An online brawl between an Israeli startup entrepreneur and Amazon earlier this year, focusing on the US e-commerce giant’s talent-poaching, has highlighted the strained balance between the advantages of having multinationals come and operate in Israel and the damage their activities can inflict on the local tech ecosystem, with salaries being driven up and skilled employees in short supply.
Most multinationals in Israel operate through R&D centers, which they generally set up after the acquisition of a local startup.
Now, however, the country is looking to have multinationals diversify their activities, encouraging them to add manufacturing to their local R&D and to set up innovation hubs — where startups and corporations work together to develop and test out technologies — or accelerators, where startups are mentored by corporations to speed up development of their product.
These giants could also increase their presence in Israel by investing in local VC funds or opening their own corporate venture capital operations to invest in local startups.
“Multinationals are setting up R&D centers in Israel at an accelerating pace,” said Guy Hilton, the general manager of Start-Up Nation Central, a nonprofit organization that aims to connect Israeli startup firms to corporations, governments and NGOs around the world.
“On the one hand it’s great for the economy and the country: more global businesses opening here, more validation of Israel’s great tech industry, and greater connectivity with the world. The multinationals also serve as an unofficial academy for Israelis to learn how to work with large corporates. We can’t downplay the importance of this to the Israeli ecosystem over the years.
“On the other hand, it’s no longer possible to deny that the very high salaries at multinational R&D are making it hard for startups and scale-ups to hire good people,” Hilton said in an interview with The Times of Israel.
The head of the Israel Innovation Authority, Aharon Aharon, has also warned of backlash to the higher salaries paid by the multinationals. The authority is in charge of setting out Israel’s policies for its tech sector.
Diversify, don’t just multiply
In an interview published Wednesday in the Hebrew-language Calcalist daily newspaper, Aharon said that Israel should not encourage multinationals to set up new R&D centers but should lead them to engage in more diversified activities locally. His comments echoed sentiments he expressed in an interview with The Times of Israel last year.
“If you ask me if we should be happy or sad if another giant like Microsoft, Cisco, Apple and Amazon comes here, the answer is sad,” Aharon told Calcalist. “If another company like this comes, it will steal more people from one place to another, and it could be at the expense of Israeli companies, and it will not add to our country too much benefit. But it will lead to a salary rise. We have today the highest tech salaries in the world.”
Even so, Aharon, a former CEO of Apple’s R&D center in Israel, said he does not think the government should intervene in any way, but said it “does not have to support” the establishment of new R&D centers. “Whoever comes will come, but they will not receive government funding,” he urged.
In the interview with The Times of Israel last year Aharon said that multinationals should be encouraged to expand their interests from computerization, communication and software to areas including biotechnology and medicine, and also to set up other activities, like manufacturing, design and product engineering.
Start-Up Nation Central is also trying to show global companies that while “there’s still room for growth in multinational activity here” — especially in sectors such as pharma, digital health, Agri-Food Tech — they should also mull other forms of participation in the local ecosystem.
“Overall, there’s great value in engaging with the ecosystem through alternative models, not just buying a company and turning it into an R&D center.” These new models of operation have been “gaining momentum in the last 12-18 months,” SNC’s Hilton said in the interview.
“The acquisition of local startups or hiring the best software programmers is still going to happen, and that’s fine, as long as there’s a healthy balance between talent going to startups, scale-ups, and multinational corporations,” he said.
Some 23.4 new multinational R&D centers a year since 2014
Data compiled by SNC shows that there are now some 303 multinationals operating in Israel, running 344 currently active R&D centers; some multinationals have more than one R&D center.
According to the Central Bureau of Statistics, in 1989-2004 multinationals opened R&D centers in Israel at an average of 3.6 per year. However, since 2004 the rate has increased, and, according to data compiled by SNC, over the next 12 years Israel saw an average of 19.5 multinational R&D centers opened per year.
From 2014 through the first six months of 2018, around 117 multinational corporations from 21 countries have opened an R&D center in Israel. That’s an average of 23.4 R&D centers per year, the data shows.
More than half the multinationals opening innovation centers in Israel over the past five years are US-based companies — 67 in total. Canadian corporations have opened five centers and British and Chinese have set up seven each. Multinationals from Japan, Switzerland, Germany, France, India, Holland and Russia are also active in Israel via R&D centers.
The top five sectors of operation of these centers are software and programming; semiconductors; telecommunications equipment, information technology and services; medical devices; and financial services and banking, according to SNC data.