Asia: The New Frontier

The shift of global economic power towards East Asia demands Israel's renewed attention in light of the fact that our two main trade blocs – the U.S. and the European Union – have been suffering from a significant slowdown. Asian countries are willingly picking up the slack and eager to acquire technology and know-how from Israel.

In recent decades, there has been a growing recognition of the fact that the focus of the global economy is shifting gradually eastward and that the Asian continent is occupying, and will continue to occupy in the future, a dominant place in the world economy to the detriment of American and European economies.

The ascendency of Asian markets constitutes a dramatic change in the distribution of global power. China is already ranked the second largest economy in the world, and one forecast predicts that it will overtake the U.S. by 2030.

We can also learn about the power of the Asian countries (led by China) from studying global intellectual property data. As explained later in this report, intellectual property is both a reflection of a country's economic performance and a reliable indicator of future performance.

In 2014, China recorded a record number of international patent applications – close to 800,000, four times more than the U.S. In practice, China was responsible for over 89% of the global growth in international patent application numbers in 2013-2014. Other Asian countries, such as Thailand, Singapore and Indonesia, also had a hand in this as well. Almost 60% of all international patent applications in 2014 came from Asian countries, compared with 50% in 2004. During that decade, Europe saw a decline of 8% in patent applications, and North America, a smaller decline of 2%, reverberations of the global financial crisis whose secondary tremors are still being felt in western European countries.

China's transition to an innovation economy is particularly impressive owing to the fact that it lagged behind western countries in matters of economic and technological development for so long. In the 1980s, it had barely registered a single patent, and starting in the 1990s it gradually entered the world's intellectual property market. From the 2000s onwards, the country witnessed steep incline. This change reflects, among other things, China's huge investments in R&D.

A shift in the Israeli mindset

The migration of economic power to East Asia necessitates a reevaluation of the commercial map as Israel's traditional trade blocks, the U.S. and Europe, take a backseat.

For the past ten years, Israel has been working to assimilate this new reality, all the while increasing the volume of trade with Asia – and the potential is far from exhausted. As the Western markets struggle to shake off the remnants of the 2008 crisis, the need to find alternative markets, primarily in Asia, becomes a matter of economic survival.

It is astonishing to learn that as early as 1950, Israel's first Prime Minister, David Ben Gurion, predicted these trends when he said, in a Knesset speech: "The existing situation, in which the United States and the Soviet Union guide and lead the world, will not last long, of that there can be no doubt … and the two Asian countries – China and India – will be the most powerful in the world."

For years Israel wooed Asian countries – first China and then India – but was refused. Only when the Iron Curtain fell did the situation begin to show signs of change. Over the course of the past three decades, the renewal of relations with China and India have brought increased trade, investments and economic ties.

Today, Israel imports consumer products that Asians make better, faster and primarily cheaper than we do. China and India have traditionally imported large quantities of Israeli fertilizers and diamonds; however, these exports show limited growth potential, while there is a rapidly developing export of technology eastwards in communications, software, hardware, drugs, medical instruments, agricultural products, or Israeli technologies sold to Korean, Japanese and Chinese manufacturing companies in "technology transfers".

More and more Asian countries recognize the advantages of fostering a relationship with Israel. Korea established the Koril Fund, which builds bridges between Israeli R&D companies and the Korean manufacturing industry. India sends delegations that bring technologies from Israel to the developed provinces of Gujerat and Maharashtra. China has extended invitations to Israeli entrepreneurs to pursue development in China's well-endowed high-tech incubators. Even the traditionally-reserved Japan is climbing on the bandwagon with a project for Israeli start-ups on the outskirts of Tokyo. The bilateral R&D agreements between Israel, India and China are key to promoting cooperation in an interconnected economic reality. Dozens of R&D projects are already under way on the Israel–China route, and similar developments are forecasted to develop with India in the near future.

East Asia's growth will continue, and China and India are sure to be joined by Vietnam and Indonesia, Sri Lanka and Myanmar. More players in the Asian market will seek out their competitive edge in the production of technology products in their quest for the next breakthrough. Also to Israel's advantage is the fact that growing Asian companies will require organizational tools, information, communications and computing. Asian industry will look for new sources of energy, wind, sun and wave energy—and all of them will be fast after the next brilliant idea to garner newspaper headlines and fill supermarket shelves. Fortunately for Israel, we have a plethora of resources to offer in this regard.

Israel-China: Synergy in the making

In July 2015, shares on the Shanghai stock exchange fell by tens of percentage points. There are those who were surprised by this, and there were those who saw it as evidence of a strategic shift in Chinese policy. The direction of China's economy is dictated, in large part, by the country's strong, centralized government, and any fluctuation in the stock market is a sure sign of a change in the government policy behind it.

