Global tech hubs are a source of technology, talent, and funding

While media coverage of the technology industry focuses largely on Silicon Valley, savvy tech and life sciences executives have been looking much farther afield, well beyond American borders.

Americans are engaging with overseas companies in more diverse ways, fueling our thirst for knowledge about overseas markets. What is the climate in these countries for launching, growing, or buying a business? For locating an R&D center or a manufacturing plant? For hiring or acquiring talent? For receiving or making investments? For making business deals of all kinds?

With questions abounding about the world’s most active technology and life sciences hubs, MoFo Tech takes a look at the business and legal climate in some of the countries that rank most highly in global competitiveness indexes.

CHINA: The Contender

Population: 1.367 billion

GDP per capita: $5,414

World Economic Forum Competitiveness Ranking: 29

Perhaps no nation has moved as far and as fast up the technology value chain as China. Forget cheap factory labor: Beijing is now the only “serious contender” to match Silicon Valley’s “prowess at churning out startups and multibillion-dollar technology companies,” according to the MIT Technology Review. It’s home to giants like Baidu and Tencent as well as up-and-comers like e-commerce specialist LightInTheBox and smartphone maker Xiaomi.

Tech firms in China generally have a different flavor than their American counterparts, says Thomas Chou, a partner in Morrison & Foerster’s Hong Kong office. “The startups we see in China have traditionally been less about innovation and disruptive technology than about tapping into the scale of China’s middle class and its Netizens,” Chou says. “The emphasis is on technologies that are scalable and can be properly adapted to suit the local tastes of China’s consumers.”

China boasts a huge cadre of talented engineers and computer scientists who can be hired at a fraction of the cost of their Silicon Valley peers, notes Chou. Its management bench continues to improve, as senior executives from growing Chinese companies launch their own firms. Still, the Chinese tech industry has faced serious challenges since 2012. An economic slowdown, coupled with widespread accounting scandals, has led to a dramatic drop-off in venture capital funding, says Sherry Xiaowei Yin, a partner in Morrison & Foerster’s Beijing office. The Chinese government also throws up barriers: startups must obtain licenses for specific industries and activities, and foreigners must establish offshore entities to invest successfully in Chinese tech companies.

But China still harbors an enormous and tech-hungry market that seems likely to grow over time, thanks to the Chinese government’s efforts to shift the economy toward consumption. And foreign investors who are willing to take a risk on China are rewarded with “transaction terms that tend to be, at least on paper, much more investor-favorable than in Silicon Valley,” Chou says.

The state of intellectual property has also advanced, notes Gordon Milner, a partner in Morrison & Foerster’s Hong Kong office. In life sciences and especially in biotech, patents are about as important as they are in the U.S., Milner says. And while IP protection and enforcement are still not as powerful in China as they are in Western countries, more tech companies are building up patent portfolios, in part to satisfy investors. They’re also registering more trademarks and copyrights, largely in the hope of enlisting the government’s help in stopping counterfeiters.

ISRAEL: The Brain Trust

Population: 8 million

GDP per capita: $31,986

WEF Competitiveness Ranking: 26

Once best-known for its oranges and diamonds, Israel’s top export today is innovation. The World Economic Forum gives top-tier global rankings to its scientific research institutions, R&D spending, and availability of scientists and engineers. Major firms such as Intel, Google, Apple, and IBM have R&D centers in multiple locations in Israel, including Haifa, as well as Tel-Aviv, Ra’anana, and Herzliya (an area commonly referred to as Israel’s “Silicon Wadi”). These technology clusters also boast hundreds of Israeli startups.

There could be many reasons why Israel is bursting with talent, says Gal Eschet, a tech transactions attorney and the co-chair of Morrison & Foerster’s Israel desk. During mandatory military training, many Israelis learn and develop technical, leadership, and management skills. There was a mass exodus of Jewish scientists to Israel after the collapse of the Soviet Union. The Israeli government is also highly supportive of R&D and the startup scene. Generous tax incentives and grants have helped convince Intel to invest $10.5 billion in Israel over the last decade, according to Reuters.

Whatever its source, all that technical savvy often comes at a relative bargain, says Eschet, who was raised in Haifa but now works in Morrison & Foerster’s Palo Alto office. Israeli startups are attractive acquisition targets not only because of their solid innovation and engineering talent, but also because valuations sometimes are lower than comparable companies in countries such as the U.S. and China, Eschet says.

The violence and turbulence just beyond its borders has very little effect on business inside Israel, says Bruce Alan Mann, head of the Israel practice at Morrison & Foerster. But the country’s small size forces many Israeli entrepreneurs to the U.S. in search of growth and exit opportunities. At one time, there were more Israeli companies traded on the NASDAQ than any other non-U.S. country other than Canada, Mann says. Thousands of Israelis are in the Silicon Valley at any one time, developing Israeli startups, collaborating with or working for American companies, or arranging acquisitions. The result is an active cross-fertilization of skills and talent.

JAPAN: Longer Horizons

Population: 134.9 million

GDP per capita: $45,920

WEF Competitiveness Ranking: 10

In 2013, Japan was pulling itself out of a long recession, and the spotlight was returning to its role in promoting global innovation. Dominated by large, conservative companies, Japan’s tech sector doesn’t look much like Silicon Valley, but those companies have made a big impact, especially in hardware. Japan’s Nintendo developed the Wii, which shook up the gaming industry. Japan is also a major force behind standards in flat-panel screens—including the 4K ultra high-resolution video standard—and in mobile communications, including the LTE 4G standard.

