Boaz Hirsch, the director of foreign trade at Israel’s Ministry of Industry, Trade, and Labor, has just made his first visit to our country. Together with a delegation representing nearly 20 Israeli companies, the minister took part in the Fourth Joint Session of the Ukrainian-Israeli Intergovernmental Commission on Trade and Economic Cooperation. The guest from Israel formed a very positive impression of Kyiv, with its many cranes rising above construction sites, numerous traffic jams, and the views from new skyscrapers and towers.
Is today’s political situation favorable for Israeli companies to do business in Ukraine? What does our country need to do in order to create a more attractive investment climate? What is the secret behind Israel’s investment attractiveness? These and other questions are answered in The Day ’s exclusive interview with Boaz Hirsch.
Does the current political situation in Ukraine influence the business climate for Israeli companies?
“It is very hard for me to give a clear answer to this. First of all, we have a very large and substantial community of Israelis of Ukrainian origin. There are nearly 100,000 of them. They know even more about Ukraine than I do. They speak the language, they know the country; they know the restaurants. They are Ukrainians. So I imagine that they have a better understanding of the political arena and know how to act under these circumstances. The second thing is that we should meet again in one year and you should ask me this question. I’ll tell you why: because we are starting to see the focus of Israeli investments. So far our investments abroad have been concentrated in countries like Armenia, Hungary, and Poland, but we now starting to shift towards the east, towards Ukraine.”
And what is the reason for that?
“The reason is the potential we see in Ukraine. So you can start to see the shift. If it does not stop, then you know that the political climate is not affecting it. I was not told by business people here that the political situation inhibits doing something like this.”
Are Israeli companies going to develop businesses in Ukraine?
“The point is that we do not, as a government, invest money. It is the market, it is very private, and it is done according to the business opportunities that I identify here in Ukraine. What I can tell you from past experience is that there are a lot of Israeli companies that are really state and commercial centers. For example, there is an Israeli company that I think was the first to build shopping malls in all the Eastern European countries, like Hungary, Slovak, Poland, and so on. It has a well-developed infrastructure, and of course telecommunications in which Israel is very strong. So this is typically where you can see Israeli investments. In Romania, one of the largest Israeli companies invested tens of millions of dollars to open a very large, probably the largest in Romania, dairy (milk) plant. Where business opportunities in Ukraine are concerned, they can be implemented after Israeli businessmen become familiar with the specific characteristic of the Ukrainian economy. So far these are early stages, but they are interested in infrastructure, tourism, etc.”
Are they interested in cooperation in other high-tech spheres?
“There is much interest in Ukraine in Israeli high-tech industries. For example, we discussed this yesterday at the Ministry of Transport and Communications. They are already working with several leading Israeli companies, and we suggested that they try and involve more Israeli companies, but I understand that there is an attempt to deploy the 3G Network. This is a very massive process everywhere in the world and especially in such a large country as Ukraine. So we are inviting them to take advantage of Israeli innovations and involve more Israeli companies, not necessarily the large ones, because within the Israeli infrastructure of the telecommunications industry you have several leading domains, very large companies. The vast majority comprises small to medium-sized businesses with no more than a dozen employees, which are introducing innovative ideas. Most of them are very good at the entrepreneurial stage, not necessarily at building companies the size of General Electric.
These companies, which are very small, do not have a lot of resources. They are focusing their attention on Ukraine because this country with a population of 47.5 million people has an immense potential.”
What about big companies like IAI?
“First of all, I don’t want to speak on their behalf; my portfolio does not include the defense industries. I can imagine that they would like very much to work here, but this is not my domain. But, for example, I will talk about another Israeli company that specializes in the technical servicing of aircraft. They are competing with GE to acquire the majority of civilian air fleets in the world. Last night I was shown an ad by TEVA, which has more employees than IAI. I think that if our two governments work more closely together, then Ukraine, which is facing immense challenges and manages to deal with them, then this will transform the country and its economy. I think that in certain areas we can offer added value to Ukrainian companies, so our motto is to build partnerships, joint ventures with local entities, where we could bring added value in. I think that in such ambitious projects that involve upgrading of infrastructure, airports, seaports, highways, tourism etc., we can create a very successful partnership with local entities.”
What, in your opinion, should a country do in order to make the investment climate more transparent?
“I am not familiar with Ukrainian legislation regarding investments. But I can tell you about our real experience. Israel has attracted 20 billion dollars in direct and indirect investments. Compare this to China. China attracted 63 billions. China is 200 times larger than Israel and attracts only three times more investments.”
What is the secret?
“I can’t tell you because I don’t know. But I can say that in Israel, besides its main asset - innovations - we also build environments: a regulatory environment built to international standards, and in this domain we have the strictest international standards and the efforts that an international investor receives when he comes to Israel. If you compare us, for example, to Ireland, or other countries as far as grants and money are concerned, we cannot compete with them; we do not have that much money, but we are members of the WTO, so we have international obligations to the WTO. We are a candidate to join the OECD; we are already a member of the Investment Committee of the OECD.
