The Problem With Microsoft’s Massive Expansion in Israel

Omri Zerachovitz
Omri Zerachovitz
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A Microsoft R&D Center in Herzliya, central Israel.
A Microsoft R&D Center in Herzliya, central Israel.Credit: Tomer Appelbaum
Omri Zerachovitz
Omri Zerachovitz

Last Tuesday, tech giant Microsoft announced massive expansion plans for its operations in Israel, doubling the number of employees over the next four years and opening new development centers in Be’er Sheva and Jerusalem.

The company has set a goal of hiring 2,500 new workers over this time frame, adding to the 2,000 workers already employed by Microsoft in Israel. In fact, the plan is part of ongoing expansion efforts with the company having doubled its Israeli payroll in the past three years.

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Microsoft’s plan is highly ambitious in light of the severe shortage in employees currently operating in the field. In the past decade alone, the tech giants have grown their Israeli workforces tenfold – they currently employ over 6,000 employees. Microsoft’s plan may further harm Israeli companies’ ability to grow locally, since they won’t be able to compete with the deep pockets of Microsoft and other behemoths. Over this period, the general rate of workers in high-tech (not limited to tech positions) grew by only 25 percent.

The multinationals take over

The past decade was not just one in which Israeli high-tech matured and managed to produce relatively large Israeli firms, but also the decade in which foreign research and development centers began to occupy a more central place on the map. In this time, the number of R&D centers grew from 150 to almost 400. True, some of these are small, but some are centers owned by major companies such as Microsoft, Intel, Apple and Amazon.

Accordingly, the rate of workers employed at foreign R&D centers, out of all workers in the field, has risen: According to Central Bureau of Statistics data processed by the Israel Innovation Authority, from 2005 to 2018 the percentage of workers employed by multinational companies rose from 7 to 19 percent.

The expansion of the tech giants should come as no surprise. In recent years, they have grown richer and more powerful, and to maintain that lead they invest even more in research and development. This process has a wide impact on the local high-tech sector as well.

For instance, when Amazon expanded its activities in Israel several years ago, voices were heard from other employers in the field that they were finding it difficult to match the e-commerce giant’s generous offers. This problem is present today as well – and even applies to other major companies.

They also compete with each other, by the way. This can be observed in the field of microchip manufacturing, among others. At the same time, Israeli companies that held large funding rounds last year still have the ability to attract workers as well.

In fact, the major question is whether Microsoft and other giants can help enlarge the “employment pie” – or whether they simply plan on drawing workers from other companies. It’s a free market, so there’s potential for positive competition over talent that will lead to rising salaries. But on the employers’ side, Microsoft’s announcement may reflect a broad trend and is therefore not necessarily an encouraging sign.

For Israeli companies to be able to develop, they need access to workers. True, they can recruit them from overseas. But for Israeli high-tech to be at its best, it is better that there be a balanced mixture of workers in foreign R&D centers and at Israeli companies, and of companies large and small. The reason for this is that foreign R&D centers are based mostly on tech workers, while Israeli companies also have marketing and sales activity, customer support, etc. A good balance between the two will allow for an increase in non-tech workers in high-tech.

“I think there’s a proper mix of startups and multinational companies; they receive value from working with us and with other companies,” said Microsoft R&D General Manager Michal Braverman-Blumenstyk.

Microsoft R&D General Manager Michal Braverman-Blumenstyk.Credit: Yossi Zeliger

“The mixture in Israel is very unique and everyone benefits from it. I’m all for competition,” she added. “It’s not a bad thing, and I think it keeps all of us much sharper. I agree that we have an obligation to get as many people into high-tech as possible, and we’re doing a lot of work to make that happen – for instance, working with youth.”

She said her company holds professional retraining for workers to allow them to enter the high-tech industry, though Microsoft declined to provide relevant data.

Generally speaking, large companies – especially multinationals – employ more inexperienced workers and workers from underrepresented communities compared to other companies. The reason is that their budgets are sufficiently large to train workers over time. At startups, money is tighter and every employee counts, so they seek more experienced workers.

It is probable that Microsoft won’t be able to recruit 2,500 new workers without contributing to an expansion of the employment pie in the field, but with rapid expansion it’s easier to whip out the wallet and compete for seasoned workers rather than invest in training. According to the company, it will also expand through acquisitions, as has happened in the past.

A challenge and an opportunity

Microsoft Israel is voicing confidence in its ability to meet that 2,500 target. To this end, the company said it will build five new development centers. Two will be in cities where the company is already active, Herzliya and Tel Aviv. Each of those will house 1,000 new employees, which means 80 percent of the new hires will be situated in central Israel. Centers will also be established in Be’er Sheva and Jerusalem. The location of the fifth center is yet to be determined.

The decision to open new R&D centers at such a rate is surprising in light of the recent switch to a hybrid work model (i.e., working both onsite and offsite), which could enable the company to employ workers in outlying areas without building large research facilities there. “Microsoft has examined the effects of the hybrid work model on its workers, and the findings show that the company’s employees wish to split their time between working remotely and working from the office,” a company press release stated. “Further, the findings show that workers’ ability to choose between the various options and combine them leads to greater satisfaction and organizational flexibility.”

The company rightly stressed that opening centers in outlying areas increases exposure to the high-tech industry as a whole. Microsoft also noted that its presence in the these more remote areas doesn’t end with employing workers, but also includes encouraging youngsters to enter the technological fields.

This is an important statement by Microsoft, especially at a time when there is widespread discussion regarding the need to open the gates of high-tech to more communities. Increasing awareness and creating role models will aid this goal.

And yet, Microsoft’s activity also shows the daunting challenge of expanding to outlying areas: Jerusalem, Be’er Sheva and the fifth center will employ a combined total of only 500 workers. The same challenge can be seen in the company’s operations in the predominantly Arab city of Nazareth, in the Galilee. The Nazareth center was established five years ago and today employs several dozen workers. Microsoft says the center has led to the employment of Arab employees in some of its other centers as well, but their numbers are modest.

The company refused to provide that data, but according to industry estimates, Microsoft employs about 100 Arab workers in Israel, or some 5 percent of its workforce in the country. This is a significant increase and a positive figure compared to the industry average, but lower than the average at multinational corporations. According to a 2018 report by the Innovation Authority and Startup Nation Central, the major companies – including multinationals – draw only 8 percent of their workers from the Arab community.

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