A summary of the main results of a research done by Tamir Agmon and Ido Kalir

   In the period 1994-2008 more than 24 billion USD were invested in more than 6000 companies in the high tech sector in Israel. 70% of this amount was funded by venture capital funds that raised more than 95% of their capital outside Israel, primarily in theUS. About one third of the investment were done in an early stage, but as an average investment in an early stage over this period was about 0.5 million USD and an average investment in a late stage was 25 million USD most of the companies that received investment were in an early stage. About two thirds of the companies that received investments in the period 1994-2008 still operate in 2009. However, only a very small number, about 100 brought their investors very high return (an exit). Most of the surviving small companies pay for their expenses but not return on the capital. We maintain in the study that the major contribution of this industry to the Israeli economy is in the fact that foreign capital pays the lions’ share of the cost of employment for a large number of engineers and other workers. The contribution can be measured in building up high skilled labor force. However, in the study we measure the direct effect through taxes paid on the wage bill of the industry. To illustrate, in the period 1994-2008 the workers in the high tech industry paid as a direct taxes about 2.5 billion USD and additional 0.9 billion USD as indirect taxes. At that time the computed tax on exits, that probably was never paid, was about 0.4 billion USD. The research has a number of implications for government policy:

• From macro-economic point of view the important variable is total foreign investment in the high-tech industry. Realizing expected return is a necessary condition for investors and entrepreneurs, but in itself is not important for the economy as a whole.
• The above implication crucially depending on two facts; (1) the money comes from abroad, and (2) if this money would not be invested in the high-tech industry in Israel it would not be invested in Israel at all.
• That means that it makes sense for the government to subsidize the upside, the success, for the investors by abolishing on direct and indirect taxes on success (exits).
• The government should encourage those areas in high-tech where there is a lot of allocated money to be invested by foreign investors like pension funds regardless of the expected return and success of the investment, (biotech is a good case in point. Nanotechnology may be another).
• IIn time of a down cycle the government should keep investment opportunities by putting more money into pre-seed and seed stages