Israel Strengthens Science and Tech Strategy

UNCLAS TEL AVIV 000327

SIPDIS
SENSITIVE

STATE FOR D/Lew
STATE FOR OES/STP - Ferguson, NEA/RA AND NEA/IPA
AMMAN FOR ESTH - BHALLA

E.O. 12958: N/A
TAGS: EINV TBIO TSPL ETRD IS
SUBJECT: Israel Strengthens Science and Tech Strategy

Ref: 09 Tel Aviv 653


1. (U) Summary. The confluence of several different GOI initiatives
indicate that the government is reassessing its industrial policy.
Broadening Israel's R&D strength beyond the high-tech IT and
communications sectors is the objective, with energy, life sciences,
water and cleantech sectors being the priorities. By grappling with
these issues, Netanyahu hopes to address both short term and long
term economic problems Israel faces. End Summary.

Doing Well, and Doing Better
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2. (U) At a Cabinet meeting February 7, Prime Minister Netanyahu
announced that he is establishing a team headed by National Economic
Council Chairman Prof. Eugene Kandel to formulate a national policy
on reducing dependency on petroleum, focusing on alternatives and
research. This comes on top of recent GOI actions to strengthen
high-technology funding from the Office of the Chief Scientist of
the Industry Ministry, start a Life Sciences Venture Capital fund,
and augment the Israeli contribution to the three US-Israel
bilateral research foundations. Separately, Finance Ministry DG
Shani has started discussions with Kandel on the country's
industrial policy, asking questions such as what is the best R&D
policy, whether to encourage large companies or small companies, how
to further cooperation between academia and industry, and whether to
encourage investment in one sector over another. Since November,
when the PM asked Kandel to formulate a new model for supporting R&D
in industry, Kandel has been rethinking how to better engage the
private sector.


3. (U) Some of these issues were brought into focus by the February
8 announcement by Intel Israel General Manager Maxine Fassberg that
Israel is in competition with Ireland to be the host of Intel's new
22-nanometer chip fabrication plant. Intel is comparing the
government grants and incentives of the two countries, and will
decide on the venue in mid-March. At present Intel has $7.3 billion
invested in Israel, of which $1.3 billion came from government
grants. Intel is now Israel's largest private sector employer with
nearly 6500 employees working at two chip plants and three design
and development centers. It exported $3.4 billion of products from
Israel in 2009, about 10 percent of the country's tech sector total
exports. The new plant would cost $2.7 billion and add 400 more
jobs. Debate over how much the government should spend to attract
investment from one of the world's best capitalized companies is
expected.


4. (U) Opponents of massive government pay-outs to attract foreign
high-tech producers prefer to see such funds spent domestically.
Israel has long promoted home-grown technology start-ups. Since
1993 the government has funded a program of assistance and advising
to small technology entrepreneurs, the Yozma program. Yozma founded
the Israeli venture capital market, and since then has sunk $170
million into companies in all phases of development with a primary
focus on the early stage. Initial individual investments by Yozma
in the start-up's equity typically range between $1 million and $6
million. Yozma works with companies on their business plan, on
management and hiring issues, and in finding strategic partners when
they are mature enough to go public. In a less structured but
equally important vein, the Industry Ministry's Chief Scientist
office controls a purse of 1.7 billion NIS (USD 456 million),up
from 1.2 billion in 2007. These funds are used to support
handpicked R&D priorities, and the Chief Scientist has great
latitude in how he can distribute it to spur enterprise development.
Yozma and the Chief Scientist's program are only two of the ways
the GOI has invested in Israel's innovation capability (described
more fully reftel).

Life Sciences Targeted Separately
--------------

5. (U) In a December 8, 2009, meeting with the investment community,
Israel's Ministry of Finance and Ministry of Industry and Labor
jointly unveiled a publicly financed Venture Capital Life Sciences
Fund. Finance Director General Haim Shani and Industry and Trade
Ministry Chief Scientist Eli Opper announced the new Fund will total
250 million shekels ($80 million). Trying to copy the successes of
Israeli high-technology start-ups in the Information and
Communication fields, the GOI hopes to stimulate Venture Capital
investment in the biotech, bio-engineering, pharmaceutical, and
medical devices fields. The GOI funds will be invested to leverage
private sector buy-in to product development and research. As
Shani put it, "we want to attract smart money." There will
actually be two or three different funds by sub-sector, with a
five-year investment period, and the Life Sciences Fund program is
expected to last for ten years. Opper lauded Israeli's
entrepreneurial spirit, but cautioned that the full impact of the
new Life Sciences Funds would only be seen in a decade.


6. (U) In announcing the search for managers of the new fund, Shani
made clear that only well-experienced VC fund managers would be
considered: those who had managed VC funds of at least $750 million
for at least 7 years. Competence in dealing with USG regulatory
authorities (FDA, USPTO, NIH) was noted as a pre-requisite for
potential fund managers, possibly indicating the export-driven
intent of the new VC program. Additionally, the Tel Aviv Stock
Exchange (TASE) Board of Directors has announced plans to launch a
new equity index covering the biomed sector. Of the approximately
100 technology companies currently traded on the TASE, 38 are in
biomed industries, mostly early stage enterprises engaged in life
sciences, biotech, pharmaceuticals and medical equipment R&D. The
total market value of all biomed shares is US$2.2 billion.


7. (U) Job creation is apparently another objective; Israel has more
than 160 biotechnology R&D companies, of which 90% have fewer than
50 employees and most do not ordinarily reach commercial levels of
development. Finding more ways to employ Israel's biotech
intellectual capital can reduce the brain-drain phenomenon appearing
in academia and medicine.

Comment
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8. (SBU) By reassessing its role in S&T development across a range
of economic sectors, the GOI is trying to grapple with both present
and future problems. For the present, it is trying to maintain
Israel's competitiveness as a venue for high tech R&D and
production, doing what is needed to attract the Intel and other
plants and development centers, and the investment they provide.
One the practical side, such measures would help address current
unemployment and budget deficit problems. For the future, GOI
investments in Venture Capital funds, technology incubators, the
binational research foundations (BIRD, BSF and BARD) and other
measures aim at securing Israel's technology leadership and
productivity in coming decades. Given the challenges the future
poses - regaining education excellence, better integrating
minorities into the workplace, finding the capital to pursue
expensive technologies - Kandel is asking the right questions. An
activist state role figures largely in the GOI responses.

Cunningham