VII. INVESTMENT CLIMATE Openness to Foreign Investment ------------------------------ The Israeli government places a high priority on encouraging foreign investment in the Israeli economy. There are generally no restrictions for foreign investors doing business in Israel and, except in certain departments of the defense industry which are closed to outside investors for reasons of national security, there are no restrictions on foreign investment in the private sector. Investments in regulated industries (e.g. banking or insurance) require prior government approval. There are no regulations regarding acquisitions, mergers, and takeovers that differ for foreign investors. The registration and screening mechanisms for foreign investment are routine and non-discriminatory. The one exception is the purchase of land which is carefully screened to prevent its control by elements considered "hostile" to Israel. Otherwise, there is no formal screening. At the same time, problems can, and do, arise affecting both prospective and current investment. These difficulties are usually based on bureaucratic inefficiency or non-transparency regarding the application of regulations; the same kinds of problems are encountered by domestic investors. The Israeli government offers incentives for investment in specified regions of the country and in certain economic sectors, such as tourism and agriculture, to both residents and foreign investors. All benefits available to Israelis are available to foreign investors, and there is specific legislation to encourage foreign investment which gives the foreign investor certain advantages, such as reduced tax rates for longer periods of time (up to ten years, instead of seven) than for residents. If a foreign investor elects not to accept grants, a tax holiday is provided, also for up to ten years. Projects which meet relevant criteria are given the status of "approved enterprise" by the Israeli Investment Center, enabling investors to take advantage of investment incentive options. Details on the government's investment incentives are provided below in the section on performance requirements and incentives. Various international agreements are in effect to finance research and development (R&D) jointly with Israel on a national treatment basis. The Government of Israel actively encourages industrial research and development, and the Office of the Chief Scientist at the Ministry of Industry and Trade offers R&D grant incentives for a wide variety of projects. The Israel-United States Binational Industrial Research and Development Foundation (BIRD) promotes commercial cooperation in R&D, and the United States-Israel Science and Technology Commission has recently been established to foster the commercialization of technology in the two countries. Specific R&D incentives are discussed in the Performance Requirements and Incentives section. Israel accords foreign investors national treatment. Foreign investors are actively encouraged to participate in the ongoing Israeli privatization program, and there is no discrimination against foreign investors either at the time of the initial investment or after it is made. There is no discrimination regarding work permits, other than the standard procedure for foreign workers. Conversion and Transfer Policies -------------------------------- In principle, foreign exchange transactions and holdings in Israel are controlled. However, if an investment is an approved enterprise, there are no restrictions on capital outflow. Nontheless, it is critical that a foreign investor be informed regarding currency control regulations, although negotiations are now taking place to change some of the more restrictive regulations. Foreign residents and recent immigrants can maintain unrestricted, freely transferable accounts (called "Patah" nonresident accounts) with Israeli commercial banks. Once the "Patah" account is established, foreign investors can open a shekel account which allows them to freely invest in Israeli companies and securities. These shekel accounts are fully convertible into foreign exchange. Foreign residents can invest in real estate or Israeli securities or enterprises; they cannot invest in partnerships. When investing, foreign residents should make sure they comply with certain formalities that will enable them to repatriate their funds or place them in freely convertible accounts. In every case, it is recommended that qualified professional advice be obtained on how to invest, on what kind of approvals are required, and what records should be kept. Most transactions are conditional upon their performance being carried out through an authorized dealer. An authorized dealer is a banking institution licensed to arrange, inter alia, foreign currency transactions for its clients. The authorized dealer operates in accordance with the procedural instructions of the Comptroller of Foreign Exchange and the operations of authorized dealers are subject to the directives of the Examiner of Banks. The trend in Israel is toward liberalization of foreign exchange