THE ISRAELI ECONOMY AT A GLANCE 2009

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1 Ministry of Industry Trade and Labor THE ISRAELI ECONOMY AT A GLANCE July DATA REFERS TO 2008

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3 Minister of Industry, Trade and Labor. Dear Friends, The Israeli economy continued to grow at a relatively fast pace during the year In comparison with all developed economies Israel's growth was clearly among the fastest. Against the backdrop of the global financial crisis, much of the year witnessed further rises in industrial production as well as in foreign trade. The very nature of Israel's open economy and international trading activities in diversified fields, at once exposed Israel to the global crisis whilst allowing for adjustments and restructuring of the domestic economy. On the one hand the Israeli economy has been shifting from agricultural and traditional industrial manufacturing to more knowledge intensive industries and ICT trading and service provision. On the other hand, much of the traditional industries have been undergoing technological upgrading in a constant bid to remain competitive and innovative in the global market place. Success has largely been based on the one major comparative advantage of the Israeli economy the availability of a large pool of highly skilled engineers and technicians. The continued policies of nurturing and encouraging young students to enter the science-based fields of engineering and software, coupled with the support granted to companies engaged in research and development have further enriched the stock of human capital. The Ministry of Industry Trade and Labor continues under the Netanyahu government, to encourage investment in the periphery as well as supporting widespread investment in research and development. Despite the current downturn in the global markets which adversely affected our economy in the first quarter of, the outlook for the medium to long term is for strong economic recovery and growth. Regional trading with our immediate neighbors has increased and around the globe Free Trade Agreements with major trading blocs, as well as other international agreements, further enhanced Israel s position to trading with a widening range of countries. With Israel working steadily towards full accession to the OECD we are confident that our economy will continue to provide unique investment opportunities to an increasing number of global partners. Sincerely, Binyamin Ben-Eliezer

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5 INTRODUCTION THE ISRAELI ECONOMY AT A GLANCE The Israeli Economy at a Glance, as the title suggests, provides the reader with an overall picture of the Israeli economy in graphic, tabular and textual form. The continued widespread demand for this publication has encouraged us to keep amendments to a minimum, aside from the annual statistical updates. Essentially the publication is divided into three main sections: The first section contains basic macro-economic data, foreign trade statistics and international comparisons portrayed in graphical form. The second section contains tables of data, particularly major economic and industrial indicators, enabling a quick look at recent trends and developments in the growth of the local Israeli economy. The third section of the publication reviews selected economic policy and industrial policy, enabling a brief understanding of macro-economic policy in general and the Ministry s contribution in particular. Furthermore, the reader will find a comprehensive list of world-wide contacts appended to the main publication. Our internet website also provides a wide range of information including this publication and many others. Our main address, at which a full English text is available is: The editor. 5

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7 TABLE OF CONTENTS (2008) GRAPHS & CHARTS Facts & Figures 2008 Israel s Exports of Goods, 2008 Israel s Imports of Goods, 2008 Industrial Exports by Major Branches, 2008 Contribution of Specific Region to Export Growth Composition of Industrial Exports 1995 vs Breakdown of Import Increase by Region Resources and Uses of Resources, 2008 Business Product Composition, 2008 Quarterly Employment & Unemployment since 2006 Production by Major Industrial Branches, 2008 Consumer Price Inflation Rates, Industrial Production Comparison 2008 G.D.P. Per Capita, in P.P.P. Terms, 2008 Real G.D.P. Growth Comparison, 2008 Civillian R&D Expenditure as a % age GDP 2006 Hourly Compensation Cost in Manufacturing, 2007 Technology Indicators Comparison Share of ICT Value Added Share of ICT Jobs TABLES Main Indicators, Population Employment and Industrial Indicators Imports of Goods Exports of Goods Service Sector Exports Selected Industrial Policy Foreign Trade Invest in Israel Center Israel s International Trade and Economic Agreements Investment Incentives Employment Grant Program Research & Development Incentives Industrial Cooperation Authority Economic & Trade Representatives Abroad

