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.
Israel's high-tech sector attracted a staggering $4.43 billion in investment during 2015, according to the Israel Venture Capital Research Center (IVC). This number represents a 30% increase over 2014's amount. The IVC reported that there were 708 deals completed in the Israeli high-tech sector during 2015, averaging $6.3 million per deal.
- A Brief History
- High-Tech Today
- Resourceful Workplace
- Research Centers
- Foreign Investment
- Venture Capital
- Government Incentives
- International R&D Programs
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.
Resourceful Workforce
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.
Research Centers
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.
Foreign Investment
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.
Tech giant Amazon.com announced plans to buy Israeli firm Annapurna Labs for between $350 and $400 million in January of 2015. Annapurna Labs is a small company with 90 employees headquartered in Yokne’am that has been operating discreetly since 2011. Amazon is interested in purchasing Annapurna because they specialize in communications and processing systems for data centres, specifically for cloud-based services. The acquisition will allow Amazon customers to have a faster, more reliable, and more streamlined purchasing experience. This will be Amazon's first major dive into Israeli technology. Earlier in the week, US based cloud document storage firm Dropbox announced the purchase of Israeli company CloudOn for $100 million.
South Korean company Samsung announced a $10 million investment in the Israeli firm EarlySense in January 2015. EarlySense is a system that monitors patients who are ill enough to warrant continuous monitoring of their condition, but are unwilling or do not need to be connected to the standard array of monitors and sensors. The product is designed for use in non-hospital settings, including homes. Sensors installed in the special mattress or seat cushion monitor the patient's heartbeat, respiration rate, and movement. This represents Samsung's second investment in Israeli technology since the begining of 2015. During the previous week Samsung was part of a $12 million investment in Israeli app Rounds, which allows users to group-chat using video and other features. Other funders who invested in Rounds include Verizon Ventures and investment firms Rhodium and Draper Associates.
Venture Capital
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.
Government Incentives
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.
International 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.
BIRD
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.
CIIRDF
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.
SII-RD
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.
BRITECH
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.
Sources: Ministry of Foreign
Affairs, Times of Israel (January 20, 2015), (January 23, 2015) |