Who Should Receive R&D Grants?

The debate over the distribution of the chief scientist?s research and development ?(R&D?) funds refuses to subside, mainly with respect to the proportion of grants given to small companies versus big ones. The R&D budget for all types of financial assistance in 2006 was NIS 1.2 billion, but not all of it was awarded to startups.

Last year, the large technology companies received R&D grants totaling NIS 200 million. Although this is just 17 percent of the total financial support allocated by the chief scientist, some claim that the smaller companies are in greater need of that money − that the NIS 1 million they receive each year is not enough to help them grow.

Consultants at Sunrise Projects, which assists companies in obtaining R&D grants, believe that this is a distortion that should not be allowed to continue.?Take a company like ECI Telecom, for example,? says Sunrise CEO Boaz Lantsman. ?It received NIS 41.4 million from the chief scientist, but this is a company with a market value of about a billion dollars and annual sales in the hundreds of millions of dollars. For ECI, the $10 million the company received from the chief scientist hardly made a difference, while that sum could help a great many other companies.?

?The best economists in the R&D field do not accept the concept that a grant will be more effective in a smaller company than a larger one,? explain sources at the offices of Chief Scientist Eli Opper.

According to figures published by the chief scientist, ECI received more R&D grant money than any other Israeli company, and also received almost 50 percent more in 2006 than in the two previous years. In 2006 ECI received grants totaling NIS 41.4 million, compared with NIS 27.9 million in 2005 and 29 million in 2004.

Other recipients of very large R&D grants in 2006 were Applied Materials, Teva Pharmaceuticals, and Elbit Systems, which received NIS 29.5 million, NIS 25.5 million and NIS 25.2 million, respectively.

?The law to encourage industrial R&D determines the chief scientist?s criteria for awarding grants,? responded a source at the chief scientist?s office, ?and does not discriminate between large and small companies, between companies whose profits may be in the hundreds of millions of dollars and companies that are just starting out. All the companies can submit their applications to the chief scientist when it suits them, such that there is no separate track for large companies, but there is definitely competition over the money.?

Lantsman says that the need for the money is not taken into consideration.

?It is well known that in the early stages there is a tremendous failure in the market in the financing of technology-rich companies,? say Lantsman. ?Sometimes the grants from the chief scientist to small companies tip the scales between success and failure. Among the 41 companies that could have received ECI?s grant, there are a few that, thanks to that money, could become a future ECI.?

Lantsman feels that the problem facing the small companies that receive an average of NIS 1 million a year from the chief scientist is that their proposals face competition from many other small and medium companies in grants committee discussions, and only the very best receive financing. The plans of the big companies, on the other hand, are reviewed by a different committee and compete only against other big companies.

Lantsman believes that the big companies are not subjected to the same tests as the small companies, and essentially follow an application track that bypasses competition. Sources at the chief scientist?s office tried to sidestep this issue. They explain that the size of a company is not a criterion, but confirm that some of the large companies are on a different grant track that currently awards grants totaling NIS 90 million.

?If the purpose of the grants is to promote the most promising developments,? says Lantsman, leveling criticism at the R&D encouragement law ?that is not what is happening, because many of the most promising startups do not apply to the chief scientist.?

Lantsman also enumerates some of the problems with the law: The chief scientist?s approval for the export of knowledge from Israel for manufacturing purposes is not automatic − something that scares away foreign investors; the formula for calculating the chief scientist?s royalties causes distortions, as it does not include the company?s value at the time the grant is awarded and also ignores the entrepreneur?s contribution. If entrepreneurs feel the chief scientist is demanding too much in return for the grant, they will not even apply.

In general, says Lantsman, the R&D encouragement law favors larger companies. The chief scientist?s office recognizes this and told TheMarker that further amendments to the law are being drafted to solve the problems.

Periphery will see more grantsThe Chief Scientist, Eli Opper, will approve additional grants to companies who hire subcontractors in the periphery.

According to the new rules, a firm that receives an R&D grant and hires a subcontractor in a development area will be eligible to receive an additional grant proportional to the percent of the project done in the periphery.

Opper said that this is another step in the Trade and Industry Ministry?s policy to give priority to the periphery and close the gaps between those regions and the center of the country.