ISRAEL'S HIGH-TECH BOOM

by Debbie Buchwald inFocus Summer 2 ! While the American economy has been hurt in recent months by the subprime crisis and the resulting ripple effect into other parts of the global economy, some sectors have still profited. Notably, oil and other commodities have made handsome gains. Surprisingly, spring 2008 witnessed a better than e!pected earnings season for some high tech stoc"s, too. #nbe"nownst to many investors, $srael has played a significant role in recent tech gains. $ntel%s new micro processing chip is being made in $srael, not &alifornia. Silicon 'alley based multi national giants li"e (oogle, )racle, and Applied *aterials now maintain facilities in $srael that are integral to their operations. +ueled by venture capital investment in industries li"e communications, information technology, pharmaceuticals, medical devices, biotechnology, alternative energy, and cleantech, $srael%s high tech industry is not ,ust booming, it is a worldwide leader.

A Gl"bal C"m#e$i$"r
-he global financial community is beginning to see the benefits of investing in $sraeli industry. $n 200., foreign investment in $srael totaled /2. billion. 0eal (ross 1omestic 2roduct 3(124 growth has averaged a staggering 5 percent over the last three years. According to *organ Stanley, 6high technology goods and services have developed beyond the wildest pro,ections and now account for about one third of (12 and 75 percent of industrial e!ports,6 ma"ing $srael 6one of the most competitive economies in the world.6 (lobal competitiveness indices support this statement. -he World 8conomic +orum ran"s $srael second in the world for the amount of funds raised by technology start ups, following only the #.S. $srael ran"s first in 0esearch and 1evelopment 30914 e!penditure as a percentage of (12, third in s"illed labor availability, and fourth in :uality of scientific research institutions. -his is remar"able for a country that is only .0 years old with 7 million residents, hostile neighbors, and limited natural resources. $srael is starting to receive the recognition it deserves in world economic forums. ;ast year, the )rgani<ation for 8conomic 1evelopment and &ooperation 3)8&14 invited $srael to commence the process for accession to the organi<ation. -hrough its decision to include $srael, the )8&1 ac"nowledges that $srael%s economic and fiscal policies comply with the highest international standards.

I%$ellec$ual Ca#i$al
$srael%s success, to a certain e!tent, stems from its history, geography, and visionary government leaders. Waves of immigration, first from 8astern 8urope and later from the former Soviet #nion, led to the development of an e!ceptionally educated and s"illed wor"force. According to ;arry 8llison, the &8) of )racle, 6What%s really different about $srael compared with other places we do business is the number of partners we have in the technology area. $srael has always had a wealth of intellectual talent.6 2resently, $srael has more scientists and engineers, proportional to its population, than any other country =>?5 for every >0,000 people. +aced with multiple military threats, $srael%s scientists and engineers have developed sophisticated military technologies. +ortunately for $srael, many of these technologies have

important commercial applications. -he lac" of natural resources has also led $sraeli scientists to find innovative solutions for irrigation and solar power. A seemingly limitless supply of high tech talent at below #.S. mar"et salaries has made $srael an attractive site for multinational 091 labs. 6-he cost of an $sraeli engineer is still about 80 percent of his counterpart in Silicon 'alley,6 notes *oshe @viran, an $sraeli e!pert who trac"s high tech manpower. -his competitive advantage is diminishing, however, as the she"el gains against the #.S. dollar. Wages have increased annually for the last three years, and $srael now faces mounting competition from $ndia and &hina, where wages are almost 80 percent lower than in $srael.