“You can see that you can learn from the best practices of other countries, and formulate high regulatory commitments in order to attract international investments. We have a vertically open economy, in certain areas highly liberal, which in certain spheres is superior to the United States or Canada or Switzerland, and binds the investor when he comes in relevant regulatory norms. They speak the same language, they have the same accounting regulations, same standards; it’s the same technical standards, because we adapt easily and we are continuing to do that, whether these are European or American standards. With the exception of two areas, we long ago rejected Israeli standards.
“I will give you an example. Before coming here, I signed a program to finance the Standards Institution of Israel. Over the next three years more than 50 million dollars will be provided just for the transformation of another hundred Israeli mandatory standards that are oriented towards Israel into international standards by 2010, which means that by 2010 most of the mandatory standards in Israel will be international one, and already we have a very high percentage. So this effort to adopt international practices and guarantee rights in combination with quite a unique and global feeling for innovation will manage to transform Israel into a very hot spot for direct investments. I think we would be more than willing to share with Ukraine the Israeli experience as far as creating a comfortable and hospitable regulatory environment for foreign direct investments. We would gladly do this.”
As far as I know, Israel’s economic growth started from approving a number of reforms in 1985. In the same period the Soviet Union’s economic growth started to fall, and this led to its collapse. How did Israel become an innovation mecca?
“The most important step concerning the mid-1980s economic crisis is that Israel took steps at the level of macro-economic policy to ensure that what happened in the 1980s would not reoccur. We are talking mainly about hyper-inflation with three-digit inflation. Some of the things that were done, just to give you some examples, are as follows: we substantially reduced customs duties. Why? Because we import a lot of raw materials. The more customs you pay the higher the price of raw materials, which of course contributes to CPI - the consumer price index. So the course was: let’s lower the barriers, customs, standards, and so on, in order to have cheaper imports in order to reduce prices. This is one thing. The other thing is, for example, within the Ministry of Industry we took the Research and Development (R&D) unit and made it into one of the most important government units in Israel, which is the anti-trust authority. Now it has about 70 or 80 people, and it’s highly influential. If we are talking from the point of view of investments, the Israeli anti-trust authority is one of only five anti- trust authorities in the world that combat monopolies and other types of activity which distort free competition.
“There was a massive investment in education. A lot of what you call innovation stems from investments that were done in the 1970s in military R&D, which during the 1980s were transformed into civilian sphere. And I think that there is also an understanding, which is very important, that Israel is only seven million people, and it cannot flourish without being part of the international arena. It must be part of the international community; we emphasize international cooperation, and we are building a regulatory system in order to foster it.
Israel has the highest investments in the world in R&D. About 4.6 percent of the GDP goes to R&D: it’s impressive. If you take the total GDP, 140 billion, it’s about 7-8 billion dollars, which is equivalent to what some American companies, General Electric, in particular, have. So, in the unit of the ministry that is responsible for R&D, today one of its strongest emphases or priorities is international R&D cooperation. And this is one of the things we discussed yesterday, how Ukraine and Israeli cooperate in the domain of R&D. In order for us to move ahead, we must be part of the international community; we must collaborate intensively with global leaders. We cannot allow ourselves to play at being number three or number two. You must be able to be sufficiently competitive and attractive to Siemens, Alcatel, and so on and so on. And this is why the emphasis of Israel is on R&D and education.
“In terms of education spending, we are number one in the world. If you familiarize yourself with the indices of competitiveness of the WF, you will see that Israel jumped from the 23rd ranking in 2005 to 15 in 2006. The reason that jumped us eight places ahead was a reform in the financial market, which introduced more competition into the financial sphere. The banks did not like it, but the reform was completed, perhaps not with the percentage that we initially expected, but still this massive reform changed the banks, the structure of the banks. It significantly introduced competition, and all of the banks have survived and they are still making a lot of money. The main thing is to use the government to create an optimal regulatory environment.”
Do you think that Ukraine will achieve this with the people who are now heading to parliament?
“The truth, I think, is a mix. I do not think that these businessmen possess the capacity to walk into a government; it’s a totally different world. You have to look at the different variety of interests. But I think that the key ingredient is to have a very strong dialogue with industry and be able to internalize it. We have a lot of arguments in the ministry with industrialists. We tell them to read the plaque at the entrance. It reads the Ministry of Industry, not the Ministry of Industrialists. So it’s an on-going dialogue. I am not a businessman. I could never understand what a business has to do in Ukraine, unless like in Europe or in Australia a businessman comes and tells me: ‘Look, you want me to export, you want me to bring investments, I need A, B, C, and D.’ The businessman is bargaining with you.
“You too have to make a breakthrough into the international world. I think it’s a mix of business, government, and certain areas of academia, which generate ideas. My job is to see that the idea fits the real world. You need this mechanism, you need this dialogue. For example, we have established a committee within our ministry, which is headed by a former businessman. In his work he may use his own experience in dealing with certain questions and give his recommendations.”
