‘Internet sector will reach 8.5% of GDP by 2015’

Web’s share in Israel’s economy one of highest in the world, Internet economy accounted for around NIS 50b. in 2009, McKinsey study finds.

The nation’s Internet sector is expected to grow at twice the pace of the overall economy, to reach an estimated NIS 85 billion by 2015, or 8.5 percent of the gross domestic product, according to a report released on Wednesday by international management consulting firm McKinsey & Company.
The report, believed to be the first to study the impact of the Internet on the country’s economy, found that the local Internet economy accounted for around NIS 50b. in 2009, or 6.4% of the GDP – after being nearly nonexistent in the early 1990s.
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The relative level of Israel’s Internet economy was found to be “probably one of the highest in the world” – slightly lower than that of the United Kingdom (7.2% of the GDP), but significantly higher than that of France (3.2%).
The study measured total spending on finished goods and services in four main categories: consumption (mainly e-commerce, or online purchases), investment, government expenditure and net exports.
In comparison to other developed economies, the study found that Israel boasts a higher-than-average share of Internet-related net exports and investment, but lags behind in its share of e-commerce and government investment.
The report listed several possible reasons for the low rate of e-commerce, which stands at just 0.5% of GDP, putting Israel in 19th place out of 21 OECD member countries with available data.
Although admitting that the issue was difficult to address, the report’s authors said geography and climate could be partly responsible for the phenomenon – while other evolutionary factors, such as culture and confidence, might also play a part.
“The Israeli consumer likes interacting with the seller to build trust and potentially bargain for the best deal. In addition, the Israeli consumer has the desire to ‘see and touch’ a product before purchasing,” the report said.
It added that the reluctance to buy online could fade over time as culture becomes “an evolutionary variable.”
Offsetting this, Israeli consumers were found to be among the most frequent Internet users who “research online and purchase offline.”
Israelis bought NIS 20b.
worth of goods and services at brick-and-mortar outlets after first researching the products online, the report estimated.
It added that three-quarters of Israelis conduct their shopping this way – the fourthhighest rate in surveyed countries, behind only Portugal, the Czech Republic and Finland.
Net Internet-related exports reached NIS 19b. in 2009, or 2.5% of the GDP, thanks to Israel’s large information and communication technology sector.
Although overall net exports fluctuated between 2002 and 2009, the report said, the export of Internetrelated products showed a consistent upward trend that should see net exports increase to 3.1% of the GDP by 2015.
Internet-related investment was measured at 1.7% of the GDP, which put Israel well ahead of the UK (1.3%), and France (1%).
Based on the assumption that Israel can maintain the same rate of foreign investment in its Internet sector – and find the required human resources to fill Internet-related jobs – the report predicted that investment would rise at an annual rate of around 8%, to represent around 2% of the GDP by 2015.
The report also looked at the non-GDP impact of the Internet on society, including its effect on job growth. According to the collected data, 110,000-130,000 people, or 4% of all employed Israelis, work in jobs that can be considered part of the Internet economy – as everything from computer engineers to programmers in small startups.
Internet and communications technology jobs have grown twice as fast as other positions since 2002, the report said, adding that employees in the sector are overwhelmingly male and “earn twice as much as their peers despite being younger – a gap that has increased in recent years.”
But it warned that the rate at which new, skilled employees are trained could constitute one of the main risks for the evolution of the Internet economy, pointing out that with the decrease in immigration the economy would need to look to untapped sectors to increase employment, namely the large haredi and Arab communities.
Among the more surprising aspects of the report was its conclusion on Internet connectivity, in which Israel ranked 19th out of the 34 OECD countries based on several key indicators, despite having the fourth highest rate of household broadband penetration.
Part of the reason was Israel’s poor showing in the “Internet bandwidth” parameter, in which it was ranked second to last, ahead of only Mexico.
However, Israel led other OECD countries in both individual and business Internet usage, it said, noting that around three out of every five bank customers had an online account.
It added: “Half of the small and medium businesses (SMBs) in Israel are actively leveraging the Web and have shown higher growth than those that don’t. About 80% of the jobs created in the sector over the last three years came from the Web-active.”