I%cuba$"r&
)ne notable aspect of the $sraeli success story is how the government wor"ed to create an economic infrastructure that enabled $srael to reach its current levels of economic success. $n the early >AA0s, the $srael government created an incubator program to leverage the strengths of appro!imately 750,000 scientists, engineers, and physicians who had ,ust arrived from 0ussia. $srael%s )ffice of the &hief Scientist 3)&S4, a division of the *inistry of $ndustry -rade 9 ;abor, started si! 6incubators6 designed to integrate newcomers with local talent and to foster early stage technology development through entrepreneurship. -oday there are 2? such incubators located throughout $srael, and .5 percent of the pro,ects are science related research and development. -he )&S%s investment has paid off. -oday, B0 to ?0 percent of the )&S budget is derived from royalty payments from companies that initially received government support through its grant program. $n 2007, incubator companies raised /?B5 million in private funds, up 7? percent from 200.. &urrently, the )&S allocates appro!imately /> billion per year to incubators and other programs that encourage technology development.

'"(ma
$ncubators are not the only government sponsored programs fueling growth in $srael%s high tech industry. $n >AAB, the government created the Co<ma program to stimulate venture capital and attract foreign investment. At its inception, Co<ma consisted of >0 new venture capital funds, managing /20 million each, capitali<ed with a combination of government funds 3?0 percent4 and foreign investment 3.0 percent4. Co<ma made >5 direct investments and nine en,oyed successful e!its, either through public offerings or ac:uisitions. Co<ma attracted ma,or international venture investors li"e Advent from the #.S., 1aimler Den< from 8urope, and Eyocera from the +ar 8ast. -he average si<e of the leading $sraeli venture capital fund ,umped from /20 million to more than /250 million today. $srael%s venture capital industry is now second only to the #.S. &urrently, $srael has 80 active funds and total capital under management in e!cess of />0 billion.

E%c"ura)i%) I%*e&$me%$
$srael%s government has also enacted laws to encourage foreign investment. +or e!ample, corporate income ta!es have been reduced from B. percent in 200B to 27 percent in 2008. Additionally, the government approved a ta! e!emption on capital gains from foreign investment until the end of 2008.

*oreover, unli"e other emerging mar"et economies, $sraeli investment laws have helped shape a stoc" e!change that brings the public into its companies. +ounded in >A5B, the -el Aviv Stoc" 8!change 3-AS84 is a "ey player in the nation%s economic growth. As private venture capital investment began to fuel technology development in the mid >AA0s, the -AS8 developed state of the art practices and protocols to meet the standards of international modern e!changes. -he -AS8 reported an unprecedented number of initial public offerings in the first :uarter of 2007. $sraeli companies continue to list on the NAS1AF and New Cor" Stoc" 8!change. $n fact, $srael has more companies trading on the NAS1AF than any country other than the #nited States.

I&rael'& T"# Hi)h-Tech +irm&

$srael%s best "nown recent success is $scar *etalwor"ing, a leader in precision metalwor"ing tools. -he company attracted international attention when Warren Duffett%s Der"shire Gathaway $nc. made an 80 percent ac:uisition of /? billion, its first investment deal outside of the #.S., and the largest corporate deal in $srael%s history. According to Duffet, $scar is an 6ama<ing company run by ama<ing people. $ don%t get many opportunities to invest in companies li"e that.6 -eva, an $sraeli global pharmaceutical company, has also become a household name. With operations in over 50 countries and appro!imately 2.,000 employees worldwide, -eva is among the top 20 pharmaceutical companies and among the largest generic pharmaceutical companies in the world. According to $sraeli government data, -eva%s net income for 2007 reached />.A52 billion, 5 percent more than 200.. Another well "nown $sraeli company is &hec" 2oint Software -echnologies, a global leader in internet security. &hec" 2oint%s worldwide distribution includes 2,200 channel partners in 88 countries. 8ach and every Fortune 100 company uses &hec" 2oint security solutions. 0evenues for 2007 were /7B0.A million, an increase of 27 percent compared to /575.> million for 200..

