The Israeli High-Tech Sector
Israel has long been on the cutting edge of research and development in advanced technologies. A country of very limited natural and financial resources, as yet not at peace with some of its neighbors, Israel's scientists and engineers have been constantly faced with the challenge of quickly devising new and innovative solutions, such as drip irrigation (in response to the country's limited water resources) or the Merkava tank (as part of a wider effort to develop a home-grown defense industry). History and geography have made Israelis adept at identifying problems, finding solutions, and shortening the development process to turn them into commercial products.
Over the last decade, Israel's research and development (R&D) prowess has rapidly expanded out of the military sphere, the universities and research institutes, where it was originally concentrated, to create what is widely acknowledged as a model high technology economy. Israel is second only to the United States on a per capita basis in its ability to generate new, technology-based companies with innovative, market-focused products.
A Brief History
Amid the kibbutzim and factories of the early 20th century, the seeds of Israel's future technological institutions were planted. The Technion-Israel Institute of Technology, the Hebrew University and the Weizmann Institute of Science were all established prior to the founding of the State in 1948, and the arrival of highly educated refugees fleeing Nazi Europe contributed significantly to its pool of scientific talent. The fledgling state enjoyed early success in its efforts to make the desert bloom, and created a large farm-export industry. These agricultural achievements were made possible by R&D in areas such as plant and animal propagation, and soil and water technology, conducted at the Volcani Center's Agricultural Research Organization and the Hebrew University's Faculty of Agriculture in Rehovot.
Having fought three major wars in the first two decades of its existence, the government reached the conclusion in the late 1960s that it would have to develop as much of its own defense capabilities as possible. The resulting flurry of R&D activity was aimed principally at military communications and electronics, but civilian spin-offs from military technology laid the basis for Israel's first generation of high tech enterprises. By the early 1970s, the government-owned Israel Aircraft Industries (IAI) had successfully built its own fighter jet, the Kfir. In 1988, Israel became the eighth country to have independently launched its own satellite into space. More recently, with U.S. funding, IAI successfully developed the Arrow missile, the world's first missile-to-missile defense system.
High Tech Today
At the turn of the new millennium, Israel boasts many thousands of high technology companies in a wide range of fields such as telecommunications equipment, software, semiconductors, biotechnology and medical electronics. The majority of these companies are start-ups, with the most successful becoming world leaders in their respective fields. High technology and technology-rich products account for some 70% of exports. Multinational corporations have come to recognize Israel's technology abilities: leading global companies like Intel, Motorola, IBM, Microsoft, Alcatel and 3Com all have research and development facilities in Israel. Intel and Motorola also manufacture advanced products in Israel, and many other multinationals have purchased local companies, buying their patents and acquiring their human talent.
High tech companies are located throughout the country: in central Tel Aviv, in the suburbs of Jerusalem, even in development towns in the Galilee and the Negev. But the main centers are in Tel Aviv's Atidim Industrial Park, to the north of Tel Aviv in Herzliya Pituah, and to the south in Rehovot, adjacent to the Weizmann Institute, as well as in Tel Aviv's northeastern suburbs. Israel invests 2.2% of its gross domestic product in R&D (the third highest level in the world, after Japan and Sweden and on a par with Germany).
There are currently some 100 Israeli companies trading in the U.S., mainly on the NASDAQ market, representing the second-largest number of foreign firms appearing on the U.S. stock markets (after Canada). Some 80% of these companies develop and manufacture advanced technological products. An additional 14 companies have made public offerings on European exchanges and, of course, dozens of high tech firms are traded on the Tel Aviv Stock Exchange.
The essence of Israel's achievements in the high tech sector is the quality, energy and enterprise of its people. Twenty percent of the country's workforce are university graduates, the highest proportion in the world after the U.S., compared with 17% in Canada, 12% in Britain and 8% in Italy. Israel has the world's highest percentage of engineers (135 per 10,000 people compared to 85 per 10,000 in the U.S.) and, with 28,000 physicians, by far the highest number of medical doctors per capita in the world. In addition, Israeli academics publish more scientific papers in international journals (110 for every 10,000 persons) than any other country in the world.