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9 ISRAEL FACTS & FIGURES 2008 Figures refer to millions of U.S. $ unless otherwise stated. Gross Domestic Product 198,997 Business Sector Product 147,200 GDP Per Capita (U.S.$) 27,224 Investment in Fixed Capital 35,920 Imports of Goods (Net) 64,531 Exports of Goods (Net) 51,321 Industrial Exports* 46,933 of which, hi-tech 17,150 Imports of Goods and Services** 84,192 Exports of Goods and Services** 80,427 Population Average (Thousands) 7,308 Unemployment Rate (%) 6.1 Inflation Rate (CPI-%) 3.8 * Including net polished diamonds ** Balance of payments figures. Source: Israel C.B.S 9

10 10 ISRAEL`S EXPORTS OF GOODS, 2008 (MILLIONS OF U.S. $) TOTAL EXPORTS 61,322* CENTRAL & EASTERN EUROPE 2, % EFTA 1, % E.U. 17, % NORTH AMERICA** 21, % ASIA*** 12, % AFRICA 1, % OCEANIA % LATIN AMERICA 1, % Unclassified-$1,813 (3.0%) * Before reduction of returned goods ** 1. N.America including: U.S.A., Canada & Mexico 2.Export to U.S.A.- $19,973 (32.3%) ***Including Asian Republics of former U.S.S.R Source: C.B.S.

11 ISRAEL`S IMPORTS OF GOODS, 2008 (MILLIONS OF U.S. $) TOTAL IMPORTS 65,173* NORTH AMERICA** 8, % E.U. 22, % EFTA 4, % CENTRAL & EASTERN EUROPE 3, % ASIA*** 13, % LATIN AMERICA 1, % AFRICA % OCEANIA % Unclassified-$11,057 (17.0%) * Before reduction of returned goods ** 1. N.America including: U.S.A., Canada & Mexico 2.Import from U.S.A.- $8,034 (12.3%) ***Including Asian Republics of former U.S.S.R Source: C.B.S. 11

12 INDUSTRIAL EXPORT BY MAJOR BRANCHES, 2008 Total Industrial Exports 46,933* Millions of U.S.$ Exports Excluding Diamonds 40,634* Millions of U.S.$ FOOD & DRINK, 2% MINING & MINERALS, 5% CHEMICALS & PLASTIC, 35% ELECTRICAL, ELECTRONIC &TRANSPORT, 33% FOOD & DRINK, 2% MINING & MINERALS, 6% METALS & MACHINERY, 12% TEXTILES CLOTHING & LEATHER, 2% OTHERS, 2% METALS & MACHINERY, 14% TEXTILES CLOTHING & LEATHER, 3% OTHERS, 2% CHEMICALS & PLASTIC, 40% *Including Net Polished Diamonds Source: Israel C.B.S 12 DIAMONDS, 13% ELECTRICAL, ELECTRONIC &TRANSPORT, 29%

13 CONTRIBUTION OF SPECIFIC REGION TO EXPORT GROWTH 2008 Compared to 2000 Increment of $ 29,918 million Oceania, 2% Asia, 21% Unclassified, 1% Central & Eastern Europe, 5% Western Europe, 33% North America, 30% Latin America, 4% Africa, 3% Source: Israel C.B.S 13

14 COMPOSITION OF INDUSTRIAL EXPORTS 1995 VS TOTAL INDUSTRIAL EXPORTS EXCLUDING DIAMONDS: IN $ 12,302, IN 2008 $ 40,634 MILION 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, HI-TECHNOLOGY INDUSTRIES 4,549 17,150 MID-HI-TECH INDUSTRIES 3,388 13,125 MID-LOW-TECH INDUSTRIES 2,542 8,081 TRADITIONAL (LOW-TECH) INDUSTRIES 1,823 2,278 TOTAL INDUSTRY 12,302 40, Office & computing equipment 1, Electronic components 1, Aircraft industries 1, Electronic communication equipment 3, Industrial medical & control equipment. 4, Pharmaceutical products 4,970 Source: Israel C.B.S 14

