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What's Sapping Foreign Investment in Israel?

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Daniel C. McCarthy

In the fall of 2000, Israel's technology sector was about to change course -- in two respects. Second only to the US in the number of high-tech start-ups, the country was on its way to drawing a record $11 billion in foreign investment, which generally has provided most of Israel's venture capital. The financial momentum drove scientific and business collaborations with foreign firms and fueled a booming job market hungry for both Israeli and Arab engineers.

In September of that same year, the Palestinian Authority declared the Al-Aqsa intifada, and Israel's government responded by imposing tight closure on the territories.

The ensuing conflict had the greater impact on the Palestinian economy, which, according to a report from the World Bank, saw a 12 percent decline in per capita real income in 2000, followed by a 19 percent drop the following year. Closure also resulted in some 80,000 Palestinians losing their jobs in Israel and the settlements alone, the same report said. Many of those unemployed were skilled workers in Israeli's high-tech work force.

"I live in East Jerusalem and know how difficult it is these days for both newly graduated or professional engineers to find a job," said Imad Khatib, secretary-general of the Palestine Academy for Science and Technology in Ramallah. Unemployment is up for Israeli engineers as well, but they have access to an active and specialized job market.

Khatib, along with a number of Israeli photonics firms, linked the problem of employing Palestinian workers to travel issues, rather than to personal political differences.

Given Imaging, which produces ingestible CMOS imaging capsules for diagnosis of disorders in the gastrointestinal tract, hires according to qualification, not nationality or religion, said Sandra Ziv, the company's media contact in Yokneam. She added the stipulation, however, that workers must "be able to get to our facilities daily."

OpTun Ltd. in Haifa makes integrated optical components for communications networks. The company would consider not only Palestinian applicants, but also business collaborations -- with the same caveats that Given Imaging expressed.

"No opportunities have arisen, but I would look upon them favorably if they did," said Edwin Shalom Slonim, OpTun CEO. "In today's climate, however, there would be practical difficulties, too."

Conflict of interests

As it is, Israeli businesses have their own difficulties. Foreign investment in Israel fell 60 percent in 2001, to $4.5 billion. The technology sector represents 80 percent of the decline.

However, it is notable that long-term investments by foreign residents in Israeli industry and real estate saw practically no reduction, suggesting that the initial decline in Israel's technology sector was linked more to global trends than to the intifada.

Several companies said the hostilities discouraged visits from foreign investors and customer contacts, but didn't influence investments, sales or shipments. There are signs, however, that this is changing in the wake of increasing and prolonged antagonism. The recent escalation of violence caused a US fund to reconsider a venture-leasing round for OpTun, Slonim said. The company was able to convince the fund that there was little effect on development activities and proceeded to close the deal.

"So, yes," Slonim concluded. "The balance changed, and intifada is today the first barrier; the global market is second."

The Oslo accords were founded on sustained improvements in the economy of the West Bank and the Gaza Strip that would lead to a lasting peace in the region. The increasingly protracted conflict diminishes that possibility and also puts foreign investment in Israel's economy at risk.

"Priorities are in health, management of natural resources, education and so forth," said Khatib of markets for Palestinian engineers. "These are also priorities for the Israelis. You know we live in a small piece of land and share [the] same problems that could be tackled jointly only when the political crisis and the occupation end."

Once a viable engine for both economies and, ultimately, for peace, Israel's technology sector could become the conflict's greatest casualty.

Photonics Spectra
Aug 2002
BusinessCommunicationslight speed

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