The Economic Impact of Foreign Investments in Israel

The Economic Impact of Foreign Investments in Israel
The Economic Impact of Foreign

Investments in Israel
Current State of Affairs and Analysis of New Data
March 2019
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Administration and editing:

Mr. Eyal Eliezer, Senior Director, Strategy and Marketing Department, Invest in Israel
Mr. Gilad Be'ery, Director, Economic Research Manager, Invest in Israel
Analysis and writing:

Numerics Economic & Financial Consulting
We thank the Israeli Central Bureau of Statistics for its assistance with the collecting, processing and
producing of the special data in this report, and particularly to:
Ms. Naomi Zachman-Frish, Head of Macro-Economy Department
Ms. Miri Ben-Tulila, Senior Director, Balance of Payments
Mr. Shimon Arieli, Department Manager (ret.)
Ms. Natalia Miskevitch
Mr. Meir Izhak Cohen (accountant)
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Executive Summary
 The prevalence of foreign investment has been on the rise in recent years. Foreign investments have a
significant impact on a country's economy, both directly and indirectly. In recent years, foreign
investments have been made in Israel on a large scale, even by international standards, and a significant
portion of these investments was related to knowledge and technology intensive sectors. However, the
economic research on the subject is scant considering its importance to the Israeli economy. As part of
its mission to promote an evidence-based discussion of foreign investments, Invest in Israel has initiated
this study in order to bridge knowledge gaps regarding this subject.
 This study aims to bridge knowledge gaps in three ways. The study: (1) examines statistical data from
a variety of sources and describes the current state of affairs regarding foreign investments in Israel; (2)
reviews the current national and international economic literature on the subject; and (3) conducts and
empirical econometric analysis of sectorial data in order to examine the effects of foreign investments
in Israel based on previously unexamined data, some of which was produces especially for this report
in cooperation with the Israeli Central Bureau of Statistics.
 The increasing prevalence of foreign investments in the Israeli economy:

o An examination of world trends shows that the flow of investments in developing countries has a
growing share in the total Foreign Direct Investments (FDI) around the world, and in recent years
amounts to nearly half of the total FDI. Despite this trend, a significant increase in the flow of
direct investment in Israel, peaking in 2018, can be identified.
o The share of Foreign-owned Companies in the Israeli product is not negligible: in 2015, the output
of Foreign-owned Companies amounted to 11.24% of the total output in the Israeli market and
11.82% of the gross value-added in the Israeli market. However, the share of Foreign-owned
Companies in the labor force is not as high as their share in the product and amounts to 6.4%, i.e.
the product per employee in Foreign-owned Companies is about twice as high as the average
product per employee in the Israeli market.
o The foreign trade activity of IN companies amounts to 26% of the total export in the Israeli market.
In addition, the rate of foreign funding of R&D in Israel is the highest among OECD countries. In
2016, this rate amounted to 55.6% of the total expenditure.
 Current studies of foreign investments around the world and in Israel mostly indicate important
positive effects on the local economy:
o Studies that examined the effects of foreign companies on local companies within the same sector
in developed countries based on panel data found a significant positive effect. Many Empirical
studies found that foreign companies have a significant positive effect on their suppliers (but not
their customers).
o In the Israeli market, similarly to many countries around the world, the productivity of employees
in Foreign-owned Companies is high compared to the market average, and, accordingly, the wages
of such employees are higher. The higher wages are due to the experience of employees working
for Foreign-owned Companies. The wages of employees of Foreign-owned Companies also have
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a positive effect on the wages of other employees in their sector.
o Spillover of R&D conducted by Multinational Enterprises in Israel has a significant influence on

many parameters such as: output, self R&D productivity, employee wages and export. In addition,
it was found that the higher the R&D expenditure of Foreign-owned Companies is, the higher the
number of employees in local companies of the same sector is.
 An analysis of new data regarding Multinational Enterprises confirms the insights regarding a
positive effect, including:
o A significant positive relation was found between the presence of Foreign-owned Companies in a
sector and the average compensation per position in such sector.
o A significant positive relation was found between the compensation per position in Foreign-owned
Companies and their share in the total number of positions and the compensation per position in
Israeli-owned companies.1
o A significant positive relation was found between the presence of Foreign-owned Companies and
human capital stock in industry sectors.
o Foreign-owned Companies have higher labor productivity than local companies. In addition, a
positive relation was found between the presence of Foreign-owned Companies and labor
productivity, which is explained by the quality of human capital in industry sectors where such
Foreign-owned Companies operate, and less significantly, between the presence of Foreign-owned
Companies and higher capital intensity. However, no correlation was found with overall
productivity in a sector.
o Indications were found to refute some problematic aspects related to foreign investments: no close
relation was found between changes in the number of employees in Foreign-owned Companies
and changes in the number of employees in Israeli companies of the same sector, and no significant
statistical relation was found between Foreign Direct Investments and the entry or exit of
companies into or out of a sector.
 Recommendations:
 Regarding government policies:
o This study affirms a government policy that supports foreign investments, for example,
through promotion activities, incentives and removal of obstacles.
o As aforementioned, FDI in Israel is concentrated in the sectors of computing, R&D and high
technology. Israel is also unique in its rate of foreign fudding for R&D. The marginal utility
of such investments should therefore be examined in comparison to a "whole company"
model, combining both R&D and manufacturing – a model that is already implemented by
1 It should be noted that the data does not provide a significant answer to the questions of whether Foreign-owned
Companies enter sectors where the compensation per position is higher to begin with, or whether the competition over
human capital following the entry of Foreign-owned Companies increases the average compensation per position.
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dozens of Foreign-owned Companies in Israel. Israel's future challenges lay in identifying
relative advantages in these areas, creating suitable incentives and directing the activity of
Invest in Israel accordingly.
 Regarding research:
o While this study investigates the average contribution of Foreign Direct Investments, the
issue of its contribution margin in various sectors is very important for policy making and
should therefore be the subject of further studies.
o A study should be conducted to accurately assess the effects of foreign investments in Israel
on the overall productivity of the suppliers of Foreign-owned Companies as well as on local
companies in the sectors where such Foreign-owned Companies operate. This study should
be based on company level data, in accordance with international economic literature. I
addition, the causal relation between foreign investments and labor productivity in the Israeli
market should be examined, as well as the effects of such foreign investments on factors that
influence labor productivity.
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Table of Contents
1. Introduction…………………………………………………………………………………………. 10
1.1 Background…………………………………………………………………………………………. 10
1.2 Structure of the report………………………………………………………………………………. 11
2. Descriptive statistic: FDI in Israel and around the world……………………………………….. 11
2.1 Sources of information……………………………………………………………………………… 11
2.2 Foreign Direct Investments – world trends…………………………………………………………. 14
2.3 Investments by foreign nationals in Israel according to the Balance of Payments…………………. 18
2.4 Distribution of Foreign-owned Companies in Israel and their activities…………………………… 21
2.5 The share of IN companies in employment………………………………………………………… 24
2.6 The wage of employees in Foreign-owned Companies…………………………………………….. 27
2.7 Productivity in Foreign-owned Companies compared to the general productivity in the market….. 30
2.8 Distribution of IN companies by country…………………………………………………………... 36
2.9 The share of IN companies in Israeli foreign trade………………………………………………… 37
2.10 The share of FDI in research and development investments……………………………………… 46
2.11 Summary of the findings of the descriptive statistics: FDI in Israel in around the world………… 49
3. Literature review: measuring the effects of FDI on local economies……………………………. 51
3.1 Summary of the economic theory…………………………………………………………………... 51
3.2 Empirical articles examining the effects of FDI from around the world…………………………… 53
3.2.1 Introduction: the effects of FDI on the local economy…………………………………………………... 53
3.2.2 The effects of FDI on the local market…………………………………………………………………... 55
3.2.3 The effects of FDI on target countries from a macro-economic perspective……………………………. 56
3.2.4 Examination of vertical and horizontal spillovers……………………………………………………….. 58
3.2.5 Empirical findings regarding horizontal spillovers related to Foreign Direct Investments in local
economies…………………………………………………………………………………………………………… 59
3.2.6 Empirical findings regarding vertical spillovers related to Foreign Direct Investments in local
economies…………………………………………………………………………………………………………… 62
3.2.7 Empirical findings regarding the effects of FDI on tax revenues………………………………………... 65
3.2.8 The effects of government policies on FDI……………………………………………………………… 66
3.3 Israeli empirical studies examining the effects of Foreign Direct Investments…………………….. 67
3.3.1 The effects of Multinational Enterprises on high-tech in Israel: Somkin at al. (2014)………………….. 67
3.3.2 The effects of Multinational Enterprises on high-tech in Israel: Somkin at al. (2016)………………….. 68
3.3.3 The effects of Multinational Enterprises on high-tech in Israel: Slovodnizki et al. (2016)……………… 68
3.3.4 The effects of the Encouragement of Capital Investments Law: Bar (2013)…………………………….. 69
3.4 Israeli empirical studies examining R&D spillovers……………………………………………….. 70
3.4.1 Assessing horizontal and vertical R&D spillovers based on industry data: Bergman and Bar Eliezer
(2001)……………………………………………………………………………………………………………….. 70
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3.4.2 Assessing the effects of R&D subsidies based on firm-level data: Prizet et al. (2008)………………... 71
3.5 Summary of empirical literature…………………………………………………………………… 71

4. Measuring the effects of Foreign-owned Companies on economic sectors in Israel…………… 73
4.1 Description of the data used in the study…………………………………………………………… 73
4.2 Assessing the relation between FDI and wage and employment in Israel………………………….. 75
4.3 Assessing the relation between FDI and the entry and exit of Israeli companies………………….. 83
4.4 Assessing the relation between FDI and capital accumulation per employee……………………… 85
4.5 Assessing the relation between FDI and labor productivity………………………………………... 89
5. Summary and recommendations…………………………………………………………………... 98
5.1 Summary of the descriptive statistic: FDI in Israel and around the world…………………………. 98
5.2 Summary of empirical literature on the effects of FDI…………………………………………….. 100
5.3 Summary of the analysis of the effects of FDI on the Israeli economy……………………………. 101
5.4 Directions for future research………………………………………………………………………. 102
5.5 Policy recommendations…………………………………………………………………………… 103
6. Bibliography………………………………………………………………………………………… 104
7. Supplements………………………………………………………………………………………… 108
Supplement 1 – Integration of industry survey data by 1993 classification and 2011 classification….. 108
Supplement 2 – Calculation of physical capital accumulation………………………………………… 111
Supplement 3 – Methodological description of ICBS Foreign-owned Companies data……………….. 111
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Tables and Charts

Table 1 – Distribution of Foreign-owned Companies by economic sector, 2015………………………………….. 22
Table 2 – Weight of Foreign-owned Companies in product and employment, 2014………………………………. 30
Table 3 – The effects of FDI by Multinational Enterprises on local economy……………………………………... 55
Table 4 – Assessment of the effects of FDI on tax revenues……………………………………………………….. 66
Table 5 – The relation between the presence of Foreign-owned Companies and compensation per position in
economic sectors……………………………………………………………………………………………………. 78
Table 6 – The relation between compensation per position in Foreign-owned Companies and their presence and
compensation per position in local companies in economic sectors………………………………………………... 78
Table 7 – The relation between the log of labor productivity and the presence of Foreign-owned Companies in
economic sectors……………………………………………………………………………………………………. 81
Table 8 – Relation between share of Foreign-owned Companies in positions and capital accumulation per
position in industry sectors…………………………………………………………………………………………. 86
Table 9 – Relation between export activity and capital accumulation per position in industry sectors……………. 88
Table 10 – Relation between export activity and presence of Foreign-owned Companies and sector capital
accumulation per position…………………………………………………………………………………………... 88
Table 11 – Relation between labor productivity and the presence of Foreign-owned Companies in industry
sectors……………………………………………………………………………………………………………….. 90
Table 12 – Relation between the presence of Foreign-owned Companies and the physical capital accumulation to
product ratio in industry sectors…………………………………………………………………………………….. 93
Table 13 – Relation between change in the presence of Foreign-owned Companies and the ratio of physical
capital accumulation to product in industry sectors………………………………………………………………… 94
Table 14 – Relation between compensation per position and the presence of Foreign-owned Companies in
industry sectors……………………………………………………………………………………………………... 95
Table 15 – Relation between the presence of Foreign-owned Companies and total factor productivity in industry
sectors……………………………………………………………………………………………………………….. 97
Chart 1 – Illustration of Foreign Direct Investments in the national accounting…………………………………… 13

Chart 2 – Illustration of an Israeli company owned by a foreign national (IN) ……………………………………. 14
Chart 3 – FDI balance in countries around the world………………………………………………………………. 15
Chart 4 – FDI as a percentage of the world balance of investments by development level………………………... 16
Chart 5 – Foreign Direct Investments flow around the world by development level of the receiving country……. 17
Chart 6 – Annual investments by foreign nationals in Israel, 2005 - 2018…………………………………………. 18
Chart 7 – Investments balance (inward position) of foreign nationals in Israel, 2005 - 2017……………………… 20
Chart 8 – Balance of investments by foreign nationals in Israel as a percentage of the GDP, 2005 - 2016……….. 21
Chart 9 – Revenues of Foreign-owned Companies by economic sector, 2015…………………………………….. 23
Chart 10 – Number of occupied positions, 2015…………………………………………………………………… 25
Chart 11 – Employees in Foreign-owned Companies by economic sector, 2015………………………………….. 26
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Chart 12 – Compensation per position in the business sector and in Foreign-owned Companies by economic
sector, 2015…………………………………………………………………………………………………………. 28
Chart 13 – Average wage for a position by the number salaried positions in the company, 2015…………………. 29
Chart 14 – Share of Foreign-owned Companies in product and employment in Israel by sector, 2015…………… 32
Chart 15 – Average value-added per position by economic sector, 2013…………………………………………... 33
Chart 16 – Average revenue per position in Foreign-owned Companies by sector………………………………... 34
Chart 17 – Average revenue per position in Foreign-owned Companies by company size, 2015…………………. 36
Chart 18 – Distribution of IN companies by country of origin, 2013………………………………………………. 37
Chart 19 – Export of goods and services by IN companies in Israel, 2009 - 2013…………………………………. 38
Chart 20 – Import of goods and services by IN companies in Israel, 2009 - 2013…………………………………. 39
Chart 21 – International trade with related companies and other foreign nationals, 2013…………………………. 40
Chart 22 – Import and export of goods, 2013………………………………………………………………………. 40
Chart 23 – Export of goods and services by economic sector, 2013……………………………………………….. 42
Chart 24 – Export of goods by Foreign-owned Companies by economic sector, 2015……………………………. 43
Chart 25 – Export by Foreign-owned Companies by company size, 2015…………………………………………. 44
Chart 26 – Total R&D expenditure in Israel, 2005 - 2016…………………………………………………………. 46
Chart 27 – Share of R&D expenditure funded by foreign nationals, 2014…………………………………………. 47
Chart 28 – Designation of R&D by multinational enterprises in Israel, 2013……………………………………… 49
Chart 29 – Average wage cost in Foreign-owned Companies and in sectors, by sector…………………………… 76
Chart 30 – Compensation per position in economic sectors in relation to the presence of Foreign-owned
Companies…………………………………………………………………………………………………………... 77
Chart 31 – Relation between labor productivity and compensation per position in economic sectors…………….. 80
Chart 32 – Changes in the number of salaried positions in economic sectors and Foreign-owned Companies……. 82
Chart 33 – Lack of significant relation between the exit of companies from a sector and Foreign Direct
Investments in economic sectors……………………………………………………………………………………. 84
Chart 34 – Relation between the presence of Foreign-owned Companies and capital accumulation per position in
Chart 35 – Relation between export activity and capital accumulation per position in industry sectors…………... 87
Chart 36 – Relation between labor productivity and the presence of Foreign-owned Companies in industry
sectors……………………………………………………………………………………………………………….. 90
Chart 37 – Relation between the presence of Foreign-owned Companies and the physical capital accumulation to
product ratio in industry sectors…………………………………………………………………………………….. 92
Chart 38 – Relation between change in the presence of Foreign-owned Companies and the ratio of physical
capital accumulation to product in industry sectors………………………………………………………………… 93
Chart 39 – Relation between the presence of Foreign-owned Companies and compensation per position in
Chart 40 – Average compensation per position in industry sectors and in Foreign-owned Companies operating in
Chart 41 – Relation between the presence of Foreign-owned Companies and total factor productivity in industry
sectors………………………………………………………………………………………………………………. 97
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1. Introduction
1.1 Background
Foreign Direct Investments (FDI) are investments by a foreign investor in another country with the
objective of establishing a lasting interest in assets outside the country of the foreign investor. 2 These
investments consist of all the cross-border transactions conducted between investors.
In other words, an FDI is an investment by a foreign entity, usually a Multinational Enterprise (MNE),
outside its country of residence. FDI is different than trade in that trade is an exchange of finished or in-
process goods that does not involve any management of or control over the manufacturing of such goods.
Foreign investments have a significant influence over the economy of the target country (the country
receiving the foreign investments). Extensive literature suggests that this influence can be seen both in aspects
of the overall local economy (the macro level), such as product, tax revenues and export levels, and in the
sector where the Foreign-owned Companies operate (horizontal spillover). In addition, this influence also
extends to entities related to the value chain of the Foreign-owned Companies, such as suppliers and
customers (vertical spillover).
In recent years, foreign investments have been made in Israel on a large scale, even by international
standards, and a significant portion of these investments were related to knowledge and technology intensive
sectors. Nevertheless, the economic research on the subject is scant considering its importance to the Israeli
economy.
One of the conclusions of the report of the inter-ministerial committee for policies regarding foreign
investments in Israel, which was the basis for establishing Invest in Israel, was that measurement of the real
effect of foreign investments in Israel must be improved. Following the report, the Authority cooperated with
statistical bodies dealing with foreign investments, and particularly with the Israeli Central Bureau of
Statistics (ICBS), to achieve this improvement. In addition to improving future data collection questionnaires,
a concurrent effort was made to improve existing data regarding foreign investment activity by extracting
data from various ICBS databases, increasing the resolution of existing data and enriching it with additional
data.
The first fruits of this labor are presented in this report. The report examines the statistical data and
describes the current state of affairs regarding foreign investments in Israel; reviews the local and
international economic literature on the subject; and provides an empirical econometric analysis of sectorial
2See http://www.oecd.org/daf/inv/FDI-statistics-explanatory-notes.pdf and

http://www.oecd.org/corporate/mne/statistics.htm.
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data in order to examine the effects of foreign investments in Israel on the basis of previously unexamined
data.
1.2 Structure of the report

This study presents data of Foreign-owned Companies in Israel compared to local companies and to
activities of Foreign-owned Companies in other countries around the world. It also presents an extensive
review of previous studies from the economic literature that examined the effects of Foreign-owned
Companies on the local economy – on the productivity of companies in the sectors where such Foreign-
owned Companies operate, as well as on the local suppliers and customers of such Foreign-owned
Companies.
The study is structured as follows: chapter 2 presents a descriptive statistic of FDI in Israel, including
international comparisons; chapter 3 presents a review of empirical economic literature from Israel and other
countries regarding the effects of FDI on the local economy; chapter 4 presents the new results of the effects
of FDI in Israel, based, in part, on an analysis of previously unexamined ICBS data; and chapter 5 presents a
summary and recommendations for policies and future research.
2. Descriptive statistic: FDI in Israel and around the world
2.1 Sources of information

As will be explained in more detail below, foreign investments affect local markets in two ways: direct
effects – the productivity and wages of employees, foreign trade activity, local R&D activity, government
tax revenues and more; and indirect effects – spillover of knowledge and technology to competing companies
and other entities in the value chain that have contacts with Foreign-owned Companies.
This chapter will present a descriptive statistic focused on the direct effects of foreign investments:
scope and distribution of foreign investments in Israel (Foreign Direct Investments), as well as the
characteristics of Foreign-owned Companies operating in Israel (referred to in the ICBS data as IN), and a
comparison with the presence of Foreign-owned Companies in other countries around the world.
For the purpose of this study we used pubic information sources – mostly public ICBS data, OECD
data and UNCTAD data. In addition, we used special ICBS data for the years 2012 - 2015 prepared especially
for this study, including aggregative data (main sector level), to supplement the data of the globalization
survey published by ICBS.
The analysis presented below is based on several databases, as specified below:
 Data from the Israeli Central Bureau of Statistics:
1. Balance of Payments; updated data for 2018.
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2. Table 1: trade countries – import and export; Israeli Central Bureau of Statistics; 2018; updated data
for 2017.
3. Media release – Foreign Direct Investment in Israel and Direct Investment Abroad, by Sectors and
Countries 2014 - 2016; updated data for 2016.
4. Media release – R&D Activity in Start-ups and Multinational R&D Centers, 2015; updated date for
2015.
5. Business demographic data for 2011 - 2013; ICBS.
6. Economic sectors survey; updated data for 2008 - 2015.
7. Industry sectors survey; updated data for 1990 - 2015.
8. Activity of Multinational Enterprises in Israel (Globalization Survey); updated data for 2013.
9. Research and Development by Multinational Enterprises in Israel (Multinational Enterprises