15 BREAKDOWN OF IMPORT INCREASE BY REGION 2008 COMPARED TO 2000 INCREMENT OF: $ 29,426 million. % Western Europe Asia Unclassified North America Central & Eastern Europe Latin America Africa Oceania Source: Israel C.B.S 15

16 RESOURCES AND USE OF RESOURCES 2008 RESOURCES (282 BILLION U.S.$) USE OF RESOURCES (282 BILLION U.S.$) IMPORTS, 30% PUBLIC CONSUMPTION, 18% EXPORTS, 28% GROSS DOMESTIC PRODUCT,70% PRIVATE CONSUMPTION, 41% GROSS DOMESTIC INVESTMENT, 13% Source: Israel C.B.S 16

17 BUSINESS PRODUCT COMPOSITION 2008 Electricity & water 2.6% Personal and other services 3.1% Agriculture, forestry and fishing 2.4% Finance and business 37.0% Manufacturing 23.2% Construction 6.7% Transportation and communications 10.2% Commerce, restaurants and hotels 14.7% Source: Israel C.B.S 17

18 QUARTERLY EMPLOYMENT & UNEMPLOYMENT 4 1 SINCE 2006 unemployment (rate) employment (thousands) I - III IV - VI VII - IX X - XII I - III IV - VI VII - IX X - XII I - III IV - VI VII - IX X - XII Page 1 2, , , , , , , , , ,400.0 Source: Israel C.B.S 18

19 INDUSTRIAL PRODUCTION* BY MAJOR BRANCHES, 2008 PERCENTAGE BREAKDOWN **LIGHT INDUSTRY 7% FOOD & DRINK 14% ELECTRICAL, ELECTRONIC & TRANSPORT 25% MINING & MINERALS 4% METALS & MACHINERY 13% TEXTILES CLOTHING & LEATHER 3% CHEMICALS & PLASTIC 34% * Excluding diamonds ** Light industry includes: wood, paper, printing, furniture and jewellery. Source: C.B.S Ministry of Industry Trade Labor. * Excluding diamonds. **Light industries includes: wood, paper, printing, furniture & jewellery. SOURCE: Israel C.B.S. and Ministry of Industry, Trade & Labor 19

20 20 CONSUMER PRICE INFLATION RATES ANNUAL PERCENTAGE CHANGE* Source: C.B.S - Prices Division. * Year end compared to previous year end

21 INDUSTRIAL PRODUCTION 2008 REAL ANNUAL PERCENTAGE CHANGE (Compared to 2007) Israel Slovak Rep. Korea Poland Norway Germany Denmark Finland Turkey Ireland Czech Republic United States France Japan Portugal Source: OECD - Main Economic Indicators, Israel C.B.S. 21

22 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,859 G.D.P per Capita, in P.P.P*, 2008 U.S. Dollars 42,539 37,266 36,523 34,208 34,100 30,620 28,206 27,644 27,060 25,395 22,190 22,040 19,499 13,138 Denmark United Kingdom France Japan Spain Israel Korea New Zealand Czech Rep Portugal Slovak Rep. Hungary Turkey *Purchasing Power Parities Source: International Monetary Fund, World Economic Outlook Database, United States Ireland 22

23 * Source: Eurostat except Israel THE ISRAELI ECONOMY AT A GLANCE REAL GDP GROWTH 2008* % * EUROSTAT forecasts, except Israel Ireland Poland Israel Czech Republic Norway Germany Turkey United States Finland United Kingdom Euro area France Portugal Sweden Japan Denmark 23

24 24 R&D EXPENDITURE AS A PERCENTAGE OF GDP, 2006 OR THE LATEST AVAILABLE YEAR Portugal Israel Sweden Finland Japan Korea Germany Denmark United States France United Kingdom Czech Republic Ireland Spain Source: OECD and Israel C.B.S Souce: OECD and Israel C.B.S.

