Are International R&D Centers Hurting Israel's Local High-tech Sector?

The pool of trained engineers isn’t growing fast enough, as multinationals swoop up local talent with limited benefits to economy

Google's office in Israel.
Google's office in Israel. Nir Keidar

Over the past few weeks, two online sales giants seized Israel’s headlines with the news that they would be launching development centers in the country. Amazon announced that it would be launching a research and development center employing 100 people to work on its personal assistant Alexa. Meanwhile, China-based e-commerce giant Alibaba is also planning to open a development center in Israel within the next few months, employing dozens of people in the fields of financial technology and artificial intelligence.

Amazon and Alibaba will thus join a list of more than 300 international companies conducting research and development in Israel.

The news comes after significant changes in the field of technology over the past few years. Consumers are now the main drivers of technological innovation, and as a result companies such as Apple, Google, Facebook and Amazon are taking the place of those such as Microsoft, IBM, Oracle and Motorola as the world’s technological leaders. These companies make daily impact on their consumers’ lives, and the fact that Israelis have a significant role in groundbreaking developments is no doubt reason to be proud.

Unfortunately, these companies have limited impact on Israeli society as a whole. However, they do have an unfortunate side effect on Israel’s own technology industry; the demand they create for employees with experience raises salaries and pushes current local market players to look for cheaper workers overseas. The global companies launching Israeli centers pull from the limited supply of engineers available within Israel, drawing workers from other companies.

Average monthly pay for experienced high-tech workers in Israel from 2005-2010, in shekels
Haaretz

Amazon has already made several notable hires. It pulled Dr. Yoelle Mark away from Yahoo to serve as VP of international development, and Eyal Itah from Microsoft in order to head its development team. Meanwhile, graphic processor company Nvidia launched a development center in Israel less than a year ago, hiring Avi Shapira away from AMD. Company VMware hired Nati Amsterdam away from Waze.

The development centers hire more than executives, of course – all talented developers with experience are desirable targets. The foreign companies have a clear advantage over Israeli companies – they have excellent reputations, and they can offer attractive pay, experience, knowledge and opportunities to relocate abroad.

The Finance Ministry found that employees at international tech companies can earn salaries far higher than their counterparts at local companies, in a report published a year ago. The research covered employees at multinational corporations between 2005 and 2010. As of 2010, the employees at multinationals earned 64% more than those at local tech companies. Workers at international companies averaged gross salaries of 26,640 shekels a month, while those at local companies averaged 16,205 shekels. The gap was 43% when looking only at workers at local companies who had worked at some point at an international tech company; these workers earned an average of 18,595 shekels a month.

One of the effective ways to build a local team is by buying small Israeli startups. Sometimes the tactic is known as acqui-hiring, when the main goal is acquiring the founders’ knowledge and experience as a team; other times the acquisition is designed to purchase a product with potential financial benefits.

Tourism site giant Booking.com announced in July that it intended to launch a development center in Israel, and acquired the team of Tel Aviv-based startup Evature. Facebook, which launched its team in Israel four years ago, did so by acquiring the start-up Onavo. Based on the statistics of the NGO Start-Up Nation Central, international companies have launched at least 80 development centers in Israel since 2014, and at least 50 of them started as acquisitions of Israeli startups.

The new Amazon and Alibaba employees will be joining the some 71,000 people already employed at international development centers in Israel, which account for more than 50% of local research and development activity. Every new development center, and every acquisition of an Israeli company by a foreign company, boosts essentially this specific group of workers, whose average salary is three times that of the Israeli average. However, this group is not growing quickly, and is not significantly increasing the number of Israelis who benefit from the high-tech industry’s growth.

Israel on the R&D map
Haaretz

These companies create limited direct benefits for Israel’s economy. According to the central bureau of statistics, some 70% of the the jobs at the international development centers are in research and development, and are open to a limited group of engineers and programmers, while jobs in production, marketing, support and design are primarily overseas. In comparison, Israeli companies that conduct research and development employ no more than 20% of their workforce in this field. In other words, these companies’ main impact in Israel is to boost the salaries of a select group of people, and thus indirectly make it more difficult for Israeli high-tech companies to compete internationally.

Eyal Salomon, CEO of Ethusia, a headhunting company in the fields of high-tech and biotech, agrees. “Our relative advantage in Israel is entrepreneurship – our ability to find solutions. Quality development also happens in Germany, India and Ukraine,” he says. “International companies look at the average price of hiring an engineer in each location. If it costs 10% more here than in the U.S., that leads to projects being shuttered and being transferred to development centers in cheaper locations. That’s why we’re seeing layoffs at international companies in Israel despite the market being white-hot. I expect we’ll see more layoffs over the next two quarters.”

Even Amazon’s plan to hire 100 engineers and Alibaba’s intent to hire a few dozen will push up salaries, he said. It’s nearly a zero-sum game,” he said.

Innovation Authority CEO Aharon Aharon noted that today’s innovative companies are focused on supplying content instead of equipment or programs, and that it’s great that they’re choosing Israel as a home for their development. “These centers are raising generations of local engineers, who are being exposed to management methods and the forefront of technological innovation,” he said. These skills cross over into local industry, he noted.

In order for the success of Israel’s high-tech industry to improve the wellbeing of more groups of employees, Israel would do better to attract companies in different fields, such as pharmaceuticals, and companies that do more than just conduct research and development in Israel, he said. Companies such as HP Indigo and Intel also manufacture in Israel, which creates added value for Israel’s economy, Aharon explained.

“However, we shouldn’t expect to control the market, because it’s stronger than us,” he added.