controls. There are no restrictions on repayment of loans. Local banks will readily provide loans to foreign investors as long as they have foreign assets, which local banks can use as collateral. There is no delay in remitting investment returns. The investor, however, can take out only what has been brought into Israel, plus profits (allowance is made for necessary business expenditures), and must work through the "Patah" account. Expropriation and Compensation ------------------------------ There have been no expropriatory actions affecting businesses in the recent past. Public authorities have expropriated land, but rarely, although they will do so in the near future, with compensation, for the construction of a new highway which will run through the northern third of the country. Property would only be expropriated if the possibility had been indicated in a contract or as a result of a court order. Such an event remains unlikely, but, if it should occur, adequate payment, with interest from day of expropriation until final payment, is prescribed by law. Dispute Settlement ------------------ In recent years, there has been one significant investment dispute involving two U.S. construction firms. Both cases concern compensation for housing construction contracts cancelled by the Government of Israel. Both companies negotiated a compensation package with the Israeli government only to have those packages withdrawn by the government. One of the companies rejected as inadequate a settlement offer of the Government of Israel and filed suit for adequate compensation in the Israeli District Court in late February 1994. These cases do not reflect a pattern of investment disputes. Israel has a modern legal system based on mandate and British case law. Effective means exist for enforcing property and contractual rights. Courts are independent; there is no government interference in the court system. Israeli civil procedures provide that judgments of foreign courts may be accepted and enforced by the local courts. Israel has a written and consistently applied commercial law based on the British Companies Act of 1948 as amended over time. The Government of Israel is currently writing a new, modern, and comprehensive commercial law which is expected to be introduced to the Israeli parliament shortly. Israel's commercial law contains standard provisions governing company bankruptcy and liquidation. Personal bankruptcy is covered by a separate bankruptcy ordinance. Monetary judgements are always awarded in local currency. Secured interests in property, both chattel and real, are recognized and enforced by the Israeli judicial system. A recognized and reliable system of recording such security interests exists. The Government of Israel accepts binding international abitration of investments disputes between foreign investors and the State. Israel is a member of the International Center for the Settlement of Investment Disputes (ICSID) and the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. Performance Requirements and Incentives --------------------------------------- There are no universal performance requirements for investors in Israel; however, performance requirements are sometimes included in contracts with the government, particularly, from time to time, relating to exports. Two basic laws provide the framework for investment incentives in Israel: the Encouragement of Capital Investments Law -- 1959 (with subsequent amendments), and the Encouragement of Industry (Taxes) Law -- 1969. In addition, there are the Encouragement of Industrial Research and Development Law -- 1984, and the Law for the Encouragement of Investments (Capital Intensive Companies) -- 1990. The Law for the Encouragement of Investments expires December 31, 1994. It remains unclear whether the current law will simply be rolled over or amended before the December expiration date. Foreign investors do not need government approval to invest in Israel. To receive investment incentives from the Israeli government, however, such investors must apply for status as an approved enterprise. They are required to submit an application to the Investment Center, Ministry of Industry and Trade, including physical and financial details of the projected investment; background information on the investors; sources of financing; forecasts of sales, operating results, cashflow, and "breakeven point"; and projected manpower requirements. Companies seeking "approved enterprise" status must have paid-up capital equal to 30 percent of the total required investment in the enterprise. Government approval for the incentives program is not given if investment in a proposed area is considered saturated. There are certain restrictions applying to foreign investments that need to be taken into account. Certain criteria are applied by the Israeli government in the case of guaranteed loans as described elsewhere, e.g., investment in development zones identified by the government as particularly worthy for new business. There are no special local conditions or ones that differ from those for