Israel: R&D funding schemes of the Chief Scientist Office under criticism

The Israeli Chief Scientist Office (CSO), a technology agency under the Ministry of Industry, Trade and Labor, has been criticised that its funding programmes in support of the Israeli industry are inefficient and do not have the expected positive impact on the economy.

The CSO is empowered by the Israeli law for the encouragement of industrial R&D. It manages all government-sponsored R&D support schemes in the Israeli industry, including international R&D collaboration projects. The public funding aims to address market failures inherent to innovation processes. The CSO invests approximately € 230-460 million each year through various support mechanisms, including grants for R&D projects in developed regions, projects in traditional industries, and innovation projects in the fields of nanotechnology, biotechnology and clean-tech sectors. Israeli firms applying for a grant can receive up to 50% of the project costs. In exchange, the firms are obliged to pay royalties if the project's outcomes become commercial.

Critique in The Marker

An article in “The Marker", a major economic newspaper in Israel, has published an article which criticises that the funding schemes of the CSO are inefficient and ineffective. The critique argues that the CSO's application procedures are too complex, that the selection criteria are (at least in some areas) unclear, that the resulting paperwork is too complicated. The administrative burdens for applying have attracted consulting companies that assist companies in submitting proposals successfully. The high rates for their services increase the costs of applicants to submit a proposal. The article argues that a simpler and more apparent procedure would enable companies to prepare proposals without having to hire external consultants. Another area of critique is that the royalties mechanism hinder private investors from investing in Israeli firms that received the CSO's grant.

Critique in a position paper of the Jerusalem Institute for Market Studies

A position paper of the Jerusalem Institute for Market Studies (JIMS) also raises criticism. It argues that the CSO's grants unjustifiably subsidise large pyramids and big corporations that would have conducted the projects without public funding anyway. The paper states that nearly half of the largest publicly traded technology companies received the CSO's grants themselves or through subsidiaries (such as Teva Pharmaceutical Industries and Elbit Systems). Hence, instead of achieving desired "additionality” effects (e.g. through the support of SMEs), the CSO is mostly financing large corporations that could have privately financed their projects. Therefore, a "crowding out effect" of private investment, rather than an additionality effect occurs in practice. More importantly, according to the paper, this cements the existing market structure and high concentration, where a small number of groups and corporations that control a large portion of the market.

Response by the CSO

The CSO released an official response to this critique, stating that the grants are given on the basis of the firms' technological capacity and the project's contribution to the Israeli market. The grants are to promote entrepreneurial activity and assist SMEs that lack sufficient resources thereby encourage their competitiveness advantages. In most cases, according to the CSO response, the grants are given to firms located in the Israeli periphery and when the R&D is generic. Moreover, the large firms receiving the CSO's funds are usually considered as SMEs within foreign markets.

Critique on the bottom-up approach

Another area of critique is the CSO "bottom-up" approach. The CSO operates on the basis of a "neutrality principle", required by the R&D law, according to which the support must be given to companies with high technological capacity independently to their sectoral classification. Critics argue that the CSO's neutral support is an insufficient responsive mechanism which cannot bring about actual competitive advantage for Israeli sectors.

In order to build specialised industries, alternatively, a "top-down" component would be needed, targeting chosen sectors with high economic potential. A lead sector approach is a complicated task that requires systematic policy, setting priorities and providing targeted or "vertical" support (in contrast to neutral or "horizontal" support).

Bluntly speaking, the critique is that the CSO funds 1000-2000 projects a year but without a significant positive effect, since it does not focus on strategic sectors. In addition, some claim that the neutral support is inefficient since there are sectors, such as software or IT, in which the market failure is less prominent due to the high inclination of business angels and venture capitals to invest in them. The CSO's support should focus instead on sectors which are deprived of private investments, such as biotech and clean-tech.

Finally, the CSO's support mechanisms is also accused of lacking transparency. The public should be able to access accurate data regarding the firms receiving the grants, their size and royalty payments. It was also proposed that the CSO's budget, which is being reduced every year, should instead proportionally increase in relation to the Israeli industry.

Suggestion to revise support schemes

In spite of all this criticism, the CSO's support is far from being redundant, as stated in the article. According to a study conducted by "Applied Economics" in 2008, the CSO's support mechanisms do create an additionality effect in a scope of 2 to 3 times of the grant provided to the firms. Therefore, the article concludes, the CSO's support mechanisms should be revised, rather than cancelled, and adjusted to the current state of affairs in order to enlarge their positive impact on the Israeli market.

References / further information:

• Article in The Marker (in Hebrew)
• The CSO website
• The JIMS' article