Activity Survey); updated data for 2013.
10. Various other media releases by the Israeli Central Bureau of Statistics as specified in the study.
 OECD data:
1. The presence of Foreign-owned Companies in the economies of various countries (Globalization

database); updated for 2015 until the first half of 2017.
2. Dataset: Gross domestic expenditure on R-D by sector of performance and source of funds.
3. Level of GDP per capita and productivity data.
 Bank of Israel data: statistic view 2017.
 UNCTAD data: Foreign direct investment: Inward and outward flows and stock, annual, 1970 - 2017.
 Special ICBS data for 2012 - 2015 prepared for this study:
For the purpose of this study, the Israeli Central Bureau of Statistics collected and sorted the data of
Foreign-owned Companies in order to re-classify the activities of groups of Foreign-owned Companies,
such as holdings companies, into economic sectors. In the public data of the Israeli Central Bureau of
Statistics available until now, Foreign-owned Companies incorporating the activity of several companies
in different economic sectors were classified as service companies. The project also included the use of
administrative data to assess various variables.
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The new database (hereinafter, "Foreign-owned Companies data") provides a clearer view of the nature
of the activity of Foreign-owned Companies in Israel. The new data provides information at the major
economy sector level (two digits) compared with the public data that provides information at a
significantly lower resolution.3
In addition to the re-classification, the new data were crossed with administrative data to provide new
information regarding the size of Foreign-owned Companies in terms of the number of salaried positions
in each company with a distribution by economic sector.
It should be noted that due to inconsistency in the ranges of data in various databases, some of the
analyses refer to different time periods. Furthermore, it should be noted that the sources of information and
the methods of data collection differ, as specified below.
The latest data regarding Foreign Direct Investments comes from the Balance of Payments published
by ICBS, consisting, at the time of writing this study, of data up to the end of 2018. FDI is recorded as a
category in the national Balance of Payments of every country when the capital investment balance amounts
to at least 10%,4,5 in two ways: stocks and flows.
Stocks of direct equity investments and debt investments 6 are listed in the country's balance of assets
and liabilities with the rest of the world (International Investment Position), as illustrated by the following
chart:
3 For additional technical details regarding the methodology behind this data see supplement 7.3.
4 The Balance of Payments of a country records all the receipts and payments of that country's international trade, i.e. the
import and export of goods, services, financial capital and financial transfers. For example:
https://stats.oecd.org/glossary/detail.asp?ID=150 or https://stats.oecd.org/glossary/detail.asp?ID=149.
5 Due to different standards of listing movements in the Balance of Payments, FDI was not consistently recorded for
every country, and particularly was not recorded at a high level of detail of foreign investments in a specific country
by each investing country, but rather at an aggregated level. The most detail available is found at the OECD database.
See Gouel & Laborde (2012).
6 Debt investments include shareholders' loan, debentures and other instruments.
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Chart 1 – Illustration of Foreign Direct Investments in the national accounting
Equity
Flows from direct investments include dividends, re-investment of profits and debt interest.7 Such
flows are listed in the Balance of Payments.8 Measurements are made both ways: inwards – investments by
an investing country in the reporting country; and outwards – investments by the reporting country in a target
country.
Additional data regarding Foreign-owned Companies is based on the ICBS globalization survey,
updated for 2013. This survey separately examined companies owned by foreign nationals, referred to as IN
companies. IN companies include all companies in Israel where at least 50% of the share capital is held by
foreign nationals, as illustrated in the following chart:
Chart 2 – Illustration of an Israeli company owned by a foreign national (IN)
Equity
It should be further noted that some of the data refers to Foreign-owned Companies, i.e. at least 51%
held by foreign nationals. In other words, the globalization survey focuses on foreign-controlled companies.
In general, the data available to us for this study had many limitations. First, the data was aggregative
and not company-level data. This presented an inherent limitation in the amount of data and the ability to
identify various phenomena that were not clearly reflected in aggregative data. For example, the data did not
show the geographic location of investments in Israel (distribution by center/periphery); or distinction could
not be made between foreign investments aimed at significant change in real activity, such as opening a new
factory, and foreign investments aimed at a financial transfer of shares to a foreign entity. Second, some of
7 See http://www.oecd.org/daf/inv/FDI-statistics-explanatory-notes.pdf and

http://www.oecd.org/corporate/mne/statistics.htm.
8 It should be noted that profits distributed to shareholders (dividends) and interest revenue for lenders are listed in the
revenues and expenses account of the Balance of Payments and not in the financial account.
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the data, particularly the data based on the ICBS globalization survey, were not up-to-date and were published
with at least three years' delay.
2.2 Foreign Direct Investments – world trends

The balance of FDI around the world in on a continuous rise at significant rates. The following chart
is based on data from the United Nations Conference on Trade and Development (UNCTAD). It presents the
balance of FDI in countries around the world:
Chart 3 – FDI balance in countries around the world
Source: UNCTAD; Foreign direct investment: Inward and outward flows and stock, annual, 1970-2017.
Since 2000, the balance has increased by an average annual rate of 9% every year except two (most
prominently 2008, the year of the world financial crisis). It should be noted that the size of the increase in the
investments balance, influenced by new investments and the withdrawal of old investments, changes
dramatically between years.
The following chart presents a distribution of FDI by the development level of the target country:
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Chart 4 – FDI as a percentage of the world balance of investments by development level
The share of developing countries in the world FDI balance increased between 2004 and 2017 from
21% in 2004 to 33% in 2017. Despite this increase, the share of developed country in the world FDI balance
remained the largest.
The following chart presents the investment flow (inward) in countries around the world, distributed
by the development level of the receiving country:
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Chart 5 – Foreign Direct Investments flow around the world by development level of the
receiving country
The flow of investments in developing countries is increasing. In recent years, the flow of investments
in developing countries has reached close to half of the total world FDI. In 2014, the flow of investments in
developing countries was even higher than the flow of investments in developed countries and amounted to
51% of the total world FDI for that year.
It is important to note in this regard that one of the components of the flow of investments is re-
investment in companies that distribute profits (i.e. dividends distributed to shareholders and re-invested in
the company). Since the balance of investments in developed countries is significantly higher than in
developing countries (almost twice in 2017), the amount of new investments in developed countries may be
higher than reflected in the chart above.9
9 New investments refer to investments by foreign nationals in companies that were previously owned entirely by local
residents.
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2.3 Investments by foreign nationals in Israel according to the Balance of

Payments
As aforementioned, the latest data regarding Foreign Direct Investments comes from the Balance of
Payments published by ICBS, consisting, at the time of writing this study, of data up to the end of 2018. It
should be noted that the scope of FDI in this data is defined as investments by foreign nationals, companies
or private individuals, at a rate of more than 10% of the share capital of companies in Israel. In addition,
direct investments also include profits accrued by companies owned in Israel and shareholders' loan to such
companies.
Based on the data of the Balance of Payments, published by ICBS, Foreign Direct Investments in
Israel amounted to 21.8 billion Dollars in 2018. The annual amount of FDI was between 4.6 and 21.8 billion
Dollars in 2005 - 2018. The following chart presents the development of annual investments (current prices):
Chart 6 – Annual investments by foreign nationals in Israel, 2005 - 2018
Source: for 2005 - 2014: OECD; for 2015 - 2018: Table 7: financial account (original data), ICBS, 2018.
Until 2005, the level of gross direct investment flows into the market was relatively low: an annual
average in 1998 - 2005 of 3.4 billion Dollars in incoming direct investments. In recent years, a significant
increase in direct investment flows can be overserved, up to a peak in 2018. Compared to the rest of the
world, the net direct investment flow is relatively high considering the product. Between 2006 and 2015, the
average ratio between the net incoming investment flow and the national product was 4.1%, compared to
- Page 18 of 114 -
2.9% in OECD countries.10
It can be further observed that the scope of direct investments by foreign nationals in Israeli companies
does not significantly change between years. A possible reason for this is the sale of Israeli companies to
overseas investors that occur from time to time in the Israeli market, mostly in knowledge intensive sectors,
and involve substantial amounts. 2006 was an exception regarding the scope of direct investments because
of a significant investment in the Israeli company "Iscar".11 In addition, about a third of the direct investments
in 2017 (amounting to 18.9 billion Dollars) comes from a direct investment in a single company in the
computer production and programing sector. 12
It should be noted that some congruence exists between the trend of FDI in Israel and world data –
with a decrease during the height of the 2008 economic crisis and a recovery since then.
A significant part of the investment flow is directed at the computing and R&D sectors, amounting to
34.2% of the total investment flow in 2016, and at high technology sectors, amounting to 11.9% of the total
investment flow in 2016. 2.6 billion Dollars, constituting 21.7% of the total investment flow in 2016, were
invested in the 'Information and Communication, Programing and Computer Consulting Services' sector.
Around 1.5 billion Dollars were invested in the 'Scientific Research and Development' sector, constituting
12.5% of the total investment flow, and around 1.4 billion Dollars were invested in the 'Financial Services'
sector, constituting 11.4% of the total investment flow. In addition, 1.1 billion Dollars were invested in the
'Computer, Electronic and Optical Equipment and Electrical Equipment Manufacturing' sector, constituting
9.4% of the total investment flow. 13
The balance of investments by foreign nationals in Israel amounted to 128,819 million Dollars in
2017,14 following a continuous increase between 2005 and 2016 (current prices):
10 See: Yahalom and Azam (2016).

11 Ibid.
12 Bank of Israel, Statistical View 2017, p. 30.
13 Data concerning distribution by sector does not exist for 17.7% if the total investment. Source: Media release – Foreign
Direct Investment in Israel and Direct Investment Abroad, by Sectors and Countries 2014 - 2016, Israeli Central Bureau
of Statistics, 2018.
14 The investment balance accrues the net movements each year (i.e. the investments by foreign nationals in Israel minus
their realizations/sales), exchange rates, prices changes and other adjustments. For more details see: Yahalom and Azam
(2016).
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Chart 7 – Investments balance (inward position) of foreign nationals in Israel, 2005 - 2017
Source: 2005 - 2016: OECD; 2017: Table 8 – assets and liabilities of the market abroad, ICBS, 2018.
Based on ICBS data, the investment balance in knowledge intensive sectors has a significant share in
the total investment. Investments in the sectors of Information and Communication, Programing and
Computer Consulting Services constituted 22.5%, in Computer, Electronic and Optical Equipment and
Electrical Equipment Manufacturing 13.1% and in Scientific Research and Development 13.5% of the
investments balance of foreign nationals in Israel in 2016.15
Compared to the rest of the world, the balance of FDI in Israel is not particularly high. The following
chart presents the balance of investments by foreign nationals in Israel as a percentage of the annual Gross
Domestic Product:
15 Source: Media release – Foreign Direct Investment in Israel and Direct Investment Abroad, by Sectors and Countries
2014 - 2016, Israeli Central Bureau of Statistics, 2018.
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Chart 8 – Balance of investments by foreign nationals in Israel as a percentage of the GDP,

2005 - 2016
Source: OECD.
The growing trends of globalization around the world in recent years, which are also reflected in the
data for Israel, can be clearly seen. However, the balance of investments by foreign nationals in Israel is not
particularly high compared to the rest of the world. The EU countries are prominent in their foreign
investment balances – also because of cross investments by EU members in each other.
2.4 Distribution of Foreign-owned Companies in Israel and their activities

According to the economic sectors survey, the share of Foreign-owned Companies in the Israeli
product is not negligible.16 The output of these companies in Israel amounted to 152,558 million NIS in 2015,
which is 11.24% of the total output of the Israeli economy.17 Between 2008 and 2015, this rate ranged
16 To define a company as a Foreign-owned Company, the survey defines foreign ownership as at least 51%.
17 According to the Israeli Central Bureau of Statistics: Output – the value of goods and services produced by an
enterprise, excluding the value of goods and services used for activities for which such enterprise does not risk using
products for the purpose of production, and excluding the value of goods and services consumed by such enterprise (no
including goods and services used for investment in fixed assets or inventory or final self-consumption).
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between 10.0% and 11.5%.
The gross value added of Foreign-owned Companies in Israel amount to 74,548 million NIS in 2015, 18
which is 11.82% of the total Gross Value Added in Israel.19 Between 2008 and 2015, this rate ranged between
10.3% and 12.6%.
The following table presents the distribution of Foreign-owned Companies by economic sectors:
Table 1 – Distribution of Foreign-owned Companies by economic sector, 2015

Share of total number of
Economic sector
companies
24.6% Information and communication
19.7% Professional, scientific and technical services
15.4% Retail and wholesale trade; motor vehicle and motorcycle repair
10.5% Industry; mining and excavating
9.6% Real-estate activity
Education; health and welfare services; art, entertainment and leisure;
7.0%
other
4.0% Construction
3.6% Administration and support services
2.9% Hosting and food services
1.7% Transportation, storage, mail and currier services
Electricity, gas, steam and air-conditioning supply; water supply;
0.9%
sewage services, waste management and treatment services
Source: Foreign-owned Companies data, ICBS
Companies in the information and communication sectors constitute 24.6% of the total number of
Foreign-owned Companies; companies in the professional, scientific and technical services sectors constitute
19.7% of the total number of Foreign-owned Companies; and companies in the retail and wholesale trade
sectors constitute 15.4% of the total number of Foreign-owned Companies. Companies in the industry sector
constitute only 10.5% of the total number of Foreign-owned Companies. However, 34.8% of the revenues of
Foreign-owned Companies belong to companies in the industry sector:20
18 According to the Israeli Central Bureau of Statistics: Value Added – the value of output minus the total input.
19 Source: Economic sectors Survey 2015; Table 18.14 – Jobs, output, gross value added and compensation for jobs in
economic sectors (2011 classification) by sector and sub-sector, ICBS, 2017.
20 As will be seen later, the number of employees in industrial companies is also relatively large, i.e. companies in the
industry sector employ more employees on average.
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Chart 9 – Revenues of Foreign-owned Companies by economic sector, 2015
Source: Foreign-owned Companies data, ICBS
The industry sector includes 'Computer, Electronic and Optical Equipment Manufacturing'. The
revenue in this sub-sector amounted to 31.5 billion NIS in 2015, which is 13.2% of the total revenue of
Foreign-owned Companies. Giant companies, such as Intel, manufacturing on very large scales for the Israeli
market, have a significant influence on the total revenue in this sector. 21 Other prominent industry sectors
include the manufacturing of chemicals and their products, constituting 4.5% of the total revenue of Foreign-
owned Companies in 2015 and the manufacturing of food products, constituting 4.3% of the total revenue of
Foreign-owned Companies in 2015.
The revenue in the information and communication sectors amounted to 35.0 billion NIS 2015,
constituting 14.9% of the total revenue of Foreign-owned Companies in this year. Due to the nature of
companies in the high-tech sector, which focus a significant part of their activity on development, extensive
activity is possible in this sector without and sales. The revenue in the information and communication sector
may therefore misrepresent the extent of activity by companies in the sector. In addition, the scientific
research and development sub-sector, belonging to the professional, scientific and technical services sector
21 According to the corporate responsibility report published by Intel in 2016, the company's export in Israel amounted
to 3.4 billion Dollars. See https://www.intel.co.il/content/dam/www/public/emea/il/he/pdf/csr-report-2016.pdf.
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constituted 6.4% of the total revenue of Foreign-owned Companies in 2015.
Other prominent economic sectors include wholesale trade, excluding motor vehicles and
motorcycles, where the revenue constituted 14.4% of the total revenue of Foreign-owned Companies in 2015,
and retail sales, excluding motor vehicle and motorcycles, where the revenue constituted 10.1% of the total
revenue of Foreign-owned Companies in 2015.
2.5 The share of IN companies in employment

According to the Foreign-owned Companies data, 11.2% of Foreign-owned Companies employ over
100 employees – a relatively high rate compared to the general business sector, where the rate of companies
employing over 100 employees is only 1.42%.22
As may be expected from the share of Foreign-owned Companies in the Israeli product, their share in
the Israeli labor force is not negligible. However, their share in the labor force is not as high as their share in
the product.
The following chart presents the number of occupied positions in 2015, in Israel, in the business sector
and in IN companies:
Chart 10 – Number of occupied positions, 2015
Source: Table 1 – selected data by economic sector – 2015, ICBS, 2017; Foreign-owned Companies, ICBS.
22 As of 2015; source for the Israeli market: Table 18.3 – Businesses by economic sector (2011 classification) and size
group for average salaried employees, ICBS 2015; source for Foreign-owned Companies: Foreign-owned Companies
data, ICBS.
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In 2015, the number of jobs in Israel was 3,934 thousand. The number of jobs in the business sector
was 2,923 thousand in 2015. The number of jobs in IN companies amounted to 252 thousand in 2015, which
is 8.6% of the total number of jobs in the business sector and only 6.4% of the total number of jobs in the
Israeli market.23 Between 2008 and 2015 the share of IN companies in the total number of jobs in the Israeli
market ranged between 5.6% and 6.5%.
Employees in IN companies in Israel work in a variety of sectors, some traditional and some
knowledge intensive. The Foreign-owned Companies data presents a detailed distribution of 252 thousand
employees in Foreign-owned Companies in 2015. The chart below shows the workplaces of these employees
by economic sector:24
23 Source: Table 16 – Output and employees in Foreign-owned Companies by economic sector: IN companies, Israeli
Central Bureau of Statistics, 2017.
24 The category "other" includes: art, entertainment and leisure, 0.8%; other services, 0.2%; education, 0.6%; financial
and insurance services, 0.3%; real-estate, 0.3%; agriculture, forestry and fishing, 0.3%; mining and excavating, 0.3%;
electricity, gas, steam and AC supply, 0.0%; water supply; sewages, waste management and treatment services, 0.7%.
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Chart 11 – Employees in Foreign-owned Companies by economic sector, 2015
Source: Foreign-owned Companies data, ICBS.
The industry sectors account for 26.7% of the total number of jobs in Foreign-owned Companies in Israel.
40.2% of the occupied positions in Foreign-owned Companies in the industry sectors are in the 'Computer,
Electronic and Optical Equipment Manufacturing' sector, which is characterized by high technology. Other
dominant sectors among Foreign-owned Companies in the industry sectors include the manufacturing of
chemicals and their products (7.4%) – characterized by mixed-high technology, machine and equipment
manufacturing NME25 (6.9%) – characterized by mixed-high technology, metal assembly products
manufacturing (7.0%) – characterized by mixed-traditional technology, and food products manufacturing
(11.9%) – characterized by traditional technology.
The sectors of information and communication are mostly based on computer programming, computer
consulting and other accompanying services. This sector account for 91.7% of the total number of jobs in the
information and communication sector, with a share of 18.7% in the total number of jobs in Foreign-owned
Companies in Israel.
25 Not mentioned elsewhere.
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Professional and technical services account for 10.5% of the total number of jobs in Foreign-owned
Companies. They include, among others, scientific research and development, which accounts for 70.9% of
the total number of employees in Foreign-owned Companies in this category. 8.3% are engaged in
architecture and engineering services and in technical examinations and technical data analysis. 12.2% are
engaged in advertisement and market research.
It is evident therefore that most of the activity of Foreign-owned Companies is in economic sectors that are
characterized by advance levels of technology and knowledge.
Regarding Foreign-owned Companies in the administration and support sectors, accounting for 11.8% of the
total number jobs in Foreign-owned Companies in Israel, it appears that they employ salaried employees
mostly in security and investigation services (33.2%), building maintenance services and gardening (25.7%)
and employment services (28%).
2.6 The wage of employees in Foreign-owned Companies

The special Foreign-owned Companies data prepared for this study by the Israeli Central Bureau of Statistics
provide information regarding the wage of employees in Foreign-owned Companies. The following chart
presents the average compensation per position in a Foreign-owned Company compared to the average in the
business sector by economic sector, in thousands of NIS per year: 26
26 The business sector data is based on compensation data for positions and the number of positions in table 1 –
practitioners, positions, revenue, output, gross value added (economic sectors survey).
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Chart 12 – Compensation per position in the business sector and in Foreign-owned

Companies by economic sector, 2015
Source: Foreign-owned Companies data; ICBS data, economic sectors survey 2015; table 1.
As can be seen, the compensation per position in Foreign-owned Companies is generally much higher than
the average for the business sector in Israel. Accordingly, the average compensation per position in Foreign-
owned Companies is 36% higher than the general average in the business sector. Particularly high levels of
average compensation per position in Foreign-owned Companies can be seen in the scientific research and
development sectors (sector 72) and in the machine and equipment repair, maintenance and installation
sectors (sector 73), where the difference between Foreign-owned Companies and Israeli companies is
significant, as well as in the sectors of maintenance companies and financial services, excluding insurance
and pension funds (sectors 64 - 66). Large differences in the average compensation per position can be seen
in most economic sectors.
- Page 28 of 114 -
The exception, where the compensation per position is lower in Foreign-owned Companies, is sectors 29 -
30: manufacturing of motor vehicles and trailers and manufacturing of other motor and transport vehicles,
showing the largest difference between the sector average and the Foreign-owned Companies' average;
sectors 05 - 09: mining and excavating sectors; sectors 37 - 38: sewages services, waste management and
treatment, recycling (and reclamation) of materials; sectors 50 - 52: naval transport, aerial transport, storage
and auxiliary services for transportation; sector 26: computer, electronic and optical equipment
manufacturing; and sectors 11 - 12: food product manufacturing, drink manufacturing and tobacco products
manufacturing – showing small differences between the sector average and the Foreign-owned Companies'
average.
The Foreign-owned Companies data shows that the average wage of salaried employees is higher in smaller
companies. The following chart presents the average wage for a position in Foreign-owned Companies in
2015 by the number of salaried positions:
Chart 13 – Average wage for a position by the number salaried positions in the company,
2015
The data shows that in Foreign-owned Companies where the number of salaried employees is 1 to 19,
the average (annual) wage in 2015 is 368.6 thousand NIS, compared to an average wage of 165.4 thousand
NIS in companies where the number of salaried employees is over 1000. A possible reason for this difference
is that the weight of the wages of senior executives is lower in larger companies and therefore they have less
- Page 29 of 114 -
influence on the average.27
To summarize, the wages of employees in Foreign-owned Companies is generally higher that the
average wage in the Israel. This is true for most economic sectors and can be seen especially in Foreign-
owned Companies with a relatively small number of salaried employees.
2.7 Productivity in Foreign-owned Companies compared to the general

productivity in the market
The following table presents an international comparison of the share of Foreign-owned Companies
in the Gross Value Added and the number of employees in 2014:28
Table 2 – Weight of Foreign-owned Companies in product and employment, 2014

