High-tech workers.
Another U.S. giant buys out an Israeli high-tech company. Communications software provider Avaya is acquiring the software division of ITNavigator. Photo by Ilan Assayag
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A dark cloud hovered over multinational research and development centers operating in Israel this week, after two new studies cast the desirability of government support for them into doubt. Until now, the centers were considered a source of Israeli pride. The Economy Ministry, which came up with a plan for supporting them years ago, continues to encourage multinational firms to set up R&D centers in Israel. But after all these years, the time has come to ask: Was it worth it? Do they make a positive contribution to the economy?

There are two main problems with the foreign R&D centers. The first is that they register hundreds of patents abroad rather than in Israel, which means tax can’t be collected on the profits. The second is that they tend to operate as closed bubbles, without any know-know spilling over into the local market - they don’t scatter their seeds in the local high-tech industry, as was anticipated by the Economy Ministry.

Only a small part of the funding for R&D by foreign firms in Israel comes from the Office of the Chief Scientist, but the government’s incentives have still been attractive enough to draw dozens of multinationals to the country. What they mostly receive is assurances for funding R&D projects in partnership with Israeli companies, usually startups, along with their own company’s investment. But the latest studies indicate that the economy sees the best returns from supporting small companies.

This means that the Israeli economy loses a great deal of added value to the foreign companies under the program. From the increase in registering patents abroad rather than in Israel, and doubts over the contribution made by the international R&D centers, we need to reevaluate the government support they get. In particular, a team headed by the director of the Tax Authority should look into taxation in relation to intellectual property.

Considering the reduced budgets of the Office of the Chief Scientist, it would be best to channel funds to whatever will yield the best returns for the economy. We should stop courting multinationals until we have thoroughly examined their added value to the economy. If the decision is made to renew support for them, it should be conditional on their registering patents in Israel. Given this factor, it is also vital that the chief scientist is part of the Tax Authority team looking into the issue.