While the high-tech sectors in Israel present workforce productivity higher than the average among OECD countries, the majority of the economy's other sectors suffer from low productivity compared to their counterparts in these countries. Despite Israel's small territory and its characteristically dense social and professional networks, the innovation and technology created in the high-tech sectors do not sufficiently reach the other industrial sectors.
We place special emphasis on the manufacturing industries which have difficulty competing with the low production costs in developing countries (mainly in the East) but on the other hand, sometimes fail to meet the high-quality threshold of western manufacturing companies. As we elaborated in detail in the 2016 Innovation Report, the main reasons for this are low technological intensity and lack of a sufficient level of innovation, particularly problematic characteristics in an industry that does not benefit from proximity to the main markets or advantages of economies of scale.
It is our belief that the manufacturing industries are also at a crossroads. Without determined and effective action, we will continue to witness the current trends of erosion and the widening of gaps relative to parallel sectors in developed economies. In the face of the wide-scale scope of employment in these industries today, realization of this scenario contains severe ramifications on a socio-economic level: the level of inequality will rise and the separation between the "traditional economy" and "the high-tech economy" will continue to worsen. This polarization also has a geographical aspect, as while high-tech companies are focused in the central region and the other large metropolises, the majority of the manufacturing industry is located in the periphery.
On the other hand, harnessing the engine of innovation and entrepreneurship to the manufacturing industry may cause a halt in its erosion and develop for it a sustainable competitive advantage. Special importance should be given to the integration of the industry in Israel with current technological trends, primarily the 'Industry 4.0' revolution that is leveraging developments in the fields of robotics, Internet of Things, Machine Learning and Big Data, in order to streamline production processes and increase productivity. Israel's leading position in these technologies, together with the developed local entrepreneurial culture, create the conditions for a significant leap in the level of the manufacture industry's innovation and productivity.
- 1.  'Basic Financeability of the Workers in Israel and Productivity in the Market's Sectors', from the Periodical Fiscal Survey and Assorted Research Issues, Research Division, Bank of Israel, July 2016