Japan remains a large and sophisticated market with well-developed IP protection, says Stuart Beraha, a partner in Morrison & Foerster’s Tokyo office. It is wide open to foreign competition: the iPhone, Facebook, and Twitter are hugely popular. And this wealthy market has adopted the most sophisticated Web and mobile technologies as quickly as anywhere else. In fact, in major cities there’s little evidence of the downturns that have scarred Japan’s small towns and countryside. “Here in the central business district, there’s a forest of new business towers with super-high-quality offices that fill immediately and a plethora of new high-end retail stores and restaurants,” Beraha reports.

Japanese companies are open to a wide variety of technology transactions with foreign firms, though cultural differences persist. “Japanese firms tend to have longer horizons when looking at what they want to get out of a deal,” Beraha says. When selling a business, for example, they tend to seek assurances that the acquirer will protect employees’ jobs. When entering into collaborative transactions, they may resist provisions to dissolve a partnership if milestones or targets aren’t met. Japanese companies are more likely to see an alliance as a long-term commitment rather than purely as a economic transaction. That said, many of these long-term commitments have worked out splendidly—despite the culture gap.

SINGAPORE: The Shining Hub

Population: 5.3 million

GDP per capita: $49,271

WEF Competitiveness Ranking: 2

To understand Singapore’s appeal, think of it as the flawlessly run economic capital of Southeast Asia—a region with 600 million inhabitants and boundless growth potential. A panoply of major American tech firms have established their regional headquarters here in one of the many sparkling business parks.

Singapore’s government gets much of the credit for its success as a business hub, says Marshall Horowitz, Senior Of Counsel in Morrison & Foerster’s Singapore office, which formally opened in April. Singapore provides subsidies to foreign firms to locate regional headquarters or R&D centers. It offers low corporate tax rates and tax treaties that mitigate the effects of double taxation for companies doing business in China and elsewhere. Singapore is also setting itself up as a dispute resolution center for IP and other cross-border business disputes.

Comfortable and corruption-free, Singapore is a good neutral ground for discussing cross-border deals. It’s also a plush posting for foreign executives, with top-notch transport and other infrastructure. The airport is famously efficient and easy to reach, a big factor for jet-set- ting international executives. And the workforce is well educated and trained. Is there a downside? That workforce isn’t cheap, Horowitz notes. But many businesses feel that clean, green, and orderly Singapore is worth the extra cost.

UNITED KINGDOM: The Launchpad

Population: 65.3 million

GDP per capita: $38,592

WEF Competitiveness Ranking: 8

London’s “Silicon Roundabout” launched more than 15,000 companies last year, according to accounting firm UHY Hacker Young. It’s not yet Silicon Valley, but Britain’s tech industry is getting a boost from government policies, says Chris Coulter, a partner in Morrison & Foerster’s London office. They include a “patent box” regime that reduces taxes on revenue flowing from patents, and a new online exchange for high-volume copyright transactions known as a “copyright hub.”

While venture capital investment in Britain pales when compared to Silicon Valley, it is still the second-largest VC target behind the U.S., according to data from Ernst & Young. Many British startups still see the U.S. as the best opportunity for funding or an exit, says Justin Stock, a corporate partner in Morrison & Foerster’s London office. But at the larger end of the spectrum, the private equity world is very well developed with significant U.K. private equity firms doing deals on both sides of the Atlantic. On the technology side, “We are also seeing a lot of interest from U.S. companies for small technology based businesses in the U.K.,” Stock adds.

For many fast-growing American tech firms, London is the first choice for a European headquarters, Stock says. And growing into Europe is still a worthy endeavor. In recent months, concern about the euro and the economic crises in weaker nations like Greece and Spain has yielded to indications of recovery through much of the eurozone.

IRELAND: The Safe Harbor

Population: 4.7 million

GDP per capita: $47,513

WEF Competitiveness Ranking: 27

Tourists may appreciate Ireland for its cozy pubs and mossy bogs, but for multinationals it has a special appeal—a low corporate tax rate, currently at 12.5 percent. And that low rate is broadly applied—whereas Britain’s “patent box” legislation applies only to patents produced by a company, Ireland’s low rate applies to any sort of intellectual property (including trademarks) and to IP that has been acquired by the company. It also has a wide range of favorable tax treaties with other countries.

Multinationals that are doing an acquisition can take advantage of Ireland’s tax structure by buying the IP separately and placing it in an Irish holding company, says Bernie Pistillo, a tax partner at Morrison & Foerster. When your group’s affiliates need the IP, they pay royalties to the Irish company. The affiliates get to take a deduction at the (relatively high) rates of their home countries. The royalty is taxed at the (relatively low) Irish rate.

That 12.5 percent rate can be reduced further if the multinational creates jobs in Ireland, Pistillo says. And here’s where Ireland’s other benefits factor in: its well-educated (and English-speaking) workforce, its political stability, good quality of life, and proximity to Europe. All of these factors have led tech giants such as Google, Facebook, and Yahoo! to establish a large presence there—not only housing their IP but developing it as well.