Entrepreneurship thrives in Israel

Israel has emerged as a destination where development and manufacturing exist hand-in-hand, allowing tech firms to streamline processes

  • By Eyal Eliezer, Head of Strategy, Invest in Israel | Monday, May 22nd, 2017

The ReWalk Personal Exoskeleton is an example of Israeli innovation

For multinational manufacturers, there is often both a physical and logistical distance between the development of a product and its construction. Devices may be designed and built at opposite ends of the world, making feedback and quick iterations in the development process incredibly difficult. In today’s business environment, any chance to accelerate business chains is therefore a golden opportunity. For this reason many companies are looking to bring development and manufacturing much closer together.

Israel has emerged as a destination in which a business can harness a flourishing and innovative development community, while also having access to world-leading manufacturing centres. As a result, more and more multinational companies are flocking to the country to take advantage of its business environment. In light of this trend, The New Economy spoke to Eyal Eliezer, Head of Strategy at Invest in Israel, about the many opportunities that exist for multinational companies that decide to build a presence in Israel.

In recent years, Israel has become a global hub for innovation, thanks to an enabling ecosystem that allows innovation to flourish

Can you give us an idea of the shape of Israel’s economy?
Israel is an increasingly strong, resilient and open economy. For consecutive years, Israel has seen significant GDP growth above that of the OECD and the US, and our unemployment rate of less than five percent is among the lowest in the world.

Despite the regional geopolitical challenges, the Israeli economy has been identified as one of the world’s healthiest and most secure. As an indication of this, all major ratings agencies have recently raised Israel’s credit rating to A+.

How has Israel’s economy – and in particular its technology sector – evolved over the last five years?
I would say that Israel, and especially its tech sector, has changed its orientation from a start-up nation to a scale-up nation. In the start-up phase, companies with innovative technologies were developing products while aiming at a relatively quick exit, such as a sale to a foreign multinational. This was good for the ecosystem in the beginning, and this is part of the reason there are more than 300 R&D centres in Israel today, as these foreign companies often converted their expertise into R&D centres rather than just
taking the IP and leaving.

Today, we still have thousands of start-ups, but we also have more examples of mature companies led by seasoned entrepreneurs, with the patience to build and grow. For example, according to research firm IVC, in 2016 late-stage companies raised more than four times the amount they did in 2012. This does not dilute the potential for foreign investment, but adds additional flavour to it; you can now partner with more developed companies and undertake activities in any part of the product cycle.

What makes Israel a good investment destination, and what role does Invest in Israel play in that?
In recent years, Israel has become a global hub for innovation, thanks to an enabling ecosystem that allows innovation to flourish. The cornerstones of this ecosystem are world-class academia, a talented workforce, the presence of hundreds of multinational R&D centres, supportive government policy, very active VC funding and an entrepreneurial culture. This spirit of innovation and entrepreneurship is not just confined to R&D, but pervades other sectors such as manufacturing and, more generally, the whole business ethos of the country.

Invest in Israel offers end-to-end services for interested parties. We are a one-stop shop for foreign investment in Israel. If you are an investor or a multinational company, we will engage with you during conferences both abroad and in Israel, supply information about the Israeli ecosystem, escort you during your visit, answer follow-up questions, help you navigate the Israeli Government and regulations, and much more. In addition, we will be here to assist you even after you have made your investment, in order to ensure that you have the very best experience.

Can you explain the country’s ‘innovation box’ regime?
The innovation box comes as a response to the base erosion and profit shifting (BEPS) project, a G20-led initiative that was designed to address governmental concerns about the potential for multinational corporations to direct profits where they are subject to favourable tax treatment. The essence of guidelines on this issue states that intercompany remuneration of the IP owner should be in line with the locations of its actual functions, assets and risk profile.

The Israeli Government believes that this regime change is an important opportunity for multinationals operating in Israel, and is determined to take the necessary steps to facilitate this opportunity. Following this determination, Israel has launched a new IP tax regime, as part of the 2017-18 state budget. Under the regime, a six percent corporate income tax rate and four percent withholding tax on dividends are expected to apply to qualifying companies with consolidated revenues of over $2.5bn. These companies will be given a commitment of rate stability for at least 10 years, if certain conditions are met.

Other qualifying companies would be subject to a 7.5-12 percent corporate income tax, with lower rates for companies set up in development regions and four percent dividend withholding tax.

We believe that the combination of the new innovation box and the already thriving innovation ecosystem is a very strong value proposition for multinationals; both for those that already have a presence in Israel and those that don’t. The opportunity lies in increasing the value-creating footprint in Israel, alongside shifting IP registration to Israel. Global companies following this path can include Israel’s innovation advantages within their enterprise, as well as enjoying an attractive way of adhering to the new tax regime.

Could you tell us more about Israel’s advanced manufacturing industry?
One of the main reasons that many multinationals have moved to Israel for advanced manufacturing is because the country is a hub for many of their R&D centres. The big plus those companies enjoy is much closer feedback between R&D and manufacturing, thanks to physical proximity, which makes the production process much more dynamic and allows for a far more efficient ‘learning by making’ process.

In addition, the vibrant start-up ecosystem in Israel is producing many technologies that enable next-generation manufacturing in areas such as the Internet of Things, big data and cybersecurity. Furthermore, Israel holds a strategic geographical position in terms of market access, as the country is located at the meeting point of Europe, Asia and Africa. Our country is situated close to the European market and benefits from an open EU-Israel trade agreement. Our relative proximity to Asian markets, which are enjoying spectacular growth, speaks for itself. The emerging African market is also an option.

What future role does foreign investment have to play in Israel’s economy?
We expect an even stronger acknowledgment of Israel as a global innovation hub and higher amounts of capital flowing here. Between 2013 and 2016, the amount of capital raised by Israeli hi-tech companies almost doubled. This flow of capital not only allows more start-ups to enter the space, it also represents a trend of more mature companies that not only aim at a quick M&A process, but are also becoming global enterprises themselves.

We also see an important trend of diversification in terms of sources. A prominent example is China. It is estimated that, in 2016, the vast majority of Israeli venture capital funds had at least one Chinese investor in their financing rounds. This diversification trend makes Israeli innovation more global, helping it to penetrate new markets and become more resilient. In the coming years, we expect more companies to open advanced manufacturing facilities in Israel in order to leverage the R&D-manufacturing proximity advantage. We expect more multinationals to register their IP here, alongside shifting even more value-creating activity in regard to the BEPS guidelines.