Israel's highly educated workforce has been strengthened by more than one million new immigrants from the former Soviet Union over the past decade. These newcomers have an even more impressive educational profile than the average Israeli: 2.3% have second and third degrees compared to 1.2% of the general population. Russian immigrants are especially proficient in R&D disciplines such as advanced materials and new industrial processes which complement the country's traditional expertise in software, semiconductors, medical equipment, biotechnology, electronics and communications.
An important and unusual source of high tech talent comes from the Israel Defense Forces. The army serves as a nationwide screening program to identify the most promising and talented young people and puts them through rigorous training via elite programs in technology and other military functions. Not only do participants gain an unparalleled education, they learn leadership and problem-solving skills and establish personal networks that often form the basis for later partnerships in industry. The co-founders of many high tech companies began working together in the same army unit.
Dozens of government, defense and public research institutes, medical centers and universities conduct R&D. In addition to the Technion and the Hebrew University, these universities include "Bar-Ilan University, Tel Aviv University, the University of Haifa and Ben-Gurion University of the Negev. The universities, together with the Hadassah Medical Center in Jerusalem and the Hebrew University's Faculty of Agriculture in Rehovot, have all established companies to register patents on and commercially exploit the technologies they develop. Relative to their expenditure on R&D, Israel's universities have been granted twice as many patents as American universities and nine times as many as in Canada.
In addition, there is often close cooperation between high tech industrial parks and neighboring universities. Some examples are: the Kiryat Weizmann Industrial Park and the Weizmann Institute in Rehovot; Jerusalem's Har Hotzvim and Malkah Technological Parks and the Hebrew University; the MATAM High Tech Park in Haifa and the Haifa Technion; and the Atidim High Tech Park and Tel Aviv University.
In the early years of the State, foreign investment was almost nil. Recurrent wars made Israel too high a risk, and successive socialist governments believed in the development of a strong, domestically owned industrial infrastructure. But slowly foreign companies began testing the waters. In the 1970s, Motorola set up the first major U.S. R&D presence in Israel, and today develops and manufactures communications equipment and semiconductors with annual sales of over $1 billion. Motorola was followed by IBM, which expanded its sales and technical support facilities into a major R&D presence in Haifa in the late 1970s, and Intel, which started with an R&D facility in Haifa and now operates two huge semiconductor fabrication plants, one in Jerusalem and the other in the development town of Kiryat Gat. Foreign investment, however, really only took off in the 1990s. The Middle East peace process reduced the perception of political risk while the early successes of the first generation of high tech companies like Scitex and ECI Telecom clearly demonstrated the country's abilities to investors. Israeli high tech entrepreneurs working in Silicon Valley played no small role in coaxing their employers to invest in their native country. In 1999, direct and financial foreign investment in Israeli companies - virtually all of it in the high tech sector - reached a record $3.7 billion, up from $2.4 billion in 1998.
Just a few of the bigger direct investments in recent years include:
America's BMC, which paid $675 million for Israel's New Dimension that develops unique enterprise control, automation and management software systems. It was a record price tag for an Israeli company;
SunGuard of the U.S., which paid $210 million for the Herzliya-based company Oshap that has developed real-time software systems for vehicle and aerospace production lines;
America On-Line, which acquired Mirabilis, a start-up whose "twenty-something" owners had developed a unique program (ICQ) for notifying Internet-users if their friends are on-line, in a deal worth $407 million;
Platinum Technology, which spent $386 million to buy out Memco Software - a network security company.
Europeans have traditionally been slower to appreciate Israel's high tech potential. But this too has been changing. The German car manufacturing giant Volkswagen has set up a $200 million joint venture with the Dead Sea Works to extract magnesium from the Dead Sea and convert it into metal for use in the automotive and aerospace industries. Germany's Siemens has bought several start-ups as well as Ornet, and the UK's Picker has acquired part of Elscint's medical-imaging business.
Israelis are not only being bought, they are buying, too. Amdocs, for example, bought Canada's Architel in 1999 for $358 million.
A key factor in the high tech success story is the venture capital industry. The availability of capital as well as management expertise offered by some 60 funds operating in Israel has led to the creation of hundreds of high tech start-up companies. The funds count as their backers not only major global financial investors but high tech multinationals anxious to gain access to Israeli start-up companies.
