Israel is a global hub of innovation and R&D with its immensely skilled and highly educated workforce, however, the country is less well known for its advanced manufacturing capabilities,” observes Ziva Eger Chief Executive, Foreign Investments & Industrial Cooperation Authority at Israel’s Ministry of Economy and Industry.
She adds, “These are capabilities that are especially vital in more sophisticated industries like biotech, pharmaceuticals, medicals devices and digital health and can offer a competitive advantage to the global healthcare and pharmaceutical companies looking to have that extra edge over their rivals.”
Ms. Eger explains that multinationals like Johnson & Johnson, GE Healthcare and Philips Healthcare as well as Israel’s own Teva Pharmaceuticals already have manufacturing plants in Israel but for the most part, the world’s major biomed companies see Israel as a source of R&D, while overlooking the enormous sophisticated manufacturing potential.
The Foreign Investments and Industrial Cooperation Authority is doing much to attract more multinationals to Israel. She says, “Firstly, we offer a one-stop-shop for facilitating investments in Israel. We help companies find Israeli capabilities that match their needs and collaborate with them to build a constructive visit in Israel, and escort them on the visit. When they decide to make the investment we assist them in doing business in Israel, including supporting them in their dialogue with relevant government agencies.”
This assistance is not limited to the first investment process – The Authority offers services for foreign investors even after the initial investment, as it believes that this holds the potential for long-lasting relationships between the investor and Israel.
She adds, “Secondly, we are making a substantial effort to spread the word about the great opportunity for life-sciences companies in Israel. We are engaging potential investors through delegations, conferences and proactive reach-out to companies with especially high investment potential.”
“Thirdly, we work towards promoting specific sub-sectors of the industry where Israel could offer the best value-proposition for investors. For example, we believe that the interplay between digital health and the pharma and medical devices sectors is a great opportunity, as Israel excels in digital health with close to 400 companies in the field. Business partnerships that will be created along these lines could translate into investments in R&D and manufacturing activities in Israel, as digital transformation pervades the whole industry.”
The Authority tailors its approach to different sources of potential investment with each deserving a unique approach. The US and Europe are already established markets. The advantage stemming from this is that many companies from these countries already have acquaintance with the qualities of the Israeli ecosystem and many of them already have presence here in the shape of scouting offices or innovation centers. The Authority’s focus with these kinds of investors is to broaden and deepen their activities in Israel, e.g. co-locating advanced manufacturing activities alongside the current R&D activities.
“On the other hand,” Ms. Eger explains, “the emerging economies of China and India are less acquainted with Israel. This means that we have to focus first on getting them to understand the immense benefits of working with Israel and the unique opportunities Israel has to offer. However, the upside of the relatively nascent life-sciences industries is that we are starting to work with them in a very early stage, and as a result, Israel could play a larger role in the partnership, compared to working with established markets, and so Israel could be better positioned in these huge, fast-developing markets.”
She also notes that since 2014, the Department sees a tremendous surge of interest of Japanese investors in Israel. “Innovation is at the core of ‘Abenomics’, the Japanese prime minister’s economic plan for revitalization of Japan’s economy. Innovation is of course Israel’s forte. In 2015 it was reported that FDI from Japan in Israel has doubled in comparison to 2014. Adding to that, at the beginning of 2017, Israel and Japan have signed a bilateral investment agreement that would further encourage investment and economic ties.”
“Identifying this potential, we recently held two investment conferences in Japan, in Tokyo and Osaka, with over 500 representatives of Japanese companies. These conferences had a special focus on the life-sciences, as we believe that Japan’s leading life-sciences industry, alongside Japan’s rising demand for healthcare as a result of its ageing population, holds great potential for Israeli innovation. We have received very positive feedback from this engagement with Japanese companies and we will continue to develop the relationships that were created as a result.”
Ms. Eger warns that starting a Greenfield investment in life-sciences is a very long process. “However, we see positive growth in manufacturing in Israel, we continue the dialogue with several investors, and are confident that it will bear fruit in the near future.”
As of January 2017, there were about 285 multinationals operating in Israel, a 5% increase over the past year and more than 330 R&D centers, a 10% increase.
She explains that there are new incentives planned to attract life sciences investors. This includes a government plan to transform the northern region of Israel into a healthcare and life-sciences hub. The plan, built on the successful concept of “industry clusters”, will take the different components of the ecosystem that already exist – hospitals, universities and research institutions, companies – and weave them into an organic ecosystem where the whole is greater than its parts. Foreign investors could play a very important role within the framework of this program, and we are very keen on giving foreign multinationals a respectful place in this program – including in advanced manufacturing of pharmaceutical products and medical devices.
The fine details of the program are still in final phase of approval, but it will involve enlargement of capital and labor grants “earmarked” for the region, upgrading of industrial zones in the region as well as supporting R&D efforts in advanced manufacturing and FoodTech.
She adds, “Secondly, I want to highlight the new tax incentive for IP creation and registration in Israel, also known as Israel’s Innovation Box. This new regime aims at leveraging the OECD’s BEPS (base erosion and profit shifting) project, to address government concerns about the potential for MNCs to locate profits where they are subject to favorable tax treatment. A central issue within these recommendations is the issue of the location of IP registration. The essence of guidelines on this issue is that IP registration should be in line with the locations of its actual functions, assets and risk profile. It is already widely agreed that multinationals are currently evaluating their global operations in a post-BEPS world, seeking to align ownership and control over intangibles with value creating functions. This change is expected to have a high impact on life-sciences companies, since a relatively large part of their revenues is attributed to their IP.”
The benefits of the program for the company include:

Corporate tax rate on eligible income: 6% for companies with consolidated revenues of over NIS 10b (app. $2.5b), 12% for other qualified companies (7.5% in national priority areas).

Dividend tax rate on eligible income: 4% • Capital gains (upon sale of IP): 6% for companies with consolidated revenues of over NIS 10b (app. $2.5b), 12% for other qualified companies.

Ms. Eger concludes, “We are certain that the combination of the new Innovation box with the already thriving innovative ecosystem is a very strong value proposition for multinationals – both for those who already have a presence in Israel and those who don’t. The opportunity lies in increasing the value-creating footprint in Israel, alongside shifting IP registration to Israel. Global companies following this path will allow themselves both to include Israel’s innovation advantage within their enterprise, as well as to enjoy an attractive way of adhering to the new tax regime.”