25 HOURLY COMPENSATION COST IN MANUFACTURING, 2007 IN U.S. DOLLARS Sweden Finland United Kingdom Ireland France United States Japan Korea Israel Hong Kong SOURCE: U.S. Bureau of Labor Statistics Denmark 25

26 INFORMATION TECHNOLOGY INDICATORS COMPARISON SELECTED OWNERSHIP PER 100 INHABITANTS, 2005 Internet users Personal Computers Cellular subscription Israel Hong Kong, China Denmark United Kingdom Austria Germany France Ireland Japan Belgium Spain U.S.A Portugal Greece Source: International Telecommunication Union. Sweden 26

27 SHARE OF ICT VALUE ADDED IN BUSINESS SECTOR PRODUCT Finland Korea Ireland Hungary Sweden United Kingdom United States Denmark Japan Czech Rep. Portugal Germany Spain ICT: Information and Communications Technologies Source: OECD Israel 27

28 SHARE OF ICT JOBS IN BUSINESS SECTOR, Portugal Source: OECD Sweden Israel Ireland Denmark France Hungary Korea Japan Germany United States United Kingdom Czech Rep. Spain ICT: Information and Communications Technologies Finland 28

29 TABLES

30 Main Indicators Real annual percentage change Annual average Gross Domestic Product Business Sector Product GDP per capita Fixed Capital Investment Buildings and other construction works Investment Annual Average Current Balance (Billions of Dollars) Net External Debt (Billions of Dollars) Consumer Price Inflation (Annual percentage change) Source: C.B.S., Ministry of Industry, Trade & Labor 30

31 Population, Immigration and Employment Average Population (thousands) Percentage change in average population Source: C.B.S ,690 6,809 6,929 7,054 7,180 7, Immigration (thousands) Employed Persons (thousands) 2,330 2,401 2,494 2,547 2,682 2,777 Unemployed Persons (thousands) Unemployment Rate (%) Main Industrial Indicators Real Annual Percentage Change Production Export Employment Productivity Gross Investment Capital Stock All figures refer to total industry excluding diamonds. Source: C.B.S., Ministry of Industry, Trade and Labor & Bank of Israel.

32 Imports of Goods (gross) By Major Category Millions of U.S. $ (Current Prices) Consumer goods 4,257 4,977 5,330 5,901 6,852 8,240 of which, durable 1,733 2,150 2,312 2,513 2,842 3,189 Production inputs 24,584 29,936 33,340 35,155 40,491 46,604 Investment goods 5,342 6,020 6,226 6,746 9,231 10,270 of which, machinery & equipment 4,399 4,876 4,949 5,242 6,473 7,127 Total Imports 34,212 40,969 44,943 47,841 56,623 65,173 Source: C.B.S. 32

33 Exports of Goods (gross) Millions of U.S.$ (Current Prices) Agricultural exports ,027 1,029 1,326 1, Citrus Flowers Industrial exports 28,441 34,308 37,627 42,038 48,845 56, Polished Diamonds 8,991 10,577 12,061 12,737 14,569 15, Industrial exports excluding diamonds 19,450 23,731 25,566 29,301 34,276 40,634 Of which hi-tech 9,000 10,982 11,767 14,156 15,781 17,150 Other exports 2,628 3,402 4,116 3,381 3,921 3,957 Total Exports 31,783 38,618 42,770 46,448 54,092 61,339 Source: C.B.S., Foreign Trade. 33

34 Service Sector Exports Millions of U.S.$ (Current Prices) Travel & Tourist Services Transportation Services Other Business Services Of which: Computer Software Research & Development 2,060 2,380 2,783 2,755 3,095 4,057 2,599 3,201 3,686 3,659 4,444 5,170 8,609 10,352 10,909 12,713 13,513 14,815 2,878 3,176 3,384 3,991 4,364 4,849 1,252 1,593 1,278 1,768 1,711 2,911 Total Services 13,222 15,979 17,436 19,185 21,107 24,088 Source: C.B.S., Balance of Payments 34

