Encouraging industrial investments is of special interest to Israel. For investments to be successful in the long run they require a sound return to the investors. In deciding on new investment the predicted economic return rate generated by the investment is often used as a measurement for its attractiveness. However there is a lack of data for the actual inflation adjusted return on investment for industrial companies. Professor Shinnar developed a method for estimating the actual economic return. The method has been applied to a cross section of American industry.
In this report the actual return on investment (ROI) for selected Israeli companies is evaluated for as far backwards as data from the yearly reports are available. The rates of return are independent of the source of the capital applied. As such, they are of special interest in Israel where government support is significant.
Inflation adjusted results are obtained for seven major industries in the Chemical, Electrical, Pharmaceutical, Textile and Aerospace sectors, with emphasis on the export oriented industries. The rates of returns in major Israel industries are, on the average, similar to their American equivalents, but the fluctuation of the returns for the Israeli industry are bigger. Most of the Israeli companies showed a strong decline of the inflation adjusted return on investment during the period of high inflation, recovering in the late 1980’s. Many U.S. industries also showed decline in the end of the 1970’s and the beginning of the 1980’s, (see Table S1) but had a good return during the mid eighties.
Other conventional measures such as return on equity (ROE) are of little use when inflation rates are high, and give a completely distorted picture of the health of a company.
We hope that further research by these methods will contribute to this important discussion and lead to more effective government policies for promoting a larger healthy industrial basis for the Israeli economy.