Country Labor force share Added value share Ratio
Belgium 16.10% 36.99% 2.30
Germany 11.66% 26.72% 2.29
Slovakia 25.50% 56.93% 2.23
Spain 12.20% 27.02% 2.21
Hungary 26.41% 57.43% 2.17
Italy 8.02% 17.28% 2.15
Netherlands 16.27% 34.66% 2.13
Greece 5.15% 10.69% 2.08
Israel 5.80% 12.03% 2.07
Portugal 12.78% 23.62% 1.85
Czech Republic 26.81% 48.37% 1.80
Britain 19.23% 34.32% 1.78
France 10.67% 19.02% 1.78
Latvia 18.66% 29.12% 1.56
Luxembourg 39.45% 58.47% 1.48
Austria 19.75% 28.40% 1.44
Sweden 21.46% 30.63% 1.43
Poland 27.57% 38.91% 1.41
Slovenia 19.25% 26.60% 1.38
Finland 16.42% 21.92% 1.33
Norway 21.53% 27.26% 1.27
Estonia 38.42% 45.45% 1.18
Denmark 19.71% 18.93% 0.96
Source: for Israel, ICBS data, economic sectors survey 2014, table 18.14, published in 2017.
For the rest of the countries, OECD, Inward activity of multinationals by industrial sector – ISIC Rev 4.
The table shows that in all countries except Denmark, the share of Foreign-owned Companies in the
27 For comparison, the average wage in start-up companies in Israel in 2016 increased with the size of the company. See
http://old.ICBS.gov.il/hodaot2018n/29_18_144t5.pdf.
28 For Israel, the data refers to Foreign-owned Companies, i.e. where more than 51% of the company's equity is held by
a foreign national. In addition, due to lack of data, for Israel, the data excludes financial companies, while for the rest
of the countries, the data includes all companies.
- Page 30 of 114 -
product is larger than their share in the number of employees. This points to a high productivity per employee
in Foreign-owned Companies compared to local-owned companies. The ratio between share in the product
and the share in labor in Israel was 2.07 in 2014, i.e. the product per employee in Foreign-owned Companies
was twice as high as the average product per employee. In fact, the Gross Value Added per employee in Israel
was 209 thousand NIS in 2014, while the Gross Value Added per employee in Foreign-owned Companies
was 433 thousand NIS.29 It should be noted that the average productivity per employee in Israel is
significantly lower than the OECD average.30
As will be seen below, one of the challenges facing empirical studies that examined this issue was
analyzing the causality behind the differences between productivity levels in Foreign-owned Companies and
the average and distinguishing between this causality and the possible tendency of foreign investments to
invest in high productivity sectors.
According to ICBS data regarding the productivity of Foreign-owned Companies in Israel by

economic sector, it seems that the productivity of employees in Foreign-owned Companies is higher than the
average industry productivity in all sampled sectors. The following chart presents the productivity of Foreign-
owned Companies by sector:
29 The ICBS data is based on company accounting statements. Many transactions between IN companies and related
companies abroad are based on transfer prices and are reported as such in the companies' book. It's possible that in
some cases these prices would not fully represent the real value added of the economic activity of a Foreign-owned
Company operating in Israel. Accordingly, the economic value added of IN companies may be higher than the measured
accounting value.
30 In 2016, the product per employee in Israel was 17% lower than the OECD average. See: Level of GDP per capita and
productivity; OECD; 2017.
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Chart 14 – Share of Foreign-owned Companies in product and employment in Israel by

sector, 2015
Source: ICBS data, economic sectors survey 2015; table 7.
The chart presents the rate of positions in Foreign-owned Companies out of the total number of
positions in each sector, the rate of Gross Value Added in Foreign-owned Companies out of the total Gross
Value Added in each sector and the ratio between the value-added rate and the positions rate of Foreign-
owned Companies in each sector.
In the information and communication sector, the share of Foreign-owned Companies in the value
added was 27%. This is the sector where the share of Foreign-owned Companies was the most significant.
However, the ratio between the value-added rate and the positions rate in this sector is the lowest, at only
1.33. In other words, the productivity of employees in Foreign-owned Companies in this sector is relatively
similar to the productivity of employees in other companies in this sector. 31
Conversely, in the agriculture sector, the ratio between the value-added rate and the positions rate is
2.20. This means that an employee in a Foreign-owned Company in the agriculture sector is 2.20 times more
productive than an average employee in this sector.
31 It should be noted that the dominance of Foreign-owned Companies in this sector has a significant influence on the
average, therefore the comparison to the sector average reduces the ratio compared to a comparison to the average of
employees in local-owned companies.
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In sectors characterized by the dominance of Foreign-owned Companies (25% of the total Gross Value
Added), the ratio between the value-added rate and the positions rate of Foreign-owned Companies is 1.52.
The ICBS sector surveys provide a distribution of the value-added of companies by economic sector
and by sector. The following chart presents the product per position32 by economic sector:
Chart 15 – Average value-added per position by economic sector, 2013
Thousands (NIS)
Source: industry survey, ICBS, 2013.
As can be seen, the average value-added for a position in Foreign-owned Companies is significantly
higher in most sectors.33 This is an indication that Foreign-owned Companies use their labor force more
efficiently. Possible reasons for this may be a larger investment in capital reserve or better-quality human
capital.
The Foreign-owned Companies data provides new information about the revenues of companies. The
following chart presents the average revenue per position by economic sector in 2015:
32 Average Gross value added in buyer prices per position.

33 An exception can be seen in sectors 19 - 21: Coke and refined raw oil products manufacturing; chemicals and chemical
products manufacturing; conventional and homeopathic medicine manufacturing.
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Chart 16 – Average revenue per position in Foreign-owned Companies by sector
A significant difference between the companies' productivity or value-added and their revenues is the
inventory value created, including intangible assets. For example, a research company that produced
intangible assets but did not yet sell these assets would show low revenues. Conversely, a retail trade
company whose revenues are derived from mediation between the manufacturer and the end consumer mostly
indicate the value of sold goods rather than the value-added they create. Furthermore, the sale price may be
biased since Multinational Enterprises may sell their products to parent companies at a price calculated as
cost plus some rate of profit (cost-plus), and this price may not represent the value of the sold goods.
The data shows that the average revenues per position of companies in the information and
communication sector is only 742 thousand NIS per year. In industry sectors, on the other hand, the average
revenue per position is 1,215 thousand NIS per year.
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The Foreign-owned Companies data allows higher resolution examination of economic sectors.
According to the data, the average revenue per position in the scientific research and development sector is
807 thousand NIS per year, and in the computer programming, computer consulting and other accompanying
services only 665 thousand NIS. However, the average revenue per position in the chemical and chemical
products manufacturing sector is 2,131 thousand NIS per year, 34 despite the fact that the average wage of
employees in the research and development and in the computer programming and consulting sectors is
significantly higher than the average wage of employees in the chemical and chemical products
manufacturing sector.35 Particularly high levels of revenue per position can be seen in the financial services
sector, where the average revenue per position is 5,354 thousand NIS per year, and in the real-estate and
mining and excavation sectors, where the average revenue per position is 3,318 thousand NIS and 3,291
thousand NIS per year, respectively.
Although the revenue data of Foreign-owned Companies is not a good approximation of the products
of these companies, it clarifies the nature of the activity of Foreign-owned Companies in various sectors.
While the value of work in some sectors is derived directly from the amount of sales, in other sectors, the
value of work is not reflected in short term sales. This happens more often in sectors where wages are high.
Regarding the size of companies, it seems that the average revenue per position is higher in smaller
companies. The following chart presents the average revenue per position in Foreign-owned Companies in
2015 by the number of salaried positions in the company:
34 The average revenue per position is calculated as the total revenue of companies in the industry divided by the number
of salaried positions in the industry, as an indication of the productivity of salaried employees.
35 In 2015, the average wage in the computer programing, computer consulting and other accompanying services industry
was 386 thousand NIS, the average wage in the scientific research and development industry was 476 thousand NIS,
and the average wage in the chemical and chemical products manufacturing industry was 236 thousand NIS in Foreign-
owned Companies. Source: Foreign-owned Companies data, ICBS.
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Chart 17 – Average revenue per position in Foreign-owned Companies by company size,

2015
Foreign-owned Companies with 1 to 19 salaried employees employed 10,275 people in 2015. The
average revenue per position in these companies was 2,605.7 thousand NIS. The average revenue per position
in Foreign-owned Companies with over 1,000 salaried employees was only 581.2 thousand NIS. It should be
noted that the data includes all economic sectors. In some sectors size may and advantage, while in others
most players may be small companies. This means that the characteristics of a sector could have a greater
influence on average revenues that the size of a company.
2.8 Distribution of IN companies by country

Based on the ICBS globalization survey, the following chart presents the distribution of IN companies
in Israel in 2013 by country of origin:
- Page 36 of 114 -
Chart 18 – Distribution of IN companies by country of origin, 2013
Source: Media release – Activity of Multinational Enterprises in Israel 2012 - 2013, ICBS, 2017.
The country of origin of most IN companies in Israel is in North America (41.6%) or Europe
(39.5%). The country of origin of 39.4% of the companies is the United States, 9.2% of the companies are
from the United Kingdom and 10.2% are from Latin America.
2.9 The share of IN companies in Israeli foreign trade

In recent decades, globalization process led to the development of a global value chain, where the
geographic location of each link in the chain is distinguished according to the advantages of each country.
There are claims that Foreign-owned Companies help countries to be included in the global value chain.36 In
this context, it is interesting to examine the relation between Multinational Enterprises and foreign trade.
A significant part of the activity of Multinational Enterprises in Israel involves the import and export
of goods and services – often with related companies abroad. The total export of goods and services
constituted 48.6% of the total output of IN companies in 2013.
The foreign trade activity of IN companies is a significant part of the total Israeli foreign trade. In
2013, the total goods and services of IN companies amounted to 24,010 million Dollars, compared to a total
of 23,399 million Dollars in 2012, and constituted 25% of the total export of goods and services by IN
companies in each of these years.37 The following chart presents the total export of goods and services by IN
36 See, for example: http://www.oecd.org/investment/trade-investment-gvc.htm.

37 Source: Media release – Activity of Multinational Enterprises in Israel 2012 - 2013, ICBS, 2017.
- Page 37 of 114 -
companies in Israel between 2009 and 2013 (current prices):
Chart 19 – Export of goods and services by IN companies in Israel, 2009 - 2013
Source: Table 9 – International trade with related companies and other foreign nationals, globalization survey, ICBS, 2017.
Between 2009 and 2013 there was an increase in the export by IN companies in Israel of both goods
and services, in accordance with the increase of the activity these companies in Israel.
The import by IN companies is also a significant part of Israeli import activity. In 2013, it amounted
to 22.7% of the total import in Israel. 38 The following chart presents the total import of goods and services
by IN companies in Israel between 2009 and 2013 (current prices):
38 Ibid.
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Chart 20 – Import of goods and services by IN companies in Israel, 2009 - 2013
Source: Table 9 – International trade with related companies and other foreign nationals, globalization survey, ICBS, 2017.
In 2013, the total import of goods and services by IN companies amounted to 11,672 million Dollars
– significantly lower than the total export of IN companies in this period. The most significant difference can
be found in services. In 2013, the total import of services was only 2,788 million Dollars, compared to a total
export of services of 10,244 million Dollars.
Compared to the trade in goods by IN companies, the trade in goods by the State of Israel was in
deficit between 2005 and 2014. In 2014, the import of goods amounted to 71 million Dollars, while the export
of goods amounted to only 57 million Dollars. 39
Most of the export by IN companies in Israel is intended for the parent companies of the IN companies,
while most of the import is from other foreign nationals. This can be seen in the following chart:
39 Source: Israel's import and export of Goods (Statistical), Israeli Central Bureau of Statistics, 2015.
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Chart 21 – International trade with related companies and other foreign nationals, 2013
Source: Table 9 – International trade with related companies and other foreign nationals, globalization survey, ICBS, 2017
76.4% of the export is intended for related companies, while only 41.7% of the import is from related
companies.
Concerning trade with various countries around the world, it seems that a significant share of the
export is intended to Asian countries, while a significant share of the import is from Europe and North
America.
Chart 22 – Import and export of goods, 2013
- Page 40 of 114 -
Source: Israeli Central Bureau of Statistics.40
The main sources of goods import are Europe, Asia and Oceania, constituting 83% of the total import
by IN companies in Israel.41 The main export destinations are Asia and Oceania, North America and Europe,
constituting 91% of the total export by IN companies in Israel.
In comparison, the general Israeli import from Asia and Pacific countries is higher than the general
Israeli export to these countries. In 2017, this export amounted to 17.9 billion Dollars, compared to an import
of only 14.2 billion Dollars.42
A possible reason for the large scope of export to Asia may be the export of goods to related
enterprises in Asia, which are a part of the manufacturing chain of foreign companies. For example, the
export by Intel is very high for the Israeli market, and most of it consists of the export of microchips. Intel
may manufacture the chips in Israel and the send them for assembly in China. Conversely, the export of
goods to North America may be of finished products.43
In Asia and the Pacific and America (both North and South), the total export of goods is significantly
higher than the import of goods, while in Europe, the total import of goods is higher than the total export of
goods.
The following chart present export data by economic sector:
40 Sources: Table 14 – Export of goods by Foreign-owned Companies – by country, Israeli Central Bureau of Statistics,
2017; Table 15 – Import of goods by Foreign-owned Companies – by country, Israeli Central Bureau of Statistics,
2017.
41 Source: Media release – Activity of Multinational Enterprises in Israel 2012 - 2013.
42 Source: Table 1 – Trade countries – Import and Export, Israeli Central Bureau of Statistics, 2018.
43 For an analysis of the activity of Intel in Israel see: Somkin et al. (2016).
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Chart 23 – Export of goods and services by economic sector, 2013
Source: Israeli Central Bureau of Statistics.44
The vast majority of export by IN companies involves goods, mostly in the metal sector (64% of the
total export of goods by IN companies in 2013)45 and the chemicals and medicine manufacturing sector (20%
of the total export of goods by IN companies in 2013), and services, mostly in the science and communication
services sector (52% of the total export of services by IN companies in 2013) and the scientific research and
development services sector (28% of the total export of services by IN companies in 2013).46
The Foreign-owned Companies data include data regarding the export of goods by Foreign-owned
Companies in Israel that sheds light on the most significant sources of goods in the Israeli industry. In 2015,
the total export by Foreign-owned Companies amounted to 54,154 million NIS, which was 26% of the total
export in the Israeli market. Out of the total goods exported from Israel by IN companies, 92.5% are
exported by companies in the industry, mining and excavating sectors. The chart below presents the
44 Sources: Table 10 – Export of goods by Foreign-owned Companies by economic sector, Israeli Central Bureau of
Statistics, 2017; Table 11 – Import of goods by Foreign-owned Companies by economic sector, Israeli Central Bureau
of Statistics, 2017; Table 12 – Export of services by Foreign-owned Companies by economic sector, Israeli Central
Bureau of Statistics, 2017; Table 13 – Import of services by Foreign-owned Companies by economic sector, Israeli
45 Including: basic metal industry and assembly metal products manufacturing, computers, electronic and optical
equipment, electrical equipment and machines and NME equipment. Source: Table 10 – Export of goods by Foreign-
owned Companies by economic sector, Israeli Central Bureau of Statistics, 2017.
46 Source: Table 10 – Export of goods by Foreign-owned Companies by economic sector, Israeli Central Bureau of
Statistics, 2017.
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distribution of sectors in this category by share in the total export: 47
Chart 24 – Export of goods by Foreign-owned Companies by economic sector, 2015
Machine and NME Other, 7%

equipment, 10%
Computers,
electronic and
optical equipment
Chemicals and manufacturing,
chemical products 46%
manufacturing,
18%
Assembly metal
Medicine products
manufacturing manufacturing
including excluding
Rubber and plastic machines and
homeopathic
products equipment, 7%
medicine, 7%
manufacturing,
5%
47 Source: Foreign-owned Companies data, ICBS. The 'other' category include the following sectors: motor vehicle and
trailers manufacturing – other transport vehicles (2.73%); manufacturing in other manufacturing sectors – mining and
excavating (1.2%); electrical equipment manufacturing (1.43%); food and drink products manufacturing (0.34%);
clothing, wood and cork products manufacturing except furniture; straw and basketry products manufacturing (0.63%);
manufacturing of other products based on non-metal minerals (0.3%); basic metal industry (0.3%); printing and copying
of recorded communication material (0.0%); textile manufacturing (0.1%).
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Almost half of the goods exported by Foreign-owned Companies in the industry, mining and excavation
sectors belong to the sectors of computers, electronic and optical equipment manufacturing, with a total of
22.8 billion NIS in 2015. 18% of the goods are exported by companies in the chemical and chemical products
manufacturing sector, and 10% by companies in the machine and NME equipment sector. These sectors are
characterized by high or mixed-high technology.
An examination of Foreign-owned Companies shows that most export comes from the larger companies. The
following chart presents the total export by IN companies by the number of positions in the company: 48
Chart 25 – Export by Foreign-owned Companies by company size, 2015
In fact, 88.5% of the total export by IN companies comes from companies with 100 and more positions. This
group included only 400 companies in 2015. The share of export of these companies in the total activity of
IN companies in Israel is higher than their share in positions (82.0%), in wage (76.6%) and in revenues
(73.1%). This means that a relatively small number of companies account for significant share of the export
activities by IN companies and in the Israeli economy in general. 49
48 Source: Foreign-owned Companies data, ICBS.

49 The number of Foreign-owned Companies that employ more than 100 employees increased from 400 in 2012 to 425
in 2015, according to Foreign-owned Companies data. The total number of businesses employing more than 100
employees in the Israeli business sector in 2015 was 3,846.
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In comparison, Foreign-owned Companies that employed between 500 and 999 employees in 2015 accounted
for 11.97% of the total number of positions in Foreign-owned Companies, paid 13.84% of the total wages
paid by Foreign-owned Companies and earned 15.33% of the total revenues of Foreign-owned Companies.
In their foreign trade activities, these companies accounted for 23.47% of the total export by Foreign-owned
Companies. Foreign-owned Companies that employed between 50 and 99 employees accounted for 8.09%
of the total number of positions in Foreign-owned Companies, paid 10.03% of the total wages paid by
Foreign-owned Companies, earned 8.54% of the revenues of Foreign-owned Companies and exported 5.12%
of the total export by Foreign-owned Companies.
The vast majority of import involves goods, mostly in the metal sector (26% of the total import of
goods by IN companies) and the retail and wholesale trade sector (35% of the total import of goods by IN
companies in Israel).50
In summary, the foreign trade activities of IN companies account for a significant share of Israeli
foreign trade. It's possible that FDI contributes to the adjustment of the relative advantages of the Israeli
economy in the global value chain.
50 Including: retail and wholesale trade and motor vehicle repair.
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2.10 The share of FDI in research and development investments

The following chart presents the R&D expenditure of Israeli-owned companies and IN Companies
between 2005 and 2016 (fixed prices):51
Chart 26 – Total R&D expenditure in Israel, 2005 – 2016
25,000
20,000
Million NIS (2010 prices)
15,000
10,000
5,000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Israeli-owned companies Multinational Enterprise R&D centres