In 1999, privately controlled high tech companies raised a record $1.003 billion from both venture capital funds and other investors, compared with $600 million raised in 1998 and $430 million in 1997. About 43% of the total raised came from local funds and the rest from overseas. Some 330 companies raised capital from venture capital funds in 1999. The most active sector in 1999 for high tech companies was the Internet, but there were also substantial investments in communications, semiconductors, and software. Local venture capital funds are estimated to have raised $900 million, compared with $668 million in 1998 and $712 million in 1997.
The government offers generous assistance to both high technology and other companies, to subsidize R&D and capital spending.
The Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade disburses to companies some $400 million annually in grants that cover between 30% and 66% of total development costs. The OCS recoups about $100 million per year in royalty payments from subsequent sales of successful products.
The OCS also provides assistance to start-up and new-immigrant entrepreneurs, through its network of 24 technological incubators around the country. More than 800 projects have been initiated, of which 600 have been completed. Some 50% of the completed projects achieved their objectives, signing an agreement with investment, commercial or strategic partners with capital investments ranging from $50,000 to $18 million. Total investment in these projects stands at more than $320 million. Companies accepted into an incubator qualify for a grant of 85% of their approved budget, or up to $170,000 annually for two years.
The OCS also supervises bi-national R&D cooperation, infrastructures and agreements, which complement Israel's unique range of Free Trade Agreements (FTAs) with the US, Canada, the European Union, EFTA and other European countries. Israel also has R&D agreements with France, the Netherlands, Spain, Portugal, Austria, Belgium, Ireland and India. Bi-national R&D funds have been set up with the US, Canada, Britain and Singapore, and Israel participates in the Fifth Framework Program of the European Union's Commission on Science, Research and Development (see box).
In addition, the Investment Center at the Ministry of Industry and Trade provides subsidies for capital spending on new and expanded industrial plants. The rate of these subsidies varies according to region, with the outlying zones qualifying for the highest levels. High tech companies, which more often than not have low capital spending requirements, often opt to take the assistance in the form of tax incentives.
Foreign companies looking to link up with Israelis on joint R&D projects can apply for assistance from one of several bilateral R&D programs:
US-Israel Science and Technology Commission
Set up by the late Prime Minister Yitzhak Rabin and U.S. President Bill Clinton, the commission's aim is to fund long-term projects that improve the quality of life and the environment and advance the economic and technological interests of both countries. Recent projects include the development of a method for solar thermal electrical generation capable of producing tens of megawatts of power, and vertical desalination installations that can provide fresh water to densely populated urban areas.
The Israel-US Bi-national Industrial Research and Development Foundation (BIRD) was set up in 1977 to promote non-defense industrial R&D. BIRD funds 50% of the projects' costs and receives royalties worth up to 150% of the grant. BIRD also helps Israeli or American companies to identify partners, thus enabling them to submit joint R&D programs for funding. Projects have included biosensors for human diagnostic applications based on specific peptides, advanced chip sets for wireless communications devices, and computerized milking parlors for cow sheds.
The Canada-Israel Industry and Research Development Foundation (CIIRDF) was founded in 1994 and is modeled on BIRD. CIIRDF funds 50% of the joint projects of Canadian and Israeli companies. The fund finances about seven projects annually, and promotes cooperation between the companies, using a network of more than 270 experts throughout Canada.
The Singapore-Israel Industrial R&D Fund (SII-RD) was set up in 1996 under an agreement that obliges Israel and Singapore to contribute $1 million each. Projects have included the creation of compact yet affordable systems that harness digital technology to solutions for graphics preprint and print workflow.
The Britain-Israel Industrial R&D Fund (BRITECH) was established in 1999. The total contribution to BRITECH will be £15.5 million over five years; £2.5 million annually for the first two years and £3.5 million each for the third, fourth and fifth years. The fund will be used to promote and encourage joint industrial R&D collaborations between companies in Britain and Israel. BRITECH will support bi-national industrial R&D projects that lead to the development of commercial projects or processes.
The EU Fifth Framework
Israel is the only country outside Europe participating in this program under which research institutes in signatory countries are eligible for funding of projects in partnership with EU countries. Some 16 programs in different sectors such as telecommunications and biotechnology are being funded. The four-year projects have a total fund of $15 billion.
Source: Israel Ministry of Foreign Affairs