Study: Foreign R&D Centers Play Key Role in Israeli Tech

Report by Dun & Bradstreet finds 20% also manufacture in Israel and that government should be encouraging more

goshen - Haaretz - December 30 2010
A Tefron manufacturing plant in Israel. Haaretz

Israel’s high-tech sector glorifies the small, brash startup that employs a handful of workers and dreams of changing the world. The reality, however, is very different: Almost a quarter of the people employed in high-tech work for one of the 300-plus research and development centers of an international company.

In fact, the R&D centers and their multinational parents stirred fears that the jobs they created would be temporary and that they exploited Israeli know-how to earn profits in their home countries. The great majority of R&D centers were set up after a multinational bought an Israeli startup and rehired its staff as local employees.

A new report conducted by Dun & Bradstreet for the Economy and Industry Ministry dispels these fears. Despite wars, terror attacks and the occasional contraction or closure of a center, more companies have set up shop in Israel than have left. Salaries are high and managers learn the culture of big tech companies they can use when they start their own firms.

Main sites of Israel-based R&D centers

The R&D centers also have a knock-on effect. They not only use basic local services like cleaning and catering, but also more advanced ones such as outsourced software development, product design and hardware, which adds top to extra jobs. The outsized number of R&D centers enhances Israel’s global reputation as a high-tech center and even contributes to better political relations with foreign countries.

Some 380 multinational R&D centers have been set up in Israel since the 1960s, of which 307 are in operation today, according to the report. The first was IBM, which remains in Israel today, but most of the centers have emerged since 2008.

Among those that have shut down, the main reasons were high Israeli labor costs and downsizing after a merger or acquisition.

By numbers they account for only 4.5% of all high-tech companies in Israel, but they employ 71,000 people — a quarter of the country’s tech workforce.

Surprisingly, more than a fifth of the companies that operate R&D centers in Israel have also opened adjacent production facilities. Most of those involve highly sophisticated production, for instance semiconductors, medical equipment, pharmaceuticals manufacturing, aviation or water and agricultural technology.

There is a lot of potential for more manufacturing, says D&B. In addition to the 63 multinationals that report they do some kind of production now in Israel, another 91 said they were considering it, which could have important implications for employment in Israel’s underdeveloped Negev and Galilee regions.

“The importance of foreign companies investing in advanced production is critical in terms of advancing Israel’s socioeconomic goals,” said Tzach Barkai, senior vice president and head of the economics, research and development at D&B Israel.

“Pure R&D operations tend to be concentrated in very specific skills — engineers and programmers — working mainly in the center of the country. By comparison, manufacturing by nature includes a lot of skills and can bring to the periphery high-paid jobs,” he said.

In addition, Barkai noted, multinational companies bring with them technological know-how and state-of-the-art management techniques that could help raise productivity in Israel.

Israel is attuned to the need to generate as much added value as possible from the big overseas R&D presence, via expanded manufacturing but also by retaining the intellectual property developed in Israel. One way it’s doing that is through legislation approved last January that slashes tax rates on intellectual property registered in Israel.

The legislation also is in line with efforts by the Organization for Economic Cooperation and Development to crack down on multinational companies exploiting different tax rates in different countries to book profits in low-tax countries.

The D&B report found that U.S.-backed companies accounted for 70% of all the multinational R&D centers in Israel, 210 in number. German companies were second, with 17 centers and 5%.

Only eight Chinese and Hong Kong companies were represented, or 3% of the total, but Chinese companies tend to enter Israel through investment in venture capital funds rather than through a R&D presence, the report said. It estimated that as much as 20% of all venture capital entering Israel now comes from China.

Breaking down R&D centers by sectors, the D&B report said 26% were focused on information technology. Medical equipment, communications, semiconductors, internet and mobile each accounted for another 10% to 12%. Computer security accounted for about 7% of all activity at the centers, it estimated.