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Chapter 1: Doing Business in Israel

Market Overview

  • The U.S. is Israel's largest single trading partner. Since signing a Free Trade Agreement in 1985, US-Israel–trade has grown eight-fold. Since 1995 nearly all trade tariffs between the U.S. and Israel have been eliminated.
  • In 2014, GDP real growth decreased to 2.5% from 3.2% in 2013. In 2012, Israel’s GDP real growth rate was 3%.
  • Israel’s GDP in 2014 was $268.3 billion.
  • In 2014, Per Capita GDP (PPP) increased to $33,400. In 2013, GDP Per Capita (PPP) was $33,300.
  • Israel’s 2014 inflation rate was 0.5%, down from 1.5% in 2013.
  • Israel’s 2014 unemployment rate was 6.6%, compared to 6.2% in 2013.
  • Exports of U.S. goods to Israel in 2014 were $15 billion, compared to $13.7 billion in 2013 and $14.3 billion in 2012.
  • U.S. imports from Israel were $23.0 billion in 2014, $22.8 billion in 2013 and $22.1 billion in 2012.

Market Challenges

  • Israel is a mature market in many sectors and U.S. companies will face significant local and international competition.
  • Agriculture trade regulations, IPR protection weaknesses, certain technical standards and regulatory uncertainties in the natural gas sector are non-tariff barriers. US Export Control regulations for re-exports are perceived as a challenge by Israeli manufacturers.
  • The political and security environment is tense because of the geopolitical situation in the nearby region.
  • The business environment and style will seem familiar to Americans, though dress may seem more informal and personal relationships play a greater role.

Market Opportunities

  • Hi-tech and defense dominate Israel's trade numbers, and Israel remains a global center for hi-tech design and R&D. Hi-tech continues to provide opportunities for U.S.-Israel commercial partnerships, specifically in ICT technologies including cyber security, safety and security equipment and services, defense equipment, medical technologies and biotechnology products. Power generation and education/training also represent good opportunities.
  • U.S.-Israeli commercial linkages often consist of U.S. firms providing electronic inputs which Israeli firms integrate into final products destined for re-export.
  • Road technology and infrastructure projects could offer millions of dollars' worth of export opportunities for U.S. firms over the next five years, especially since Israel adopted U.S. standards in intelligent transportation systems.
  • Health IT - Israel is very advanced in the implementation of multifunctional, interoperable health IT systems built around electronic medical records. However, since local software development companies and integrators provide Israel’s health IT infrastructure and services, there are limited opportunities for U.S. SMEs in this sector.
  • Aerospace - Through the large USG Foreign Military Funding/Sales program in Israel, exceeding $3 billion annually, most major procurements for the Israel Air Force originate in the USA.  The Israel Air Force (IAF) is in the process of a staggered replacement of its F-16 fleet of fighter aircraft, and a helicopter procurement plan is under consideration.
  • Upstream Gas - Since 2009, Israel has discovered over 800 Billion Cubic Meters (BCM) of offshore natural gas.  U.S. energy company Noble Energy and its local partners are supplying gas from the Tamar field.  The future of the Leviathan field and Israel’s ability to develop the potential of its natural gas resources will depend on the final review by the Israeli government and legislators of the regulatory framework for the natural gas sector and on the energy companies’ ability to find reliable export partners for the gas.
  • Semiconductor - Israel is recognized as a leading player in the semiconductor industry with five active semiconductor manufacturing plants (fabs) in Israel, three owned by Intel and two by Tower/Jazz.  Intel is considering investing approximately $6 billion in upgrading its Kiryat Gat fab facility

Why Export to Israel

Top five reasons why U.S. companies should consider exporting to Israel

1. The economy has remained robust during the period of economic downturns in the USA and the EU.  In 2014, economic growth slowed, but it is expected to recover to around 3.5% in 2015 and 2016.   

2. This educated, entrepreneurial and innovative society is open to new products and friendly to the USA.  The country has approximately 250,000 U.S. expats and many Israelis are alumni of U.S. universities.

3. Israel has a modern banking and logistics infrastructure and one of the highest penetration rates for mobile telecom. 

4. Strong, diversified and technologically advanced high-tech sector. Israel leads OECD in R&D spending at 4.3% of GDP.

5. The U.S.-Israel Free Trade Agreement, signed in 1985 was the first FTA for the USA.  It continues to provide easy market access to U.S. products and services. 

Market Entry Strategy

Distribution methods vary by type of product.

  • Commissioned Agents: used mainly for industrial equipment, raw materials and commodities.
  • Non-Stocking Agents: used mainly by manufacturers.
  • Stocking Agents: used mainly for high volume items.
  • Importers/distributors: used often for consumer goods.
  • Franchising: since its introduction to Israel in the mid-1980s, franchises have increased in popularity. ACE Hardware, Office Depot, Re/MAX, McDonalds, Toys-R-US, UPS, and FedEx all operate in Israel.

Direct marketing is fairly common.

  • Door-to-door salesmanship is uncommon in Israel and is considered a nuisance.
  • Cable and satellite TV offer shopping channels.
  • Direct marketing is common through mail order booklets that are distributed monthly by credit card companies and through the Internet. An “opt-in” spam law was introduced to Israel in late 2008. Companies can only send individuals spam if the individual agrees in advance. Political and charity mailings are exempt.
  • Mobile phone marketing through messaging is common.
  • Internet use in Israel is widespread and represents a good marketing avenue.

The Government of Israel encourages both joint ventures and licensing.

  • Joint ventures are the most popular method of cooperation for Israeli firms, especially in technology-related industries.
  • Israeli businesses prefer obtaining five-year licensing agreements with automatically renewable clauses that extend the agreement for another five years.
  • A Commercial Agents Law became effective in 2012. The law specifies advance notice of termination of a relationship related to the duration of the supplier/agent contract and monetary compensation of the agent for the loss of potential profits.
  • Manufacturing under licensing agreements is common in Israel.
  • Israeli businesses prefer licensing agreements in which the licensor takes equity with the licensee.
  • The norm for royalties is 4-5% of turnover. Higher rates are common for luxury articles, author's fees and specialized machinery.
  • A 10-15% withholding tax on royalties and fees is often deducted at the source.
  • Licensees may repatriate royalties through an authorized bank, and are entitled to claim an income tax deduction on royalties and fee payments.
  • U.S. companies should seek advice from a respected law firm and accounting firm when figuring tax liabilities.
  • The United States and Israel have signed a tax treaty to avoid double taxation.

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