Israel is a small country with a small economy, surrounded by hostile neighbours and facing constant geopolitical uncertainties. On the face of it, investing in Israel seems to be an irrational business decision. Nevertheless, Israel is a prime destination for a wide range of investors. A strong combination of innovation and entrepreneurial drive continues to attract to Israel the world’s leading technological companies, venture funds, private equity funds and, more recently “crowd funding” investors, all of whom are looking for the idea, the development, the product that is ahead of the field, either for strategic reasons of simply for a financial return.

Israel is a technological powerhouse. The Israeli business milieu is cosmopolitan, business professionals are highly qualified, the courts are well-regarded and impartial. The Israeli workforce is educated and skilled. So, despite the apparent disadvantages, Israel continues to attract substantial foreign investment.

Microsoft, Apple, Facebook and Google have all made recent acquisitions in Israel, highlighting Israel as a focal point of technological development for these global giants. A number of Israeli companies have completed high profile public listings. At the same time we are beginning to see more local technology companies making their own acquisitions within Israel. The fact that Israeli companies are looking to grow through local acquisitions is an indication that not all high-tech entrepreneurs are looking for an early “exit”, and reflects a greater maturity in the Israeli high-tech sector. This trend is boosted in part by the growing ability of the more mature Israeli hi-tech companies to raise capital both privately and  in public markets.

And it is not just in the technological sector. The Chinese State-owned Bright Food

Group in 2015 acquired control of Tnuva, Israel’s largest dairy concern, in a deal valuing Tnuva at approximately US$2.5 billion. The seller was Apax Partners, one of the world’s largest investment funds, which continues to look for investment opportunities in Israel. This deal and others are indicative of the growing wave of interest from China in the Israeli marketplace. Since the acquisition in 2011 by China National Chemical Corporation (ChemChina) of Makhteshim Agan Industries, the world’s largest generic agrochemical producer (now rebranded as “Adama”), there has been a remarkable increase in Chinese investment in Israeli technology and Israeli know-how. A major “driver” for M & A activity in traditional areas of the economy is a recent law introduced in order to promote competition in the over-concentrated Israeli economy.

Some of the world’s largest private equity funds are looking closely at Israel for opportunities. As a general rule, these funds are looking for more mature companies, with proven revenue history and especially with export sales. There are numerous such opportunities in Israel of companies still controlled by the founding shareholders or by the second generation, or owned by Kibbutzim.

At the end of an initial transition period, it will no longer be permitted for a single investment group to own both a substantial financial enterprise and a substantial nonfinancial enterprise. As a result, a number of major financial enterprises (banks and insurance companies) and industrial concerns will inevitably be sold off in the coming years. In addition, a number of major conglomerates in Israel have borrowed too heavily, and have been forced to sell off major assets in order to finance indebtedness.

Israel’s new Finance Minister, Moshe Kahlon, faces three major economic challenges.The first of these is to introduce competition into Israel’s banking sector. The banking sector is totally dominated by Israel’s two largest banks, Bank Leumi and Bank Hapoalim. The new Minister has entered office vowing to open up Israel’s highly concentrated credit market to competition. The first move appears to be a demand that Israel’s major banks dispose of their credit card operations.

The second challenge is the ongoing saga of Israel’s offshore gas monopoly. The two major offshore gas discoveries, the Tamar and Leviathan fields, are both owned by the same consortium (Noble Energy, the Delek Group and the Ratio Group). The lack of decisiveness in dealing with the resulting concentration of the gas market, which will be a vital economic asset for Israel in the coming decades both domestically and in terms of export, has been embarrassing for the Israeli regulators and the Government.

The third issue facing the Minister of Finance is to deal with the critical housing situation in Israel, especially for first-time buyers and lower income groups. Any solution to this problem will involve simplifying Israel’s planning regulations, and the release by the Government of at least a portion of the large reserves of real estate held by the State.

Israel will continue to be a centre for technological innovation, and despite the geopolitical environment, Israel will continue to offer attractive investment opportunities. As soon as the uncertainties surrounding the commercial exploitation of the major offshore gas discoveries are resolved (issues including the right to export gas, the level royalties to be paid to the State, and the need for competition and competitive pricing in the natural gas sector), the result will be a dramatic boost for the Israeli economy. There are many reasons for optimism doing business in Israel.