Is Israeli hi-tech at risk of splitting

Are global trends putting the Israeli high-tech sector at risk of breaking apart? Well, the experts at the Israel Innovation Authority say they very well might. But what the experts did not do was explain what is causing this phenomenon.

The Israel Innovation Authority’s (IAA) research wing presented a position paper that it prepared on the subject to Israel’s Minister for Innovation, Science and Technology Ofir Akunis. The paper provides an up-to-date picture of Israeli hi-tech against the background of recent events in the global and Israeli economy. It also analyzes the current and future macro-economic environment, and its influence on the hi-tech industry, as well as the influence of the uncertainty in relation to the local circumstances.

The position paper offers several possible ways of dealing with the situation. It must be emphasized that, if the local uncertainty continues, none of these responses will be sufficient.

For example, the IAA pointed out that in recent months there has been a “significant negative gap” between the technological stock index return on the Tel Aviv Stock Exchange and that of Nasdaq. This could signal a splitting of the Israeli market from the global market

If this is the case, many Israeli hi-tech companies will find it very hard to raise investment and will be forced to close or move to other countries.

The position paper also shows a “significant decline” in the number and range of hi-tech investments being made by foreign investors in Israeli firms.

During the first quarter of 2023, investments in Israeli hi-tech stood at only $1.7 billion – the lowest quarterly figure since 2019, before the Covid crisis, while in parallel there is a decline in the number of investment rounds in start-ups and in the range of deals.

If this trend continues, the papers authors said the forecasts show that investments in 2023 will be significantly lower than in recent years. For sake of comparison, private investments in hi-tech reached a peak in 2021 with investments of around $26 billion and in 2022 they were around $15 billion.

In 2019, prior to the corona crisis, investments stood at $8 billion. These figures can be added to the continued and significant decline in the number of start-ups being opened in Israel each year, from a record 1,386 in 2015 to 728 in 2021 and an estimated 630 in 2022.

But why?

Some would cite the current political upheaval in Israel over the government’s judicial reform plan.

Massive protests have rocked Israel over the past few months, ever since Justice Minister Yariv Levin revealed the government’s plans to alter the nature of Israel’s judicial system. The government’s judicial reform plan would greatly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. The opposition charges this would harm Israel’s democracy, eroding foreign confidence in the country and hurting its economy. And this is why the country is now on the brink of what some are describing as the biggest societal clash in Israel’s history.

Israel Innovation Authority CEO Dror Bin touched upon this in his comments about the position paper.

“We are today in the middle of a global crisis, and it is still too early to know when and how it will end. Added to this is a local crisis that has created additional uncertainty,” he said. “Even if the legal-judicial crisis is solved, it will take time to reach a solution, and even after this, it will take time to build confidence with investors once more. Therefore, we must act efficiently and take the necessary steps to deal with the challenges. In light of the figures we have analyzed, we have recommended a number of possible actions for the government to consider both in the short term and in the medium-long term to deal with the uncertainty that has been created.”