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Foreign direct investment in Israel is expected to reach $9.5 billion, a drop from the record $14.3b. achieved in 2006 but still the second-highest level in the country's history, a new study released Tuesday predicted.
The World Investment Report, an annual publication of the United Nations Conference on Trade and Development (UNCTAD), expects the downward trend to continue over the next few years given an expected economic slowdown in the US.
"We are expecting more of a drop-off in 2008-2010 as we think that the US economy will go through a recession and, even if it is a minor one, the impact on the incoming flow of funds will be aggressive as 60-70% of FDI (foreign direct investment) in Israel is from North America," said Ido Kallir, a member of the research department in the Business Management School at the College of Management in Rishon Lezion, the group that prepared the Israel portion of the WIR report.
This year's report examines transnational corporation activities in extractive industries and their development implications; explores policy options aimed at ensuring tangible and long-term gains for growth and development in developing countries; and reviews current trends in foreign direct investment in extractive industries.
"The numbers that we saw in 2006 are very surprising and nobody expected it coming out of 2005," said Kallir. "But we saw a couple of huge deals including Iscar, a deal worth some $5b., and that really boosted the numbers last year."
The Iscar deal led the way to Israel receiving the "billion-plus" moniker, a title assigned to countries who have completed transactions worth more than $1b.
"It's not every year that Israel can land deals like Iscar and M-Systems," Kallir told The Jerusalem Post.
Prior to 2006, the country's previous FDI high was $4.8b. set in 2005. Looking ahead, the study predicted $6.5b. in foreign investments would be generated in 2008, $6.4b. in 2009 and $6.5b. in 2010.
The 2006 WIR report is the 17th edition of the publication and marks the second time Israel has been listed, having until last year published its own foreign investment numbers.
The 2006 report covers more than 200 countries, including a short list of countries that UNCTAD has deemed to have "developed economies," of which Israel is included. Others on the list include EU countries, Switzerland, the US, Canada, Japan, Australia, New Zealand and Bermuda.
"By establishing itself as a regular on the list, Israel has placed itself into the top 10 percent of the world's most developed economic nations," the report said.
On a per capita basis, the report said FDI in Israel totaled slightly more than $2,000, a number that places the country in the middle of the UNCTAD's list of developed countries, above the $643 of the US, but far less than the $7,000 that Belgium boasts, while the country participated in $18.3b. worth of mergers and acquisition, slightly above the international average of approximately $17b. More than half, or $9.2b., of the M&A activity here came from foreign investment, while $9.1b. was generated by Israeli investments in foreign countries.
"In 2006, Israel participated in shaping the globalization of the world economy despite an unstable security situation, the Second Lebanon War and the country's geographic isolation," the report said.
Local M&A activity was led by Teva Pharmaceutical's $7.4b. acquisition of the US-based Ivax Corp., the $5b. acquisition of 80% of Iscar Metalworking Co. by US investor Warren Buffett and the $1.6b. purchase of Kfar Saba-based M-Systems by the US technology company SanDisk.
Despite the very large amount of M&A activity, the report said the country's full potential in terms of generating foreign investment is not being met, as Israel was ranked 26th in that category, the same as in 2005 and four spots below its ranking from 2001-2004.
"In 2006, we were able to shape a very optimistic outlook, but it turned out that we weren't optimistic enough," said Professor Tamir Agnon, head of the Business Management School in the College of Management."But we still have not met our full potential in terms of attracting foreign direct investment."
In its comparison of Mideast nations and levels of foreign investment, the WIR report noted that the pace of growth the region is currently going through is unprecedented. Behind Israel on the FDI list for 2006 was Lebanon with $2.8b.; Egypt with $2.1b.; and Jordan with $1.5b.
"We think that this trend is very good news for the region and it is definitely surprising," said Kallir. "We have never before seen such a steady high growth in the Middle East like we are seeing now." The Palestinian Authority, however, has not enjoyed similar growth, reported the WIR, as it managed a mere $38m. in foreign investment in 2006, a total "as close to zero as you can get," Kallir said.
Meanwhile, according to the report, per capita income and purchasing power of Israelis remained lower than citizens of other countries, as the yearly average salary in Israel in 2006 was less than $30,000, compared to the international average of approximately $37,500.
Additionally, 19.8% of local GDP is generated by international corporations, far less than the 71.3% in Ireland, yet enough to place it in the middle of the list of UNCTAD's developed countries, the report noted.