a national. If foreign nationals are brought in to work on an enterprise, certain conditions are imposed. There are no enforcement procedures for performance requirements; if an investor is willing to pay local corporate taxes, there is no limit on the investment. However, there is a limit to the industries and activities that are encouraged by the government. For technology, there are limitations dependent on whether or not the government invested in the enterprise, in which case, the resulting technology cannot be transferred abroad without the approval of the Chief Scientist. Investors are required to disclose proprietary information to the government. To encourage foreign investors, Israel offers a package designed to provide higher leverage for lower costs and risks, as well as increased profits. The incentives package is easily adaptable to many types of investment projects or business plans in a broad range of economic sectors including manufacturing, real estate, and tourism. In general, preference is given to industrial and tourism projects with the potential to inject foreign currency into the economy and provide employment opportunities in defined areas. The benefits offered are government investment grants, tax benefits, and government loan guarantees; the extent of the benefits is determined by the geographic location, or zone, of the enterprise. In addition to a central area, there are two development areas, development area "A" and development area "B," with higher grants for development area "A." All of the incentives require an equity investment; grants require an investment equal to 30 percent of the project's physical assets (buildings, equipment, etc.) and loan guarantees require an investment equal to 33 percent of the "total investment program" (physical assets, intangible assets, working capital, marketing investments, etc.) The amounts of the grants and loans are also based on a percentage of the enterprise's physical assets. Some of the investment incentives available for industrial enterprises are listed below. TAX RATES FOR INVESTMENT IN ISRAEL NON-APPROVED ENTERPRISE Percentage Taxable Income 100 Corporate Tax Rate 38 Balance 62 Income Tax Rate 0 Tax Rate on Undistributed Income 40 Tax Rate on Dividends (15 percent of balance) 25 Total Effective Tax Rate on Distributed Income 55 On January 1, 1995, the corporate tax rate for non-approved investments is scheduled to fall to 37 percent. This rate is being reduced annually until it reaches 36 percent on January 1, 1996. It is not yet clear how or if this reduction will affect the tax rate for approved enterprises. APPROVED ENTERPRISE - LOCALLY OWNED Percentage Taxable Income 100 Corporate Tax Rate 25 Balance 75 Income Tax Rate 0 Tax Rate on Undistributed Income 25 Tax Rate on Dividends (15 percent of balance) 11.25 Total Effective Tax Rate on Distributed Income 36.25 APPROVED ENTERPRISE - OWNED BY FOREIGN INVESTORS Percentage of Foreign Ownership 49-73.9 74-89.9 90+ (percent) ---------------------------- Taxable Income 100 100 100 Corporate Tax Rate 20 15 10 Balance 80 85 90 Income Tax Rate 0 0 0 Tax Rate on Undistributed Income 20 20 15 Tax Rate on Dividends (15 percent of balance) 12 12.75 13.5 Total Effective Tax Rate on Distributed Income 32 27.75 23.5 GOVERNMENT INCENTIVES FOR INVESTMENT IN ISRAEL Grant Plan ---------- Government Area Grant Guarantee Tax Exemption ------------ ---------- --------- ------------- Area A 38 percent N/A N/A Area B 20 percent N/A N/A Central Israel 0 percent N/A N/A Central Israel 0 percent N/A N/A Government Guarantee Plan ------------------------- Guarantee as Proportion of Area Approved Project Tax Exemption Grant ------------ ---------------- ------------- ----- Area A 85 percent 10 years N/A Area B 85 percent 6 years N/A Central Israel 85 percent 2 years N/A Central Israel Guarantee waiver 4 years N/A Combined Plan - Including Grant and Guarantee --------------------------------------------- Guarantee as Proportion of Area Grant Grant Approved Project ---------- ----- -------------------------- Area A 25 percent 66.66 percent 10 years Area B 10 percent 66.66 percent 6 years Central Israel N/A N/A N/A Research and Development: The Israeli Government is particularly interested in research and development (R&D) and provides grants of up to 66 percent of approved R&D expenditures through the Ministry of Industry and Trade's Office of the Chief Scientist (OCS). This is a highly active office, providing most of the R&D monies spent to develop Israel's infrastructure. Its grants take various forms, from the 66 percent available to start-up companies, to the 60 percent for those investing in Development Area "A", to the 50 percent for standard R&D projects, to the 20 percent available for foreign subcontractors. There are also specific tax benefits and credits available for R&D investors; these may be amended in 1994. Overhead expenses are provided for as an agreed-upon percentage of direct R&D expenditure, usually around 45 percent of sanctioned gross salaries. If a grant-supported R&D project results in a commercial