Rule of Law29

Human Development

26

MicroeconomicCompetitiveness

23

Macroeconomic Policy58

National Business Environment

27

Company Operations and Strategy

13

Country Competitiveness29

Significant advantage

ModerateadvantageNeutral Moderate

disadvantageSignificant

disadvantage


ISC Competitiveness ModelIsrael’s Competitiveness Profile, 2012

Note: Rank versus 128 countries; *Color coding based on comparison relative to income; Source: Institute for Strategy and Competitiveness, Harvard University (2012), based in part on survey data from the World Economic Forum; analysis prepared based on research findings by Scott Stern, Mercedes Delgado, and Christian Ketels.

Macroeconomic Competitiveness 30

Political Institutions 48Effectiveness of law -making bodies 56Public trust of politicians 58(Low ) Wastefulness of government spending 64(Low ) Favoritism in decisions of government off icials 42Government effectiveness in reducing poverty and inequality 89Transparency of government policymaking 67Decentralization of economic policymaking *Freedom of the press 16Voice and Accountability (WB) 42

Rule of Law 29Safety 39Judicial independence 18Efficiency of legal framew ork 50Property rights 29(Low occurrence of) Diversion of public funds 23(Low occurrence of) Irregular payments by f irms 26(Low ) Business costs of corruption *Ethical behavior of f irms 29Control of Corruption (WB) 35Rule of Law (WB) 32

Human Development 26Quality of primary education 67Quality of healthcare services 24Accessibility of healthcare services 36Health expenditure 47Life expectancy 8(Low ) Malaria incidence 1(Low ) Tuberculosis incidence 9(Low ) Infant mortality 19Primary enrollment 38Secondary enrollment 1(Low ) Gender inequality 22

Macroeconomic Policy 58Government surplus/deficit 61Government debt 108Inflation 44

Microeconomic Competitiveness 23

National Business Environment 27Factor (input) conditions 28

- Logistical infrastructure 56- Communications infrastructure 27- Administrative infrastructure 61- Capital market infrastructure 24- Innovation infrastructure 20

Demand conditions 22Supporting and related industries and clusters 28Context for strategy and rivalry 34

Company Operations and Strategy 13Strategy and operational effectiveness 10Organizational practices 29Internationalization of f irms 10


Corruption Perception IndexOECD Countries

Note: Methodology for comparison is based on adjusted rankings only for countries available in both years (161 countries total) Source: Global Corruption Report, 2011

AustraliaAustria

Belgium

Canada

Chile

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Slovakia

SloveniaSouth Korea

Spain

SwedenSwitzerland

Turkey

United KingdomUnited States

Rank in Global Corruption Index, 2011

Change in Rank, Global Corruption Report, 2011 versus 2006

High corruption

Low corruption

Worsening Improving


Microeconomic Competitiveness Indicators Ease of Doing Business Rankings (Israel, 2013)

Ranking, 2010 (vs. 183 countries)

Source: World Bank Report, Doing Business (2012).

Favorable Unfavorable

0

20

40

60

80

100

120

140

Ease ofDoing

BusinessRank

ProtectingInvestors

TradingAcrossBorders

Getting Credit Starting aBusiness

ResolvingInsolvency

Paying Taxes GettingElectricity

EnforcingContracts

Dealing withConstruction

Permits

RegisteringProperty

Israel’s GDP per capita rank: 26


Composition of ExportsIsrael’s Exports By Type of Good

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Processed GoodsSemi-processed GoodsUnprocessed GoodsServicesTOTAL

World Export Market Share (current USD)

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.


Israel’s National Cluster Export Portfolio2000-2010

= $1.5 billion

Jewelry, Precious Metals and Collectibles

Communications Services

Biopharmaceuticals

Business Services

Chemical Products

Hospitality and Tourism

Analytical Instruments

Production Technology

Communications Equipment

Aerospace Vehicles and Defense

Plastics

Medical Devices

Metal Mining and Manufacturing

Oil and Gas Products

Construction Services

TextilesEntertainment and

Reproduction Equipment

Automotive

Processed FoodMotor Driven

Products

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

-4.00% -3.00% -2.00% -1.00% 0.00% 1.00% 2.00%

Wor

ld E

xpor

t Mar

ket S

hare

, 201

0

Change in World Export Market Share, 2000-2010

Israel’s Overall World Export Share: 0.47%

Change in Israel’s Overall World Export Share: -0.16%


Aerospace Vehicles &

Defense

FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products

Hospitality & TourismAgricultural

Products

Transportation & Logistics

Cluster Linkages and Economic DiversificationIsrael, 2010

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Aerospace Engines

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology

Motor Driven Products

Mining & Metal Manufacturing

Apparel

Leather & Related Products

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Enter-tainment

Information Tech.

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation Communi-

cationsServices and

Equipment

0.25% - 0.46%

0.47% - 1.00%

> 1.00%

World Market Share