The economic collaboration between Israel and the European Union has not come close to fulfilling its potential, particularly with regard to the tech sector, according to a first-of-its-kind report by the EU.
The authors of the report said European conglomerates are lagging behind their US and Chinese competitors with regard to both merger and acquisition deals and corporate investments in Israel, while VC engagement in the Israeli tech sector is low too.
Small and medium-sized European companies, which make up approximately 99.8% of all non-financial business in Europe and generate more than 50% of the EU’s gross domestic product (GDP), “are almost entirely absent” from the Israeli market, as they face “significant barriers” to being able to engage with the nation.
Collaboration in research and innovation (R&I) is limited, despite Israel’s growing participation in EU framework programs, such as the Horizon programs. This participation has “rarely translated into mutual collaboration,” the authors said, and in general, “trading and business conditions for EU companies in Israel could be improved.”
To say that Europeans are under-represented in the Israeli innovation scene is an “understatement,” said Ido Alon, one of the authors of the report, in a phone interview with The Times of Israel. Strengthening collaborations could be a “win-win” for all. Alon worked on the report for over a year with co-authors Shai Harel and Ori Ellman.
The aim of the study, called Strengthening Investment Opportunities in EU-Israel Economic Relations, is to help create new trade and investment opportunities between the EU and Israel “in the most dynamic sectors of the Israeli economy” by offering insights and relevant business information to EU investors and companies, the authors of the report said.
The research identified awareness gaps, lack of information and misperceptions among economic operators on both sides that are inhibiting cooperation between the two markets.
The UK has has been a leader among EU nations over the years in forging tech ties with Israel, explained Alon. After Brexit and the departure of the UK, the EU decided it was time to map out its position, without the UK, in the competitive Israeli tech scene.
Key recommendations include increasing the amount of information available to both sides by concentrating business, investment and research opportunities and offerings on joint platforms in English; increasing dialogue with financial institutions; creating a one-stop shop for all EU-related research grants and opportunities; creating a single-entry path to Europe for startups and firms accessing the member nations; and touting success stories, in order to create a ripple down effect.
The findings of the study rely on data compiled by Start-Up Nation Central, a nonprofit organization, and IVC Research Center, which track Israel’s high-tech industry. The authors also held some 50 interviews with players in the EU and Israel between March and July 2020.
A long history of ties
The European Union and Israel are close geographically. They have a long history of diplomatic and economic relations, and over the years have set up a framework of agreements that support and deepen trade and investment relations, providing “a strong basis for a flourishing economic partnership between the two,” the authors of the report said.
Trade relations between the EU and Israel are thriving, amounting to approximately €36.1 billion ($43.8 billion) annually. In 2019, EU exports to Israel were valued at €21.8 billion and imports at €14.3 billion, making the EU Israel’s largest trading partner.
In recent years, the EU has also been the top destination for Israel’s outgoing investments, amounting to €58.3 billion in 2018, according to data provided in the report. In addition, by 2019 Israel had invested approximately €1 billion into EU research and innovation frameworks and received a total of €1.4 billion in support.
The study focuses on Israel’s startup and VC ecosystems, in artificial intelligence, cybersecurity and digital health. It also looks at the potential of collaboration in the clean tech sector and the food technologies sector, which are areas where parties from both sides could benefit.
In recent years, Israel’s recognition as a global innovation hub offering opportunities for companies from around the world has gained traction. With more than 9,000 active companies among a population of 9 million, Israel boasts the largest startup density in the world, the report said.
This small community of entrepreneurs, representing only 0.1% of the world’s population, is at the forefront of global technological developments. Pioneering solutions in software, medicine, navigation and more are impacting industries around the world. Israeli startups attracted some 31% of global investment in cybersecurity in 2020, second only to the US, according to data compiled by the Israel National Cyber Directorate.
Israeli startups also own 11% of the global artificial intelligence market, the report said.
More than 500 multinational corporations from 35 countries conduct innovation activities in Israel — of which some 27% are headquartered in Europe — and belong to the automotive, engineering, biotech, and life sciences, IT and software sectors.
Israel’s booming high-tech industry has been fueled by major capital inflow in the last decade, amounting to €35.6 billion in 2010-2019. Annual investments in the ecosystem have grown from approximately €2 billion in 2013 to €7.29 billion in 2019. In 2020, Israeli tech firms raised a record $9.93 billion from investors, according to a report by IVC Research Center, which tracks the industry, and Meitar Law Offices.
‘Disproportionately small’ EU activity
EU firms and investors, however, are “disproportionately small” players in the Israeli tech scene, the report said, considering the size of the EU market and its overall relevance as Israel’s economic partner. In addition, EU investments in Israeli tech firms “falls significantly behind foreign competitors, particularly US, Chinese and UK firms.
