Israeli high-tech sector at risk of ‘splitting away from global trends’, Israel innovation authority says

09 May 2023 | Network Updates | Update from ISERD
These updates are republished press releases and communications from members of the Science|Business Network

Minister of Innovation, Science and Technology Ofir Akunis said: "The findings of the study by the Israel Innovation Authority require the government to take rapid action in order to reverse the worrying trends it highlights. The fact that the deceleration in capital investment in hi-tech is an international trend and has continued for a year does not prevent the Finance, Innovation, and Economy ministries from taking action that will preserve and strengthen hi-tech as growth engine of the Israeli economy."
Israel Innovation Authority CEO, Dror Bin said: "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. Even if the legal-judicial crisis is solved, it will take time to reach a solution, and even then, it will take time to re-build investors' confidence. Therefore, we must act efficiently and take the necessary steps to deal with the challenges. In light of the data 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." 

Jerusalem: A position paper prepared by the Israel Innovation Authority's research division, and which has been presented to the Minister for Innovation, Science and Technology and to the Innovation Authority Chairman Dr. Ami Applebaum, provides an up-to-date status of Israeli hi-tech against the background of recent events in the global and Israeli economy. The position paper 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. 

The recent figures, which are presented in the attached position paper, paint a worrisome picture: 

  • The splitting of the Israeli market from the global market. In recent months we have seen a significant negative gap between the technological stock index return on the Tel Aviv Stock Exchange and that of Nasdaq. The position paper indicates that this gap is increasing the fear that we are on the verge of a situation in which there will be a "split" between the global and Israeli markets. If this is the case, many Israeli hi-tech companies will find it very difficult to raise capital investments and will be forced to close down or move to other countries. 
  • Significant increase in the establishment of companies abroad. A survey of the industry revealed that there has been a significant increase in the number of companies established abroad – today 80% of companies are already opened overseas. This phenomenon could have far-reaching consequences on the Israeli economy in the medium and long term. While it's true that companies mainly register abroad for technical reasons, the survey shows that the companies also intend to register their future intellectual property overseas. As a result, companies that aren't located in Israel will pay significantly fewer taxes, resulting in severe decrease in the state's income. 

Significant decline in the number and range of hi-tech investments 

During the first quarter of 2023, investments in Israeli hi-tech amounted to only $1.7 billion – the lowest quarterly figure since 2019, while in parallel there is a decline in the number of investment rounds in start-ups and in the scope of deals. If this trend continues, 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 total investments of around $26 billion and in 2022 they were around $15 billion. In 2019, prior to the corona crisis, investments amounted to $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.  

It is important to note: The decline in investments is without doubt a global phenomenon. Never-the-less, there are some elements that are unique to Israel, and these cannot be disentangled from the current uncertainty in the Israeli market and its implications.  

The position paper argues that removing the uncertainty as soon as possible is the most significant step that the government can take to reduce the problems that have been detected. It is preferable that this will be done as quickly and decisively as possible in a way that will allay the fears of investors and entrepreneurs in the medium-long term and will create long-term certainty and stability. This should be conducted alongside specific steps that the government should consider taking which will strengthen the industry as a whole. 

Even in the best-case scenario that a solution to the crisis is found relatively quickly bringing the desired certainty, it will take several months for it to be consolidated and implemented. It should also be assumed that, even after its consolidation, it will take time to build the confidence of investors and entrepreneurs anew. Therefore, even in this positive scenario, the government must also consider taking additional steps that will strengthen confidence in the hi-tech sector and will allow Israel to adhere to global hi-tech trends. Steps to be taken can include: 

  1. The immediate passing of the Law to Encourage a Knowledge-Intensive Industry, which passed its first reading in the prior Knesset and which the current government has also adopted.    
  2. An updating and implementation of the Innovation Authority programs in a way that meets the growing funding needs of Israeli start-ups. 
  3. Examining the need to update the regulatory environment, including incentives to encourage investments in Israeli technological companies, including increasing the level of Israeli investment in these companies. 
  4. Assessing the need to update incentives for start-ups to register intellectual property in Israel. 
  5. Accelerating the implementation of multi-year government programs for technological infrastructure (such as the national programs).  

An examination of the way in which previous Israeli governments dealt with crises that created uncertainty, influencing the Israeli economy and the hi-tech sectors, teaches us that the government can act quickly and with determination if and when it chooses to do so thus reducing the uncertainty for the hi-tech sector and supporting its continued growth.

For the full Position Paper, click here

This article was first published on 2 May by ISERD.

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