Other Foreign-owned Companies
Source: Media release – R&D Activity in Start-ups and Multinational R&D Centers, 2015, ICBS, 2018.
51 The analysis refers to Foreign-owned Companies, i.e. companies where at least 51% of the equity is held by foreign
nationals.
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Between 2005 and 2016, there was a significant increase in R&D expenditure by R&D centers, at an
average rate of nearly 10%. A significant amount of activity is conducted by R&D centers of Foreign-owned
Companies: 46% of the total activity in 2016 and 24.1 billion NIS in total (current prices).52
The following chart presents a global comparison of the share of foreign funding sources in the gross
expenditure on research and development in 2014:
52 Source: Media release – 5% rise in fixed prices in the national expenses for civil research and development in 2017,
Israeli Central Bureau of Statistics, 2018. See:
https://old.ICBS.gov.il/reader/newhodaot/hodaa_template.html?hodaa=201812258.
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Chart 27 – Share of R&D expenditure funded by foreign nationals, 2014
Source: OECD, Dataset: Gross domestic expenditure on R-D by sector of performance and source of funds.
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The share of foreign funding in Israeli R&D expenditure was the highest of all the examined
countries and amounted in total to 54% of the total expenditure in 2014.53 In 2016, the share of foreign
funding in the R&D expenditure of Israel was 55.6%. 54
According to studies conducted in Israel to examine the effects of R&D spillover, R&D activities have
a significant influence on the output and productivity of employees (Bergman and Ben Eliezer, 2012), as well
as on wages and, indirectly, on export. In addition, according to a study conducted for the Ministry of Finance
and the Ministry of Economy (Frisset et al., 2008), government support creates new R&D activity two or
three times greater than the government grant, that would otherwise not exist, in both traditional sectors and
high sectors.
Most of the R&D expenditure of IN companies is directed towards knowledge intensive sectors. 83%
of the R&D expenditure of Multinational Enterprises in 2012 - 2013 was concentrated in the computer
sectors55 and in scientific research and development. Wages and accompanying expenses make up 68% of
the total expenditure in 2012 and 67% in 2013.56 In 2016, the share of wages and accompanying expenses in
the total R&D expenditure was 66.5%.57 The labor force is therefore a central component of the R&D
expenditure, which may indicate the importance of local human capital to R&D activity.
Although most of the R&D expenditure is directed towards high sectors, the importance of
government R&D expenditure may actually be greater in Israel's traditional sectors, because productivity in
these sectors, unlike high sectors, is falling behind compared to the rest of the world. An investment in R&D
may therefore yield a higher Return on Investment.58
The following chart presents the designation of R&D by Multinational Enterprises in Israel by
economic sector in 2013:59
53 The examined countries include most OECD countries, as well as additional countries as specified in the chart.
54 Source: Table 2 – National R&D expenditure per person, by funding sector and executing sector, Israeli Central Bureau
of Statistics, 2019.
55 Including: computer programming, consulting and other services, data processing, storage and accompanying services,
internet portals.
56 Remaining cost components include raw materials, payments to external entities and other R&D expenses. Source:
Table 1 – Israeli companies held by foreign-nationals (IN companies) – R&D expenditure by economic sector, Israeli
57 Source: Media release – R&D Activity in Start-ups and Multinational R&D Centers, 2016, Israeli Central Bureau of
Statistics, 2018.
58 See: description and analysis of the traditional industry in Israel, the Knesset Research and Information Center, 2015.
59 Source: Research and development by Multinational Enterprises in Israel – Israeli companies held by foreign nationals
(IN companies); Table 2 – R&D designation by economic sector, 2013, Israeli Central Bureau of Statistics, 2017.
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Chart 28 – Designation of R&D by multinational enterprises in Israel, 2013
Source: Research and development by multinational enterprises in Israel – Israeli companies held by foreign nationals
(IN companies); Table 2 – R&D designation by economic sector, 2013, Israeli Central Bureau of Statistics, 2017.
While in the sectors of agriculture and industry most of the R&D activity is designated for self-use,
R&D activity in the computer and research sectors is mostly designated for related companies. In other words,
knowledge intensive sectors use the products of research conducted in Israel for the activity of related
companies abroad.
2.11 Summary of the findings of the descriptive statistics: FDI in Israel in around
the world
An examination of world trends shows that the share of developing countries in the world FDI balance
increased between 2004 and 2017 from a rate of 22% in 2004 to 33% in 2017. Despite this increase, the share
of developed country in the world FDI balance remained the largest. The flow of investments in developing
countries is gaining a larger and larger share of the total world FDI, and, in recent years, has reached
nearly half of the total investments. In 2014 the flow of investments in developing countries surpassed the
flow of investments in developed countries.
Until 2005, the level of gross direct investment flows into the Israeli economy was relatively low: an
annual average in 1998 - 2005 of 3.4 billion Dollars in incoming direct investments. In recent years, a
significant increase in direct investment flows can be overserved, up to a peak in 2018. Compared to the
rest of the world, the net direct investment flow is relatively high considering the product. Between 2006 and
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2015, the average ratio between the net incoming investment flow and the national product was 4.1%,
compared to 2.9% in OECD countries. A significant part of FDI is Israel is directed at the computing and
R&D sectors, amounting to 34.2% of the total investments in 2016, and at high technology sectors, amounting
to 11.9% of the total investments in 2016.
The balance of investments by foreign nationals in Israel amounted to 128,819 million Dollars in
2017. As a percentage of the GDP, this balance is not particularly high compared to the rest of the world.
Based on ICBS data, the investment balance in knowledge intensive sectors has a significant share in
the total investment. Investments in the sectors of Information and Communication, Programming and
Computer Consulting Services constituted 22.5%, in Computer, Electronic and Optical Equipment and
Electrical Equipment Manufacturing 13.1% and in Scientific Research and Development 13.5% of the
investments balance of foreign nationals in Israel in 2016.
Most IN companies in Israel originate in North America (41.6%) and Europe (39.5%).
The share of Foreign-owned Companies in the Israeli product in not negligible. The output of
these companies in Israel amounted to 152,558 million NIS in 2015, which is 11.24% of the total output of
the Israeli economy. In 2015, the gross value added of Foreign-owned Companies in Israel was 11.82% of
the total Gross Value Added in Israel.
The distribution of Foreign-owned Companies shows that most belong to the information and
communication sectors (24.6%); the professional, scientific and technical services sectors (19.7%); the trade
sectors (15.4%); and the industry, mining and excavating sectors (10.5%). The revenue in the information
and communication sector amounted to 35.0 billion NIS 2015, constituting 14.9% of the total revenue of
Foreign-owned Companies in this year.
The share of Foreign-owned Companies in the labor force is not as high as their share in the
product. Between 2008 and 2015 the share of IN companies in the total number of jobs in the Israeli market
ranged between 5.6% and 6.5%. The industry sectors account for 27.8% of the total number of jobs in
Foreign-owned Companies in Israel. 40.2% of the occupied positions in Foreign-owned Companies in the
industry sectors are in the 'Computer, Electronic and Optical Equipment Manufacturing' sector, characterized
by high technology.
The product per employee in Foreign-owned Companies is twice as high as the general average
product per employee in the Israeli economy. The productivity of employees in Foreign-owned Companies
is higher than the average sector productivity in all sectors. The compensation per position in Foreign-owned
Companies is generally much higher than the average for the business sector in Israel – and particularly high
in smaller Foreign-owned Companies. Particularly high levels of average compensation per position in
Foreign-owned Companies are found in the financial and insurance services sectors and the information and
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communication sectors.
The foreign trade activity of IN companies is a significant part of the total Israeli foreign trade.
Most of the export by IN companies in Israel is intended for the parent companies of the IN companies. The
share of Foreign-owned Companies in the total export from Israel was 26% in 2015.
The share of foreign funding in Israeli R&D expenditure is the highest of all OECD countries
and amounted in total to 54% of the total expenditure in 2014. Between 2005 and 2015 there was a significant
increase in R&D expenditure by R&D centers, with an average annual rate of more than 8%. The total R&D
expenditure by the R&D centers of Foreign-owned Companies amounted in 2016 to 24.1 billion NIS, which
constitute 46% of the total business R&D expenditure in Israel.
3. Literature review: measuring the effects of FDI on local economies
3.1 Summary of the economic theory

FDI theories have been developed from the traditional economic perspective regarding market
failures, by dealing with the premises of neo-classical economic theory, which do not exist in reality, i.e. that
markets are perfect and that manufacturing entities do not move between markets.
The premises of the economic theory of trade is that markets are perfect and open, that there is an
equilibrium between manufacturing costs and the prices of goods and that manufacturing entities are
immobile. It is assumed that there no handling costs, information costs and competitive entry obstacles, and
that different markets have the same preferences and that manufacturers' return is constant (constant return
to scale),60 and therefore players have no incentive to mobilize resources between countries. In other words,
the required resources are available to all and mobile within a country, so that manufacturing by a foreign
entity is not included in the international trade theory.
The economic theory of FDI makes different postulates: markets are imperfect, prices are not equal,
and resources can be mobilized between countries. Since prices are different between countries, Multinational
Enterprises enter new markets (and countries) in order to utilize their competitive advantage in foreign
countries. While doing so, Multinational Enterprises transfer non-wasting assets such as knowledge,
technology, capital and initiation of new activities to foreign countries, and create themselves value by
reducing their manufacturing costs or by increasing the value per manufactured unit.
Hymer, who is considered to be the father of FDI studies, 61 provides important insights regarding the
desire of companies to grow and use their assets, which may be more significant in foreign markets, to
60 See, for example: Rugman (1980) and Cho & Moon (2013).
61 See Hymer (1976).
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become a monopoly due to market failures. The studies of Williamson (1975) were based on the theory of
transaction costs, according to which the transaction costs of companies that conduct business remotely in
foreign countries may be significantly high, and, therefore, such companies sometimes need to enter such
markets to reduce transaction costs, i.e. to invest directly.
Dunning (1980; 1993; 2000), who established FDI theories, include both the economic aspect of
market failures and the business aspect of creating value regarding Foreign Direct Investments. Although
Dunning explains that the main goal of Foreign Direct Investments is to use the assets of companies optimally
(and monopolistically) in foreign markets, he also describes how FDI is in effect a way for companies to
internalize the foreign market (in contrast to conducting remote transactions in this market), and therefore
increase their power. He describes how companies conduct transactions in foreign markets.
Dunning (1977; 1981) presents the Eclectic Paradigm, combining different perspectives to the reasons
and ways in which companies conduct business abroad, according to which international investments have
three prerequisites:
(a) Ownership advantage: The company investing abroad should have a unique asset that can provide rent
as means to overcome the relative disadvantage in costs that a Multinational Enterprise entering a
foreign market would have compared to local competitors;
(b) Location advantage: Manufacturing in the target country should provide an advantage;
(c) Internalization advantage: The Multinational Enterprise should have justification to enter the foreign
market itself and not conduct regular market transactions (such as licensing or concession of the brand
or technology to a local entity).
According to Dunning (1993)62, the motives of Multinational Enterprises to engage in foreign

investment are derived from four main sources:
(a) Resource-seeking;
(b) Market-seeking;
(c) Efficiency-seeking;
(d) Strategic asset-seeking.
Direct investment in markets leads of an internalization of foreign markets in the decisions of the
company. When the value of internalization exceeds the cost of a transaction (including local risks, such as
62 Dunning (1993) actually presents nine incentives, but the academic literature focuses on the four mentioned.
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political and geopolitical risks), companies will choose to enter the market directly rather than conduct
transaction from "outside".
3.2 Empirical articles examining the effects of FDI from around the world
3.2.1 Introduction: the effects of FDI on the local economy
The influence of foreign companies is manifested in many ways, including direct influence on foreign
trade activity, tax revenues and the productivity of employees employed by such companies, as we saw in
the descriptive statistics chapter. In addition, there are external effects such as spillover to competing
companies of knowledge, manufacturing technologies, management methods and more. In the following
chapters, we will use econometric models to inspect these external effects on the Israeli market. In this chapter
we will present the academic literature that examines the effects of foreign investments on the target country.
International allocation of capital has influence on social, political and economic aspects of the trading
countries. The effects of FDI on the counties involved have been studied extensively in the economic
literature, both theoretically and empirically, in particularly, the effects of FDI on the target country, i.e. the
country receiving the investment.
Until the middle of 1990s, FDI was not considered to have a positive effect on the target country. In
the years before the 1990s, Foreign Direct Investments were usually made by Multinational Enterprises from
developed countries and were seen as just another method of 'capitalist' expansion and takeover. However,
this point of view has changed since then in light of ideological changes. 63
Since around the middle of the 1990s, policy makers in many countries have been striving to attract
Foreign Direct Investments. Their goal is to enjoy the benefits of such investments to the local industry
through spillover to competitors and the rest of the local economy.
Most of the discussion of spillovers due to FDI in the economic literature is positive and focuses on
the transfer of new technologies, knowledge, marketing and managerial skills, manufacturing methods and
any other knowledge related to products and services. From the perspective of the target country, Foreign
Direct Investments can have influence on several levels: 64
 Direct influence on the specific company or asset receiving the FDI.
 Horizontal spillover – influence on other (competing) companies in the same sector.
 Vertical spillover – influence on various entities in the value chain, both upstream (such as suppliers)
63 See: Moon (2016).

64 See: Gorodnichenko (2014).
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and downstream (such as customers).
FDI spillover to other economic entities can occur through a number of channels. Local competing
companies may learn new procedures from the investing international company; local companies may learn
by observing new marketing methods; they may gain access to new specialists coming into the local market;
FDI by foreign companies can act as a catalyst for local suppliers to improve their products and services by
requiring higher standards, benefiting competitors as well; and more. The effects of horizontal spillover are
usually divided into three main channels:65
1) Competition effect – the arrival of a foreign company may change the local equilibrium price; cause
local competitors to become more efficient and promote faster adoption of new technologies.
2) Imitation effect – local competing companies can learn from the foreign company and adopt new
practices of manufacturing, management, marketing and distribution which are more efficient than
their existing practices.
3) Labor turnover effect – foreign companies invest in their employees and provide them with new
training. These employees may later transfer to local competitors and bring with them this new
knowledge. This process would increase the productivity of companies.
In the professional literature, 'externalities' and 'spillovers' are considered synonyms, but for Narula
& Driffield (2012), a spillover in this context implies a process of learning by local companies of knowledge
brought Multinational Enterprises through FDI. Therefore, all spillovers are externalities, but not all
externalities are spillovers.
When spillovers relate to local competitors in the sector, they are horizontal spillovers. However,
when spillovers relate to entities up or down the value chain, such as suppliers and customers, they are
referred to as backward and forward vertical spillovers, respectively.
While spillovers are unintended influences by Multinational Enterprises, some influences are
intended. These can be classified into two types: 66
 Backward linkages – interaction between local suppliers of inputs and raw materials and international
customers.
 Forward linkages – interaction between foreign suppliers of inputs and raw materials and local
customers.
65 See: Holger & Greenaway (2004).

66 These definitions are given, for example, in Smarzynska Jayorcik (2004).
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Such linkages may include intended and consensual sharing of knowledge and skills by the
Multinational Enterprise, for example, in order to improve the procedures of local suppliers working with the
Multinational Enterprise to achieve higher standards or availability. They may also include sharing of
technological and financial resources with suppliers in order to improve external processes that would assist
the Multinational Enterprise, providing an incentive for the Multinational Enterprise to create such linkages.
These linkages are therefore also known as knowledge transfer or technological transfer.
The difference between spillovers and linkages is the question of intention behind the influence of the
Multinational Enterprise. The distinction between spillovers and linkages is made by Hirschman (1958) and
Lall (1978, 1980), but is not common in the literature. However, it is important for policy making (and
subsidies to encourage foreign investments). To illustrate this, the following table summarizes the different
levels of influence by different profiles:
Table 3 – The effects of FDI by Multinational Enterprises on local economy

Is the influence of the Multinational Enterprise
planned/intentional?
Influence entity in the
Perspective No Yes
local economy
Local competitors in
Intra-sectoral (within the sector where the
Horizontal spillovers
the sector/section) Multinational
Enterprise operates
Local value chain of Backward and Backward and forward
Inter-sectoral the Multinational forward vertical linkage:
(between the Enterprise spillovers  Knowledge transfer
sector/section)  Technological
Other local sectors transfer
FDI may also have negative effects on the local economy. For example, the entering Multinational
Enterprise may take market shares from local companies, thereby increasing their average cost per output
unit. The Multinational Enterprise may recruit the best human capital in the local economy, with a negative
influence on other companies and their efficiency. There are also the questions of whether FDI displace local
investments or whether they encourage them.
3.2.2 The effects of FDI on the local market
There is extensive economic literature investigating the cross-country effects of FDI on both the
investing country (the country of origin of the investing entity) and the target country (the country where the
company invests). Some studies examine the effects of FDI based on several types of data:
(a) Case studies regarding the effects of FDI on specific projects – although they contain a lot of specific
information, it's hard to make inductions based on them;
(b) FDI studies on specific sectors – mostly showing a positive correlation between the local presence of
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foreign companies and the average value-added per employee. however, it is generally hard to prove
causality with these studies, since Multinational Enterprises may simply be investing in high
productivity sectors;
(c) Studies regarding various companies in various periods (panel data) – examining the correlation
between the productivity of local companies and the presence of Multinational Enterprises in their
sector.67
Existing literature tries to answer several main questions about the effects of foreign investments.
Some studies examine the effects of foreign companies from a macro-economic perspective, including the
influence of foreign companies on growth and the displacement of local companies following the entry of
foreign companies. Some studies examine the effects of foreign companies on other companies in the same
economic sector, including the betterment of employees and knowledge spillover. Other studies examine the
effects of foreign companies on other links in the value chain – suppliers and customers of foreign companies
in the local economy. There is also literature that examines the interaction between foreign investors and
governments in target countries, including the effects of foreign investments on tax revenues and the effects
of government policies on the scope and type of foreign investments.
3.2.3 The effects of FDI on target countries from a macro-economic perspective
According to accepted economic theory, an economy's level of product depends, among others, on its
capital accumulation, and, therefore, economic growth depends on changes in this stock. Unlike neo-classical
models,68 where a distinction is not made between local and external investments, since both contribute
similarly to capital accumulation and thus to economic growth, endogenous models distinguish between the
sources of investments (local or external) regarding technological aspects. It is common to assume that
external investments bring more efficient technologies to the target economy, and, therefore, the effects of
foreign investments are expected to be greater than those of local investments.
Foreign Direct Investments do not necessarily create capital per se. the funding brought by
Multinational Enterprises may create new assets or purchase existing assets. However, there is no guarantee
that Foreign Direct Investments would bring positive net effects, since such investments may crowd out local
investments that would have been made otherwise and thus have a negative net effect. On the other hand,
Foreign Direct Investments can create new local markets and profits to attract also local investors (crowd in).
67 See: Smarzynska Jayorcik (2004).

68 Exogenous growth models, such as the model of Slow (1956).
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Cross-country FDI studies on the macro level present mixed findings regarding the effects of Foreign
Direct Investments on local economies. These studies show that the effects of FDI are significant only when
several basic conditions in local economy are met.
Regarding inward investments and economic growth, studies usually show a positive connection,
particularly in developing economies. One of the most quoted studies on the effects of FDI is the study by
Borensztein et al. (1998) that examines the effects of investment flows from developed countries to 69
developing countries between 1971 and 2000. The findings show that the contribution of FDI to growth in
the target country was higher than the contribution of local investments, because new knowledge and
technologies are transferred through FDI. However, the study found that this positive effect only occurs
when the target country has a minimum level of quality human capital (measured by level of education),
and the capability to absorb and adopt new technologies (absorptive capacity). These findings are confirmed
by the study of Wang & Wong (2009).
Conversely, Mencinger (2003) found a negative relation between Foreign Direct Investments and
GDP growth in transition economies between 1994 and 2001.69 Azman-Saini et al. (2010), by examining
cross-country data from 91 countries between 1975 and 2005, showed that the positive effects of Foreign
Direct Investments can be seen in local economies only after the local financial markets pass a minimum
threshold of development. This finding supports similar findings by Alfaro (2004).
Carkovic & Levine (2005) are critical about findings that show a positive relation between Foreign
Direct Investments (inward) and the growth of the target country, due to inadequate control of bias related to
specific characteristics of the sample countries in such studies. After reviewing the characteristics of 72
countries between 1960 and 1995, they found no significant relation between Foreign Direct Investments and
growth and did not find that the effects of FDI on GDP depend on human capital stock, per-capita income or
the financial development of the country. However, a possible criticism of their study is that the sample used
them included both developed and developing countries.
Agosin & Machado (2005), examined the extent to which Foreign Direct Investments crowd out or
crown in local investments according to data from 1971 - 2000 from 12 countries in Africa, Asia and Latin
America. They found that, in all the developing continents examined, FDI at best had no effect on local
investments and in some periods crowded out local investments, particularly in Latin America. Their
conclusion was that FDI did not always benefit local economies, and that an efficient economic policy
regarding such investments was required.
69 Economies transitioning from a planned economy to a market economy.
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Meyer & Sinnai (2009) conducted a meta-analysis based on 66 empirical studies that examined
Foreign Direct Investments. The relationship between the benefits of spillover and the economy's level of
development was described as having a U shape. Developing countries are characterized by a low level of
competition (no competition), therefore local companies are not displaced, and the general effect on the local
economy is positive. In developed countries, where the level of competition is high, foreign investments
invigorate economic activity and also have a positive effect on the economy. However, countries in transition
stages are characterized by a relatively low level of competition, and the entry of foreign companies,
particularly when their target market is the local market, displaces local companies. As for types of
investments, when foreign investments are aimed at efficient manufacturing and export activity, a negative
effect on local companies is not seen, while foreign investments aimed at expanding the customer base
directly displace local companies.70
In summary, on the macro level, findings tend to confirm the hypothesis of a positive relation between
Foreign Direct Investments and the growth of GDP in the target country (this relation may work both ways
– so that developing countries attract more Foreign Direct Investments), however, this relation exists mostly
in countries at the lowest and highest levels of development and not in the middle levels.
Israel is a developed country with quality human capital and developed financial markets. However,
it may be said that some economic sectors are not sufficiently developed. These accumulating conditions
may serve as the basis for the absorption of knowledge and technologies through Foreign Direct Investments,
if directed to the right places.
3.2.4 Examination of vertical and horizontal spillovers
Within a sector, on the micro level, the presence of a Multinational Enterprise can affect local
companies. This effect of Foreign Direct Investments is considered external, beyond the observed direct
effects, such as reduction of unemployment and creation of additional revenues. Among such external effects
(positive or negative), which are not directly observed, is the transfer of management knowledge or
manufacturing techniques between companies in the local industry.
Empirical studies examine spillovers indirectly. To identify the effects of spillovers, studies usually
use the variable of the foreign company's presence in the sector as an additional variable to explain the total
productivity (TFP – Total Factor Productivity) in some manufacturing function. 71
70 Meyer, Klaus & Evis Sinnai (2009).