project, repayment of the grant is usually stipulated, generally through royalty paybacks at a set rate. Repayment is not required for projects that do not achieve commercialization. For joint ventures between Israeli and American firms, research funding is also available through the Israel-United States Bilateral Industrial Research and Development Fund (BIRD). BIRD funding is in the form of conditional grants of up to 50 percent of approved R&D costs over a two- to three-year period. These grants are repayable if a project supplies commercial revenues, usually at an agreed-upon rate of gross sales. Because BIRD encourages R&D projects, it tends to more readily support new programs than the private sector. The recently established United States-Israel Science and Technology Commission also has the objective of commercializing technology. "Capital Intensive" Investments: In 1990, the Israeli parliament passed the Law for the Encouragement of Investments (Capital Intensive Companies), providing further tax benefits for investors qualifying as "capital intensive companies." A company may be qualified as a "capital intensive company" by the Minister of Finance if: a) It has paid up capital of no less than 30 million dollars, of which at least 75 percent is channelled into qualifying activities; b) share ownership is restricted to non-residents, and; c) the aim of the company is to either a) conduct business in Israel in areas of activity which have been designated as "qualifying activities"; or b) invest in Israeli companies whose primary activities are "qualifying activities." "Qualifying activities" include the establishment or expansion of businesses in areas such as industry, agriculture, tourism, transportation, construction, water, energy, communications, computers, etc. Benefits to the company include: a) Real capital gains from the sale of shares or fixed assets (including real estate) which were used in qualifying activities are taxed at the rate of 25 percent, lower than the standard rate of taxation for businesses. b) Revenue income of the company derived from these activities is taxed at 25 percent. c) Revenue income which the company derives from dividends paid from a "qualified investment" is taxed at 15 percent. Right to Private Ownership and Establishment -------------------------------------------- The Israeli legal system protects the right of both foreign and domestic entities to establish and own business enterprises, as well as the right to engage in remunerative activity. Private enterprises are free to establish, acquire, and dispose of interests in business enterprises. As part of its current privatization efforts, the Israeli government actively promotes foreign investment in government-owned entities. Both the Ministry of Industry and Trade and the Ministry of Finance are concerned with fair trade, and there is a law against unfair competition. It is Israeli government policy to equalize competition between private and public enterprises, although there are problems with competition because of the existence of monopolies and oligopolies in several sectors in Israel. In the case of monopolies, prices are controlled by the government. Protection of Intellectual Property Rights ------------------------------------------ While Israel has a legislative framework to ensure the protection of intellectual property rights (IPR), enforcement is a problem, because of inadequate penalities and scarce policing resources. The U.S. Trade Representative, in recognition of problems in the context of generally good protection, cited Israel for a "special mention" in 1993's Special 301 Report. The Government of Israel plans to address the problems listed by the U.S. Trade Representative -- those of an old statutory framework for copyright law and inadequate enforcement -- through revision of IPR in the areas of patents, copyrights, trademarks, design, and computer microchip design. Progress in the committees convened to draft new legislation is varied, with legislation nearly ready for introduction into the Knesset, Israel's legislative body, in the area of design, but with other committees one to two years from completion. All legislation will be based on the guidelines of the World Intellectual Property Organization's (WIPO) model legislation. In addition, as a signatory of the GATT Uruguay Round and World Trade Organization (WTO) agreements, including Trade in Intellectual Property and Services (TRIPS), Israel will make the revisions necessary to meet all GATT TRIPS requirements. Patents: Patent protection is available comprehensively, including product as well as process protection for pharmaceuticals. Israel employs compulsory licensing in limited circumstances: for medicines, for a dependent patent (i.e., an earlier patent on which use of a later patent is dependent), in case of abuse of monopoly, where the Arab boycott precludes use of the patent, or where necessary to protect the public interest. Patent protection is provided for twenty years from filing. Under the revised patent law, which is expected to