Investment Climate in IsraelInvestment Climate in Israel

June, 2005

State of Israel Ministry of Industry, Trade & Labor - Foreign Trade Administration

Investment Promotion Center

Contents

1. From Citrus to Software - An Economy Transformed

2. Foreign Investment & Venture Capital

3. Israel - a High-Tech Powerhouse

Main Indicators

Inflation (%)

Unemployment (%)

Imports ($ billion)

Exports ($ billion)

GDP ($ billions)

GDP/Cap ($)

2005F

1 - 3

9.1*

45.8

43.1

121

17.7

2001

1.4

9.3

33.3

29.0

109.5

17,180

2002

6.5

10.5

33.1

29.3

102.7

15,468

2003

-1.9

10.9

34.2

31.8

109.1

16,312

2004

1.2

10.0

41.1

38.5

117.2

17,200

* May 2005

From Citrus to Software – An Economy Transformed From Citrus to Software – An Economy Transformed

From Citrus to Software - An Economy Transformed

Until the 1980s, the Israeli economy was mainly focused on traditional industries

Since the 1980’s, the economy has been transformed by a high-tech explosion

In the 1960s, agriculture represented 70% of Israeli exports

Today, agriculture comprises only 3%

Jaffa Oranges vs. Software

0

500

1000

1500

2000

2500

3000

3500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Citrus Software

Source: Dept. Economic & Planning Admin., Ministry Industry, Trade and Labor

Exports ($ millions)

High-tech Exports

During 2003, hi-tech exports comprised 36% of Israel’s industrial exports

2003: Hi-tech exports - $9 billion

Over the last ten years, hi-tech exports have tripled

Source: Association of Electronics &Information Industries (Israel) - 2003

High-Tech Exports

0

2

4

6

8

10

12

14

16

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Economic & Planning Admin., Min. of Industry, Trade & Labor 2003

*

Case Study: The Software Industry

Sales of Israeli software have increased by over 700%, over the last 10 years

Professional manpower has increased 250%

Local sales amount to over $900 m per year

Where does Israel excel?

Biotechnology

Data security

Software

Semiconductors

Agrotechnology

Safety & Security

Telecommunications

Medical equipment

Optics

Internet technologies

Computer aided education

Excellence

Y. Hasson – Senior Vice President Nokia Venture Partners (London) September 2003

“

”

There are few places like Israel

where one can find leading technologies

in almost every field.

Foreign Investment & Venture Capital Foreign Investment & Venture Capital

Investment climate in Israel

Foreign Direct Investment in Israel

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

91' 92' 93' 94' 95' 96' 97' 98' 99' 00' 01' 02' 03' 04' 05'(F)

Source: Bank of Israel Not including traded securities

Millions USD

Sources of Foreign Investment - 2003

Source: Israel Venture Association , March 2003

Asia6%

North America

49%

Europe27%

Other18%

Happy Investors

Julien Nguyen, Managing Partner,

Applied Materials Ventures September 2003

Outside the US, we invest in only one other

country. That’s Israel.

“”

Major Acquisitions of Israeli companies

Perrigo bought Agis for $900 million

Intel bought DSP Communications for $1.6 billion

Lucent bought Chromatis for $4.5 billion

Marvell bought Galileo for $2.7 billion

Marvell bought Radlan for $195 million

Broadcom bought VisionTech for $1 billion

HP bought Indigo for $629 million

Veritas bought Precise software for $609 million

Guidant bought X-Technologies for $160miliion

Recent trends and developments Recent M&A

Technology Acquirer Sum TimeIsraeli Company

semiconductors fabless Agere Systems $150M 02/2005Modem-Art

healthcare Johnson & Johnson $80M 05/2005Impulse Dynamics

software UGS Corp $228M 04/2005Tecnomatix

Voiceover Internet Juniper Networks $68M 03/2005Kagoor

biopharmaceutical Ferring Holding SA $80M 03/2005Savient

Medical equipment Kodak $51M 03/2005OREX Radiography

Communication Alcatel ~$50M 03/2005Native Networks

processors for digital display devices Intel $100M 03/2005Oplus Technologies

semiconductors fabless Broadcom ~$85M 05/2005Siliquent

Recent trends and developments Recent M&A

Technology Acquirer Sum TimeIsraeli Company

Pharmaceutical Perrigo $900M 11/2004Agis

Speech Applications Scansoft $100M 11/2004ART Technologies & Phonetic Systems

Traffic Management CISCO $200M 8/2004P-CUBE

Wireless infrastructure INTEL $40M 3/2004ENVARA

Chips for Mobile-device applications ZORAN $54M 6/2004EMBLAZE

Enterprise software CISCO $100M 6/2004ACTONA TECHNOLOGIES

Content management software SAP $10M 7/2004A2I

Web security WATCHFIRE $45M 7/2004SANCTUME

Israel in the global investment market

Over 70 Israeli companies are traded on the Nasdaq (the biggest outside N. America)

Over 30 Israeli companies traded on European exchanges

21 Israeli companies dual-listed on the Tel Aviv Stock Exchange and Nasdaq

Venture Capital

Investments by venture capital funds constitute an added value above financial contributions - in management, world market familiarity, strategic guidance and economic credibility.