71 See: Lenaerts & Merlevede (2016).
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When examining horizontal spillovers, researchers usually assess an equation where the productivity
of local companies in a specific sector72 depends on the presence of a foreign company in this sector, whiling
controlling other observable factors.73 When examining vertical spillovers, the presence of a Multinational
Enterprise in the relevant section of the value chain is measured by the share of sales to or from the
Multinational Enterprise (or to or from its subsidiaries) out of the total sales in the section. Other studies
measure rates of ownership (of the total equity) in the Multinational Enterprise in the relevant section or the
number of employees.
The evaluation of vertical spillovers requires data regarding the input-output ratios of the value chain,
but because of limitations with this data, it is common to use an input-output matrix to input-output tables (in
short, I-O tables) of a single year for the entire measured period. These tables are used to derive coefficients
for backward and forward spillovers. 74
3.2.5 Empirical findings regarding horizontal spillovers related to Foreign Direct Investments in
local economies
Research literature examined the effects of horizontal spillovers as a result of FDI. The empirical
findings regarding FDI spillovers (both horizontal and vertical) were generally not conclusive, particularly
regarding horizontal spillovers in developing countries, where findings were mixed and tended to indicate a
negative effect or no effect. Conversely, in developed countries, although the findings were also mixed, they
tended to indicate a positive effect.75
72 Some studies use Labor Productivity, usually calculated by sales (monetary value) per employee or number of products
(units) per employee. More recent studies use TFP, which requires data on the capital employed by companies that is
hard to obtain. Assessment is usually based on a Cobb-Douglas manufacturing function. For more information see:
Smarzynska Javorcik (2004) and Driffield & Jindra (2012).
73 According to Smarzynska Javorcik (2004), horizontal spillover is assessed by multiplying the rate of ownership of a
foreign company in a local company manufacturing i in year t by the output of company i in year t in industry j, and
dividing by the total output of all sectors. Horizontal spillovers (intra-industry) is therefore measured by:
∑𝑖∈𝑗 𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑆ℎ𝑎𝑟𝑒𝑖𝑡 × 𝑌𝑖𝑡

𝐻𝑜𝑟𝑖𝑧𝑜𝑛𝑡𝑎𝑙𝑗𝑡 =
∑𝑖∈𝑗 𝑌𝑖𝑡
74 The I-O tables method is the standard method for examining vertical spillovers. Smarzynska Javorcik (2004) uses
coefficient derived from I-O tables to examine vertical spillovers, using such coefficients to convert horizontal
spillovers to vertical spillovers. Barrios et al. (2011) also use this technique to examine backward linkage, but they
challenge the parameters required to construct such tables (instead of data from the target country of the foreign
company, they examine the relation using data from the foreign company's county of origin). Lenaerts & Merlevede
(2016) also use I-O tables, but unlike other studies, distinguish between industry aggregated IO tables for horizontal
spillovers and more detailed tables for vertical spillovers.
75 See: Fons-Rosen (2013).
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Examining the effect of horizontal spillover on the productivity of competitors in the same sector,
Caves (1974) found a positive relation between the share of the foreign company in the local market and
higher productivity of local competitors among manufacturing companies in Australia. 76 Keller & Yeaple
(2009), found that Foreign Direct Investments yield significant benefits for the productivity of local
companies in the U.S.A. They examined the spillover of technologies to manufacturing companies in the
U.S.A. between 1987 and 1996 and found that Foreign Direct Investments brought an increase of 14% in the
productivity of local companies during this period. The effects of horizontal spillovers are particularly
significant in high-tech sectors, and almost entirely absent in traditional sectors. Smaller companies with
lower productivity enjoy the benefits of FDI more than larger companies with higher productivity.
Other studies examining the relation between the total factor productivity77 and the market share of
the foreign company in the local market found a clear positive relation in Britain between 1973 and 1992
(Haskel et al. (2007)).78 Similarly, based on data from Romania between 1995 and 2001, Altomonte &
Pennings (2009) found that the first foreign investment in a specific sector in a specific area increased the
TFP of local companies by 3.5%, but that this effect diminished as additional foreign competitors (additional
investments) entered the specific sector, until it became negative when the number of foreign companies
reached 12.
Relatively few studies tried to measure the effect of employee changes (acquisition of skills) in
horizontal spillovers. Gorg & Strobl (2005) found that a possible positive effect on the productivity of local
manufacturing companies in Ghana when the owners of such companies had previous experience of working
with Multinational Enterprises. Poole (2013) found that employees in local companies in Brazil earned higher
wages when the company had more employees who previously worked in Multinational Enterprises. This
points to a positive effect on wages following the entry of foreign companies to a sector.
Other studies that examined the effects of horizontal spillovers on local companies found a negative,
mixed or minor positive effect. This was the case in Venezuela, where the effect was found to be minor; 79 in
76 Caves suggested in his article to measure the effect of horizontal spillover as the rate of the output created by the
foreign company in the local industry – a common measurement of horizontal spillovers (in its various versions) in
many studies to date.
77 See: https://stats.oecd.org/glossary/detail.asp?ID=3091; https://stats.oecd.org/glossary/detail.asp?ID=1698.
78 They examined the effects of DFI spillovers using panel data of manufacturing companies in Britain between 1973 and
1992. Their findings showed that an increase of 10% in the presence of foreign companies in Britain increased the
general productivity of the specific industry by 0.5%. They assessed the effect of horizontal spillover as 2,400 Pounds
(4,300$) per position as of 2000.
79 See: Aitken & Harrison (1999).
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Bulgaria and Romania, where horizontal FDI spillovers had a generally negative effect on local companies; 80
and in Poland, where no effect of horizontal spillovers was found.81 Haddad & Harrison (1993) showed that
there were no conclusive evidence that foreign companies accelerated the growth in productivity of local
industrial companies in the first half of the 1980s in Morocco.82 Gorodnichenko et al. (2014) also reported
that horizontal spillovers are usually not significant.83 A study examining manufacturing companies in China
found that horizontal spillovers where relevant for non-exporting companies, while exporting companies
suffered by the presence of foreign companies. Furthermore, the chances for a positive effect were greater
when the FDI was a joint venture.84
Following studies tried to explain the inconsistency of the findings of all these studies. Aitken &
Harrison (1999) explained the mixed findings by "market stealing" or a crowding out effect. They claimed
that despite the positive technological spillover, more efficient foreign companies may attract local demand,
so that the competition effect is greater than the technology effect. Caves (1996) and Blomström et al. (2000)
claim that the likelihood of companies causing a crowding out in developing countries is higher than in
developed countries because of the starting technological gaps.
Indeed, Fons-Rosen et al., analyzing firm-level data from 60 developing and developed countries,
found that the positive effect of productivity growth due to knowledge spillover enjoyed by local companies
in developed countries was almost entirely offset by the effect of competition spillover (i.e. crowding out),
while in developing countries both effects were negative.
Liu (2008) reported that an increase in FDI in a specific sector reduced the short-term level of
productivity of local companies but increased the long-term rate of productivity growth of local companies.
He noted that when these two aspects were not separated, the result was a negative horizontal effect, which
might explain the inconsistency of findings in the literature.
Kosova (2010), examined whether the crowding out effect was dynamic when foreign companies
entered the local market in the Czech Republic. The findings showed that the initial shock of the entry of
foreign companies first displaced local companies and forced them to reduce their output. But this effect
dissipated after two years. The increase in local demand and technological spillovers offset the displacement
80 See: Konings (2001).

81 Ibid.
82 As far as we can tell, they were the first to publish a study of Foreign Direct Investments using firm-level panel data.
83 The researchers used firm-level data from 17 developing economies with a number of profiles, including company
size, manufacturing or service providing companies and more. Their data included 7,942 companies, around 200 - 600
from each country, measuring the effects of spillovers using revenue efficiency, i.e. how efficient companies are in
creating revenue from labor capital and materials. They weighted RFP, improvement in marketing prices and more.
84 See: Abraham et al. (2010).
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of competitors, and players adjusted to the new situation.
Gorg & Strobl (2001), conducting a meta-analysis of horizontal spillovers based on economic
literature, concluded that inconsistency of samples, variable definitions and assessment methods can explain
the mixed results regarding the effects of horizontal FDI spillovers. In their article, they noted that, on
average, studies based on cross-section data analysis reported a greater effect than studies based on panel
data.
Irsova & Havranek (2013) conducted a meta-analysis study to examine the effects of horizontal
spillovers on the productivity of competing companies in a sector. 85 Their findings showed that the foreign
company's country of origin influenced the magnitude of the effect. When the technological gap between the
foreign company and the competing local companies is great, the spillover effect is small. The horizontal
spillover effect is smaller when a market open to international trade exists and when there is better protection
of intellectual property. Conversely, a higher level of human capital in the target country is related to a higher
level of spillover. In addition, when joint venture projects are conducted between the foreign company and
local companies, a more positive spillover occurs compared to projects conducted by the foreign company
alone. The bottom line, they conclude, is that, on average, Foreign Direct Investments do not yield benefits
to the local economy on the horizontal level, but with better policies it might.
To summarize, the effects of horizontal spillovers may be entirely cancelled out by the effect of local
investment displacement. Nevertheless, positive horizontal effects are seen mostly in developed countries,
where the quality of human capital is high, when there is no protection of intellectual property, and when the
technological gaps between the country of origin and the target country are not too high. Positive effects are
usually seen in high technology sectors, particularly regarding joint ventures between foreign companies and
local companies.
3.2.6 Empirical findings regarding vertical spillovers related to Foreign Direct Investments in local
economies
The idea of examining the vertical effects of FDI was first presented by McAleese & McDonald
(1978). Until the early 2000s, not too many studies examined the effects of vertical spillover from foreign
85 They focused on more recent studies than other meta-analysis studies, such as Gorg & Strovl, that examined studies
from before 2000, when a relatively unified methodology did not exist for such studies (therefore the findings of earlier
studies are more contradictory). They examined 52 studies referring to 45 countries. They found that the average effect
of horizontal spillovers was negligible, although the variance between studies was great.
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companies on the local value chain.86 Most of the focus was on horizontal spillovers.
Smarzynska Javorcik (2004) thinks that the findings concerning horizontal spillover are contradictory
because studies are searching for effects on the wrong levels. She argues that foreign companies have an
interest to keep special knowledge from their competitors, so effects should be looked for on the vertical
levels, where foreign companies might have an interest to share knowledge and technology in order to
improve processes and the quality of inputs from their local suppliers. 87 Her findings show that there is a
positive effect on productivity by backward linkages, so that an increase in one standard deviation with
the presence of a foreign company down the value chain (downstream) is related to a 15% increase in the
output of every company in different sectors that supplies the foreign company (upstream). Furthermore, the
findings show that there is a horizontal spillover to local competitors, and there are no indications of forward
linkages. Her findings also support previous studies that confirm the positive effects of Foreign Direct
Investments through backward linkages: a study by Blalock (2001) that examined firm-level panel data from
Indonesia, and a study by Schoors et al. (2001) that was based on corporate level data from Hungary.
In line with these findings, Barrios et al. (2011) also found that choosing a more "calibrated"
measurement than the standard and its accompanying assumptions changed the findings and the conclusions
regarding the effects of FDI related backward linkage spillovers. They used firm-level data from Ireland and
argued that unlike the standard measurements used in the literature, which find no backward linkage effects,
when using better measurements, including the parameters required to create I-O tables for such studies, a
robust positive backward linkage effect could be founds. 88
Liu (2008) examined whether the presence of foreign companies in China affected the level of
productivity and the growth rate of productivity of local manufacturing Chinese companies. His study
showed that backward linkage was statistically the most important channel for technological spillover from
foreign companies to local companies that increased productivity.
Gorodnichenko et al. (2014), using industry level I-O tables, found significant positive backward
spillover effects. They further reported that expanding the examination to the firm level showed that the effect
of backward spillover was positive and significant in all company categories, contrary to other studies
86 See: Blomström et al. (2000).

87 Javorcik examined firm-level panel data in Lithuania between 1996 and 2000 concerning 2,500 - 4,000 manufacturing
companies per year. She examined both backward linkages – interactions between local suppliers and foreign
companies, and forward linkages – interactions between foreign suppliers and local companies, as well as horizontal
spillovers.
88 They found that choosing a more "calibrated" measurement than the standard and its accompanying assumptions
changed the findings and the conclusions regarding the effects of FDI related backward linkage spillovers.
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using industry level I-O tables, which showed that backward spillover was only significant for larger, newer
and manufacturing companies. However, in line with other studies, they reported that forward spillovers were
usually insignificant. In addition, they noted that Foreign Direct Investments originating in developed
countries were more "beneficial" to local economy.
In line with these findings, Lenaerts & Merlevede (2016) used more detailed I-O tables than "rough"
aggregative tables and reported a significant strong positive effect of backward spillover on total factor
productivity. They examined panel data from manufacturing companies in Romania with a minimum
average of 5 employees between 1996 and 2005.89
Studies examining the effects of backward linkage assume, explicitly or implicitly, that foreign
companies normally act "politely" toward their local suppliers and are willing to share knowledge with them.
Godart & Holger (2013) were apparently the first to examine what they called the "forced linkage
effect", where foreign companies force local suppliers to meet their requirements. They examined 1,000
companies in 25 developing countries and reported that a growth in productivity (i.e. a positive effect)
occurs among local suppliers only when they are pressed by foreign companies to reduce the costs of
materials or manufacture new products (inputs) while meeting stricter requirements and procedures.
Havranek & Irsova (2011) conducted a meta-analysis study focused on the effects of vertical spillovers
related to Foreign Direct Investments. They used 3,626 evaluations of spillovers from 52 studies of 47
countries and estimated that an increase of 10 percent in the presence of foreign companies in a specific
sector was related to a 9% increase in the productivity of local suppliers, while forward spillover for buyers
was, on average, statistically significant but small. In addition, they noted that vertical spillover was actually
more significant in countries where the financial system was less developed – most likely due to local
difficulties of obtaining credit, which are relieved by Foreign Direct Investments. They also noted that
vertical spillover was more significant in countries that are open to international trade. It is interesting
to note that the effect of spillover is higher when the origin of foreign investor is a country that is far away
(from the target country) with a slight technological advantage compared to the target country. 90
89 They show that the effect of horizontal spillover appears much stronger when using aggregative I-O tables than when
using detailed I-O tables, because aggregative tables lead to false classification of relationships between companies
within an industry as they indicate horizontal relationships where relationships are vertical, and therefore some of the
effect of vertical spillovers is attributed to horizontal spillovers. In other words, the effect of vertical spillovers is
underestimated. They show that the results of the standard analysis of the effects of vertical spillover using I-O tables
are affected by the level industry aggregation, i.e. the industry resolution of the examination, for example, the beverages
industry vs. the flavored sparkling beverages industry, and by the definition of "spillover".
90 The researchers found there is a publication bias in the examined studies because the use of different models reduces
the effect of FDI, and journals select studies that show a relatively strong effect. Weighing this bias, they found that
backward spillover, i.e. the effect on local suppliers, was economically significant (in light of the transfer of
technological knowledge).
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In summary, many studies indicate a significant positive effect of vertical spillovers when such spillovers are
'backward spillovers'. This positive effect is seen in the product and the productivity. Vertical spillovers occur
in countries that are open to international trade and receive investments from far away countries with a
technological advantage.
3.2.7 Empirical findings regarding the effects of FDI on tax revenues
Flows of Foreign Direct Investments can potentially influence economic growth, capital
accumulation, human capital, competition, financial sector development and technological progress in the
receiving country (the target of the investments). All these factors in turn influence tax revenues. FDI cash
flows can improve competitiveness through capital movement and technology transfer and contribute to
growth and economic development. However, the flow of foreign investments can also indirectly affect tax
revenues, which are an important component of the revenues of the public sector, through economic activity.
Conversely, cutting tax for companies or providing tax exemptions for a long period and giving Multinational
Corporations license to transfer profits to other countries, may have a negative effect of tax revenues. The
net effect of Foreign Direct Investments on tax revenues is therefore theoretically unclear.
The composition of foreign investments and the level of financial incentives provided by host
countries (the countries receiving the FDI) determine the relation between tax revenues and FDI. Greenfield
investments, where the parent company builds its operations in a foreign country from the ground up,
constructing new facilities in the host country, has a greater potential to increase capital accumulation and
improve economic activity compared to Brownfield investments, consisting of mergers and acquisitions.
Investors usually prefer Greenfield investments in countries that provide financial incentives, legal privileges
and license to transfer revenues. Brownfield investments do not contribute to the accumulation of capital
accumulation but may contribute to economic growth through knowledge and technology spillover. Some
countries provide privileges to attract Brownfield Foreign Direct Investments. It is therefore difficult to
predict the effects of Greenfield and Brownfield investments on tax revenues.
A recent study by Bayer & Ozturk (2018) reviewed and analyzed the relation between the movement
of Foreign Direct Investments, economic growth and tax revenues in 33 OECD countries between 1995 and
2014, using the Westerlung-Durbin-Hausman cointegration test (2008) and the Dumitrescu-Hurlin causality
test (2012). It showed that the results of previous studies were contradictory. However, their study found one-
way causality between Foreign Direct Investments and tax revenues and two-way causality between
economic growth and foreign investment flow.
The results showed that FDI flows and economic growth did not have any meaningful influence over
tax revenues at the sample level. However, Foreign Direct Investments had a positive effect on total tax
revenues in Iceland, Israel, Sweden, Britain and the United State and a negative effect on total tax revenues
in Austria, France, Italy and Poland, as can be seen in the following table:
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Table 4 – Assessment of the effects of FDI on tax revenues
Source: Bayar & Ozturk (2018)
3.2.8 The effects of government policies on FDI
A review by the World Bank examining the effects of government policies on Foreign Direct
Investments found that many parameters affected the attraction of foreign investments, the preservation of
such investments and their influence over local economies. Significant parameters that could influence
foreign investments included regulatory entry obstacles and the safety of foreign investors. The study also
specified the great importance of understanding the relation between foreign investments and the local
economy in order to establish a government policy that would maximize the positive effects of spillover.
Greater focus on the characteristics and motives of investors may help identify the potential and unique
effects of different types of investments. 91
The study noted that creating a government agency for Foreign Direct Investments could encourage
foreign investment activity. Government FDI agencies are adapted to the scope of foreign investments,
91 Echandi & Oiang (2015).
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particularly in the agency's target sectors. Such agencies tend to have a positive influence, especially in
developing countries, but not in industrial countries. The effects of such agencies increase where information
is highly asymmetrical. Under certain conditions, in the target sectors of government FDI agencies, an
expense of one Dollar was found to correspond to an increase of 189 Dollars in foreign investments. 92 It was
also found that the quality of service provided by such government agencies had a significant influence on
the scope of foreign investments.93 According to foreign investors, some of the meaningful services provided
by such agencies included information of regulation, business procedures, company taxation and incentives. 94
3.3 Israeli empirical studies examining the effects of Foreign Direct Investments
Over the years, several studies were conducted to examine the effects of FDI on the Israeli economy.
Some focused only on the high-tech and R&D sectors. Below is a summary of the studies we reviewed,
including the data used by each study, the method of assessment and its results.
3.3.1 The effects of Multinational Enterprises on high-tech in Israel: Somkin at al. (2014)
The comprehensive report by Somkin at al. (2014) examined the effects of the presence and activity
of foreign-owned Multinational Enterprises on high-tech in Israel between 2003 and 2011.95
The study also found that, in the Israeli high sectors, the ratio of product per employee in Foreign-
owned Companies in to product per employee in local companies was 1.78, compared to a ratio of almost 3
in Ireland, 1.49 in France, 1.22 in England, 1.7 in Germany and 0.46 in the U.S.A. (i.e. the ratio in the U.S.A.
was favorable to local companies, indicating a very high quality of local labor in local companies).
The study also found that, in the Israeli high services sectors, the ratio of product per employee in
Foreign-owned Companies to product per employee in local companies was similar to that found in
Scandinavian countries at 1.38, compared to 1.44 in France, 2.30 in England and 1.65 in Germany.
92 Harding & Javorcik (2011).

93 Ibid.
94 Gómez‐Mera et al. (2015)
95 This study used a unique firm-level database from ICBS combining industry, trade and services surveys with R&D
and globalization surveys for high industry and services only. It also used data from the National Insurance Institute;
OECD data for the presence of Foreign-owned Companies in various economies (globalization database), patent data
(science, technology and patents database), R&D expenses, product and employment data (the structural analysis
database – STAN); data from statistical bureaus in various countries (U.S.A., Canada, France, Slovakia, Sweden,
Finland, Denmark, Norway and others); and interviews with seniors in Foreign-owned Companies and local companies.
The research method was, among others, crossing profiles of industry-service/local-foreign ownership/local-
multinational company-R&D centers and, among others, product per employee, cost of labor per R&D employee, R&D
costs per R&D employee, ratio of R&D wages to R&D expenses, ratio of payments to external entities to R&D
expenses, ratio of R&D expenses to output, ratio of R&D sales to output, and ratio of R&D export to output. The study
also used econometric tools.
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The wage of employees in Foreign-owned Companies had a significant positive influence on the wage
of employees in local companies. An increase of 1% in the wage of employees of Foreign-owned Companies
corresponded to an increase of 0.6% in the wage of employees of local companies operating in the same
sector (all other variables being equal).
Finally, the study showed a horizontal effect on employees with changes in R&D expenses. R&D
expenditure by Foreign-owned Companies had a significant positive influence on the number of employees
in local companies operating in the same sector. An increase of 1% in the R&D expenditure of Foreign-
owned Companies corresponded to an increase of 0.085% in the number of employees in local companies
operating in the same sector (all other variables being equal).
3.3.2 The effects of Multinational Enterprises on high-tech in Israel: Somkin at al. (2016)
In a follow-up report, Somkin et al. (2016) showed that an increase in R&D activity by Foreign-owned
Companies in Israel did not come at the expense of local R&D activity. They found that the R&D activity of
Foreign-owned Companies increased the R&D activity of local companies. Another finding indicated that
the wage of employees in Foreign-owned Companies had a significant positive influence on the wage of
employees in local companies.
Based on employee mobility data, they examined the movement of employees from Foreign-owned
Companies to local-owned start-ups. Such companies make a significant use of Chief Scientist budgets. A
significant growth was registered among these companies.
3.3.3 The effects of Multinational Enterprises on high-tech in Israel: Slovodnizki et al. (2016)
The study by Slovodnizki at al. (2016) examined two aspects of the influence of Multinational
Enterprises on labor productivity: creating jobs with high labor productivity and increasing the human capital
of employees.
The study deals with three biases found in the relevant literature: (a) the bias of cherry picking,
focusing on a sub-sample of employees who at some point during the sample period worked at a Multinational
Enterprise; (b) the bias caused by lack of information regarding the reasons behind movement of employees
between companies; and (c) the bias caused by lack of control over the brand and the measure of recognition
of the local labor market by Multinational Enterprises.
The researchers indicated that the main challenge of studies concerning the contribution of
Multinational Enterprises to productivity is identifying such contribution accurately, because Multinational
Enterprises tend to recruit the highest quality of personnel and pay the highest wages. This make it hard to
identify the contribution of Multinational Enterprises to the creation of high productivity jobs and to
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employee training. If higher employee wages are a result of cherry picking and not an increase in employee
productivity, then the presence of Multinational Enterprises does not necessary contribute to an increase in
labor productivity. Conversely, if higher wages are the result of higher productivity and employee training,
this indicates a positive external effect and a contribution to the general productivity in the economy. 96
The results of the study showed that the work experience of employees in Multinational Enterprises
increased labor productivity, so that employees who had at least two years' experience in a Multinational
Enterprise earned 1.3% more on average (whether their current employment was at a local company or a
Multinational Enterprise). Furthermore, employees in Multinational Enterprises earned 8.4% more on
average (compared to employees in local companies with similar characteristics).
It also found that the contribution to productivity was significantly higher in case of large and well-
known Multinational Enterprises. Work experience in a leading Multinational Enterprise (in terms of number
of employees and popularity according to Google trends) contributed 9.7% to wages and wage premium
increased to 12.7%. The researchers indicated that these results were mostly resistant to changes in the
method of assessment.
3.3.4 The effects of the Encouragement of Capital Investments Law: Bar (2013)
Bar (2013) examined the effects of the Encouragement of Capital Investments Law on Foreign Direct
Investments and the behavior of Foreign-owned Companies, considering the criticism of tax benefits used to
attract Multinational Enterprises to invest in Israel.97
96 The study used a unique database that included employment records and company characteristics among 450 leading
companies in Israel between 2005 and 2010. The database was created using information files from the Israel Tax
Authority, company files for 2005 - 2010, salaried employee files for 2005 - 2006 and 2009 - 2010, and salaried
employee files for the tax model in 2007 and 2008. The data base was constructed in three stages: first, the researchers
selected the 450 largest companies active in 2010 by sorting all companies using two size criteria: company revenue
and number of employees. Second, they identified all the salaried employees who worked at the selected companies in
2010 and created a file containing information regarding such employees for a period of six consecutive years (2005 -
2010) regarding the company employing them, their wages, and various personal information (age, family status,
number of children, etc.). Third, the sample was narrowed to include only employees who worked at Multinational
Enterprises at some point. After adjustments, this database contained a total of around 1.8 million observations for 2005
- 2010, but most of the econometric analysis was made on a narrower database that included only employees who
worked at Multinational Enterprises at some point. This narrower database included a total 110 thousand observations.
The methodology included assessment using ordinary least squares (OLS) panel regression, including fixed effects to
control the influence of unobserved variables that do not change over time (individual characteristics) or for all
individual in a given year (year characteristics) and included various individual and company control variables. The
researchers conducted sensitivity analyses and assessments using other methods (various models) to deal with the
aforementioned biases. In addition, the econometric analysis included control of company brand strength using data
from Google trends.
97 The empirical analysis in this study was based on data from the Israel Tax Authority, including data of the enterprises
included in Encouragement of Capital Investments Law between 2000 and 2010, their revenues, benefits, tax rate and
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Israel is competing for FDI in order to improve the productivity of local companies and advance the
local labor market by creating new jobs, particularly high productivity jobs. The assumption is that such
investments have positive external effects such as regional development, strengthening international trade
relations and horizontal and vertical spillover of knowledge and technology. The main tool used by Israel in
its tax benefit policy is the Encouragement of Capital Investments Law on its various channels.
The findings of the study showed that most of the benefits under the law apply to a small number of
companies, and that the law fails to attract high productivity enterprises to the periphery. The general average
wage in the sector and the average wage in benefiting enterprises located in the periphery are similar, while
in the center of Israel, the average wage in benefiting enterprises is significantly higher than the average wage
in regular enterprises.
The conclusion of the study is that there is no horizontal spillover in terms of a general wage increase.
It is important to note that this conclusion is based on all the companies that enjoyed benefits under the
Encouragement of Capital Investments Law, without distinction between Foreign-owned Companies and
local Israeli companies.
3.4 Israeli empirical studies examining R&D spillovers