be drafted within the next one to two years, compulsory licensing for medical purposes is likely to be eliminated. There have been no discernible complaints by American businesses regarding compulsory licensing. Copyrights: Israel's present copyright law is based on the United Kingdom Copyright Act of 1911, with subsequent amendments. Protection includes the exclusive right to (a) copy or reproduce the work; (b) translate or otherwise adapt the work; (c) distribute copies of the work; and (d) publicly communicate the work. There is no explicit protection for derivative works, but protection would be granted, provided that the derivative work includes sufficient elements of originality. At present, there is no separate statutory protection for computer software, which is protected under the general copyright law, as "literary works." Rental rights for software will be included under the new draft copyright act, currently being prepared for introduction into the Knesset, Israel's parliament. Sound recordings are protected under the present copyright act while rental rights for sound recordings are not. The latter are included in the new draft. Trademarks: Trademarks are protected under the Trade Marks Ordinance, and appellation of origins are protected under the Appelations of Origin (Protection) Law. Trade Secrets: There is no protection for trade secrets under the rubric of intellectual property law in Israel. Trade secrets are classified as privileged information under the Evidence and Civil Procedure Law, and the Penal Law provides that an employee with express knowledge of a trade secret who reveals it may be imprisoned for up to six months. In addition, a tort action may be brought against an individual who divulges a trade secret under Israeli tort law. There is no limitation on the length of time for classifying an item as a trade secret. Semi-Conductor Chip Layout/Design: At present, there is no protection for semi-conductor chip design. The Microchip Topography Committee, operating under the auspices of the Ministry of Justice, is drafting legislation for integrated circuits topography, which it hopes to submit to Israel's parliament in 1995. The legislation will meet all requirements of GATT-TRIPS and the Washington treaty on semi-conductor chips. Regulatory System ----------------- Problems with competition are evident in Israel, although it is government policy to encourage increased competition through market liberalization and deregulation. Tax, labor, health, and safety laws are frequently an impediment to the foreign investor in Israel, mostly because of high levels of regulation. Although there is a current trend towards greater deregulation, Israel's bureaucracy can still be difficult to navigate, especially for the foreign investor unfamiliar with the system. Efficient Capital Markets and Portfolio Investment -------------------------------------------------- There are no significant obstacles to the free flow of financial resources. Credit in Israel is allocated on market terms. Various credit instruments are available to the private sector, and foreign investors can receive credit on the local market. Legal, regulatory, and accounting systems are transparent and conform with international norms. The regulatory framework for portfolio investment is currently being tightened in light of rapid growth of non-traditional portfolio managers and a series of recent insider trading scandals. The Government hopes to provide a more effective regulatory environment and supervision to help encourage continued expansion of capital markets in a competitive and fair atmosphere. The Israeli banking system is financially sound. As a result of a 1982 crisis in bank shares, the government owns the majority of shares of the country's leading banks. A program to privatize the banks is underway. Three large banks -- Bank Hapoalim, Bank Leumi, and Israel Discount Bank -- dominate Israel's capital markets, controlling well over 80% of industry assets. The government is currently undertaking a comprehensive bank reform to enhance competition and improve regulation of the banking industry. As of December 1993, the total assets of Israel's five major banks amounted to an estimated 79 billion U.S. dollars. Most Israeli firms are not publicly traded and many of the dominant firms that are traded publicly are controlled through integrated holding companies. In the case of publicly traded firms where ownership is widely dispersed, the practice of "cross-shareholding" and "stable shareholder" arrangements to prevent mergers and acquisitions is common, but not directed in particular at preventing potential foreign investment. Hostile takeovers are a virtually unknown phenomenon in Israel, given the high concentration of ownership of most firms and the fairly high share prices which have characterized the domestic capital market in recent years. Israel has no laws or regulations regarding the adoption by private firms of articles of incorporation or association which limit or prohibit foreign investment, participation, or control. Standards