China is constantly changing, but for anyone looking in from the outside it takes time to grasp the change. In the 1980s, when China began to open up to foreign companies and export cheap products all over the world, China was still seen by many as a Communist dictatorship of tea, rice, blue uniforms and peasant hats. Public perception was slow to catch up and assimilate the fact that China was becoming a powerhouse. Today, as it becomes a manufacturer of advanced technological products, many are unable to see China beyond its role as a manufacturer of cheap, duplicated, or counterfeited products that aren't known for their quality or longevity. Our consciousness finds it hard to adjust to this change, but those who are able to bring this new facet of the Chinese economy into focus will be better equipped to use this understanding to their advantage.

As previously noted, China is well on its way to becoming world's biggest economy. It embarked on a worldwide acquisition spree, with an emphasis on importing technologies and new developments. As China emerges from its shell and continues to build relationships with the outside world, this will open up new paths to development. The synergy between Israel, the "start-up nation", and China, the "buy-up nation", was only a matter of time. Gradually, China is gaining a foothold here, too.

In the high-tech industry, the Chinese tripled their investments from 2012-2014. According to one estimate, 15% of investments in Israeli high-tech in 2015 can be attributed to Chinese sources. In acquisitions, we have seen a long series of deals in which large Israeli companies from various sectors were bought out, including, for example, Tnuva, The Phoenix, Lumenis and others just in 2015 alone.

China is on the brink of economic reform. The reform advocates the creation of an economic structure that operates according to regulated law rather than the decisions of lone appointees, a step towards loosening the government's grip on this sector. China is moving towards practices accepted in the world's markets: greater openness, more possibilities for foreign investment and entrepreneurship, and less red tape. These reforms will come into force gradually, reaching completion by the year 2020.

China's immense government-backed initiative to upgrade technologies and domestic R&D (under the heading "Innovated in China") will enable the country to access technology and embark on cooperative ventures with foreign companies in possession of innovative technology—and Israel is first on their list of countries to target.

Israel-India: Numerous business opportunities

India's outgoing ambassador to Israel, Jaideep Sarkar, recently announced that India intends to double its investment in R&D and scientific research, chasing the tails of rivals, China and Korea, in its national expenditure for R&D. Since it relies heavily on oil imports, the falling oil prices have allowed India to divert resources to research and development and pause to consider general economic reform.

According to Ambassador Sarkar, India produces 250,000 engineers per year and is steadily improving their academic training in the field. Sarkar estimates that within 20 years, India's rate of economic development will surpass China. This is fertile ground for advancing efforts to increase the volume of Israeli trade with India.

Relations between Israel and India have become friendlier since the recent election of Prime Minister, Narendra Modi, an avowed Israel supporter. Today, Israelis and Indians are eager to work together despite the rockiness of the past. The warming of relations between the two countries is happening in parallel to a notable stream of heavy Israeli investments in India in response to the economic policies of the new government.

Israeli industry is well–situated to the economic opportunities' India offers including Cleantech (of note here is "Clean India", a project initiated by the new Prime Minister, in which Israeli technologies are already finding ways to improve sanitation in the Ganges River); agriculture and food; water and energy; internal security, and the life sciences and high-tech. In slow but auspicious renewal of India-Israel ties, it turns out that the needs of the Indian economy can find answers in the Israeli comparative advantage.

While the opportunity is apparent, we must figure out how to effectively channel our strengths to the critical areas of the Indian economy and society. Despite the fact that cooperation at the institutional level is starting to make waves — and Israel has made a name for itself with our Indian partners in government — we must shift focus to establishing close ties with the Indian private sector.

The growth of the Indian economy is led by a burgeoning middle class. Currently 400 million strong, India's middle class is both driving the country's domestic growth and acting as a magnet for the import of products and services from abroad. The economic potential for Israelis in India is vast, but our relationship with this emerging economy demands careful attention, the right preparation, and priority on the national agenda.

Israel-Japan: prime potential for Israeli export

Israel and Japan are both technology-oriented economies, and the integration of Israeli technologies into the many products manufactured and developed in Japan presents an opportunity for both countries.

Five years ago, Japan got a new prime minister and Israel, a new opportunity. Under Shinzō Abe, who recently visited Israel, the Japanese government shook the dust from its ministries, lowered barriers to business development, initiated far-reaching changes in the relationship between the government and business arena, and is moving mountains to advance the Japanese economy after a slowdown spanning more than twenty years. Abe's government decided "to bet the house" in its efforts to rescue Japan from stagnation, and anyone who visits Japan today can easily perceive the changes afoot—including the country's attitude to Israel and trade with it.

Israel's economic opportunities in Japan lie in two main areas in which technological innovation constitutes a comparative advantage—water and environment and the life sciences, particularly pharma and medical instrumentation (of growing importance owing to the country's aging population).