Since 2015, approximately 689 Israeli startups were acquired and 213 new R&D centers were created by EU multinationals in Israel. EU companies made 42 M&A deals in 2015-2019, amounting to €1.7 billion. In terms of the number of transactions, the EU falls significantly behind the US and Israeli corporations and, in terms of total value, behind China as well.
US companies are far ahead of all other players in M&A transactions, with a total of 311 deals during the last five years, amounting to €40.8 billion. China clocked up 15 deals with a total value of €4.34 billion in 2015-2019.
If market barriers are reduced, the authors of the report said, “overcoming this difference” with competing countries “is well within reach for EU operators.”
A main reason for this EU underperformance in the Israeli tech scene is the “low level of awareness” of Israeli innovation in the EU market.
Information platforms about Israel’s high-tech ecosystem do exist in English, the authors say, but none that clearly state public and private sector opportunities.
There is also a lack of information in English about regulation or taxes, and EU operators are not always familiar with the correct channels or sites to browse through.
Some organizations in the EU see Israel as just a small market, a geopolitical island, that is already saturated with players. Others are still concerned about repercussions from the Arab world for publicly working with Israel.
Meanwhile, the US is the prime player on the Israeli scene. And China is gradually becoming a local player too. The Chinese government has been aggressively investing in Israeli startups, supporting research projects and increasing awareness in the ecosystem regarding opportunities in China. After the government opened the door for Israeli startups to enter the Chinese market, many started pursuing collaborations with China.
“Most Israeli startups look to the US market,” said Alon, for their tech pilots, for collaborations that become the basis for M&A deals. Their idea is to first target the US market and only at a later stage branch out to Europe.
That means the Europeans have missed out on “innovation, trade and other opportunities,” said Alon.
Israeli startups, for their part, find it hard to navigate Europe, which is one economic unit but made up of a variety of nations each with its own language, culture and regulations, said Alon. This makes it a daunting and time-consuming task for entrepreneurs, who find the one-language, one culture US scene much easier to handle.
There is also low awareness of Israeli startups succeeding in the EU, though there are dozens of examples. In comparison, most interviewees found it easy to list 10 or more Israeli companies that succeeded in the US.
The gaps can and must be bridged, the authors said. To do so, they suggest a number of recommendations. These include:
• Creating a joint mechanism/platform to pool the needs and resources on both sides to scout for opportunities and funding, as well as assist with market entry;
• Initiate dialogue between EU financial institutions and the Israel ecosystem and increase awareness of opportunities through roadshows, awareness building events and other initiatives;
• Create a one-stop shop for all EU-related grants, programs and opportunities in English
• Create a single pan-European path of entry for Israeli startups and firms to the single market;
• Formulate success stories of Israeli high-tech companies succeeding in the EU, and of EU companies succeeding in Israel for encouragement;
• Set up a hub or initiative at EU or member states level to match the innovation needs of small and medium businesses in the EU with what the Israeli startups can offer, and be the basis of a dialogue with the Israeli ecosystem that could lead to greater engagement.
The potential of the environment and food
The report also pinpoints environmental technologies and food tech as two main sectors that can have huge benefits both for Israel and the EU.
The EU is widely recognized as a global leader in the clean-tech industry, being one of the foremost promoters of and investors in innovative technologies that help mitigate environmental risks for future generations.
The flourishing high-tech ecosystem in Israel and the innovative clean-tech sector offer an abundance of opportunities for EU member states with different needs to boost their technological edge and get in on the latest clean-tech innovations.
To boost collaboration, the report’s authors suggest Israel set up an impact fund with a loss-protection mechanism for investors in the clean-tech sector that would reduce their risk-aversion for high-risk projects.
The report also calls for the creation of a single “marketplace of offers” for all business opportunities, grants and programs in the EU, with dedicated sections for associated members such as Israel, in English, and the creation of a pan-European on-boarding mechanism — a single entry path — to facilitate the entry of startups and small and medium enterprises to the Single Market. which could significantly reduce barriers.
To spur further innovation and the growth of the food-tech market, the EU needs to seek partnerships and engagements with external markets. This is where Israel can come into play as the 6th-largest market in the world for food-tech investments and home to 376 active companies, with 148 of them founded in the last four years alone.
Many EU food-tech needs have great potential to be matched by Israel’s capabilities in the sector, where the food industry has strong foundations in scientific research given the need for Israel’s agricultural self-sufficiency.
To boost collaboration, awareness about the opportunities in Israel must be raised, while the Israeli ecosystem needs to learn about the advantages of expanding to the EU.