April 22, 2002

Despite the recession, the overall quality of Israel’s technology hasn’t changed.Many investors think the combination of political instability and the world’s current business slowdown has created a poor environment for new investment in Israel. But, a closer examination reveals that there are some very attractive business opportunities that smart investors are taking advantage of:

Manpower – In contrast to the recent overheated economic environment, a large number of highly skilled employees have become available in Israel as startups are cutting back operations because of a lack of capital. On top of the general downward pressure on wages, an approximate 10 percent devaluation of the shekel has significantly cut wage costs. Israeli companies are upgrading their professional staffs, at lower costs.

Market Perception – Israel is perceived as a problematic area. This perception often deters companies from working directly with an Israeli-based company. This difficulty has provoked Israeli companies and startups to market their technologies through foreign-based corporations. For corporations that realize the inherent value of the technology and the true business exposure, this provides an opportunity to partner with Israeli companies that previously marketed their technologies and products directly.

Creativity – The creativity of Israeli engineers has not decreased. There are plenty of examples of world-class innovations from individuals and/or Israeli universities that formed the basis for successful businesses. This innovative process continues, and some “golden egg” opportunities are waiting for partners and/or investments.

Valuations – During the hype of the Israeli high-tech era, every entrepreneur who had an idea was able to raise funds at relatively high valuations. Startups that don’t have strong business plans are now going under. Today, companies with good business plans are having difficulties raising funds and many with real technology, markets and potential are willing to raise money at lower valuations (at times well below their true value).

Government support – Foreign investors are reluctant to invest in Israeli companies until the issue of “regional instability” passes. The government is trying to compensate for this increased risk by offering attractive incentive packages, including capital and research grants.

Other research and development incentive programs include the American-Israeli Bi-National Research and Development Foundation (BIRD-F), which offers financial support of up to 50 percent of the expenses of product and market development performed through the cooperation of U.S. and Israeli companies. In addition, the European Research & Development program supports cooperation of product and process development between European companies, European universities, Israeli companies and Israeli universities.

It is probably correct that the business climate during the current turmoil is risky for industrial businesses. However, the last 25 years of Israeli high-tech has proven that in spite of frequent problems in the region, including several short wars, the growth of many companies with strong scientific, engineering and business foundations earned an excellent return on investment to foreign and Israeli investors and strategic partners.

So what is a successful strategy for investors or business managers?

1. Understand the real risks involved in investing in and working with an Israeli company which is best learned from the histories of successful foreign companies operating in Israel, such as Intel, Microsoft, Applied Materials, Motorola, Vishay and Siemens.

2. Locate the Israeli company that best fits your needs.

3. Contact the Israeli company directly, or through a government-based liaison, such as the Israeli consulate, BIRD Foundation, or Chief Scientist’s Office.

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Jason Harris

Jason Harris

Executive Director

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