Investing In Israel

By Arthur Pinkasovitch | July 29, 2010 AAA

With 65 public companies listed on the Nasdaq, Israel has exploded to be a major international entrepreneurial and technological center. Unlike other nations which heavily depend on foreign direct investment as a means of job creation and growth, Israeli entrepreneurship has driven the small start-up nation to house some of the most respected technical institutes and major public companies in the world.

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This is not to say that Israel does not serve as a proper hub for companies originating outside its small borders. Microsoft (Nasdaq:MSFT) and Intel (Nasdaq:INTC) are two such corporations which have been able to capitalize on the Israeli expertise in programming and software engineering. For example, in 2009, Intel's Israeli subsidiary saw record breaking exports of $3.4 billion thanks to a new Israeli based chip manufacturing facility.

Growth in the Downturn
While the ongoing turmoil in the Middle East continues to be a major source of concern for Israeli investors, the nation offers some risk mitigating characteristics. Following the 2000 burst of the internet bubble, Israel's GDP grew at an annual rate of 4%. During the 2008-2009 recession its GDP continued to expand, although at a slower pace. The main source of the slowed growth came due to decreased demand for exports, which account for 45% of the gross domestic product. Nonetheless, GDP growth remained positive.

Compared to the United States which saw a 2.4% GDP decrease in 2009 and continues to experience weekly bank collapses, Israel, like Canada, did not experience a single major banking failure during the recession. Nor did the Israeli banks require bailouts. As Israel was able to weather away the global financial crisis due to strong economic fundamentals, the country with only 7.35 million people, was recently upgraded to "developed" status and was admitted into the Organization for Economic Cooperation and Development (OECD).

Technology Driver
Of the 10 largest Israeli public companies, seven are in the technology sector, two, Teva Pharmaceuticals (Nasdaq:TEVA) and Protalix BioTherapeutics (Nasdaq:PLX), are in the health care sector and Elbit Systems (Nasdaq:ESLT) is a $2.2 billion aerospace/defense products and service provider. Israel's high-tech sector, spurred by a high concentration of start-ups and entrepreneurial vision, has been engine of the country. Israel is the leader global leader for R&D spending, which amounts to 4.9% of GDP, a full percentage point above that of Sweden, which holds the second rank and 2% higher than that of the United States.

The Israeli technological sector has even been able to capitalize on the nations ongoing needs of military innovation much better than other nations. According to Dan Senor and Sual Singer, authors of "Start-up Nation: The Story of Israel's Economic Miracle," the military serves as the base for entrepreneurial and technological skills. Check Point Software Technologies (Nasdaq:CHKP), influenced by military technology, provides IT security services such as firewall and virtual private network tools. Through a series of acquisitions, Check Point has emerged as Israel's second largest company, trailing only pharmaceutical giant Teva. 98 % of Fortune 500 companies use CHKP products.

Changing the World
A thriving venture capital market, optimal allocation of government resources and an economic environment which encourages entrepreneurial risk taking, will allow Israel's technology sector to remain ahead of the curve. For example, Palo Alto-based Better Place, founded by the Israeli entrepreneur Shai Agassi, recently opened its first electric car charging station in Israel. As the infrastructure required to support such a system becomes available in Israel, the nation is slowly reducing the global dependence in oil. (For addtional stock analysis, see Israel: An Overlooked Market.)

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