35 Israel's Foreign Trade Policy Israel's trade policy objectives are as follows: Introduction International trade plays a vital role in the economy of the State of Israel. Indeed, the Israeli economy has integrated into the global trading system in a rapid and efficient manner, by implementing multilateral and bilateral trade agreements, as well as by pursuing a unilateral process of trade liberalization and structural reforms. In harmony with the policy steps, aiming at the full integration of the Israeli economy into global trade trends, the Israeli economy has undergone a substantial process of structural reforms. In a relatively short time the Israeli economy has developed into a liberalized marketplace trading in a wide range of manufactured goods and services worldwide. Throughout the 1990 s, mass immigration from the former Soviet Union, proactive economic policies, fiscal and monetary reforms pursued by the Israeli government, initiated a period of innovation and growth. The Israeli economy became open to competition from within and without, driven by the private sector. Intense entrepreneurial activity became the hallmark of the business environment, attracting the attention of foreign and local investors. The Israeli technological, research and knowledge based industries have gained world wide recognition and have served as an engine for economic growth. (1)Trade Policy Continued integration of the Israeli economy into the global trading system, through the use of policy instruments that relate to trade in goods, services, investments, competition, environment, intellectual property, development and others. Promoting and maintaining Israel s export competitiveness by expanding and updating the network of international agreements designed to promote trade, facilitate market access, eliminate non-tariff barriers and achieve sustainable economic growth. Increasing the efficiency of resource allocation, by enhancing reforms that aim at the introduction of greater competition and increased transparency in the domestic market. 35

36 Creating an attractive climate for investors, businesspeople, consumers and the public as a whole. Israel s trade policy is enhanced by a wide range of international agreements and commercial arrangements with countries and international bodies. In recent years, the Government of Israel has been pursuing its international trade policies in a well coordinated effort, along three paths in parallel: multilateral, bilateral and unilateral. WTO Israel is a founding and active member of the WTO. Israel respects and supports the fundamental principles and norms of the WTO i.e. non-discrimination, rule based system, transparency, consensus in decision-making, fair trade, progressive liberalization and special & differential treatment for Developing countries and Least Developed countries. Israel supports the Doha Development Round of negotiations in the WTO, and hopes it will come to a successful conclusion soon. Israel has faithfully implemented its Uruguay Round obligations. It took an active part in the negotiations on basic telecommunications and financial services. Its commitments under the Forth and Fifth Protocols of GATS reflect open and liberal policies, as well as its willingness to achieve even greater liberalization. Israel has also been actively participating in plurilateral trade arrangements initiated under the framework of the WTO such as the Government Procurement Agreement (GPA). Israel was among the first group of WTO Member countries who signed on the Information Technology Agreement (ITA), in That Agreement called for the elimination of tariff duties on telecommunications equipment, computers and related equipment on an MFN basis. 36

37 OECD In May of 2007, Israel was among a handful of countries invited to begin membership talks with the Organization for Economic Cooperation and Development (OECD). The different committees of the organization are conducting a review of Israel s economic policies and much progress has already been made in the process towards full accession. Israel enjoys observer status in a substantial number of OECD Committees and Working Groups and in a number of cases has achieved full membership status. Israel is a signatory to the OECD Declaration on International Investment and Multinational Enterprises, giving Israel full member status in the Investment Committee and Working Party. Likewise Israel adhered to the Mutual Acceptance of Data in the Assessment of Chemicals in the framework of the Committee on Chemicals and again received full Member status to the Working Party on Chemicals. Recently Israel joined the Anti Bribery Convention. (2) Bilateral Trade Agreements Israel s bilateral trade agreements cover a substantial portion of Israel s international trade. Israel has had free trade agreements with its major trading partners for many years - with the European Union since 1975, with the United States since 1985, as well as with the EFTA states since In November 1995, Israel and the European Union concluded a more comprehensive agreement to cover wide aspects of economic relations beyond trade in goods, enabling Israel s participation in the European Union s Research and Development Framework Programs. In recent years Israel and the EU have signed several agreements and protocols to further liberalize trade in agricultural goods, to include Israel in the Pan-European system of cumulation of origin, and the participation of Israel in the European space project of Galileo. During the last two years Israel and the EU have been involved in a wide ranging dialogue within the framework of the European Neighborhood Policy. This includes issues such as negotiations on standardization, services and dispute settlement procedures. 37