This section describes empirical studies that quantified spillovers resulting from R&D investments,
as well as the effects of R&D investments on the product of Israel, even if these studies did not examine this
issue specifically regarding Foreign-owned Companies. This subject is very relevant for Foreign-owned
Companies operating in Israel due to their increasing investments in R&D in Israel and their great share of
the R&D conducted in Israel, and, therefore, these studies are included here.
3.4.1 Assessing horizontal and vertical R&D spillovers based on industry data: Bergman and Bar
Eliezer (2001)
Bergman and Bar Eliezer (2001) examined spillovers related to investments in research and
development in the Industrial sector in Israel and abroad and quantified the spillover of local and imported
technology to other enterprises, while analyzing the interactions between knowledge variables and R&D and
industry productivity, wages and export. The study used foxed prices in 77 grouped sub-sectors (3 digits) for
number and scope of dividends distributed. In addition, the data was based on data from the VAT system for approved
enterprises between 2008 and 2011. The file contained information regarding employee wages, income tax paid, months
of employment and residential address. After filtering the data, the study focused on the years 2008 - 2010. The final
database included 375 approved enterprises per year. For each enterprise, data was collected regarding taxable income
(profit), tax benefits, companies tax paid, effective tax rate, number of employees and average wage and distance from
Tel Aviv.
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1990 - 1994, using a Cobb-Douglas Production Function, input-output coefficients and a simultaneous model
where output, R&D capital and export are determined together and are influences, among other things, by
spillover.
They found that R&D spillovers had a clear significant effect on output and production, and that this
spillover, on all its types, also had a significant positive effect on self R&D and industry wages and, indirectly,
on export. The acquisition of knowledge and patents from other sectors and from abroad also had a positive
effect on product and general productivity. They found that the average rates of return for gross physical
capital reached 14% and 20% for (gross) industry R&D capital. Including the return on spillovers, the social
rate of return on R&D investments in the industry amounted to 40% - 50%.
3.4.2 Assessing the effects of R&D subsidies based on firm-level data: Prizet et al. (2008)
In 2008, a study was conducted for the Ministry of Finance and the Bureau of the Chief Scientist at
the Ministry of Industry, Trade and Employment, to assess the effects of government support in industrial
R&D on the Israeli economy. The study examines two main questions: first, how much new R&D was created
as a direct result of government intervention that would not have been created otherwise; and second, what
is the added product related to such new R&D.
The first research question refers to a state of affairs known in the literature as 'crowding out', where
government support pushes out private money that would have been used to fund projects if government
support were not available. As described above, this issue is also relevant to Multinational Enterprises that
may crowd out investments by competitors that would have been made if Multinational Enterprises had not
entered the market. The findings of the study showed that government support created new R&D that would
not have been conducted otherwise in a general value of two to three times the amount of government support.
This finding was consistent and significant throughout various sectors, including software and R&D, and for
companies of various technological levels and sizes. The support mechanisms currently employed do not
therefore crowd out private money, but created significant addition to R&D, regardless of the industry or
company size. The study further showed that, at the lower estimation limit, in the Industrial sector, a
government grant of 1 million NIS created an additional private expenditure of 1.28 NIS, i.e. a total increase
of 2.28 million NIS in R&D, while in R&D and software sectors, the additional private expenditure on R&D
was 1.81 million NIS, i.e. a total increase of 2.81 million NIS in R&D.
The second research question refers to the added product resulting from R&D investments. This
addition comes from the direct effect on the product of the company conducting the R&D and the indirect
effect (spillover) on the product of other companies in the sector. The results of the study showed that most
R&D spillovers come from large and medium companies and giant companies, with a minimum multiplier
of 5 to 6 between the government investment and the overall addition to the product in the sector. Higher
returns were obtained in mixed and traditional sectors. However, the main finding was that in the high sectors,
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where most R&D expenditure was found and where government support was high throughout the years, the
multiplier was 4.7.
3.5 Summary of empirical literature

The discussion of positive spillovers resulting from FDI in the economic literature distinguishes
between two types of spillovers: (1) horizontal spillover – affecting other (competing) companies in the same
sector; and (2) vertical spillover – affecting other entities in the value chain (suppliers and customers).
Research literature is divided into several types regarding horizontal spillovers:
 The first are case studies, which are usually informative and laden with specific data 98 but, as they
deal with specific cases, are hard to generalize from.
 The second are industry level studies. Most of these studies show a positive effect of the presence of
Foreign-owned Companies on the value-added per employee in their sector. However, these studies
are conducted using cross-section data, and it is therefore hard to establish the direction of causality.
The positive relation found by these studies may be the result of Foreign-owned Companies entering
sectors with higher productivity to begin with, and not spillovers from such Foreign-owned
Companies. Conversely, the positive correlation may be the result of Foreign-owned Companies
crowding out less efficient local companies and taking up a greater market share, thus raising the
average productivity in the sector.
 The third type are studies of horizontal spillovers using company panel data. These studies examine
the correlation between the presence of a Foreign-owned Companies in a specific local sector and the
productivity of local (competing) companies.
The bottom line of studies examining horizontal spillovers in developed countries based on panel
data is a significant positive effect. Other studies that examined spillovers in developing countries found
that a large technological gap between the investing country and the receiving country has a negative effect
on spillovers. In transition countries, where local companies cannot compete with Foreign-owned
Companies, local companies are crowded out. Conversely, a high level of human capital in the target country
is related to greater horizontal spillover. This is also true in cases of joint venture projects between Foreign-
owned Companies and local companies. Additional findings indicate that the first foreign investment
contributes to the general productivity, but after reaching a critical mass of Foreign-owned Companies, the
effect is diminished and may even become negative.
Many empirical studies find that vertical spillovers have a significant positive effect. These studies
98 See, for example, Moran (2001).is
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show that when a positive vertical spillover effect exists, it is usually a 'backward spillover' or 'backward
linkage' resulting from the improvements of processes in the backward value chain. I.e. a positive influence
on local suppliers of Foreign-owned Companies, as Foreign-owned Companies require various higher
inputs: higher service level, meeting schedules, higher quality products, use of more advance technologies,
and more. The studies find it hard to show any positive effects related to forward spillovers.
A survey by the World Bank notes the importance of knowing foreign investors and their motives to
encourage the right investments and create the linkage between foreign investments and the local economy.
Furthermore, establishing a government agency may help attract foreign investments to target sectors and
maximize their positive effects. The main services offered by such agency would include information
regarding regulation, business procedures, company taxation and incentives.
In the Israeli market, like in many other countries around the world, the productivity of employees in
Foreign-owned Companies is higher than the average productivity, and, accordingly, their wages are also
higher. The wage of employees in Foreign-owned Companies has a positive effect on the wage of employees
in their sector (horizontal spillover). The experience accumulated by employees in Multinational Enterprises,
and especially in leading Multinational Enterprises, increases their productivity and wage even after later
being employed by a local company.
An empirical analysis of the relation between movement of Foreign Direct Investments, economic
growth and tax revenues found that Foreign Direct Investments in Israel had a positive effect on total tax
revenues.
Foreign-owned Companies in Israel are responsible for a large share of the R&D conducted in Israel.
R&D spillover has a significant effect on many parameters, including output, productivity, self R&D,
employee wages and export. Government support of R&D in Israel leads to activity that would not exist
otherwise. This government support has a positive influence in all sectors and with all company sizes.
However, most R&D spillover comes from large and medium companies and from giant companies, and
higher returns on government support are found in mixed and traditional sectors. Added R&D expenditure
has a positive horizontal effect on the number of employees in local companies. This means that the higher
the R&D expenditure of Foreign-owned Companies is, the higher the number of employees in local
companies is.
In summary, empirical studies examining spillovers related to Foreign Direct Investments in Israel
found a significant positive effect in the case of horizontal spillovers, in line with studies in other places
around the world. Significant spillovers are the result of R&D activity, which characterizes IN companies in
Israel.
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4. Measuring the effects of Foreign-owned Companies on economic

sectors in Israel
4.1 Description of the data used in the study

To analyze the effects of Foreign Direct Investments on the Israeli economy we used ICBS data that
relates to Foreign-owned Companies. It should therefore be noted that this includes only investments that
exceed a threshold of 50% holding in a Foreign-owned Company and excludes other foreign investments that
do not meet this threshold. It is reasonable to say that the effects of foreign investments are most significantly
manifested in companies that are Foreign-owned Companies, thus using Foreign-owned Companies data is
sufficiently adequate for our purpose.
The database used in this study (hereinafter, 'the integrated database of Foreign-owned Companies
in the industrial sector') is divided into main economic sectors according to the unified classification of
economic sectors from 2011 of the Israeli Central Bureau of Statistics. To this end, we used industry surveys
by the Israeli Central Bureau of Statistics for 1990 - 2015. Until 2010, industry surveys were conducted based
on the unified classification of sectors from 1993. Industry surveys allow us to measure the capital
accumulation by sector. Accordingly, the integrated database of Foreign-owned Companies in the industrial
sector contains only the sectors of this sector. Nevertheless, some examination conducted by us did not
require capital accumulation data and were therefore possible also for other economic sectors.
In order to unify the data, we had to group together data from industry surveys from 1990 - 2015,
including data related to capital investments, output, jobs, compensation and export. Then, in order to classify
economic sectors consistently, we determined that classification will be in accordance with the unified
classification of economic sectors from 2011. Accordingly, we had to match each 3-digit sub-sector in the
1993 classification with its corresponding main sector in the 2011 classification. The conversion was made
using a 4-digit transition key (sub-sectors) from the 1993 unified classification of economic sectors to the
2011 unified classification of economic sectors. Some sub-sectors in the 1993 classification where split into
several main sectors. Therefore, in order to preserve the integrity of the data, we had to unify some main
economic sectors into sector groups and omit one main sector (number 33) from the sample. In addition, in
several sub-sectors where a component was turned into a main economic sector but at a negligible rate, we
had to assume that the physical capital investments in this sector remained in the direct main sector. 99 For
example, in a group of main economic sectors (sectors number 25-28 and 30 in the 2011 classification) a
certain percentage of companies was converted to the main sector 'Repair, maintenance and installation of
99 For complete details of the conversion of sub-sectors in the 1993 classification into main sectors in the 2011
classification see Supplement 1 – Integration of industry survey data by 1993 and 2011 classifications.
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machines and equipment' (sector number 33 in the 2011 classification). The total investment in 2011 (the
year of the conversion) in sector 33 was 0.16% of the total investment in this sector group, therefore, in order
to preserve the integrity of the data, we assumed that the total investment remained in this sector group. From
these industry surveys, we collected capital investment data (including land and buildings, machine and
equipment, office furniture and equipment, vehicles, computers and software), output and product data, wage
and compensation data and revenue data.
We crossed the data in this database with data from the following databases:
 New Foreign-owned Companies data, as described in detail in the chapter dealing with
sources of information;
 ICBS business demographic data for 2011 - 2013;
 Financial data regarding the Balance of Payments for 2011 - 2013;
 Economic sectors survey data for 2012 - 2015.
Most of the analyses presented in this chapter to examine the effects of FDI on economic sectors in Israel are
based on the integrated database of Foreign-owned Companies in the industrial sector, as specified below.
4.2 Assessing the relation between FDI and wage and employment in Israel
The study by Somkin et al. (2014) found that reciprocal transitions between local companies and
Foreign-owned Companies can be identified, with a significant percentage of employees who leave Foreign-
owned Companies (including foreign R&D centers) and transfer to local companies. It also found that the
transition of employees from large local companies (more than 500 employees) to Foreign-owned Companies
was accompanied by a 20% to 80% wage increase. An econometric assessment showed that a 1% increase
in the wages of employees in Foreign-owned Companies increased the wages of employees in local
companies operating in the same sector by 0.6% (all other variables being equal).
The study by Slovodnizki et al. (2016) examined the effects of Multinational Enterprises in Israel. It
found that work experience in Multinational Enterprises had a 1.3% positive effect on wages, and,
concurrently, that Multinational Enterprises paid their employees 8.4% higher wages. 100
100 This study dealt with the problem of selection, the bias caused by lack of information regarding the reason for
employee transitions between companies and the bias caused by lack of control regarding brand strength and the
recognition of Multinational Enterprises in the local market. With the data available to us, we were unable to conduct
a study that took such biases into consideration.
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Using the new Foreign-owned Companies data, we analyzed the average and general correlation of
compensations by sector to the wages in Foreign-owned Companies in these sectors and the dominance of
these companies in each sector.
This analysis is based on all the economic sectors in Israel. We used industry surveys for 2012 - 2015
to examine the average cost of wages in each sector, using a simple division of the general compensation per
position by the number of positions in the sector for all 54 main economic sectors. 101 At the same time, we
created a similar parameter based on Foreign-owned Companies data by dividing the total wage paid by the
total number of position in each main economic sector. The following chart shows the ratios between the
average wage cost in economic sectors and the average month wage cost in Foreign-owned Companies for
the same sectors, in thousand NIS per month:
Chart 29 – Average wage cost in Foreign-owned Companies and in sectors, by sector
Source: ICBS – industry sectors survey, economic sectors survey and Foreign-owned Companies data.
The dashed line is at a 45 degrees angle. The dots on the line represent sectors where the compensation
101The sampled industry groups were: 05-09, 10, 11-12, 13, 14-16, 17, 18, 19-20, 21, 22, 23, 24, 25,26,27, 28, 29-30, 31,
32, 33, 35-37, 38-39, 41-43, 45, 46, 47, 49, 50-52, 53, 55, 56, 58, 59, 60-61, 62, 63, 64-66, 69, 70, 71,72, 73, 74, 77,
78, 79, 80, 81, 82, 86, 87-88, 90-91, 94-97.
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per position in Foreign-owned Companies equals the sector average. Dots above the line represent sectors
where the average earning in Foreign-owned Companies is higher than the sector average. The dots below
the line refer to sectors where the average earning in Foreign-owned Companies is lower than the sector
average. The data refers to 2015.
It's clear that in most sectors, the average compensation per position in Foreign-owned
Companies is higher.
We created another parameter to examine the effects of wages on the dominance of Foreign-owned
Companies in Israeli sectors. To do that, we used the number of positions in Foreign-owned Companies
compared to the total number of positions in the sector. The following chart presents the average
compensation per position in Foreign-owned Companies and in sectors by share of Foreign-owned
Companies in the total number of positions in the sector in 2015, in thousand NIS per year:
Chart 30 – Compensation per position in economic sectors in relation to the presence of

Foreign-owned Companies
A positive relation can be seen between the presence of Foreign-owned Companies and the average
compensation per position in the economic sectors in 2015. This finding is valid for both Foreign-owned
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Companies and economic sectors in Israel, in line with previous findings in Israeli research. However, the
compensation per position in Foreign-owned Companies is also relatively higher in sectors where the
presence of Foreign-owned Companies is not high. A possible explanation is that Foreign-owned Companies
attract the most qualified personnel are therefore pay higher wages. Conversely, it is possible that the
productivity per employee is higher because of a higher level of capital per employee, as will be seen below.
We assessed the relation between these variables using a linear regression based on 224 observations
in 2012 - 2015:
Table 5 – The relation between the presence of Foreign-owned Companies and

compensation per position in economic sectors
t Stat Standard Error Coefficients
18.78 5.54 103.96 Intercept
9.88 38.11 376.68 Share
‫שיעור‬ of FOC
‫החברות‬ in positions
‫הזרות‬ ‫במשרות‬
0.31 R Square
0.30 Adjusted R Square
224 Observations
A significant positive link can be seen in the economy sectors between the presence of Foreign-
owned Companies and the average compensation per position. The coefficient indicates that an increase
of 1% in the presence of Foreign-owned Companies results in an increase of 3,767 NIS per year in the average
compensation per position in the sector.102
We examined the combined influence of compensation per position in Foreign-owned Companies and
the presence of Foreign-owned Companies on the compensation per position in local companies. We
measured the effect using a linear regression of data from 2017:103
102 It should be noted that some sectors in Israel suffer from a lack of manpower, for example, engineers. The presence
of Foreign-owned Companies raising employee wages might therefore harm the recruiting efforts of local companies.
103 The data is given on a logarithmic scale. The compensation per position in a local company was calculated as the
difference between the total compensation per position and the compensation per position in Foreign-owned
Companies. The number of positions in local companies was calculated as the difference between the total number of
positions and the number of positions in Foreign-owned Companies.
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Table 6 – The relation between compensation per position in Foreign-owned Companies

and their presence and compensation per position in local companies in economic sectors
2.70 0.45 1.22 Intercept
3.23 0.47 1.52 ‫שיעור‬ ‫החברות‬
Share of FOC‫הזרות‬ ‫במשרות‬
in positions
7.59 0.09 0.67 Compensation
‫למשרה תמורה‬ per‫בחברות‬
position ‫הזרות‬
in FOC
0.62 R Square
54 Observations
The assessment indicates a positive relation between compensation per position in local
companies and compensation per position in Foreign-owned Companies and the presence of Foreign-
owned Companies. Naturally, similar companies in each economic sector are characterized by similar wage
levels. Accordingly, the assessment shows that the log of the compensation per position in local companies
corresponds to 67% of the log of the average compensation per position in Foreign-owned Companies.
This finding confirms the findings of Somkin et al. (2014), who found a similar correspondence of 60%. In
addition, for a 1% increase in the log of the presence of Foreign-owned Companies (approximately also
1% of the presence of Foreign-owned Companies), corresponds approximately to an increase of 1.5%
in compensation per position. Despite the explanation power of this assessment, it does not tell us about
the causality relation between the variables. In other words, it is not clear if Foreign-owned Companies enter
sectors where human capital requires higher compensations for a position to begin with, or whether it is the
entrance of Foreign-owned Companies into a sector that causes greater competition over human capital
resulting in increased wage levels.104
Labor productivity is calculated as the total value-added divided by labor inputs. This parameter is
discussed in detail in section 4.5 below, where we conduct a thorough analysis of labor productivity based
on ICBS industry survey data. We will now present a partial analysis of labor productivity and the factors
that influence it in economic sectors, since these sectors lack the capital accumulation data required for a full
analysis.
We used the number of positions in economic sectors to measure the labor productivity in economic
104 To examine the causal relation between the presence of Foreign-owned Companies and industry wage levels we
conducted an analysis using vector autoregression. The examination was conducted at intervals (lag) of one, two and
three years. We found that even when the model had explanatory power, not all explanatory variables were significant.
It should be noted that the database covered a period of four years only, and ass result, the findings of the assessment
reflected the limited data. When new data is published in the future, the model may produce significant results.
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sectors.105 We examined the nature of the relation between labor productivity and compensation per position.
The following chart presents the log of average compensation per position in economic sectors and the
average compensation per position in Foreign-owned Companies in economic sectors in relation to the log
of product per employee in economic sectors, as of 2017:106
Chart 31 – Relation between labor productivity and compensation per position in economic
sectors
A close correlation exists between the levels of compensation per position and labor
productivity.107 There are several sectors where the compensation per position in Foreign-owned Companies
105 Work hours data is usually used to assess labor productivity. Because of the data limitation, we used the number of
positions as an approximation for the number of work hours.
106 To clarify, labor productivity is the sector average for all observations, including observations that present the average
compensation per position in Foreign-owned Companies.

