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Sunday, January 30, 2011

Israel leverages stance in global economy

Israel leverages stance in global economy

By acting as a technology mentor to countries like China, India, Brazil, Israel hopes to enhance its global economic role.

Israel is weighing steps to leverage its place in the global economy by acting as technology mentor to the rising powers like China, India and Brazil, according to Eugene Kandel, chief economic adviser to Prime Minster Binyamin Netanyahu.

“We are a small country and can’t offer trade benefits. But we can offer technology benefits. A small idea implemented in a big country becomes a big idea,” Kandel said in a briefing to financial reporters on Wednesday, saying that policymakers are only in the early stages of developing a strategy.

Israel is an acknowledged technology power, ranking among the world’s leaders in research and development spending and patents. But with just over seven million people, its total gross domestic product is about $200 billion, about the size of Louisiana’s.

Israel’s two-way trade with China amounted to just $4.55 billion in 2009, or 0.2% of China’s
Kandel said Israel's technology companies will have to shift some of their focus from the developed markets of the US and Europe to developing economies. That will involve more than simply adjusting existing products but also developing technology that is cheaper and meets the other needs of less-advanced economies, he said.

In the past, Israel has used innovative capabilities to win friends, most notably in agro-technology and in defense electronics. Its drip-irrigation systems are used around the world and bilateral ties with India and China have involved large arms deals. But more recently, the technology Israel contributed to the Internet revolution and in biotechnology has been largely directed toward developed economies.

Israel and China have already begun cooperation in technology. Beijing wants to use Israeli innovations to help it to move up the value chain, Yiyi Chen, a professor at the Shanghai Jiaotong University and an adviser on Middle East affairs to the Beijing government, told The Media Line last week during a visit to Israel.

China National Chemical Corporation (ChemChina) two weeks ago completed its purchase of a majority stake in Israel’s Makhteshim Agan Industries, the world’s biggest maker of generic agro-chemicals. The purchase will give Chinachem access to Makhteshim’s research and development and licensing expertise. Nearly a year ago, China made its first foray into Israel’s start-up sector when Yifang Digital Technology acquired Pegasus Technologies. Huawei, China’s biggest maker of telephone equipment, has quietly opened an R&D center in Israel.

“We need to create an atmosphere and environment that when Israeli entrepreneurs decide what to work on next look not only on their familiar environment of the US and Europe but also look how to scale to China and India -- large counties that are growing fast,” Kandel said.

While he is counting on Israel’s private sector to lead the way, Kandel said Israel’s government will have to play a role because in China, at least, government-to-government ties are important even in business.

Israel has been struggling to adjust to changing world trade patterns. About three quarters of its exports, led by technology, pharmaceuticals and chemicals, go to the US and Europe. The so-called BRIC countries (Brazil, Russia, India and China) account for only about 13%. “This isn’t enough,” he said.

Meanwhile, Israel is starting to raise the bar on foreign direct investment (FDI), as the economy’s need for foreign capital has diminished, Kandel said. Israel has been running a surplus in its current account since 2003 while a shake-up of the pension fund sector has redirected more domestic capital to industry.

The discoveries of massive reserves of natural gas off Israel’s Mediterranean coast will improve Israel’s balance of payments situation as its need for oil and coal imports declines, he added.

“We have to change our policies to say we don’t want foreign investment just for the sake of foreign investment; but if it will benefit us, that will build industrial clusters,” Kandel said, citing technology multinationals like Intel and Motorola as the kind of business Israel wants to attract.

“Companies like these that bring a lot of cutting-edge technology and create cutting-edge companies around them amplify our competitive advantage,” he said.

Earlier this month, Israel formally moved to what Kandel called an “agnostic” stance on FDI when it ended the practice of giving preferential tax rates to government-approved overseas investment.

Although Kandel said Israel hadn’t taken any steps to discourage it, FDI has in fact been on the decline since 2006 when it peaked at $15.3 billion. In 2009, it plunged to $3.9 billion as the global financial crisis weighed down on cross-border investing, but last year as the world economy revived, FDI into Israel continued to decline, reaching just $456 million in the first nine months of the year.

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