from the March 2006 issue

The Perception of Israel Changes

In recent months we have noted what can only be termed as a return to sanity. The attitudes towards Israel have turned positive. Intel Corporation underscored this by announcing a $3.5b. investment in a new chip plant. Intel's history in Israel starts with the founding of an R&D center in Haifa in 1974, with just 5 employees. The Israel division of Intel is currently among the largest employers in the country and consists of five R&D centers in Haifa, Jerusalem, Kiryat Gat, Petach Tikva, and Yakum. Its staff is over 6000 employees. The top-priority line of Intel activity in Israel is R&D

- Israeli division of Intel has been acting as the R&D center for Intel divisions all over the world for over 30 years. Among the achievements of the research center in Haifa and its divisions in Yakum and Jerusalem are the first PC processor with an 8-bit 8088 bus, Intel MMX and Intel Centrino. The development center in Petach Tikva plays a leading role in Intel Mobility Group since the first processor (code named Manitoba) for mobile phones was designed in 2003. Intel has become Israel's number one exporter.

The Economist states that Israel's share of global foreign direct investment was 0.63% in 2005, amounting to $5.71 billion - 3.35 times the $1.7 billion in foreign direct investment in 2004. The surge in foreign direct investment in Israel in 2005, was due to large privatizations, especially Bank Leumi (TASE: LUMI) and Israel Discount Bank (TASE: DSCT).

There is little doubt that individual Israeli securities are often affected by developments in the United States. Towards the end of January, President George Bush in a speech stressed the need for eliminating America's dependence on foreign suppliers for oil. The proposed solutions given by the president's was to develop alternative methods of energy. The next day Ormat Technologies' (ORA:NYSE) shares appreciated by five and a half per cent. Ormat has been previously mentioned by us as one of our favorite companies.

Ormat Technologies, whose share trade on the New York Stock Exchange, specializes in developing energy from geothermal sources. We have noticed that in January 32 of 40 Israeli companies traded on the American markets advanced for a total gain of 8.5%. This was considerably above the benchmark index. In 2005 Israel experience an all-time record of inflow of foreign investment which totalled nearly $10b.

This flow of investments spells a newly accorded vote of confidence for this little country and in a change of overall perception that issues of defense alone, need not impact the view of Israel as a whole. Moreover, ties between Israel and the United States are further strengthened by Israel being viewed as a first-rate supplier of defense material. The joint Arrow project in which several billions of dollars have been invested is ample proof of a special relationship. America uses Israeli drones as well as electronic equipment for its air force. The BIRD Foundation provides matching funds for Israeli and American companies that enter into joint research and development projects. The BARD Foundation provides similar support but for joint agricultural projects.

Another development that we have noted recently in our report, is the phenomenon of Governors of American States leading groups of industrialists in visits to Israel in an attempt to to woo Israelis to establish subsidiaries in the United States. We have seen many of these interactions turn into market successes as the Israelis appreciate American expertise in marketing skills and public relations. For Americans it is a matter of adding new jobs. It is very reassuring for Israelis to hear the American president publicly state that America will stand and protect Israel in case of an attack by Iran. In the meantime American-Israeli cooperation helps Israel to grow and flourish and enforces that the perception of Israel has indeed changed.

Reprinted from the Israel High-Tech & Investment Report March 2006

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