Capital raised by Israeli VCs Surges to $724m in 2004

Capital available for investment now at $1 billion

$1.5 billion projected to be raised by VCs in 2005

Source: IVC Research Center (2004)

High-tech Capital Raised 1995-2003

Source: Israel Venture Association, March 2003

0

1000

2000

3000

4000

5000

6000

91' 92' 93' 94' 95' 96' 97' 98' 99' 00' 01' 02' 03'

0

100

200

300

400

500

600

Q2 Q3 Q4 Q12002

Q2 Q3 Q4 Q12003

Q2 Q3 Q4 Q12004

Q2 Q3

Source: IVC Online

VC Investments (by quarter)

VC Investments in Israel & Europe

0

200

400

600

800

1000

1200

1400

1600

1800

Spain Holland Sweden Italy France Germany Britain Israel

2001 2002

Source: Price Waterhouse Cooper, May 2003

Good Things – Small Packages

Israel is a small country with a tiny

population, and yet it has many significant

high-tech success stories.

“

”Sven Lingjaerarde – Co-Founder & General Partner

Vision Capital – September 2003

VC Investments by Sector - 2003

Source:Israel Venture Assoc. January, 2004

Communications35%

Software27%

Life Sciences15%

Other Technology11%

Semiconductors8%

Internet4%

Multinationals

Microsoft built their first R&D facility outside the US in Israel

Cisco built their only R&D facility outside the US in Israel

Motorola’s Israel facility is the company’s largest development center worldwide.

IBM chose Israel for its first VC investment outside of the US

Sequoia Capital (Israel) is the company’s first VC fund to be set up outside of Silicon Valley

Foreign Companies Invested in Israel- Some Examples

US

• Microsoft• Pratt & Whitney• AOL Time Warner• Intel• IBM• Boeing Enterprises• Cisco Systems• GE• Lucent• 3Com• Hewlett Packard• Merrill Lynch• Motorola• Sun Microsystems

Europe

• Philips• Alcatel • Siemens• DaimlerChrysler• Volvo• Cable & Wireless• Baan• Volkswagen• Deutsche Telecom• L’Oreal• British Telecom• Danone• Ares Sereno• Unilever

Asia

• Samsung Electronics• Daewoo• Nomura• Hutchison Telecomm.• LG Group• Sony• Toyo Ink• Hyundai• Acer Computers• Sumitomo Trading• Fuji• Honda

Israel a High-Tech Powerhouse

Israel a High-Tech Powerhouse

Excellent Human Resources Dynamic Infrastructure

Excellent Human Resources

Highly educated workforce

A multilingual population with cultural, historic and business ties to almost every other nation

Over 1 million highly educated immigrants from the former Soviet Union since 1989

275 engineers per 10,000 employees

140

83 80

6055 55

45 43

33 33 3225

0

20

40

60

80

100

120

140

Israel US Japan Germany Canada Switzerland Taiwan UK Ireland Italy Singapore Spain

Scientists & Technicians per 10,000 Workers

Excellent Human Resources II

Well established and strong academic infrastructure

An outstanding entrepreneurial spirit

Success stories breed success. Everyone wants to be an ICQ

Excellent Human Resources III

Highly trained graduates of the Israel Defense Forces have turned cutting edge defense technology into civilian applications.

Israel leads in encryption software, a by-product of

it’s military industry, as are so many technologies

in which it excels.“Forbes” June 2002

“

”

Entrepreneurship

3.8

4.97 5.06 5.16

5.836.47 6.51 6.77 6.9

7.537.83 7.9

8.42

9.11

Japan Mexico France GermanySingapore UK Korea Ireland Australia Taiwan Canada Israel HK USA

Source: IMD World Competitiveness Yearbook, 2002

World Economic Forum 2002-3

Technology Index Rank 7/ 82 Innovation Sub Index 6/82

Networked Readiness Index: 12/80 Environment Component Index: 5/80 Readiness Component Index 8/80

Microeconomic Competitiveness: 18/80

Source: World Economic Forum,

Global Competitiveness Report; 2002-03

The OECD International Investment Declaration

In 2002 Israel adhered to the OECD Declaration on International Investment and Multinational Enterprises, and to the OECD Guidelines for Multinational Enterprises.

The declaration and guidelines create a framework of good practices principles for the operation of enterprises and Member States with regard to international investment.

