Why Israel's FDI draw remains conflict-proof

In December 2017, Israel made international headlines when clashes erupted in its streets after US president Donald Trump announced that the US embassy would be moving from Tel-Aviv to Jerusalem, angering Palestinians.

Instability is never good for business and this instance was no exception. In the following days, Israeli newspapers reported that several businessmen had called off their visits to the country because of safety concerns. The group included a delegation from Chinese tech giant Tencent and Japanese carmaker Toyota.

Sophiya Berezansky, a general manager at the Israel-Japan Friendship Society and Chamber of Commerce, confirms that several Japanese companies cancelled their visits in Israel during the period of unrest. “They were afraid of the security situation at that time – protests in the streets, terrorist attacks,” she says. “But in the long term, if there is no war, hopefully, everything should be fine and they will come back,” she adds. 

The numbers back Ms Berezansky's optimism. In recent years, FDI into Israel has been on the rise, regardless of the instabilities in the Middle East and tense situation within the country's borders. International companies have still opted to establish a presence in Israel, a country that is renowned for one of the best innovation ecosystems in the world.

A troubled history 

Since its creation in 1948, Israel has been involved in more than a dozen armed conflicts, both internal and external. It has been coping with a tense situation with Palestine and other neighbouring Arab countries that do not recognise its independence. Its geopolitical position does not suggest a business environment that would be attractive to international investors.

And yet, skyscrapers housing branches of international companies have been consistently rising along the Tel Aviv coast. This relatively small country of 8 million people has gained international renown for its widespread encouragement of start-ups, and the innovative environment it fosters in which they can operate. Israel had the highest R&D spend in 2015 among all OECD countries, it is the leading country worldwide in terms of venture capital invested per capita ($423 versus, for example, $186 in the US in 2015), and it is home to the second largest number of non-US companies listed on Nasdaq.

Frederic Ichay is a partner at law firm Pinsent Masons and has been working with multinationals investing in Israel for almost two decades. He says: “When we describe other countries, we mention ‘challenges’ or ‘economic problems’ but we don’t discuss ‘security threats’. In the case of Israel, we do. But, in my opinion, there is no major threat for investment.

“If we look back, there has been a major war in Israel every 10 to 16 years and instabilities every two or three years and the growth has still been steady. We haven’t seen any major link between security issues and the economy. When companies decide to invest in Israel, the security issue is already embedded in their approach. Investors see the country [as a good long-term bet and] they believe they can cope with its security situation.”

Hitting a high

In 2017, FDI into Israel reached its highest level since greenfield investment monitor fDi Markets began recording data in 2003. The number of companies investing in the country has been rising ever since the financial crisis, reaching a high of 31 companies in 2016 and 2017, according to governmental data.

In 2017 alone, Amazon decided to expand its R&D centre with more than 1000 employees planned for two sites in Tel Aviv and Haifa; Mitsubishi Tanabe Pharma, a Japanese pharmaceutical firm, bought Neuroderm, an Israeli drug maker, for $1.1 bn; and Continental, a German tyre maker, acquired Argus, an Israeli automotive cybersecurity start-up. Another notable investment was that of Intel buying Mobileye, an Israeli start-up that is developing self-driving cars, for $15.3bn, the biggest deal in the history of the country. Recently Intel announced it would also expand its manufacturing in Qiryat Gat, investing $5bn by 2020.

Gilad Be’ery, director of economic research at Invest in Israel in the Ministry of Economy and Industry, believes that this optimistic outlook will continue throughout 2018. “In recent years the investment has diversified. Before the 2000s most of the investors were American, as Israel has strong ties with the US. Today this still represents the majority. But there are also other locations that have joined the party, and first and foremost these are companies from China and Japan,” he says.

A diverse offering 

This diversification is also sectoral. Historically, Israel has been an attractive destination for tech companies. But as innovation has entered every line of business, more traditional and non-tech firms have developed more innovation needs too. In the case of Israel, Mr Be’ery says that this has been particularly prevalent in the automotive sector.

“Israel is not well known as an automotive superpower, it rather has tier-two and tier-three companies that supply for global top-tier firms. But with the worldwide trend of cars being ‘computers with wheels’, Israel took this opportunity and created a hub offering automotive innovation,” he says. This trend has been exemplified by Intel’s acquisition of Mobileye but also by the creation of the new tech hub of Mercedes-Benz in Tel Aviv.

According to Mr Be’ery, these companies are attracted to Israel because of its unique innovation ecosystem. “It is created by several distinctive blocks – each of them you can find somewhere else, but in Israel they’re stronger together. By 'ecosystem' I mean world-renowned academics, venture capital funding, the highest R&D as percentage of GDP in the world, and a good mix of large companies and start-ups," he says. The general economic outlook is also positive. In 2016, Israel's GDP growth rose to 4%.

Mr Ichay believes that these factors do not fully explain Israel's success and a "hidden reason” behind it is the cultural mindset of its people. “They always leave the door open for potential disruption. It’s embedded in the way people work, live and innovate. They always see a potential change... The other factor is the sense of urgency that results from their geopolitical position. They think they have to do everything now because they don’t know if they will be able to do it tomorrow. These two factors are unique for Israel,” he says.