have traditionally been a non-tariff barrier to trade in Israel. In 1993, Israel committed to undertake a comprehensive review of its standards, adopting international standards as appropriate, and eliminating those standards which were not imposed for safety or health reasons. There has been little or no foreign participation in standards-setting consortia and organizations. Political Violence ------------------ Israel is a parliamentary democracy with a stable environment and with few public disturbances within its pre-1967 borders. While there has been a history of politically motivated violence within the occupied territories (the "intifada"), these incidents have not infringed significantly on daily life within pre-1967 Israel. Since the signing of the Gaza/Jericho accord between the Israelis and the Palestinians in May 1994, individual incidents involving Palestinians and Israelis have dropped sharply both within pre-1967 Israel and the occupied territories. Although Israel technically remains in a state of war with some of her neighbors, a process aimed at reaching peace with Syria and Lebanon is now underway, and a peace treaty with Jordan appears in the offing. Over the past few years, there have been no incidents involving politically motivated damage to projects or installations within pre-1967 Israel. Bilateral Investment Agreements ------------------------------- Israel has bilateral investment agreements with Bulgaria, Estonia, France, Germany, Hungary, Latvia, Poland, Romania, and Ukraine. It is currently negotiating agreements with Albania, Argentina, Belarus, Belgium, Britain, Canada, China, Greece, India, Italy, Lithuania, Portugal, Russia, Switzerland, and Turkey. Other bilateral investment agreements are being investigated as Israel continues to develop diplomatic relations with more nations. OPIC/Investment Insurance Programs ---------------------------------- OPIC offers a full range of programs in Israel and currently insures American direct investment in Israel against political risk. OPIC is also active in financing projects sponsored by U.S. investors in Israel. Israel is a member of the Multilateral Investment Guarantee Agency (MIGA). Labor ----- Israel's 1993 labor force numbered 1,969,000. Highly skilled and well-educated, the Israeli labor force continues to be a major asset to the economy. Those working in professional, technical, scientific, and academic positions account for 25 percent of the workforce. Skilled workers make up another 24 percent. Approximately 38 percent of the workforce have more than 13 years of education and over 17 percent have 16 or more years of education. More than 30 percent of university students specialize in fields with high industrial R&D potential--engineering, mathematics, physical sciences, and medicine. The Israeli labor market has also successfully absorbed a significant portion of the over 500,000 immigrants who arrived between 1989-1993, many of them scientists, physicians, and academics from the former Soviet Union. Israel has some labor shortages in unskilled labor, particularly in the agricultural and construction sectors which has traditionally relied heavily on Palestinian workers from the territories occupied by Israel. In 1993, unemployment declined to 10 percent from 11.2 percent the previous year; projections for 1994 put unemployment at about 8 percent. Most Israeli workers are organized by the national labor federation, Histadrut. In the private sector, most collective bargaining negotiations take place at the factory or industry level, while most public sector negotiations are conducted on a national level between the Ministry of Finance and Histadrut. Strikes and workers' sanctions in the private sector are relatively rare, but occur more frequently in government-owned enterprises, including the defense industry. The Government and Histadrut cooperate to ensure the protection of worker rights as defined by the International Labor Organization (ILO). Israel strictly observes the Friday afternoon to Saturday afternoon Sabbath, and special permits must be obtained from the government authorizing Sabbath employment. Generally, firms have been able to obtain the permits with little difficulty. At the age of 18, most Israelis are required to perform 2-3 years of national service. Until the age of 50, Israeli males are required to perform 30-50 days of military reserve duty annually, during which time they are compensated by the National Insurance Institute. Foreign Trade Zones/Free Ports ------------------------------ Free Trade Zones: The southern port city of Eilat is a free-trade zone. Businesses and consumers in Eilat are exempt from Value Added Tax (VAT), and employers receive refunds of up to 20 percent of wages paid to employees, not to exceed the amount automatically deducted as employee tax by the government. Israeli residents also receive tax credits of up to 10 percent on taxable income from employment or businesses in Eilat. Free Port Zones: In addition to the Eilat Free Trade Zone, the government of Israel has three free ports, in