Multinational R&D Emerges as Main Source of Israeli Innovation

Best local minds are at more than 200 R&D centers in Israel belonging to the world's leading technology companies, study finds.

Innovation is what gives Israel's high-tech industry much of its competitive edge, propelling local companies to the forefront of technology, while also attracting investment and partnership from global firms.  

Tracking patent registration gives a fair indication of Israeli innovation rates. A new study by the Samuel Neaman Institute, along with the National Council for Research and Development at the Science and Technology Ministry, has tried to establish who mans the front lines of local innovation by doing just that. The study tracked who registers the largest number of patents, businesses or research institutes, and who registers more patents in Israel, Israeli companies or local R&D centers established by multinational firms.

The results shows that the best local creative minds are concentrated at more than 200 research and development centers in Israel belonging to the world's leading technology companies.

The U.S. company IBM, the study found, has led the pack in patent registration in recent years with 463 between 2006 and 2010, followed by Israel’s Teva Pharmaceuticals with 430. As it takes such a long time to complete the patent registration process, the most recent data available is from three years back.

The study emphasizes the role of development centers as a focal point for innovation in Israel's high-tech industry. The presence of multinationals through these centers is a growing phenomenon, and the Israeli engineers employed at the centers participate in developing breakthrough innovations. These R&D centers have effectively turned into incubators for the next generation of entrepreneurs, with employees leaving to found startups.

Over the last two decades the number of new patents by foreign R&D centers has been on the rise. In the early 90s, the number was negligible, but by 2000 it had risen to 409 and reached around 1,000 in 2012, accounting for 27% of all the patents registered by Israel's business sector for the year.

The overall rate of patent applications in Israel per 100,000 people has suffered a decline since 2007. In 2010, the country placed sixth among countries belonging to the Organization for Economic Cooperation and Development in the number of patents applied for under the Patent Cooperation Treaty, with 19.9 applications for every 100,000 people. In 2007, Israel ranked fourth.

Other countries have also seen a declining trend in per capita patent applications since 2007, although this has been less pronounced. Ranking ahead of Israel in 2010 were Sweden, Switzerland, Finland, Japan and Germany, countries that devote heavy resources to encouraging innovation along with scientific and technological education.

Daphne Getz, who authored the study together with Eran Leck and Amir Hefetz, explains that because they are small, startups were hard hit by the global economic crisis, and have also been hurt by a decline in venture capital funding. They can't afford the expense of going through the patent registration process. On the other hand, large high-tech companies, suffering less from financial distress, are registering patents at a faster pace, she says.

Getz points out a peculiar phenomenon in patent registration in Israel over recent years: Whereas private individuals were responsible for many of the patents in the past – 40% of the overall number in 2003 - this dropped to 26% to 30% from 2008 to 2011. The business sector took up the slack, accounting for 58% to 59%. Meanwhile, universities are responsible for 10% to 12% of inventions and the government and hospitals for the remaining 2% to 3%.

The future may not be too rosy

Does the movement of Israeli know-how into the hands of multinational firms endanger the country's high-tech future? Opinions are mixed.

"There is an increasing trickle of know-how, intellectual property and technology in favor of the foreign companies, as reflected by a significant rise over the years in the number of unique inventions by foreign R&D centers in Israel, and the slice these inventions comprise out of overall Israeli inventive activity," claims Getz.

But, she hastens to add, having foreign R&D centers and multinationals in Israel is also a positive thing, creating jobs, spawning new business and contributing to economic output. "Beyond this, the researchers and employees at these companies acquire considerable knowledge. Even if they leave the company, they do so with knowledge in areas like marketing, management and organizational behavior. There are many examples of people who had worked at the multinational R&D centers establishing startups to which they applied the knowledge they accumulated,” she says.

But globalization - and the fact that intellectual property gets passed to another country, mainly the U.S. – also has drawbacks, admits Getz. "We aren’t succeeding in building an industry here of large- and medium-sized companies. Some of the companies already get sold at the startup stage."

The fact that Israel’s high-tech industry has no say over whether multinationals decide to keep R&D centers in the country, or move them elsewhere is a cause for concern, says Getz.

"The findings [of the study] need to encourage an in-depth discussion on R&D policy and protecting Israeli intellectual property," she concludes.

The study ranked Israeli companies, research institutes, and development centers according to the number of patent applications they submitted between 2006 and 2010. After Teva ‘s 430 patent applications, SanDisk followed with 320 as an Israeli company, along with 74 patents that it registered as a global firm. This number did not include the patents registered by Dov Moran's M-Systems – a company subsequently acquired by SanDisk.

Rounding out the top eight were all seven institutes of higher education  -- Haifa’s Technion in third place, followed by The Hebrew University of Jerusalem, Tel Aviv University, the Weizmann Institute of Science and Ben-Gurion University of the Negev. The eighth was the state-owned defense company, Rafael Advanced Defense Systems.

The researchers also ranked the patent activity of development centers run by the multinationals. It should be pointed out that patents have become key assets for these companies in waging colossal lawsuits and blocking competition. The flood of patents coming out of Israel reflects the importance of these development centers in the activity and business strategy of multinational firms.

After IBM and its 463 patent applications between 2006 and 2010, the U.S. company SanDisk was runner-up with 394 from 2006 to 2010, followed by Intel in third place with 321 applications. Altogether, these three companies accounted for 1,178 patent applications, representing 39% of all those by foreign R&D centers in Israel.

HP and Microsoft ranked fourth and fifth respectively among the multinationals in Israel, followed in order by three global microchip companies - Qualcomm, Freescale Semiconductor and Applied Materials - all of them based in the United States. Texas Instruments ranked 10th, while Eastman Kodak, Samsung (of Korea), General Electric and Deutsche Telekom (of Germany) also submitted dozens of patents for registration.

Most multinational R&D centers were established on the foundation of a local startup acquired by a multinational. The motive behind the acquisitions, particularly the larger ones among them, has been to take possession of specialized knowhow developed in Israel. Some 1,360 unique patents passed into the hands of multinationals from Israeli companies between 1990 and 2010 through a merger or acquisition with an Israeli company, the study found. These accounted for 13.4% of all the patents held by foreign R&D centers.

The study also ranked patent portfolios acquired by multinationals through mergers and acquisitions with Israeli companies. HP's acquisition of Indigo Digital Press brought with it 134 patents, giving it the top spot. Next was the 70 patents acquired in the $160 million 2010 purchase of Medingo by Hoffman-Roche, which subsequently shut down the Israeli company's local operations.

Moti Kimchi