A$$rac$i%) Hi)h-Tech Mul$i%a$i"%al&

*any global corporations have come to $srael, either to benefit from its intellectual capital or its ac:uisition opportunities. (eneral 8lectric was among the first international companies to establish a presence in $srael. $n >A70, ND& #niversal, a (8 subsidiary, opened its -el Aviv office, and by >A8?, the $srael 1efense +orce 3$1+4 was buying (8 engines for its + >. aircraft. (8 solidified its presence in $srael in 2002 through (8 Gealthcare $srael ;td., which revolutioni<ed healthcare in producing the world%s first miniature, portable cardiac ultrasound systemH the first combined nuclear and &- imaging scannerH and a new generation &reconstruction engine. SA2, the (erman based business software developer, which has more than BB,200 customers in over >20 countries and employs more than B.,.00 people in 50 countries worldwide, made its initial investment in the $sraeli company )+8E -ech, which in 2000 became a SA2 subsidiary called SA2 ;abs $srael. SA2 ;abs $srael is the company%s fourth largest development center worldwide. -oday, the 091 facility in &armiel employs around 800 people.

The ,e-$ Silic"% .alley/

&an $srael compete with high tech centers in the #.S. li"e Silicon 'alley for venture capital investmentI $n absolute terms, $srael%s venture capital mar"et is significantly smaller than the #.S. mar"et. Still, $srael is growing and attracting new investment, particularly in the area of seed stage development.

$srael%s venture capital industry e:uals roughly 7 percent of the #.S. venture capital mar"et. $n 2007, ?.2 $sraeli high tech companies raised />.7 billion from local and foreign investors compared to >,>.A &alifornia companies that raised />0.8 billion. Dut, venture capital investment in $srael continues to grow year over year, and seed stage investment in $srael is roughly e:ual to the #.S.=/88 million in $srael compared to />>0 million in the #.S. at the end of 2005. $n 200., $srael%s *ergers and Ac:uisition 3*9A4 activity hit an all time high with 8? transactions aggregating more than />0 billion. $n 2007, mergers and ac:uisitions of high tech companies totaled /B.2 billion. -here were .0 $sraeli company ac:uisitions totaling /2.5 billion, while 27 companies raised /70> million in $2)s. $n relative terms, $srael%s performance statistics in venture capital investment are nothing short of impressive. $srael%s ability to raise funds was outmatched in the #.S. only by Silicon 'alley and Doston. $srael has raised more venture capital investment than any 8uropean country by a margin of 20 percent. $srael reported 20 venture bac"ed public offerings in 200. and 2. in 2007 compared to 57 and 8. for the same years in the #.S. With >,800 active start ups=the highest seed stage investment levels since the dot com boom of the >AA0s =and a diversified high tech pipeline spread out evenly over the communications, life sciences, semi conductors, and internet technologies fields, $srael is poised for greater growth as a venture bac"ed economy. $n early 2008, $D* and *icrosoft made ac:uisitions in $srael aggregating in e!cess of /B00 million.

I&rael'& Ec"%"mic Ou$l""0

8ven as the global economy continues to ta"e investors on a wild ride, many economists predict that $srael%s economy will continue to grow steadily in 2008, despite a crippled #.S. dollar. *uch of this is due to the success of $srael%s high tech investments and development in recent decades. $srael%s success is also based on attitude=a uni:ue combination of curiosity and chutzpah. 1uring ;arry 8llison%s recent trip to $srael, he attributed $srael%s success to the constant :uestioning of conventional wisdom. 6Dusinessmen are successful when they :uestion the norms that conventional wisdom espouses,6 8llison said. 6-hat is where innovation comes from=finding errors in conventional wisdom. -hat is what my company is built upon and that is why $ thin" $srael will continue to be innovative.6 $srael%s level of investment may not match Silicon 'alley dollar for dollar, but $srael has outperformed the rest of the world in a global mar"etplace. $ndeed, despite the fact that the Jewish state has been forced to e!pend much of its energy battling for its own security over the .0 years since it declared independence, $srael continues to demonstrate its strength as a formidable candidate in the battle for investment capital in an increasingly competitive mar"etplace. Debbie Buchwald is the Executive Director for the Central Atlantic Region of the A erica!"srael Cha ber of Co erce#