Israel dropped two places to 19th in Swiss business school IMD’s 2012 World Competitiveness Index, despite displaying improvement in inbound direct investment, real GDP growth per capita and the unemployment rate.

Hong Kong maintained its position as the most competitive of the 59 economies ranked by IMD, edging out the United States, Switzerland, Singapore and Sweden. Qatar (10th) and the United Arab Emirates (16th) were the top two Middle Eastern countries.

Israel’s score of 78.57 from a possible 100 put it directly behind the United Kingdom and directly ahead of Ireland.

The IMD World Competitiveness Center has published its study every year since 1989. Considered a leading indicator of economic competitiveness, it assesses countries in four categories – economic performance, government efficiency, business efficiency and infrastructure – based on national statistics and surveys of top executives.

Israel improved strongly in the area of direct investment flows inward, which increased to $11.4 billion (or 4.69 percent of GDP), in 2011 from $5.15b. the previous year. It was also judged positively on real GDP growth per capita, which rose to 2.98% in 2011 from 2.27% the previous year, and its unemployment rate, which dropped from 6.6% to 5.6% in 2011.

The “Startup Nation” continued to lead by example in business efficiency and infrastructure, maintaining its number one ranking for business expenditure on R&D (3.52% of GDP), total expenditure on R&D (4.41% of GDP), and public and private sector ventures. It ranked second in entrepreneurship, innovative capacity, scientific research and several other sub-categories listed under infrastructure.

On the other hand, Israel was punished for its poor current account balance, which dropped to -0.1% of GDP in 2011 from 2.9% the previous year, and is expected to fall even further in 2012. It also lost points for its higher rate of consumer-price inflation, and for direct investment flows abroad – which decreased to $3.32b. (or 1.37% of GDP) in 2011 from $7.96b. the previous year.

Israel continued to be let down by its economic performance, ranking 36th in that category for the third successive year. In particular, it was downgraded for relatively high cost of living, low workforce participation (38.63% of the population), and exports of goods (27.38% of GDP).

According to the report, Israel’s main challenges now are to maintain growth, reduce bureaucracy and the burden on the business sector; invest in periphery infrastructure, including education and support of small- and medium-sized enterprises; increase labor force participation amongst minority groups; and decrease economic gaps.

Federation of Israeli Chambers of Commerce President Uriel Lynn, whose organization is IMD’s local partner, supported this conclusion, saying that the business community is disadvantaged by government-level corruption and by the increase of handicaps imposed by state-owned monopolies such as local municipalities, ports and the Israel Electric Corporation.

IMD also conducted a survey for its yearbook which showed that Israeli business executives are overwhelmingly positive about globalization (eighth-most positive out of 59 countries), but a little less understanding about the need for economic and social reforms (26th).

Notably, Ireland ranked first in both the globalization and reforms surveys, while France ranked last in both surveys.

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