38 As part of its policy to further open markets, and to maintain Israel s exports competitiveness in European and North-American markets, free trade agreements have also been signed with Canada (1996), Turkey (1997), and Mexico (2000). Israel continues to explore new initiatives to expand its market access to other countries through either multilateral or regional agreements. Recently, Israel has been focusing its attention on Asia and Latin America, in the light of the growing importance of these regions in world trade. Israel and the MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay) have concluded a Free Trade Area agreement. The Agreement awaits ratification. When entered into force, this Agreement will gradually eliminate most customs duties on trade in goods from both sides. Economic relations with its neighbors in the Middle East are of particular importance to Israel. Israel has also initiated and signed regional trade arrangements; Qualified Industrial Zone (QIZ) Agreements, operating under the framework of the Israel-US free trade area agreement, have been concluded with Jordan (1997) and Egypt (2004). The QIZ Agreements have contributed enormously to the bilateral growth of trade between Israel and Jordan on the one hand and Israel and Egypt on the other hand. Israel is confident that regional economic cooperation will contribute to the peace process and to the well-being of all people in the region. (3) Unilateral trade liberalization Israel has a liberal and open trade policy. An Import Policy Department is active within the Foreign Trade Administration. Its mandate is to explore ways to further facilitate the flow of trade into, and out of, the Israeli market as well as to carry out liberalization steps. The Free Import Order was last updated in 2008, and will be updated again towards the end oh. This order deals with free imports of goods into Israel subject to licensing requirements and/or standards, so as to ensure the safety and security of consumers and the public as a whole. As a result, the Government of Israel has introduced more transparency into the import licensing procedures, thereby removing bureaucratic barriers to trade. 38

39 Investment Promotion Center is Israel's Investment Promotion Center at the Ministry of Industry, Trade and Labor. The center promotes foreign direct investment into Israel, and encourages additional investment by multinationals already invested in the country. FDI plays an important role in the economic development of Israel by enhancing competitiveness through tech transfer, infrastructure development, productivity and increased employment provides the potential and current investor an array of professional services during the pre, present and post stages of the investment process. These include: Current and accurate information on incentives available to the investor. Coordination of investor visits and introductions to relevant businesses. Maintaining a liaison with government and non-government agencies responsible for investment policy. Providing comparative analysis on services and information on costs of business operations in Israel. Business reports of Israel s leading target sectors and implementation of activities to promote these sectors. Present Israel s breakthroughs record Israel has a proven track record of breakthroughs owing to its talented workforce, which includes the world s highest percentage of engineers and scientists and is supported by sophisticated infrastructure. Israel has the highest investment in R&D as a percentage of GDP per capita and has continued to attract foreign investment, which reached $10.5 billion in 2008, despite the present economic challenges. A small country with limited resources, Israel is rank ed as the 23rd most competitive economy out of 134 countries by the World Economic Forum. For more information on investing in Israel, visit or Investini srael@moital.gov.il, or the closest Israeli economic representative: offices. 39

