Israel Grows Up

All the world knows Israel as a “Start-Up Nation,” the world’s most prolific source of innovative technology companies. But in mainstream sectors such as banking, telecom, and even retail, Israel for many decades stifled competition—and with it, innovation.

That began to change in the mid-2000s. A combination of regulatory reform and the market forces those reforms unleashed introduced real competition into historically concentrated sectors. The result, as Brian Friedman of Israel Investment Advisors has argued, is that Israel has become something new: a Scale-Up Nation.

Scale-Up Nation describes a political-economic pattern. Israel injected competition into highly concentrated sectors without destroying economies of scale, and in doing so unlocked durable gains in productivity. The result has been value creation well beyond the technology sector—value that remains systematically underpriced.

Unlike American-style antitrust, which often breaks up firms deemed too large, Israel promoted competition while preserving scale. Efficiency replaced protection, and innovation followed.

Banking: Where Reform Began

Reform began with banking. As Friedman notes, “until 2005 Israel’s three largest banks controlled almost every financial transaction in the country—including deposits, loans, payments, securities, pensions, and asset management.” In effect, the same institutions that held household savings also decided where those savings could go.

The consequences were predictable: weak competition, rent-seeking, high fees—and stunted capital markets. Israel’s bond market was thin and inaccessible to start-ups and mid-sized firms. Lending practices were conservative by necessity. Bank-dominated systems, built to borrow long and lend short, are ill-suited to fund aggressive growth.

In the mid-2000s, regulators forced a partial unbundling. Banks were required to sell provident funds, mutual funds, and most long-term savings products. Far from suffering, the banks adapted. Rent-seeking gave way to value creation. Headcounts fell even as balance sheets grew. Assets per employee rose.

(Bank Hapoalim productivity, recreated from Bloomberg data cited by Brian J. Friedman (Israel Investment Advisors).

But that was only half the story.

The buyers of the investment vehicles the banks were forced to sell were insurance companies, which suddenly managed vast pools of long-duration capital. These structurally patient investors became dominant players in corporate bonds, infrastructure finance, and project lending.

Israel’s capital markets were transformed. The bond market expanded dramatically—in total volume, in the number of issuers, and in the breadth of borrowers. Equity participation became more common. Mid-sized firms gained access to long-term capital. Infrastructure could be financed over long payback periods.

This mattered because deregulation alone does not create competition. Someone must fund the would-be competitors.

Competition needs capital

Telecom was a hard test of reform. Communications infrastructure is capital-intensive by nature. Networks must be financed years before they pay for themselves.

The United States learned this lesson earlier. When AT&T was broken up, deregulation created room for competitors—but it was Michael Milken and the rise of the high-yield bond market that made competition real. Firms like MCI and Sprint could not have built national networks relying on bank loans alone. Deregulation gave permission; capital markets enabled entry.

Israel arrived at the same solution indirectly. By dispersing control over long-term capital after the mid-2000s reforms, it became possible to introduce competition into telecom without starving investment. Prices fell, service improved, weaker players exited—and yet the industry did not shatter. It reconsolidated around roughly three national-scale operators, still investing billions of shekels in fiber and mobile networks rather than retreating into uneconomic fragments.

Telecom did not break up; it scaled up. As in the United States, competition proved compatible with consolidation around efficient national scale.

Scale is not the enemy of competition. It is often the outcome of competition—provided capital markets function.

Even retail does it!

In food and retail, reform was messier. Both the rules and the players were entangled in dozens of ways. But as capital markets opened to new entrants, long-cartelized sectors faced competition. Margins compressed as rent-seekers became competitors, yet most incumbents adapted and survived.

Post-2005, Israel began to grow up. Firms in the Scale-Up Nation did not wither under competition—they absorbed it. They preserved scale even as rivals entered the field. Newly competitive sectors experienced fewer disorderly failures, steadier investment, and incremental gains in productivity.

Investors invited!

Markets still tend to price Israel as a fragile start-up economy—innovative, resilient, but perpetually exposed to shocks that overwhelm institutions before they can compound. That framing helps explain Israel’s persistent valuation discount, with Israeli stocks typically priced at a 25% to 40% discount to comparable U.S. firms.

Structural change happens first. Prices adjust later. Israel’s low valuation multiples reflect real risks, but they also reflect an economy that has changed faster than the stories told about it. For investors, that gap between perception and structure is a sweet invitation.