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Israel, China and the start-up relationship

11 September 2018

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The nature of the relationship between Israeli innovators and China is evolving. It used to be all about Chinese investors flying to Israel to look for opportunities for their money, but now the travel is also in the opposite direction, as Israeli start-ups set up in China to try break into the market there.

Israel has long rejoiced in the title of Start-up Nation. It’s easy to see why. With more than 4,000 technology companies, R&D investments in the country by 80 of the largest 500 companies in the world and the 3rd most companies listed on the Nasdaq, more than France, Germany, Italy and Spain combined1, Israel is referred to as the most important technological centre in the world after Silicon Valley. Waze, the popular driving navigation app, the USB flash drive and modern computer processors were all developed first in Israel. The founders of such start-up companies have been described as “broadminded and fearless, tenacious and inventive, with chutzpah in its most positive sense”2.

This record of innovation and creativity has long since come to the attention of Chinese investors, such as venture capitalists and incubators. Eighteen Chinese entities made investments in Israeli start-ups in 2013. This almost doubled to 34 by 2017. As a measure of the interest, Hainan Airlines operates multiple direct flights every week between Tel Aviv and Beijing, Shanghai and Guangzhou.

Driving investment

Organisations such as the Israel Innovation Authority3 and Start-up Nation Central work to create opportunities for Israeli companies to link up with investors whose money and expertise will help them expand outside Israel.

The Authority is a public body that is responsible for the country’s innovation policy and for developing the infrastructure and framework to help the country’s knowledge industry. Its objectives include distributing grants and financial support for R&D, connecting Israel with the global innovation industry and promoting government policies, laws and reforms. It is structured to do this under six divisions including advanced manufacturing and international collaboration.

Start-up Nation Central is a not-for-profit organisation that facilitates partnerships between Israeli innovators and potential business colleagues, such as investors, governments, non-governmental organisations (NGOs) and academic institutions.
However, the more interesting development in the relationship isn’t Chinese investors going to Israel to look for companies to buy or take a stake in, but Israeli start-ups setting up in China to try to unlock investment and create links with local companies in similar sectors.

Nearly 100 Israeli start-up companies, twice the number the organisers – Israel’s Ministry of Economy and Industry and its Chinese partners, the ShengJing Group and DayDayUp – had predicted, applied for the first China-Israel accelerator programme in November 2017 to help them crack the Chinese market4. The goal of the 10 companies chosen to join the programme is to grow in China. Given the Chinese preference for working with a local company rather than an international one, however, growing in China for Israeli start-ups will not be about going it alone but through establishing partnerships with Chinese businesses that have related or complementary technologies.

That is where different ways of doing business come in. Entrepreneurs, not just those from Israel, have found out that they can’t expect to do business in China in the same way they may have done elsewhere; linguistic, legal and cultural issues all have to be considered. They may use only English to communicate with potential partners in other countries. That is unlikely to be possible in China. Email and telephone, ie no face-to-face meetings, may be enough to negotiate partnerships in some jurisdictions. That will not be sufficient with Chinese companies, which value trust, built up over time through a number of in-person contacts, including at mealtimes.

Communicating in Mandarin or Cantonese in a way that enhances a relationship and doesn’t cause offence isn’t the only thing you as a business newcomer to China has to think about. Company administration is one of the most important. What visas and permits do I need for myself and any new employees and their families, especially if they are expats? How do I pay them and any suppliers? Where do I set up bank accounts and what is the most efficient way of managing them? How do I ensure I am tax compliant?

These questions aren’t any different to those you have to ask yourself when setting up a business in any part of the world. But it’s still important to get them right. Israeli companies have huge opportunities in China to show why their country is called Start-Up Nation. Starting out on the right path will be critical.

Intertrust has offices in Beijing, Shanghai and Guangzhou with over 15 years of experience in providing a comprehensive range of professional services to both local and international clients. From setting up of entities including Wholly Foreign Owned Enterprises (WFOE), joint ventures and representative offices, to taking care of all local formalities and ensuring full compliance with local regulatory requirements.