40 40 Israel s International Trade and Economic Agreements Free Trade Area Agreements Protection of Investments Avoidance of Double Taxation Agreements on R&D MFN Trade Agreements with non WTO Members Canada Albania Austria Funds Kazakhstan Mexico Argentina Belarus Canada Russian Fed. U.S.A Armenia Belgium Singapore Ukraine E.U. Azerbaijan) Brazil South Korea E.F.T.A. Belarus Bulgaria United Kingdom Uzbekistan MERCOSUR (1) Bulgaria Canada Parallel Funding Standardization & Product Certification Turkey China China Argentina Moldova Qualified Industrial Zones (QIZ) Agreements Croatia Croatia Belgium/ Flanders Ukraine Egypt Cyprus Czech Rep Brazil Turkey Denmark Jordan Czech Republic Ethiopia China Statement of Intent MOITAL and US Consumer Product Safety Commission (CPSC) El Salvador Finland Czech. Rep Estonia France Denmark Ethiopia Germany Finland Georgia Greece France Germany Hungary Germany Guatemala () India Greece India Ireland Hungary Kazakhstan Italy India Latvia Jamaica Ireland Lithuania Japan Italy Moldova Latvia Maryland Mongolia Lithuania Netherlands Poland Luxemburg(1) Ontario/CA Romania Mexico Portugal Serbia-Montenegro Moldova Slovenia Slovakia Netherlands Spain Slovenia Norway Sweden South Korea Philippines Taiwan South Africa(1) Poland Turkey Thailand Portugal Uruguay Turkey Romania Victoria/Au Turkmenistan Russian Fed Virginia Uruguay Singapore E.U Uzbekistan Slovenia Seventh Framework Program Slovak Republic CIP (EIP) S.Africa S.Korea E.E.N U.S.A Spain U.S. Science and Technology Commission Sweden BIRD Foundation Thailand OTHER Turkey Eureka U.K. Eurostars U.S.A Clusters Ukraine Galileo Uzbekistan Cern Switzerland (1) To be ratified Source: Ministry of Industry & Trade, Foreign Trade Department, International Division.

41 Investment Incentives Investment incentives are outlined in the Law for the Encouragement of Capital Investment* which was recently revised. The new Law differs from the previous one in that it adds a new path for incentives - an automatic one. The incentive programs can be divided into 2 main types: 1) The Grants program - administered by the Israel Investment Center (IIC), a department of the Ministry of Industry, Trade and Labor 2) The Automatic Tax Benefits program administered by the Tax Authorities. To qualify, investment projects must meet certain criteria including: international competitiveness (as described in the law), minimal designated investment, high added value and registration of the company in Israel. Once these criteria are met, the enterprise gains Approved Enterprise status from the IIC if it chooses the grants program, and Beneficiary Enterprise status by the Tax Authority if it chooses one of the tax benefits programs. It is then eligible for incentives, such as grants of up to 24% of tangible fixed assets (grants program only) and/or reduced tax rates, tax exemptions and other tax related benefits. Location The government grants scheme is affected in part by the location of the company's activities. Several regions in Israel have been declared National Priority Regions: Priority Area A includes: The Galilee Jordan Valley The Negev Jerusalem (for hi-tech enterprises) Priority Area B includes: Lower Galilee Northern Negev Area C includes the rest of the country. * The law was modified in

42 Grant Program The amount of the government grant is calculated as a percentage of the original cost of land development and investment in buildings (except in Area C), in machinery and equipment. This cost includes installation and related expenses. The percentages are: Table 1 Priority Area A* Priority Area B Industrial projects Up to NIS 140 million Industrial projects Above NIS 140 million Investment in hotels and other accommodations 24% 10% 20% 10% 24% 10% Other tourist enterprises 15% - * Plus an additional grant of up to 8% for companies locating in the south ("Negev Law") Time to Completion Under the provisions of the grants scheme, 20 percent of the approved program for industrial projects should be completed within 24 months of the date of approval. The investment program must be completed within 5 years from the date of approval. 42 Tax Benefits a) Grant Program Companies choosing the grant program also receive tax benefits for a period of 7 consecutive years, starting with the first year in which the company earns taxable income (grants are not considered income). Tax benefits are determined by the percentage of foreign control: the more foreign control in the enterprise, the higher the benefits. If at least 25% of an Approved Enterprise's owners are foreign investors, the enterprise is eligible for a 10 year period of tax benefits, as in the following table: (All figures are percentages).