If Silicon Valley didn’t exist, Microsoft would still be able to get some great ideas and acquire new technologies — in Israel. In a conversation with Israel’s Chief Scientist Avi Hasson, Microsoft CEO Steve Ballmer said that even though there is only one Silicon Valley, “Israel is among the second tier of innovative places” — akin to Microsoft’s hometown, Seattle.

That conversation — sort of a cozy “fireside chat” between Hasson and Ballmer — took place Monday during Microsoft’s biggest event in Israel: Think Next. The fifth annual event is sponsored by Microsoft’s Israel Research and Development facility, and features some of the most innovative ideas and projects on the Israeli high-tech scene today. Start-ups chosen by Microsoft display their wares at Think Next, and get exposure to investors, angels, and top industry figures that may lead to partnerships, or even a buyout.

Ballmer, both in his own remarks and in his conversation with Hasson, was effusive in his praise for Israel’s high-tech industry. Telling the crowd of about 1,000 that he was “thrilled” to be in Israel, Ballmer said that “the range of innovative things that Israel is doing is remarkable. There is such a wide scope of exciting things going on here. Israel is a start-up center, and there is always something to challenge us here, or one that we can acquire.”

One such company — one that had actually demonstrated its technology at a previous Think Next, said Tzahi Weisfeld, a top executive at Microsoft’s Israel R&D center — was Primesense, from which Microsoft licenses 3D camera technology, key to Microsoft’s Kinect gaming system. A number of MS technologies are “Made in Israel,” Weisfeld explained in a previous interview: These include Microsoft gateway VPN technology; Microsoft Security Essentials anti-virus suite; and the newest product, the recommendation system for Xbox systems, said Yoram Ya’akovi, director of Microsoft Israel’s Development Center, at the event.

That system, which recommends movies, music, games, and other downloadables based on user preference, is now a part of the newly released Windows 8 operating system, which is implemented on all of Microsoft’s offerings, including Windows phones and Slate tablets. “Anyone using preference on Windows 8 is using one of our products,” Ya’akovi announced.

Ballmer, and the rest of the MS Israel team, are naturally excited — and hopeful — over the release of Windows 8, which was just announced weeks ago. The fact that Windows 8 was released in tandem with the new phones running the operating system, as does Microsoft’s new Slate tablet, was no accident, explained Ballmer: The new OS takes an innovative approach to the user interface (replacing the traditional Windows Start menu with a series of customizable tabs to access applications, an interface well suited to mobile devices, according to many industry analysts).

“Windows 8 is the start of a shift for Microsoft,” Ballmer said. “Until now, we have been chiefly a software company, but now we are producing devices.” The future, informed Ballmer, is not just operating systems or even applications, but a user experience that combines all of them. “With Windows 8 we have re-imagined the user interface, giving the same user experience from phone to tablet to desktop, to the 82-inch tablet I have in my office.”

In addition, Ballmer continued, applications — especially those that access the cloud for services — are a major trend as well, and one that Microsoft is also working intensely to excel in. And applications are a major Israeli strength. After speaking to local start-ups that specialize in app development, Ballmer declared that “I saw so much innovation here, it is truly amazing.”

Another major trend in computing, continued Ballmer, is “big data” — getting a handle on the reams of information that come into the world every second of the day… gleaned from the Web, Facebook, Internet retail sites, and a myriad databases. The best — and perhaps only — way to control this flood of data is by implementing advanced machine-learning techniques, essentially “teaching” software to learn the habits and choices users make. “How do we use mass mounts of data to figure out what customers want? How do we figure out how to make the right suggestions?”

As data analysis gets more involved, Ballmer expounded, Microsoft will be concentrating on better ways to tame it — and in this area, especially, he expects Israel to lead.

“Leadership” might sound like a funny term to use when describing the contribution you expect a remotely located branch of the main company to provide, but Ballmer is serious. Israel was the first Microsoft R&D center outside the US, which opened in 1991. Today, the company has centers around the world, but there’s a big difference between the Israel center and the others. “In most countries, the R&D centers are given specific things to do,” explained Ballmer. An example is the R&D center for the Internet telephony app Skype, which is now a Microsoft brand, in Estonia.

“There are only four places in the world where the R&D centers get involved in general and innovative projects: the US, China, India, and Israel.” The US, of course, is where Microsoft is based; and China and India rate, Ballmer theorized, because “half the annual science grads in the world are there.”

Israel, which has far fewer tech grads — but, according to Ballmer, the highest number of Microsoft workers per capita of any place on earth — is on the company’s short list because “of the entrepreneurship and ability of Israel. We have built some great things in Israel. What you have done here is remarkable.”