Chief Scientist warns high tech success may not last

Avi Hasson

Prof. Avi Hasson: If we don't take the necessary measures now, they will be forced on us within a few years from a position of weakness.

The impressive prosperity of the Israeli high-tech industry over the past three decades is liable to come to an end unless a change is made. This is the eye-catching conclusion of a report by the Israel Innovation Authority (until recently the Office of the Chief Scientist in the Ministry of Economy and Industry). 2015 was a historic peak for volumes of capital raising and exits, but the report says that forward looking indices paint a different picture.

The Innovation Authority obviously has an interest in portraying the situation as critical - an enormous opportunity versus a great risk - in order to win a higher budget and increase its power, but the figures support its assertions.

Israeli startups raised a record-breaking $4.4 billion from venture capital entities in 2015, and exits for the year totaled $8 billion. 85% of the investments were by international capital, and the local prosperity therefore reflects the fact that 2015 was a year of worldwide prosperity.

So what is the problem? It appears in the global innovation indices. Three of the four indices show a decline. Israel fell seven places in the Global Innovation Index, mainly due to a drop in business capabilities, infrastructure, and human capital. Israel dropped five places to 11th place in the Bloomberg Markets Index, as a result of its production capacities and patent registration rate. In the Compass Index, Israel slipped from second to fifth place because of the quality of its human capital, financing, and actual performance.

"We're nearing our glass ceiling," says Chief Scientist and Innovation Authority chairman Prof. Avi Hasson. "If we don't take the necessary measures now, they will be forced on us within a few years from a position of weakness, and after a great potential is wasted."

Hasson's report criticizes Israeli R&D investments, saying that there was no actual change in the budget, which is no longer competitive in comparison with other countries, amounting to 0.52% of GNP in 2015, compared with 0.8% in 2002.The Innovation Authority wants to fix this investment as a proportion of GNP or of the budget, but this requires an additional NIS 450 million. "There is an opportunity to do this in the two-year budget," Hasson says. Since Prime Minister Benjamin Netanyahu is also Minister of Economics and Industry, it may be easier to find a sympathetic ear for this change.

When the report was presented, Netanyahu said, "We have achieved great things, but we cannot stop at this level, even if it is a very high one. You made several very good proposals, some of them involving the budget, and we will consider them in the two-year budget. Some of them require a new and far broader perspective concerning the main resource supporting innovation - personnel - and we will talk a lot about that."

The international indices in which Israel is losing ground show a growing lack of high-quality personnel in the local high-tech industry. According to the report, the proportion of scientific degrees among all academic degrees fell from 13% in 2004 to 8.7% in 2014, and this was not because of a boom in studies in other fields: the absolute number of computer science, mathematics, and statistics degrees awarded sank from 3,000 in 2004 to 2,250 in 2014, a 25% drop.

"In order for the high-tech industry to maintain it competitive position in the world, thousands of jobs must become tens of thousands of jobs," Hasson asserts. "Until suitable personnel is found to fill these jobs, we're stymied. Meanwhile, our competitors are attracting and building talented people." The report proposes 15 steps that should be taken simultaneously in order to improve the supply of personnel in the technological fields, including "importing personnel, bring back brains from overseas, including population groups with little participation in the high-tech industry (Arabs and haredim (ultra-Orthodox Jews), improving natural sciences education, putting unemployed people over 45 back to work, and retraining higher education graduates in other fields."

Notable is the fact that the actions already taken in the Arab sector have quadrupled the number Arab high-tech employees within seven years. At the same time, Arabs still account for only 2% of those employed in R&D.

Another problem mentioned in the report concerns the ease (or difficulty) of doing business in Israel, an index in which Israel has traditionally had a low rating, and which is now becoming lower. This refers to parameters such as how long it takes to start a business, regulation, the ability to import the necessary personnel, labor laws, etc.

The world is on the brink of a substantial change in taxation policy with the base erosion and profit shifting (BEPS) guidelines by the Organization for Economic Cooperation and Development (OECD). This change means that tax will be paid where R&D took place, rather than in arbitrary tax shelters. Israel currently houses 300 R&D centers of multinational companies, most of which pay tax elsewhere, but whose employees and service providers pay tax in Israel. Will they stay here? It depends on what tax proposal they get from the state, compared with other countries. "This is a great opportunity and a terrible threat," Hasson warns. A major government plan is currently being designed, led by the Ministry of Finance, including recommendations for adopting guidelines and the proper governmental response.

"Moving ahead on all fronts"

One subject that was particularly emphasized in the report concerns growth companies - relatively mature companies reporting sales in the tens of millions of dollars. The Israeli high-tech industry is maturing that is the good news. The average price of exits is rising, meaning that companies are becoming more mature before they are sold, if they are sold. Such companies need diverse financing tools, including debt instruments, and the Innovation Authority is trying to help devise these instruments. The high-tech industry's bank debt currently accounts for only 1% of the NIS 900 billion total bank debt. This figure is expected to change in the coming years.

"The Innovation Authority will be the theater that coordinates activity on all these matters. We are not the Tax Authority, but we will deal in taxation. We are not the Ministry of the Interior, but we will deal in visas. We are not the Securities Authority, but we will deal in investments in public R&D companies. We are not ashamed to say that we are moving ahead in all these matters," Hasson says.

Published by Globes [online], Israel business news - - on June 22, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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