Prof. Raphael Bar-El (p)

Innovation at the Service of the Traditional Economy
Abstract
Raphael Bar-El
While innovation is widely recognized as a major driver of economic growth, large segments of the economy remain unable to fully benefit from its potential. These include a broad range of activities based on traditional production processes that lack the capabilities required to adopt or integrate innovative tools and practices. The primary objective of this study is to assess the appropriate growth policy for a traditional economy and derive the required policy measures for its implementation and adaptation to the needs of robust sustainable development.
We focus on three main relevant populations. One is the population of traditional economic activities within low or medium or even high income regions that lack the ability to absorb and adapt new innovative processes that could increase their productivity. The second is the population of peripheral regions, within medium or high income countries, that encounter significant difficulties in competing with the metropolitan or central regions in their country for the attraction of innovative activities. The third is the population of low-income countries that lack the appropriate conditions and innovation ecosystem factors for the assimilation into the innovation trend.
We use the data of the Global Innovation Index (GII) for the distinction between knowledge creation and knowledge implementation, and for the identification of the different relevant ecosystem factors. We further use selected case studies in order to identify the potential of using innovation measures for the improvement of productivity in traditional activities.
Some of the measures identified are the nomination of Regional Innovation Agents in peripheral regions, the adoption of a Reverse Mentoring system in small and medium traditional enterprises, the technological support to agricultural activities.

Dr. Sharon Hadad (p)

This paper analyzes the "Innovation Trap" of Small and Medium Enterprises (SMEs), which constitute a central pillar of the Israeli economy, yet are characterized by low productivity and low rates of innovation adoption. The theoretical model developed in this paper offers a micro-economic explanation for this phenomenon, based on the interaction between two complementary constraints: the financial constraint, relating to the difficulty in raising capital for the required fixed investment, and the managerial time and attention constraint, reflecting the opportunity cost of the entrepreneur's time.
The model predicts an inverted-U relationship between profitability and innovation: businesses at the lower end of the profitability distribution are hindered by a lack of funding sources, while businesses at the upper end refrain from investing due to the high shadow price of managerial time. Consequently, a systemic market failure emerges, leading to under-investment in innovation. This failure is exacerbated in the periphery due to infrastructure gaps, which increase both direct financing costs and the learning and time costs required for technology adoption.
To address this market failure, the paper proposes an applied policy tool: the Innovation Agents program. The program, to be operated in collaboration with the Small and Medium Business Agency, is based on training Economics and Management students within a new academic track for Innovation Economists and Consultants. Implementing this program is expected to increase productivity and reduce economic and regional disparities within the economy.

Dr. Ohad Shaked (p), Dr. Sharon Hadad (p), Dr Josef Cohen

Regional crisis policy often assumes that financial losses are the main driver of employment cuts; however, evidence on the mechanisms linking spatial disadvantage to small and medium-sized enterprise (SME) adjustment remains limited. Drawing on regional resilience research and New Economic Geography, this study examines whether peripheral location is associated with workforce reductions among Israeli SMEs during the COVID-19 crisis and whether this relationship operates through turnover losses or perceived difficulty. Using survey data from 492 Israeli SMEs collected during the COVID-19 pandemic, with workforce outcomes observed for 205 employer firms, we estimate indirect effect models linking location, crisis experiences, and workforce reductions.
The results indicate that perceived difficulty constitutes a more proximal intervening variable than financial loss. Peripheral SMEs reported significantly greater perceived difficulty, which was in turn associated with greater workforce reductions, while the indirect pathway through turnover losses was not statistically distinguishable from zero. Evidence consistent with baseline equivalence prior to the crisis suggests that spatial disparities in perceived difficulty and employment adjustment emerged during the crisis rather than reflecting pre-existing gaps.
These findings challenge crisis interventions centered solely on liquidity support and suggest that addressing the perceptual and managerial burden of peripheral entrepreneurs, which may reflect both structural constraints and cognitive appraisal processes, may be important for safeguarding employment and strengthening regional resilience. Conceptually, the study contributes to regional science by identifying perceived difficulty as a micro-level pathway through which spatial disadvantage shapes firms' employment responses during systemic shocks