Israel Subsidizes High-Tech Firms, With Mixed Results

Intel Israel received outstanding grants from the state but has not generated the much-awaited change in the socioeconomic structure of nearby towns, nor a revolution in their education systems.  

al-monitor Ultra-Orthodox Jews take part in a protest against the operation of an Intel plant on the Jewish Sabbath in Jerusalem, Nov. 14, 2009.  Photo by REUTERS/Baz Ratner.

Topics covered

technology, negev, israeli industry, israeli economy, industry, development

Oct 18, 2013

Over the past year, there has been huge commotion in Israel over the unique status enjoyed by a handful of high-tech factories. It all began once it became public knowledge that most of these factories pay no income tax, while most citizens struggle under the tax burden. Israelis everywhere are asking how it came to be that people with more pay less, and people with less pay more.

The commotion intensified once it became known that in the past few years these very factories received tax exemptions for profits amounting to 122 billion shekels ($34.5 billion). The public regarded this as a case of exploitation and greed by those companies’ managers. The state argued in its defense that these factories employ tens of thousands of workers. Collecting taxes from these companies could harm them and even cause them to relocate to other countries.

The best-known case of this revolves around the establishment of the local branch of Intel, a company that manufactures microchips. In the early 1990s, this international corporation convinced Prime Minister Yitzhak Rabin to take part in a huge investment to establish its factory in the Negev. During his second term in office, Rabin was intent on investing vast resources to benefit the towns and settlements of the periphery, which lagged far behind the center of the country.

In the decades prior, settlements in the south were dependent on unsophisticated, labor-intensive industries, headed by the textile industry. Dozens of factories were established to produce fabric. The big collapse began in the 1980s. The opening of international markets to free trade dealt a harsh blow to these factories and expedited their closure. They collapsed one after the other, like a house of cards, bringing down those towns and settlements whose economies were tied intrinsically to them. Meanwhile, a second generation of textile workers, who had only just completed their military service, went searching for new challenges and fled from the profession as if it was a raging fire. The result was devastating. Masses of young people left the development towns in search of a better future. 

What could be done to create employment that would help the south flourish? This was the question that plagued Prime Minister Rabin since the beginning of his term in 1992. When Intel’s proposal landed on his desk, he saw it as a lifesaver for the rapidly sinking Negev. After a lengthy campaign, he succeeded in pouring $600 million into the factory, in exchange for a similar investment by the company’s corporate headquarters in the United States.

“What really appealed to Yitzhak was the vision of establishing technology-based industry at the gates of the Negev in order to promote the region’s development,” I was told by Micah Harish, who served as minister of trade and industry at the time, and was responsible for the success of the deal with Intel. “He fostered the hope that the introduction of such an advanced and sophisticated factory would bring about far reaching changes to local industries in the south’s development towns.”

The factory was established in Kiryat Gat over a decade ago. Its grand opening was celebrated with all due pomp and splendor. Thousands of invited guests, including the country’s leaders, crammed into the factory so that they could see the technological miracle from up close. “I promise you that this factory will change the south within a decade and lead to [Israel's first Prime Minister David] Ben-Gurion’s dream being fulfilled anew,” said Dov Frohman, general manager of Intel Israel, at the opening ceremony.

The expectation that emerged in the south was that all the many thousands of engineers, technicians, programmers and other technical professionals would live in Kiryat Gat and its environs, causing the region to flourish. Local residents hoped that this would lead to the opening of high quality schools, book stores, glittering residential areas, hotels and swanky restaurants. What especially appealed to the residents was the possibility that the factory would establish schools that would prepare a reserve of students from the nearby settlements, who would be trained in technology.

That didn’t happen, at least not in the early years. While thousands of workers did find jobs in the brand-new factory, most of them refused to relocate to the south. They came from the country’s center in the morning, and they returned to the country’s center in the evening. Kiryat Gat and its neighbors had longed for an influx of high-quality residents, but they were left with just the dream.

“It was a dream that blew up in our faces,” Harish said. “In our conversations with the heads of Intel, we insisted on the demand that the workers relocate to the region so that we could bring about this technological revolution. Unfortunately, they did not fulfill this demand.”

Yet even today, Harish has no regrets about the deal with Intel. Frohman also believes that the day will soon come when Intel will be the home factory for a new generation of professionals, who were born and raised in the south. So what can be made of the enormous benefits that the state provides to Intel and other, similar companies as part of the Law to Encourage Capital Investments? On Oct. 15, the state comptroller released his 2013 annual report, which focuses on the claim that the state does not receive full recompense for that law, and that there is no certainty that tax benefits really do contribute to the periphery.

The law has seen many amendments and modifications over the years, intended to encourage economic initiatives and financial investments in Israel, and to create new employment opportunities, especially in the periphery. It was a trade-off, in which the state exempted high-tech factories from tens of billions of dollars in income tax, while the factories were supposed to reciprocate by providing employment security to the south and improving the social fabric there.

Today, however, the division of labor within Intel reflects an anomaly. While most of the engineers and people in “quality” positions are from the center of the country, most maintenance, catering and service workers are from the south. The factory’s managers claim in their defense that there aren’t enough people in the south with the requisite training in engineering. Given that situation, they have promoted local training institutes. And yet, given the growing gaps between the country’s center and its periphery, bolder government action is needed to replace the failing educational infrastructure.

Last year’s data show that schools in the south still lag far behind the center of the country in everything related to eligibility for the matriculation exams and the quality of the exam results. Frohman has a vision: “You have to create an environment in the south in which students can learn differently and connect differently with their teachers. But in order to implement this revolution, you have to first bring the top young teachers to the cities of the periphery. That’s an essential precondition. Those teachers won’t come here today because there is no motivation to change the reality here. The negative image of the south will not succeed in attracting outstanding teachers.”

“If it was up to me,” he said, “I would reroute the entire country and hold scientific conventions, business activity, educational conferences and other important meetings in the cities of the periphery. The moment you create an alternative environment, there will be nothing to stop high-tech industries from moving to the south.”

Daniel Ben Simon is a former Knesset member from the Labor Party. Prior to his political career, he was a journalist with the Israeli dailies Haaretz and Davar. Ben Simon has written four books on Israeli society and is the recipient of the Sokolov Prize, an Israeli journalism award.

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