Forging Deals with U.S. Partners: A Case of Mutual BenefitPublished: January 12, 2011 in Knowledge@Wharton
After inventing the ReWalk, a device that allows paraplegics to move about in an upright position, in 2006, Amit Goffer, the CEO of Israel-based Argo Medical Technologies, needed a partner to secure funding for clinical trials and to provide access to technical support. So Goffer looked to the United States, where a rehabilitation hospital was interested in testing the product. Through various connections, Argo partnered with Allied Orthotics and Prosthetics in Mount Laurel, N.J. The two companies are now running clinical trials, and the ReWalk is expected to soon be ready for sale to the public.
"We looked into it and thought it could be a profitable venture for us," said Howard Brand, managing partner of Allied Orthotics. A device to help paraplegics walk had not been available previously, so the product was "important to an industry and to people."
Hundreds of other U.S. and Israeli companies have formed partnerships in the last several years, and more are forming every day. The dynamics of these partnerships and the resources available to create them were examined by Brand and other panelists at the conference, "The United States and Israel: Building Business Through Innovation," held recently in Washington, D.C., by the U.S. Chamber of Commerce.
Trade Access, Cost Cutting and Jobs
All of the panelists pointed out that while the United States overshadows Israel in many ways, including the size of its companies, these partnerships are typically balanced and mutually beneficial. Eitan Yudilevich, executive director of the BIRD Foundation, which provides conditional grants to support business partnerships between the two countries, said that one of the benefits is better access to export markets. Not only does an Israeli company get easier entrée to the North American market, but the American company can leverage its Israeli connection to improve access to challenging markets like India or Turkey.
According to Yudilevich, the BIRD foundation (Binational Industrial Research and Development) only gives funding -- ranging from up to $1 million or 50% of the total cost of the project -- to partnerships in which the pluses for each side are clear. "The BIRD model is mutually beneficial for U.S. and Israeli companies," Yudilevich said. "We look at the balanced interest when we judge a project and will not approve a project where there is an imbalance." Since it was founded 33 years ago, backed by funding from the governments of both countries, BIRD has supported 813 partnerships and awarded $282 million in grants.
Yoram (Jerry) Wind, a Wharton marketing professor and director of the SEI Center for Advanced Studies in Management, said that another mutual benefit is cost savings. In an interview after the conference, he noted that American companies typically provide the marketing expertise, saving the Israelis money on that front, while the Israelis handle product development and manufacturing at a lower cost for the Americans. Given this cost advantage, more U.S. companies are now looking to Israel for manufacturing partnerships, Wind said. "Because of its high-tech population, [Israel] offers high-tech and high-quality manufacturing. And relative to the U.S., it's still cheaper to [manufacture products] in Israel."
Another panelist, Donald Plusquellic, the mayor of Akron, Ohio, said that a benefit he sees from Israeli-American partnerships is an increase in jobs in both countries. In 2006, Akron became the first American city to invest directly in a technology business incubator in Israel. Since Akron's initial $1.5 million investment, 15 Israeli businesses have emerged from the Targetech incubator. Under the terms of the investment, the new businesses have to open offices in Akron while also building an Israeli presence -- and some have already done so. In exchange for its investment, Akron not only gets some jobs, but it also receives dividends from the new companies as a part owner. "This is not a one-way deal -- it's of mutual help for our communities in the United States and the businesses in Israel," Plusquellic noted.
Drawn by Innovation
The idea to invest in Israeli businesses came to Plusquellic after he toured Israel in 2005 as president of the U.S. Conference of Mayors.He was taken aback by all the innovation and development that he saw there, and was impressed by "the resiliency of a nation and the commitment to develop high-tech companies."
Among the companies that graduated from Targetech, thanks in part to Akron's investment, are Scentcom, which provides digital scent technologies for cell phones, toys and video games, and NI Medical Ltd., which makes a non-invasive device for early screening of heart disease. NI Medical recently set up shop in Akron, while Scentcom has yet to do so. "This risk, we believe, is going to pay off dramatically," Plusquellic said of the decision to invest in the incubator. "Every city in the U.S. should look into these kinds of investments."
Access to innovation is the reason that many U.S. companies seek out Israeli partners, noted Yudilevich, who added that innovation is simply ingrained in the Israeli culture. As many panelists at the conference pointed out, the innovative impulse comes from Israel's small size and location, which foster a need to be self-reliant. "Israel absolutely has something unique," Wind noted. "It offers high-quality innovativeness in terms of both scientific and technological areas."
One example of the Israeli need for innovation, which Yudilevich highlighted, is a partnership between TransBioDiesel of Israel and U.S.-based Purolite to create a biodiesel fuel enzyme. BIRD is helping to fund this project, but Yudilevich said it would not be possible without strong support from the Israeli government to promote breakthroughs in alternative fuels.
Cultural Differences Can Cause Problems
While Israel has many attractions for U.S. businesses, observers are quick to note that partnerships do not come without complications.
According to Brand, when Allied Orthotics was looking into partnering with Argo, the biggest surprise was the expectations from the Israeli executives. "We were miles apart on the relationship," he said. "They thought we would invest and fade away, and that, of course, was not our intention at all." Brand added that in order to solidify the relationship, he went to Israel to see Argo in operation. Consequently, he recommends that any U.S. company looking for an Israeli partner should go for a site visit before making a decision.
Understanding the Israeli culture is key for any U.S. company considering a partnership, Wind noted. Unlike their counterparts in the United States, he added, CEOs in Israel will tell anyone exactly what they are thinking, and lower-level employees will not hesitate to share their opinions, either. "Israeli business culture is dramatically different. It's more informal, much more direct and less rigid."
As many panelists at the conference pointed out, much of the cultural difference comes from the required service in the Israel Defense Forces (IDF) and the training that is received there. Respectful questioning of authority is encouraged, and there is much less hierarchy than in the U.S. military.
Booky Oren, chairman of WATEC Israel, an annual global conference on water technology, and chairman of the Miya Arison Group, a consulting firm for municipal water companies, said that it's simply the nature of Israelis to be upfront and direct. He added that when he has worked with American companies he has often gotten in trouble for being what Americans perceive as "rude." "As an Israeli, we don't understand enough of American culture," he noted. "We push too hard and don't understand that [Americans] run [their] business in a different manner."