accordance with the Free Port Zone Law (1969): Haifa Port (including Kishon); Port of Ashdod; and Port of Eilat. Enterprises in these ports which export all production qualify as "authorized entrepreneurial enterprises," receive special tax benefits, and are exempt from indirect taxation. Free Processing Zones: On May 20, 1994, the Israeli parliament passed legislation authorizing creation of free processing zones (FPZ's). Qualifying companies operating in the FPZ's will be exempt from direct taxation for a twenty-year period, and imported inputs will not be subject to import duties or tariff or most health and safety regulations generally in effect throughout Israel. Companies will also be exempt from collective bargaining and minimum-wage requirements, although subject to other labor regulations. The legislation was originally intended to create new incentives for investment in primarily export-related industries, to improve Israel's balance of trade. The wording of the legislation, as passed, does not limit applicant companies to exporters or providers of services to overseas clients. The legislation authorizes creation of a Free Zone Council (FZC) to select concessionaires and manufacturers/service providers from among applicants, with broad discretionary powers. Companies currently operating within Israel may apply to the FZC. If they move operations to the free zone, they may not receive other government subsidies or benefits. Such firms must return any benefits or subsidies to the government obtained previously. Capital Outflow Policy ---------------------- Israel has foreign exchange controls. Both individuals and companies can invest in financial assets abroad but must do so according to regulations in place. There are no incentives for investment abroad. Israeli residents (or "households") can invest in securities outside of Israel but are restricted regarding the securities in which they can invest (eg. cannot invest in over-the-counter stocks). Israeli residents are not allowed to give loans to foreign investors. Israeli enterprises cannot invest in foreign stocks but can invest in real estate and business subsidiaries. They must do so through an authorized dealer, a banking institution or special broker, that holds title to the investment. There are restrictions on some direct investment loans by companies. Israeli companies can invest up to 40 percent of their equity in real property and enterprises abroad. It is possible for enterprises to go beyond the 40 percent ceiling, but the companies are then subject to restrictions determined on a case by case basis by the comptroller of foreign currency. Mutual funds may invest up to 10 percent of their assets overseas; in the cases of specialized funds, this ceiling may be higher. Current foreign exchange controls prohibit investment by certain institutional investors such as provident funds and pension funds in foreign capital markets or investments, although these controls may be lifted in the near future. Foreign Direct Investment ------------------------- Foreign investment is a small portion of total investment in Israel. In the past, outside investors shied away from Israel because of several factors: high inflation in the mid-1980s, frequent changes in rules and regulations, and government intervention in the economy. Other factors influencing investors included questions about political risk and the arab boycott; these still play a role, although considerably diminished. In the past few years, Israel has more actively pursued and encouraged foreign investment, particularly because of the critical role such investment plays in creating jobs for new immigrants, a primary consideration for Israel. Also, the signing of the Gaza/Jericho accord in May 1994 and the ongoing peace process have opened Israel to more trade and investment with other countries. The results of these changes have yet to be fully measured in tangible investment returns, but there is little doubt that opportunities in Israel for countries looking for foreign investment have widened; government officials report an increase in inquiries concerning potential investment in Israel. Statistics compiled by the Bank of Israel show foreign investment transactions in the stock exchange registered through the banking system totaling $2.61 billion this year, as of March 31, 1994. Last year's (1993) registered foreign investment in the stock exchange totaled $3.1 billion. The Bank of Israel's statistics on inflow of direct foreign investment and realization (or outflow) of foreign investment for 1993 are: Inflow of Investment (In millions of US dollars) ------------------------ Real Estate 255 Others 620 Total 875 Realization (Outflow) of Investment (In millions of US dollars) ----------------------------------- Real Estate 107 Others 173 Total 280 There are no direct foreign investment figures available which are tied directly to country of origin or to industry sector destination. Nor are there reliable figures available on foreign direct investments by U.S. companies or by other nations' companies.