Israel Draws US Investors Despite Faltering Peace Process

LAST September, as Israel and the Palestine Liberation Organization were signing a historic peace accord in Washington, Israelis were eagerly lining up outside the country's first McDonald's restaurant. A second McDonald's is scheduled to open in Tel Aviv in several weeks, and construction of a third is under way.

McDonald's Corporation in Oak Brook, Ill., is just one example of a growing number of United States companies doing business in Israel. For years, many firms steered clear of Israel because of the Arab boycott, a snarled bureaucracy, and high taxes.

Israeli officials say investor interest among American firms was given a boost when Israeli Prime Minister Yitzhak Rabin shook hands with PLO Chairman Yasser Arafat. There are about 125 US companies currently in Israel. That number is steadily growing, according to the Israeli Economic Mission in New York.

Direct foreign investment in Israel has increased from $439 million in 1991 to $633 million in 1992, notes a recent Bank of Israel report. Indirect investment through the purchase of shares of Israeli companies on US exchanges is more than $1.8 billion, the report states.

``A lot of multinational companies are already in Israel because of its incentive programs, like ... guarantees for loans,'' says Giora Meyuhas, Israeli economic minister to North America. ``But if you ask [companies] what is the most important thing for them in Israel, they will tell you that it is [Israel's] highly educated, motivated, determined work force.''

As evidence of a stronger investor climate, Mr. Meyuhas cites a recent study by the Union Bank of Switzerland, which puts Israel third in the world, behind Korea and China, in terms of future competitiveness.

Digital Equipment Corporation, based in Maynard, Mass., opened its first office in Israel in 1973. ``Israel provided a good growing market for our products,'' says spokesman Mark Fredrickson. ``The business climate, including support from the government and a talented work force, was strong.''

The current prospect for peace in Israel is particularly good for business, Mr. Fredrickson adds. ``Although we have been able to have a good, healthy business in Israel despite some of the problems, stability, predictability of government and its policies, and a good and stable environment for customers are all important factors,'' he says.

ISRAEL'S improved investor climate has not come about simply because of the prospect of peace in the Gaza Strip and West Bank, and will not falter if the agreement stumbles, says Amnon Neubach, minister for economic affairs at the Embassy of Israel in Washington.

The culmination of several processes has resulted in greater prosperity for the Israeli economy, he says: In 1985, the Israeli government began to change its economic strategy to reduce annual inflation from 500 percent to 20 percent; industries were forced to become more efficient; immigrants to Israel provided ``an excellent labor force;'' the breakup of the Soviet Union lessened tensions in the Middle East, paving the way for talks in Madrid and the current negotiations.

``US companies recognize the potential in this economy now that all of these elements have come together,'' Mr. Neubach says.

Not everyone is so bullish on Israel's prospects for increased investor activity, however. Alvin Rabushka, an economist with the Hoover Institution at Stanford University, says the main reason companies have gone into Israel is the attractive benefits offered by the government. ``But taxes in Israel are so high that despite the investment benefits, the system destroys the economic and business incentives for ordinary Israelis,'' Mr. Rabushka says.

Complaints about layers of bureaucracy and high taxes may have been valid 20 years ago, but not today, Neubach counters. ``According to reports by critics, Israel's economy should be in big trouble today,'' he says. ``It is not.''