It is well known that small- and medium-sized enterprises (SMEs) contribute to economic growth and employment. And SMEs that demonstrate innovation have an even greater influence on the economy. And yet SMEs, in Israel as elsewhere, find it difficult to fundraise and maintain cash flow at various stages of their development. This problem is especially acute for companies whose assets are non-tangible, in particular those that are largely reliant on innovation and human capital. "The high uncertainty and lack of security mean that banks and other funders often view SMEs as risky borrowers," says JIIS researcher Reut Marciano. She explains that in some sectors, particularly those heavily dependent on technology, alternative sources of funding have developed – such as venture capital funds and venture capital investors. "The government identified the need for creating sources of funding for the high-tech sector in Israel and in the 1990s established Yozma [Initiative], which was aimed at promoting the creation of venture capital funds locally." The funds established following the program also assist SMEs in the field to create business networks and activities internationally.
Marciano and her colleagues Eitan Bluer and Dr. Dan Kaufmann, head of JIIS' Economics Unit, in collaboration with Ben-Gurion University of the Negev, drafted a research proposal to identify local requirements for public engagement in private equity funds and develop a model for such engagement. "The overarching goal is to expand the funding pool for the economic growth of sectors that, to date, have not received the necessary investment." In March the proposal was approved by the Small and Medium Enterprises Authority in the Ministry of Industry, Trade and Labor. Among other aspects, the study will identify the limitations of existing financial instruments, analyze the relevant public policies and suggest new policy approaches that could overcome at least some of today's market failures.