107 The coefficient of the correlation between the log of average compensation per position in an industry and the log of
labor productivity in an industry is 0.87 – a strong positive correlation. The coefficient of the correlation between the
log of average compensation per position in Foreign-owned Companies and the log of labor productivity in an industry
is 0.69 – also a positive correlation, although not as strong.
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is higher than the average product per position (labor productivity) in the sector. This finding is an indication
that labor productivity in Foreign-owned Companies is higher than the sector average labor
productivity.
We see a close relation between compensation per position and labor productivity. We can also see a
correlation between the presence of Foreign-owned Companies and compensation per position. We would
therefore expect to also see a positive correlation between the presence of Foreign-owned Companies and
labor productivity. We assessed the relation between the presence of Foreign-owned Companies and labor
productivity and found that there is a significant positive correlation between the presence of Foreign-owned
Companies and labor productivity, as of 2015:108
Table 7 – The relation between the log of labor productivity and the presence of Foreign-
owned Companies in economic sectors
37.11 0.14 5.17 Intercept
2.29 1.08 2.46 Presence
‫נוכחות‬of‫החברות‬
foreign‫הזרות‬
companies
0.09 R Square
54 Observations
The results of this assessment show that a 1% increase in the presence of Foreign-owned
Companies corresponds to an increase of 2.46% in labor productivity. This relation is statistically
significant, but it should be noted that its explanatory power is not great.
We examined the annual change in the number of salaried positions between 2012 and 2015 in
economic sectors, distinguishing between Foreign-owned Companies and the sector in general:
108 Data given on a logarithmic scale.
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Chart 32 – Changes in the number of salaried positions in economic sectors and Foreign-
owned Companies
The dashed line is at a 45 degrees angle. Dots on the line represent an increase or decrease in the
number of positions in sectors that is equal to the change in Foreign-owned Companies (net change). This
means that the number of positions in local companies remains the same. Dots in the lower right quarter
represent a positive change for Foreign-owned Companies and a negative change for the sector. Dots in the
upper left quarter represent an opposite change, i.e. a decrease in the number of employees in Foreign-owned
Companies and an increase in the number of employees in the sector.
We can see that the change in the number of positions in Foreign-owned Companies in most economic
sectors has a small share in the overall change in the sector. In other words, many of the sectors showing a
significant decrease or increase in the number of positions are sectors with hardly any change in the scope of
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activity by Foreign-owned Companies.109 In summary, the data we examined from 2012 - 2015 did not
indicate a close relation between changes in the number of employees in Foreign-owned Companies in
a sector and changes in the number of employees in Israeli companies.110
4.3 Assessing the relation between FDI and the entry and exit of Israeli companies
One of the most interesting questions when examining the effects of FDI on local economies is
whether this activity displaces local companies, i.e. makes the invest less or accelerates the exit of local
companies from the market. The study by Somkin et al. (2014) found that R&D investments by Foreign-
owned Companies did not displace investments by local companies but increased the R&D expenditure of
local companies.
We used demographical data from the Israeli Central Bureau of Statistics to examine the statistical
relation between the entry and exit of companies and the activity of Foreign-owned Companies in a sector.
Table 11 of business demography for 2011 - 2014 presents the entry and exit of companies in various
economic sectors, with data regarding the balance of FDI in the financial account of the Balance of Payments.
We did this while unifying sectors to achieve agreement between the tables. The following chart presents the
share of companies leaving the sector compared with changes in the balance of Foreign Direct Investments
for the same year:
109 An exception is industry 47 – retail sale, except motor vehicles and motorcycles, that in 2014 experienced an increase
of 15.9 thousand positions in Foreign-owned Companies compared with a general increase of 2.9 thousand for the
industry in that year. This means that concurrently with the increase in the number of positions in Foreign-owned
Companies there was a significant decrease in the number of positions in Israeli companies. A similar change occurred
in 2015 in industry 26 – computers, electronic and optical equipment manufacturing, with an increase of 4.5 thousand
positions in Foreign-owned Companies compared with a decrease of 720 position in the industry. This means that
concurrently with the increase in the number of positions in Foreign-owned Companies there was a significant decrease
in the number of positions in Israeli companies.
110 In any case, causality cannot be identified between changes in number of positions in Foreign-owned Companies and
changes in the number of positions in local companies. In other words, we cannot tell what would have happened if the
number of positions in Foreign-owned Companies had increased or decreased.
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Chart 33 – Lack of significant relation between the exit of companies from a sector and
Foreign Direct Investments in economic sectors
Source: ICBS – business demography, table 11; ICBS – Balance of Payments.
We can see that in most sectors, the percentage of business exiting the sector each year ranges between
4% and 9% regardless of changes in the balance of foreign investments in the sector. An exception is sector
55-56, 'Hosting and food services', with a particularly high annual rate of exit of 14%, characterized by
negligible activity of Foreign-owned Companies.
We ran different versions of regressions to examine the relation between sector entry and exit and
Foreign Direct Investments.111 None of the examinations we conducted showed a significant statistical
relation between FDI and the entry and exit of companies to and from a sector.
111We chose 8 regressions where the explained variable is the number or percentage of companies that entered or exited
an industry, and the explaining variable is the balance of Foreign Direct Investments or its annual change.
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4.4 Assessing the relation between FDI and capital accumulation per employee
According to the economic literature in Israel, the capital accumulation per employee in Israel is low
compare to other developed countries, and this parameter has a negative effect on labor productivity. 112 The
difference between labor productivity in Israel and in the U.S.A and OECD countries has been growing since
the 1990s, mostly as a result of physical capital intensity. 113 Studies that tried to measure the effect of physical
capital found that if the level of capital per employee in Israel were equal to the OECD average, the
productivity per work hour would have increased by 5 Dollars. 114
To examine the relation between Foreign-owned Companies and capital accumulation per employee
we used the new Foreign-owned Companies data and crossed it with capital accumulation data and the
number of positions from ICBS industry surveys.115 The capital accumulation per position was calculated
separately for each 2-digit level sector. Concurrently, we calculated the share of positions in Foreign-owned
Companies in the total number of positions in each sector. Combining this data presented a positive relation
between the presence of Foreign-owned Companies based on number of positions and the level of capital
accumulation per position in 2012 - 2015:
112 Labor productivity is calculated as the product per labor input unit, where the labor input is usually a work hour.
113 Ekstein (2014).
114 Geva (2015), pp. 6 - 8.
115 The capital accumulation was calculated based on a depreciation model, as described in supplement 2 – calculating
physical capital accumulation.
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Chart 34 – Relation between the presence of Foreign-owned Companies and capital

accumulation per position in industry sectors
Source: integrated database of Foreign-owned Companies in industry sectors
The chart above shows the capital accumulation per position in relation to the parameter of Foreign-
owned Companies presence, based on the number of positions. A positive relation can be observed. In sectors
where the presence of Foreign-owned Companies is high in terms of the number of positions, the level of
capital accumulation per position is higher than average. We assessed the relation using a linear regression
between the two variables, and the results show a significant positive relation:
Table 8 – Relation between share of Foreign-owned Companies in positions and capital

accumulation per position in industry sectors
4.17 50.8 212.1 Intercept
3.46 297.2 1,029.4 Share
‫שיעור‬of‫החברות‬
foreign‫הזרות‬
com.
0.21 R Square
48 Observations
The results show that an increase of 1% in the presence of Foreign-owned Companies in terms of
number of positions corresponds to an increase of 10.3 thousand NIS in capital accumulation (around 5.6%
of the average capital accumulation).
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Studies conducted in Israel show that industry sectors with a high rate of export differ from other
economic sectors in Israel and have a relatively high capital accumulation per employee. 116 The database
used in this study consists only of industry sectors, therefore the data presented here represents those sectors
that differ from the rest of the economic activity in Israel. However, it can be seen that these sectors are
characterized by a high degree of variance in capital accumulation per position in industry sectors and that
this variance is related positively to the presence of Foreign-owned Companies.
We used the export and output data from industry surveys to examine sectors with significant export
activity and the levels of capital accumulation per employee in these sectors. For every 2-digit level sector,
we calculated the ratio between export and total output. The following chart presets the relation between the
share of export in the sector output and capital accumulation per position for 2012 - 2015:
Chart 35 – Relation between export activity and capital accumulation per position in
industry sectors
116 Ekstein (2014).
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We can see a relation between the rate of export in industry sectors and capital accumulation per
position, but this relation seems less strong than the relation between capital accumulation per position and
the presence of Foreign-owned Companies. We examined the strength of the relation using a linear
regression. The findings indicated a significant positive relation:
Table 9 – Relation between export activity and capital accumulation per position in
industry sectors
7.16 42.10 301.42 Intercept
1.97 98.23 193.97 Share‫שיעור‬
of export in output
‫קה י צוא‬ ‫מהתפו‬
0.08 R Square
48 Observations
We can see that the relation is significant and positive, but it indicates a growth of only 1.9 thousand
NIS in capital accumulation (1.1% of the average capital accumulation), corresponding to a 1% growth in
the share of export in sector output, and a weak explanatory power. Furthermore, as we saw in section 2.9,
the export activity of Foreign-owned Companies in Israel is significant and extensive. Accordingly, there is
a positive relation between the presence of Foreign-owned Companies in a sector and the level of export in
the sector. An assessment of the relation between the share of export in the sector output and the presence of
Foreign-owned Companies in terms of position shows a correlation coefficient of 0.39 – i.e. a positive
relation. We conducted an additional examination by assessing the relation between capital accumulation per
position and the two parameters together – share of export in output and share of Foreign-owned Companies
in the total number of positions between 2012 and 2015:
Table 10 – Relation between export activity and presence of Foreign-owned Companies and
sector capital accumulation per position
3.81 52.73 200.73 Intercept
2.85 323.52 922.86 ‫נוכחות‬ ‫החברות‬
Presence ‫הזרות‬
of FOC
0.85 99.17 84.15 ‫שיעור‬
Share ‫קה י צוא‬in
of export ‫מהתפו‬
output
0.22 R Square
48 Observations
The results of the assessment reflect a significant positive relation between the capital accumulation
per position and the presence of Foreign-owned Companies. However, the relation between capital
accumulation per position and share of export in output is not significant. These results may suggest that
- Page 89 of 114 -
capital accumulation per position mostly correlates to the presence of Foreign-owned Companies, and that
the positive relation between capital accumulation per position and the share of export in the output is the
result of the large scope of export by Foreign-owned Companies.
4.5 Assessing the relation between FDI and labor productivity

Labor productivity is defined as the ratio between the total product and labor inputs and it measures
the manufacturing capability for given labor inputs. Labor productivity in Israel is 33% lower than in OECD
countries and 45% lower than in the United States. 117 Studies conducted in Israel show that the labor
productivity in Israel is relatively low compared to the rest of the world (Ekstein, 2014) because of physical
capital intensity (although industry sectors in Israel, on which we focus below, are not characterized by such
low capital intensity).
As already shown, the presence of Foreign-owned Companies correlates to higher levels of capital
accumulation per employee. We also showed that, in the economic sectors, the presence of Foreign-owned
Companies correlated with higher compensation per position, and, accordingly, the presence of Foreign-
owned Companies also correlated with higher levels of labor productivity. The following chart presents the
levels of labor productivity in the industry sectors in relation to the presence of Foreign-owned Companies
in terms of positions (productivity is given in thousand NIS per year): 118
117 It is common to use product per position to measure labor productivity. See: Ekstein (2014). In this study, we used
product per position.
118 In this section we also use the number of positions as measurement for the presence of Foreign-owned Companies in
a sector.
- Page 90 of 114 -
Chart 36 – Relation between labor productivity and the presence of Foreign-owned

Companies in industry sectors
Again, the sampled sectors are the industrial sectors, which differ from other economic sectors in
Israel in terms of labor productivity. However, it seems there is a positive relation in sectors where the
presence of Foreign-owned Companies is significant. We assessed the relation between labor productivity
and the presence of Foreign-owned Companies using a linear regression: 119
Table 11 – Relation between labor productivity and the presence of Foreign-owned

P-value t Stat Standard Error Coefficients
0.00 3.28 58.19 191.03 Intercept
0.01 2.84 340.13 965.71 Presence
‫נוכחות‬ of FOC
‫החברות‬ ‫הזרות‬
0.15 R Square
48 Observations
119 Data is given on a logarithmic scale.
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The results of the assessment show a significant positive relation between the presence of Foreign-
owned Companies and labor productivity. The strength of the relation indicates an increase of 9.65 thousand
NIS in labor productivity (2.9% of the average labor productivity) corresponds to a 1% increase in the
presence of Foreign-owned Companies in the sector. This finding is in line with the analysis presented in the
section 'Productivity in Foreign-owned Companies compared to the general productivity in the market', where
we showed that the average value-added per position in Foreign-owned Companies in industry sectors was
higher than in Israeli companies.
Based on the economic literature, labor productivity is measured according to the following
manufacturing function:
(1) Yt = A F(K, H L)
where Y is the product (sum of values-added), A is the total factor productivity, K is the physical
accumulated capital – calculated for investments in fixed property in industry sectors, 120 H is the human
capital stock – calculated based on sector compensation per position,121 and L is labor inputs – calculated
based on the number of positions in the sector. 122 We assume a Cobb-Douglass aggregate production function
with a constant returns to scale:123
(2) Y = 𝐾 𝛼 (𝐴𝐻𝐿)1−𝛼
As common in the literature, we assumed that α equals 0.33. According to function (2) the productivity
per employee is a function of:
𝑲
a) The capital – product ratio ;
𝒀
b) The human capital 𝑯;
c) And the overall productivity 𝐀:
120 See supplement 2 – calculating physical capital accumulation.

121 In the economic literature it is common to use the average years of education of employees in the sector to measure
the human capital stock. In this study, we used compensation per position as an approximation.
122 Labor inputs are usually measured by actual work hours. In this study we used the number of positions, therefore
sectors characterized by part-time positions may be seen as having higher labor productivity than they actually do.
123 In accordance with the approach used by Hall & Jones (1999) and other similar studies conducted in Israel. See:
Ekstein (2014).
- Page 92 of 114 -
𝛼
𝑌 𝐾 1−𝛼
(3) = A ∗ {( ) } ∗ H
𝐿 𝑌
Let's examine these components.
First, the capital – product ratio. As already shown, Foreign-owned Companies are characterized by
a high ratio of capital accumulation per employee (position). However, the direct relation between the
presence of Foreign-owned Companies and capital – product ratio is very weak, as can be seen in the chart
below.124
Chart 37 – Relation between the presence of Foreign-owned Companies and the physical
capital accumulation to product ratio in industry sectors
The chart above shows a positive relation between the presence of Foreign-owned Companies and
capital accumulation to product, although this relation is not strong. We assessed the strength of the relation
using a linear regression:
124 The data in the chart is given on a logarithmic scale.
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Table 12 – Relation between the presence of Foreign-owned Companies and the physical
capital accumulation to product ratio in industry sectors
-0.32 0.10 -0.03 Intercept
1.25 0.64 0.81 Presence
0.03 R Square
48 Observations
The results of the assessment show a positive relation, but this relation is not statistically significant.
The capital accumulation per employee is high in sectors with high presence of Foreign-owned Companies,
but the capital accumulation per employee is not significantly high in relation to product.
Despite these findings, examining changes in the presence of Foreign-owned Companies in relation
to the base year 2012, we found that in sectors where the presence of Foreign-owned Companies increased,
the ratio of capital accumulation to product increased. The next chart presents the relation between the ratio
of capital accumulation to product in industry sectors and the presence of Foreign-owned Companies.
Chart 38 – Relation between change in the presence of Foreign-owned Companies and the
ratio of physical capital accumulation to product in industry sectors
- Page 94 of 114 -
We assessed the strength of the relation using a linear regression:
Table 13 – Relation between change in the presence of Foreign-owned Companies and the
ratio of physical capital accumulation to product in industry sectors
-1.69 0.02 -0.03 Intercept
1.86 1.05 1.95 Change in presence
‫בנוכחות השינוי‬ ‫החברות‬of‫הזרות‬
FOC
0.09 R Square
36 Observations
The assessed relation was positive, i.e. sectors where the presence of Foreign-owned Companies
increased correlated to an increase in the ratio of capital accumulation to product. However, the relation did
not have a significance level of 95% (but 93%).
Second, the parameter of Human Capital Stock. In the literature it is common to use the average
number of years of education of employees to assess human capital stock. In this study, we used
compensation per position as measurement for the quality of human capital. The following chart shows the
relation between the average compensation per position in industry sectors and the presence of Foreign-
owned Companies:125
125Data in the chart is given on a logarithmic scale. Note that in section 4.2, we showed that the relation is also significant
without the use of log.
- Page 95 of 114 -
Chart 39 – Relation between the presence of Foreign-owned Companies and compensation

per position in industry sectors
A positive relation can be seen between the presence of Foreign-owned Companies and compensation
per position in industry sectors. We assessed the strength of the relation using a linear regression:
Table 14 – Relation between compensation per position and the presence of Foreign-owned
60.76 0.08 4.88 Intercept
3.60 0.52 1.87 Presence
0.22 R Square
48 Observations
The results of the assessment indicate a significant positive relation. This means that the high labor
productivity that characterizes industry sectors where the presence of Foreign-owned Companies is high can
be explained, among others, by the high human capital in these sectors. As shown, the compensation per
- Page 96 of 114 -
position in Foreign-owned Companies is higher than the sector average in the vast majority of economic
sectors in Israel. The following chart shows the relation between the average compensation per position in
the industry sectors examined in this chapter and the compensation per position in Foreign-owned Companies
operating in these sectors:
Chart 40 – Average compensation per position in industry sectors and in Foreign-owned

Companies operating in industry sectors
The diagonal line is at a 45 degrees angle, reflecting the relation between the average compensation
per position in the sector and the compensation per position in Foreign-owned Companies. Dots above the
line represent sectors where the compensation per position in Foreign-owned Companies is higher than the
sector average. We can see that the average compensation per position in Foreign-owned Companies is higher
or equal to the sector average in most industry sectors. 126 A possible explanation is that Foreign-owned
Companies are dominant in sectors characterized by high human capital and recruit the strongest employees
in the market.
126Exceptions are sectors 29 (motor vehicles and trailers manufacturing) and 30 (other transport vehicles manufacturing),
where the compensation per position in Foreign-owned Companies is lower than the sector average.
- Page 97 of 114 -
Third, the parameter of Total Factor Productivity (A). The following chart presents the total factor
productivity in relation to the presence of Foreign-owned Companies in industry sectors. 127
Chart 41 – Relation between the presence of Foreign-owned Companies and total factor
productivity in industry sectors
We can see that among the sectors where the presence of Foreign-owned Companies is high there are
sectors where total factor productivity is exceptionally high and sectors where total factor productivity is low.
In addition, the relation between the presence of Foreign-owned Companies and total factor productivity does
not seem close. We assessed the relation using a linear regression:
127 Data in the chart is given on a logarithmic scale.
- Page 98 of 114 -
Table 15 – Relation between the presence of Foreign-owned Companies and total factor
productivity in industry sectors
4.39 0.10 0.42 Intercept
0.97 0.62 0.61 ‫נוכחות‬ ‫החברות‬
Presence ‫הזרות‬
of FOC
0.02 R Square
48 Observations
The results of the assessment indicate a weak positive relation that is not statistically significant. This
means that sectors characterized by a high presence of Foreign-owned Companies are not characterized by a
significant high total factor productivity.
In summary, industry sectors where the presence of Foreign-owned Companies is high are
characterized by high labor productivity. The high labor productivity in industry sectors where the
presence of Foreign-owned Companies is high is mainly explained by the quality of human capital in
these sectors. Industry sectors where the presence of Foreign-owned Companies is high are also
characterized by high levels of compensation per position. The compensation per position in Foreign-
owned Companies in industry sectors is higher than the sector average. In addition, sectors where the
presence of Foreign-owned Companies increased between 2012 and 2015 also showed an increase in
the ratio of physical capital accumulation to product, although the significance of these findings was
mixed.128
5. Summary and recommendations
5.1 Summary of the descriptive statistic: FDI in Israel and around the world
An examination of world trends shows that the share of developing countries in the world FDI balance
increased between 2004 and 2017 from 22% in 2004 to 33% in 2017. Despite this increase, the share of
developed country in the world FDI balance remained the largest. The flow of investments in developing
countries is increasing, and, in recent years, has reached close to half of the total world FDI. In 2014, the
128Additional examinations of ICBS industry survey data, in an attempt to explain the effects of the presence of Foreign-
owned Companies and the value-added per position in Foreign-owned Companies on the value-added per position in
Israeli companies in the same sector, did not reveal any significant relations. It should be noted that industry surveys
provide information on the value-added of Foreign-owned Companies only partial and for a few economic sectors. In
addition, changing the ICBS classification of economic sectors from 2011 makes it harder to examine data over time.
Accordingly, it may be that our failure to identify such relations was the result of the data limitations.
- Page 99 of 114 -
flow of investments in developing countries was even higher than the flow of investments in developed
countries.
Until 2005, the level of gross direct investment flows into the Israeli market was relatively low: an
annual average in 1998 - 2005 of 3.4 billion Dollars in incoming direct investments. In recent years, a
significant increase in direct investment flows can be overserved, up to a peak in 2018. Compared to the rest
of the world, the net direct investment flow is relatively high. Between 2006 and 2015, the average ratio
between the net incoming investment flow and the national product was 4.1%, compared to 2.9% in OECD
countries. A significant part of FDI in Israel is directed at the computing and R&D sectors, amounting to
34.2% of the total investments, and at high technology sectors, amounting to 11.9% of the total investments
in 2016.
The balance of investments by foreign nationals in Israel amounted to 128,819 million Dollars in 2017
– a balance that is not particularly high compared to the rest of the world. Based on ICBS data, the investment
balance in knowledge intensive sectors has a significant share in the total investment. Investments in the
sectors of Information and Communication, Programming and Computer Consulting Services constituted
22.5%, in Computer, Electronic and Optical Equipment and Electrical Equipment Manufacturing 13.1% and
in Scientific Research and Development 13.5% of the investment balance of foreign nationals in Israel in
2016.
The country of origin of most IN companies in Israel is in North America (41.6%) or Europe (39.5%).
The share of Foreign-owned Companies in the Israeli product is not negligible. The output of these
companies in Israel amounted to 152,558 million NIS in 2015, which was 11.24% of the total output of the
Israeli economy. The gross value-added of Foreign-owned Companies in 2014 amounted to 11.82% of the
total Gross Value Added in Israel.
Most Foreign-owned Companies in Israel, in terms of number of companies, 129 belong to the
information and communication sectors (24.6%), the professional, scientific and technical services sectors
(19.7%) the trade sectors (15.4%) and the industry, mining and excavating sectors (10.5%). The revenue in
the information and communication sectors, to which many Foreign-owned Companies belong, amounted to
35.0 billion NIS 2015, constituting 14.9% of the total revenue of Foreign-owned Companies in this year.
The share of Foreign-owned Companies in the labor force is not as high as their share in the product.
Between 2008 and 2015, their share in the total number of jobs in the Israeli market ranged between 5.6%
and 6.5%. The industry sectors account for 26.7% of the total number of jobs in Foreign-owned Companies
129In terms of other parameters such as revenue and value-added the proportions of Foreign-owned Companies change
between sectors.
- Page 100 of 114 -

