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The United Nations Conference on Trade and Development (UNCTAD) report published this past Monday states that direct foreign investments in Israel in 2005 reached an all-time high - $5.6 billion. The report, which covers about 200 countries and reviews some 30 economic parameters, examined direct financial investments that are defined as strategic in such areas as manufacturing, industry, infrastructure, finances, services.

From Israel's perspective, the main news from the report is that in 2005, foreign investments in Israel crossed the $5 billion mark for the first time. For the sake of comparison, in 2000, which was considered and exceptional record year for investments in Israel, foreign investments totaled $4.3 billion. These figures reflect a 30 percent growth in foreign investments in Israel in the past five years.

The UNCTAD report also notes that in 2005, over $2 billion was spent on the acquisition of Israeli companies. This is less than half of the some $4.5 billion spent on Israeli companies in 2000-2001. From 2002-2004, the Israeli and world markets went through a crisis and recovery period, and investments in purchases and mergers involving Israeli companies in 2004 totaled $171 million. Israeli investment activity abroad in 2005 declined considerably, as Israeli companies spent just $1.5 billion on acquisitions and mergers overseas, compared with $4 billion in 2004.

The UNCTAD report also examined the investment potential of countries around the world, and placed Israel 23rd insofar as it being "attractive to foreign investors," but only 63rd when it comes to realizing its potential.

The investment potential index is composed of a number of economic indicators such as gross national product, corporate management, regulation, the capital market structure and the quality of life. The quality of life in a country affects investors willingness to visit in order to find investment opportunities or be involved in the management of companies they acquire.

Meanwhile, a study prepared by the Eastern Mediterranean Center (EMC) at the College of Management's School of Business in Rishon Letzion found that 2006 investments in Israel are expected to total $8 million - a 43-percent increase over 2005. The report is based on investment figures for January-September this year, during which time $4 billion was invested in Iscar.

The increase in foreign investment in Israel has resulted in an all-time high foreign investments to capital ratio in the local economy. In 2005, foreign investments represented 26 percent of all capital in the Israeli economy, compared to about 20 percent in 2003. By comparison, in Finland, which is similar to Israel when it comes to the size and high-tech basis of its economy, foreign investments account for just 12.3 percent of capital in the local economy.

"We are not cut off from the world," says Prof. Tamir Agmon of EMC, who believes 2006 will witness a big jump in bilateral investments in mergers and acquisitions, which will total over $8 billion.

"This figure will reflect 1.2 percent of all business merger and acquisition activity in the world," Agmon adds. "In 2005, Israel accounted for 0.4 percent of this activity. Since Israel's GNP is just 0.2 percent of the global total, [the above figures mean that] Israel is very active in mergers and acquisitions relative to its size."

Agmon believes Israel's increased involvement in mergers and acquisitions stems from recent economic reforms and the high quality and profitability of Israeli companies. "The world is shifting from companies whose power base is in physical properties to companies whose power lies in the quality of their employees," Agmon explains. noting this shift benefits Israel.

The mergers and acquisitions of the past few years are gradually turning Israel into an economy in which international companies are more involved, but still maintain a moderate presence - 16.1 percent. This is far lower than in Ireland, where foreign involvement in companies exceeds 66 percent, but more than in Japan, where just 1.1 percent of the economy is controlled by non-Japanese companies.