IMD World Report 2004

Country Rank 1st

Source: IMD World Competitiveness Yearbook- 2004

Total expenditure on R&D as percentage of GDPISRAELSWEDENFINLANDILE-DE-FRANCE

Number of mobile telephone subscribers per 1000 inhabitants

ISRAELLUXEMBURGHONG KONGITALY

Total public expenditure on education as percentage of GDP

DENMARKISRAELCANADAMALAYSIA

GDP & energy consumption - Real GDP growth minus energy consumption growth

ZHEJIANGISRAELMAHARASHTRACHINA

University education meets the needs economyFINLANDISRAELSINGAPORESWITZERLAND

Consumer price inflation - Average annual rateHONG KONGISRAELTAIWANJAPAN

Skilled labor availabilityDENMARKICELANDISRAELAUSTRIA

Total R&D personnel in business per capita, full time work equivalent (FTE) per 1000 people

LUXEMBURGILE-DE-FRANCEISRAELBAVARIA

Qualified engineers available in labor marketINDIAFINLANDISRAELMAHARASHTRA

Entrepreneurship of managersZHEJIANGHONG KONGU.S.A.ISRAEL

Legal environment affecting R&D does not restrain business development

SINGAPOREFINLANDCANADAISRAEL

4th2nd 3rd

ישראל לקידום למסרים דוגמאות

WEF –Competitiveness Report 2004 – 2005

Country Rank 1st 4th2nd 3rd

Technological readinessISRAELU.S.A.FINLANDSWEDEN

Availability of mobile or cellular telephonesISRAELNORWAYICELANDHONG KONG

Business costs of irregular payments (all countries hare the same rank #1)

ISRAELDENMARKICELANDHONG KONG

Venture capital availabilityU.S.A.ISRAELUKHONG KONG

Quality of scientific research institutionsU.S.A.SWEDENISRAELFINLAND

Availability of scientists and engineersINDIAFINLANDISRAELJAPAN

Utility patentsU.S.A.JAPANTAIWANISRAEL

ישראל לקידום למסרים דוגמאות

WEF – The Global Competitiveness Report 2004 – 2005

Innovation

Israel is important to our goal because it has

historically been a hotbed of new raw technology

and scientific developments

Matthew I. Growney, Managing Director

Motorola Ventures September 2003

”

“

Growth Competitiveness Ranking – World Economic Forum 2002-3

2001 2002USA 2 1Singapore 4 4UK 12 11Germany 17 14Israel 24 19Korea 23 21France 20 30China 39 33

Patents

Number of patents (per 10,000) registered in the U.S. during 2003

Source: BDI - Business Data Israel

2.98 2.96

2.04 2.02 1.921.74

1.5

0.7 0.68

Japan Taiwan israel Switzerland Sweden Finland Germany France Britain

Israel - An annual increase of 20%

Modern Infrastructure

State of the art telecommunications

World renowned research and educational institutions

A highly advanced banking and financial sector

A large volume of high-tech and science based industry

Government Support

Competitive government assistance for R&D projects

Tax holidays for up to 10 years for foreign investors

The reform law for the Encouragement of Capital Investment will simplify bureaucratic processes related to the approval of investments through the establishment of a "green lane". In addition a "Strategic Track" will offer multinational companies significant benefits.

Supportive Business Environment

Worldwide taxation and customs treaties

Protection of trademarks, patents and intellectual property of all kinds

Comprehensive legal protection of foreign companies

Government Reforms

Liberalization of foreign currency

Deregulation of foreign trade

Privatization of government companies

Privatization

The privatization process began in 1986 and was accelerated in 1997

During this time 82 companies have ceased to be state owned

2003:National airline El-Al begins privatization

From 1986- 2002 $8.6 billion was raised through privatization

Trade Agreements

Membership in world organizations: GATT (since 1962), WTO (since 1995) and an active part in OECD

Israel has free trade agreements with:

EU (25) EFTA (4) Romania

US Mexico Bulgaria

Canada Turkey

Joint R&D Foundations

BIRDF – with the U.S. USISTC – US-Israel Science and Technology Commission BRITECH - with Britain CIIRDF – with Canada KORIL-RDF – with Korea SIIRD – with Singapore FRANCE GERMANY ITALY SWEDEN

European Union 6th Framework Agreement

An active participant in the European Union’s R&D Framework program since 1996

Israel continues to be active in the 6th Framework Agreement that began in November 2002

Technological Incubator Projects

23

200

735

54%

technological incubators operate

projects operate currently

projects have left the incubators in the last decade

have received further private investment

So, Why Do Business in Israel?

Outstanding human resources

Modern infrastructure

Supportive business environment

Cutting edge technology and scientific breakthroughs

State of Israel State of Israel

5 Bank Israel St., Kiryat Ben-Gurion Jerusalem, Israelwww.investinisrael.gov.il infoipc@moital.gov.il

Tel: +972-2-6662607 Fax:+972-2-6662983

Ministry of Industry, Trade & LaborForeign Trade Administration

Investment Promotion Center