in Israel. As of 2005, 40.2% of the occupied positions in Foreign-owned Companies in the industry sectors
are in the 'Computer, Electronic and Optical Equipment Manufacturing' sector, which is characterized by
high technology.
The product per employee in Foreign-owned Companies is twice as high as the average product per
employee in the Israeli market. The productivity of employees in Foreign-owned Companies is higher than
the average sector productivity in all sectors. The compensation per position in Foreign-owned Companies
is generally much higher than the average for the business sector in Israel, and particularly high in smaller
Foreign-owned Companies. Particularly high levels of average compensation per position in Foreign-owned
Companies can be seen in the financial and insurance services sectors and in the information and
communication sectors.
The foreign trade activities of IN companies account for a significant share of Israeli foreign trade.
Most export by Foreign-owned Companies is intended for parent companies. The share of export by Foreign-
owned Companies in the total Israeli export was 26% in 2015.
The share of foreign funding in Israeli R&D expenditure is the highest among OECD countries. In
2014, it amounted to 54% of the total expenditure. Between 2005 and 2016, there was a significant increase
in R&D expenditure by R&D centers, at an average rate of more than 8% per year. The total R&D expenditure
of Foreign-owned Companies' R&D centers amounted to 24.1 billion NIS in 2016, which was 46% of the
total business R&D expenditure in Israel.
5.2 Summary of empirical literature on the effects of FDI

The economic literature dealing with positive spillovers related to FDI distinguishes between two
types of spillovers: (1) horizontal spillovers - influencing other (competing) companies in the same sector;
and (2) vertical spillovers – influencing various entities in the value chain (such as suppliers and customers).
The literature in this field is divided into several types:
 The first are case studies, which are usually informative and laden with specific data but, as they deal
with specific cases, are hard to generalize from.
 The second are industry level studies. Most of these studies show a positive effect of the presence of
Foreign-owned Companies on the value-added per employee in their sector. However, these studies
are conducted using cross-section data, and it is therefore hard to establish the direction of causality.
The positive relation found by these studies may be the result of Foreign-owned Companies entering
sectors with higher productivity to begin with, and not spillovers from such Foreign-owned
Companies. Conversely, the positive correlation may be the result of Foreign-owned Companies
crowding out less efficient local companies and taking up a greater market share, thus raising the
- Page 101 of 114 -

average productivity in the sector.
 The third type are studies of horizontal spillovers using company panel data. These studies examine
the correlation between the presence of a Foreign-owned Companies in a specific local sector and the
productivity of local (competing) companies.
The bottom line of studies examining horizontal spillovers in developed countries based on panel
data is a significant positive effect. Other studies that examined spillovers in developing countries found
that a large technological gap between the investing country and the receiving country has a negative effect
on spillovers. In transition countries, where local companies cannot compete with Foreign-owned
Companies, local companies are crowded out. Conversely, a high level of human capital in the target country
is related to greater horizontal spillover. This is also true in cases of joint venture projects between Foreign-
owned Companies and local companies. Additional findings indicate that the first foreign investment
contributes to the general productivity, but after reaching a critical mass of Foreign-owned Companies, the
effect is diminished and can even become negative.
Many empirical studies find that vertical spillovers have a significant positive effect. These studies
show that when a positive vertical spillover effect exists, it is usually a 'backward spillover' or 'backward
linkage' resulting from the improvements of processes in the backward value chain. I.e. a positive influence
on local suppliers of Foreign-owned Companies, as Foreign-owned Companies require various higher
inputs: higher service level, meeting schedules, higher quality products, use of more advance technologies,
and more. The studies find it hard to show any positive effects related to forward spillovers.
In the Israeli market, like in many other countries around the world, the productivity of employees in
Foreign-owned Companies is higher than the average productivity, and, accordingly, their wages are also
higher. The wages of employees in Foreign-owned Companies have a positive effect on the wages of other
employees in their sector. The experience accumulated by employees in Multinational Enterprises, and
especially in leading Multinational Enterprises, increases their productivity and wages even after later being
employed by a local company.
An empirical analysis of the relation between movement of Foreign Direct Investments, economic
growth and tax revenues found that Foreign Direct Investments in Israel had a positive effect on total tax
revenues.
Foreign-owned Companies in Israel are responsible for a large share of the R&D conducted in Israel.
R&D spillover has a significant effect on many parameters, including output, productivity, self R&D,
employee wages and export. Government support of R&D in Israel leads to activity that would not exist
otherwise. This government support has a positive influence in all sectors and with all company sizes.
- Page 102 of 114 -

However, most R&D spillover comes from large and medium companies and from giant companies, and
higher returns on government support are found in mixed and traditional sectors. Added R&D expenditure
has a positive horizontal effect on the number of employees in local companies. This means that the higher
the R&D expenditure of Foreign-owned Companies is, the higher the number of employees in local
companies is.
In summary, empirical studies examining spillovers related to Foreign Direct Investments in Israel
found a significant positive effect in the case of horizontal spillovers, in line with studies in other places
around the world. Significant spillovers are the result of R&D activity, which characterizes IN companies in
Israel.
5.3 Summary of the analysis of the effects of FDI on the Israeli economy
First, we examined the relation between FDI and wage and employment in 55 economic sectors. In
most economic sectors, the average compensation per position was higher in Foreign-owned Companies. We
also found a significant positive relation between the presence of Foreign-owned Companies and the
average compensation per position in Israeli economic sectors. Similarly, we found a significant positive
relation between the compensation per position in Foreign-owned Companies and the share of their presence
in terms of positions and the compensation per position in Israeli companies. However, it was unclear from
our analysis whether Foreign-owned Companies entered sectors with high compensation per position to begin
with (due to better human capital) or whether competition over human capital following the entry of Foreign-
owned Companies increased the compensation per position. Furthermore, we wanted to examine whether
there were any indications that positions in Israeli companies are diverted to Foreign-owned Companies. The
2015 data we examined did not show a close relation between changes in the number of employees in
Foreign-owned Companies and changes in the number of Israeli companies in the same sector.
Second, we examined whether FDI activity crowded out the activity of local companies. I.e. made
them invest less or accelerated the exit of local companies from the market. If FDI activity had crowded out
the activity of local companies, we would have expected to see a relation between Foreign Direct Investments
and the exit of local companies. However, none of our examinations showed a significant statistical
relation between FDI and the entry or exit of companies into or out of a sector.
Third, we examined the effects of FDI on the levels of capital accumulation per employee in the Israeli
market. The capital accumulation per employee in Israel is low compared to the rest of the world and it affects
labor productivity. We found a significant relation between the presence of Foreign-owned Companies
and capital accumulation per employee in the Israeli industry. Previous studies conducted in Israel
indicated a relation between the scope of export and capital accumulation per employee. We found
confirmation to this relation, but when adding the parameter of the presence of Foreign-owned Companies
to the equation, the positive relation between export out of the product and capital accumulation per employee
- Page 103 of 114 -

disappeared. In other words, we found that the presence of Foreign-owned Companies better explained
capital accumulation per employee than the scope of export out of the product.
Fourth, we examined the effects of FDI on labor productivity in the Israeli market. We found that
sectors with a high presence of Foreign-owned Companies were characterized by higher labor
productivity. The high labor productivity in these sectors is mainly explained by the quality of human
capital. Some findings also indicate that capital intensity is higher in sectors with a higher presence of
Foreign-owned Companies, but their significance is unclear. However, we did not find a correlation
with higher total factor productivity in a sector.
5.4 Directions for future research

This study was the first to analyze the 'Foreign-owned Companies data' published by the Israeli Central
Bureau of Statistics.
While the current study deals with the question of the average contribution of FDI, the question of the
marginal contribution of investments in different sectors is particularly important for policy making and is
therefore an excellent candidate for further research. A future study of this subject could assess the effects of
vertical and horizontal spillovers related to foreign investments in Israel on total factor productivity, based
on firm-level data and in accordance with economic literature from around the world, in order to identify
economic sectors to which foreign investments should be directed, particularly among tradition industry
sectors that are characterized by low levels of productivity compared to high industry sectors.
The current study also points to relations between the presence of Foreign-owned Companies and
various parameters of the Israeli economy such as sector wage, capital accumulation and labor productivity.
A significant question that is not answered by this study relates to the type of these relations and to causality.
In other words, do Foreign-owned Companies affect these parameters or do they enter sectors with specific
characteristics to begin with. A future study may shed some light on this subject.
5.5 Policy recommendations

As indicated by a publication of the World Bank, it is critically important to understand the effects of
foreign investments on the local economy in order to establish a government policy that would maximize
positive spillovers.130 Focusing on the characteristics of the foreign investor may help identify the specific
potential and effect of different types of investments.
In recent years, Foreign Direct Investments in Israel have been high, even by international standards,
and a significant portion of them has been directed at the computer, R&D and high technology sectors. Israel
130 Echandi et al. (2015).
- Page 104 of 114 -

is also unique in the rate of foreign funding of R&D. Policy makers, in recent years, have started to worry
therefore that the marginal benefit of Foreign Direct Investments in high-tech sectors was beginning to
diminish and was lower than the marginal benefit of investments in traditional sectors. Israel's future
challenges lay in identifying relative advantages in these areas and creating suitable incentives to direct the
activity of foreign companies in Israel accordingly. In order to take advantage of the potential value of foreign
investments, government activity, and particularly the activity of the government's foreign investments
agency, Invest in Israel, should be focused. In our opinion, this would require further research of the subject
based on firm-level data, in line with other studies from around the world, and based on case-study analysis.
- Page 105 of 114 -

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7. Supplements
7.1 Supplement 1 – Integration of industry survey data by 1993 classification and

2011 classification
The conversion of sub-sectors by the 1993 classification into main sectors by the 2011 classification
was conducted as follows:
Sub-sector 1993 (original Main sector

Notes
data) 2011
140 10
141 10
143 10
144 10
145 10
146 10
151 10
152 10
158 10
160 11
162 11
170 13
171 13
173 13
174 13
177 13
180 13 A component of this sub-sector is assigned to main sector 95
181 14
190 15
192 15
200 16
202 16,31
211 17
220 58,90
221 58
222 18
230 19
240 20
243 20
244 20
245 21
246 20
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248 20
250 22
251 22
252 22
255 22
263 23
265 23
270 24
271 24
272 24
274 24
281 25
282 25
283 25
294 27,28
312 27
320 26
330 26
331 26
A component of this sub-sector is assigned to main sectors 32,
343 26
33
350 29,30
361 31
392 32
393 21
138,131 8,9
142,141 10
175,174 13
178,177 13,14
191,190 15
201,200 16
223,222 18
241,240 20
243,244 20
258,257 22 A component of this sub-sector is assigned to main sector 38
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264,263 23
268,265 23
273,272 23
300,294 27,28
301,294 27,28,26
321,320 26
332,331 26
362,361 31
394,393 32
395,392 32
163,161,160 11,12
176,172,171 13
188,182,181 14
358,355,353 30 A component of this sub-sector is assigned to main sector 33
398,391,390 32, 16 A component of this sub-sector is assigned to main sector 95
242, 247,230,110 19-20 A component of this sub-sector is assigned to main sectors 6, 9
149-146 10
150-151 10
254-252 22
262-260 23 A component of this sub-sector is assigned to main sector 38
288-283 25,28 A component of this sub-sector is assigned to main sector 33
352-350 29,30
The conversion was made in order to assess the value of physical capital accumulation in main
economic sectors. To this end, the balance of investments in 2011 - 2014 is derived, among others, from
investments in physical capital in 1990 - 2010. However, small deviations from the real investment in capital
accumulation are not supposed to have a significant effect on the results of the model.
In sectors split into sector 33 – 'Repair, maintenance and installation of machines and equipment' as
described, the total investment in this sector constitutes 0.16% of the total investment in these sectors in 2011
and therefore does sway the total investment upwards but at a negligible rate that does not significantly distort
the results.
In sectors split into sector 38 – 'Collection, treatment and disposal of waste; recycling (and
reclamation) of materials': it was assumed that the total investment in this economic sector has no significant
share in the investment in sectors 16, 22 and 23.
In sectors split into sector 95 – 'Computer, personal equipment and home equipment repair': the total
investment in this sector in 2011 amounted to only 30 million NIS. It was assumed that the amount of
investment in this sector did not have a significant influence when added to economic sectors 13, 16, 31 and
32.
The four sub-sectors, 242 – 'petrochemical industry and plastic raw materials', 247 – 'prepared fibers industry',
110 – 'petroleum and natural gas production' and 230 – 'petroleum refining' appear as a single unit in industry
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sectors surveys before 2011, when sub-sector 110 was converted to the main economic sectors 6 – 'petroleum
and natural gas production' and 9 – 'mining auxiliary activities', while test were converted to sectors 19 and
20. The total investment in the four sub-sectors 242, 247, 110 and 230 in 2010 amounted to 1,595 million
NIS. A year later, in 2011, the investment made in the three sectors 242, 247 and 230 (converted to sub-
sections 1920, 2030 and 2050) amounted to 1,765 million NIS. Conversely, it is not possible to know the
amount of investment in sub-section 110 from the industry surveys. We therefore assumed that the full
amount of the investment accumulated by 2010 was related to sectors 19 and 20.
7.2 Supplement 2 – Calculation of physical capital accumulation

In order to estimate physical capital accumulation, we summed the total capital investments since
1990 minus depreciation based on the life span for each type of investment in the following way (data in
years):
Computers and Office furniture and Machines and

Vehicles Land and buildings
software equipment equipment
6 5 16 14 66
Source: Income Tax Regulations (Depreciation), https://www.btl.gov.il/Laws1/02_0103_100026.pdf.
It should be noted that for investment in land and buildings, for example, the total number of sampled
years is not enough to accurately estimate the total accumulation value. In addition, it should be emphasized
that the investment depreciation in 'computers and software' was estimate based on the category 'electronic
equipment and computerized equipment'.
7.3 Supplement 3 – Methodological description of ICBS Foreign-owned

Companies data
Below is a methodological description of Foreign-owned Companies data as provided to us by the
Israeli Central Bureau of Statistics.
The activity of Multinational Enterprises is a main axis of globalization processes in modern economy.
Israeli Multinational Enterprises are those that invest abroad and hold foreign companies, are registered in
Israel and receive direct investments from abroad.
The Israeli Central Bureau of Statistics conducts a bi-annual survey of Multinational Enterprises in
Israel and publishes economic statistics for Multinational Enterprises in Israel since 2002.
Because of the great interest in the activity of companies that receive investments from abroad, and in
order to create an adequate base of information for understanding the economic significance of such activity,
the Ministry of Economy and the Israeli Central Bureau of Statistics jointly established a venture to improve
the statistics related to foreign investments in Israeli companies.
This improvement includes extending the number of economic variables that reflect the activity of
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companies with direct investments from abroad and greater details regarding economic sectors compared to
the details given in ICBS bi-annual surveys.
This publication specifies the results of data related to the activity of Israeli companies controlled by
foreign nationals between 2012 and 2015.
Comparing these results to the ICBS bi-annual survey for these years, the following points should be
considered:
 The bi-annual survey also includes data on OUT companies (Israeli companies holding foreign
companies, while this publication deals only with the activity of IN companies – Israeli companies held
by foreign nationals).
 The sector distribution in the bi-annual survey refers parent company's sector in each group of related
companies that receive direct investments from abroad, while the sector distribution in this publication
refers to the sector of each company separately. This means that, according to the survey, the economic
sector of a subsidiary of a group that is controlled by foreign nationals is the economic sector of the
group's parent company. However, according to this publication, the subsidiary's sector is the sector of
the subsidiary itself.
 The variables compensation per position, revenues and number of companies appear for the first time
in this publication and are not included in the results of the bi-annual survey.
The data used in this publication was edited based on administrative data from ICBS combined with
the results of the bi-annual survey of Multinational Enterprises and the results of other surveys published by
ICBS. The main sources used to edit the data:
 Business registration data, including reports by employers to the Tax Authority and the National
Insurance Institute;
 The results of the bi-annual survey of Multinational Enterprises;
 The results of the economic sectors survey.
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The Economic Impact of Foreign Investments in Israel

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The Economic Impact of Foreign Investments in Israel

The Economic Impact of Foreign

Administration and editing:

Analysis and writing:

 The increasing prevalence of foreign investments in the Israeli economy:

o Spillover of R&D conducted by Multinational Enterprises in Israel has a significant influence on

3.5 Summary of empirical literature…………………………………………………………………… 71

Tables and Charts

Chart 1 – Illustration of Foreign Direct Investments in the national accounting…………………………………… 13

2See http://www.oecd.org/daf/inv/FDI-statistics-explanatory-notes.pdf and

1.2 Structure of the report

2. Descriptive statistic: FDI in Israel and around the world

2.1 Sources of information

The analysis presented below is based on several databases, as specified below:

 Data from the Israeli Central Bureau of Statistics:

1. Balance of Payments; updated data for 2018.

5. Business demographic data for 2011 - 2013; ICBS.

6. Economic sectors survey; updated data for 2008 - 2015.

7. Industry sectors survey; updated data for 1990 - 2015.

9. Research and Development by Multinational Enterprises in Israel (Multinational Enterprises

1. The presence of Foreign-owned Companies in the economies of various countries (Globalization

3. Level of GDP per capita and productivity data.

 Bank of Israel data: statistic view 2017.

Chart 1 – Illustration of Foreign Direct Investments in the national accounting

Chart 2 – Illustration of an Israeli company owned by a foreign national (IN)

7 See http://www.oecd.org/daf/inv/FDI-statistics-explanatory-notes.pdf and

2.2 Foreign Direct Investments – world trends

Chart 3 – FDI balance in countries around the world

Chart 4 – FDI as a percentage of the world balance of investments by development level

2.3 Investments by foreign nationals in Israel according to the Balance of

Chart 6 – Annual investments by foreign nationals in Israel, 2005 - 2018

10 See: Yahalom and Azam (2016).

Chart 8 – Balance of investments by foreign nationals in Israel as a percentage of the GDP,

2.4 Distribution of Foreign-owned Companies in Israel and their activities

Table 1 – Distribution of Foreign-owned Companies by economic sector, 2015

industry sector employ more employees on average.

Chart 9 – Revenues of Foreign-owned Companies by economic sector, 2015

Source: Foreign-owned Companies data, ICBS

2.5 The share of IN companies in employment

Chart 10 – Number of occupied positions, 2015

Chart 11 – Employees in Foreign-owned Companies by economic sector, 2015

Source: Foreign-owned Companies data, ICBS.

25 Not mentioned elsewhere.

2.6 The wage of employees in Foreign-owned Companies

Chart 12 – Compensation per position in the business sector and in Foreign-owned

Source: Foreign-owned Companies data, ICBS.

2.7 Productivity in Foreign-owned Companies compared to the general

Table 2 – Weight of Foreign-owned Companies in product and employment, 2014

According to ICBS data regarding the productivity of Foreign-owned Companies in Israel by

productivity; OECD; 2017.

Chart 14 – Share of Foreign-owned Companies in product and employment in Israel by

Source: ICBS data, economic sectors survey 2015; table 7.

Chart 15 – Average value-added per position by economic sector, 2013

Source: industry survey, ICBS, 2013.

32 Average Gross value added in buyer prices per position.

Chart 16 – Average revenue per position in Foreign-owned Companies by sector

Source: Foreign-owned Companies data, ICBS.

Chart 17 – Average revenue per position in Foreign-owned Companies by company size,

Source: Foreign-owned Companies data, ICBS.

2.8 Distribution of IN companies by country

Chart 18 – Distribution of IN companies by country of origin, 2013

2.9 The share of IN companies in Israeli foreign trade

36 See, for example: http://www.oecd.org/investment/trade-investment-gvc.htm.