Israel records lowest tech quarter in years, due in part to judicial overhaul

The government’s controversial judicial overhaul might be making its first significant impact on Israel’s hi-tech sector, according to a new report from the Start-Up Nation Policy Institute.

In the first quarter of 2023, investments in Israeli hi-tech totaled $1.7 billion, marking the lowest quarterly figure since 2018 and the latest in a downward trend from the industry’s record-setting year in 2021, the SNPI reported.

That trend is very likely more than just a regression to the mean following hi-tech’s banner success in 2021, when investments in Israeli hi-tech averaged about $8.7b. per quarter, according to SNPI CEO Uri Gabai.

“$8.7b. per quarter seems like an outlier, and we never expected things to stay stabilized at that level,” he said. “But we can expect that Israel’s hi-tech [sector] should be at roughly $18b. a year, according to long-term trends in VC [venture-capital] investments. We’re talking about roughly $4.5b. per quarter. When we only have one-third of that, something is definitely going on.”

Gabai suggested that the decrease in investments can be chalked up to two primary factors.

Political turmoil surrounding the government's judicial overhaul

The first is a global economic recession that has affected hi-tech around the world, he said, adding: “We’ve definitely seen a global recession for the last six or seven quarters.”

The second factor in hi-tech turbulence, one that is specific to Israel, is the political turmoil surrounding the government’s proposed judicial overhaul, which has generated significant controversy, at least in part because of its expected negative impact on Israel’s economy, Gabai said.

Critics of the overhaul – a group that includes hundreds of economists from Israel and around the world, Nobel Prize laureates, researchers, hi-tech executives and others – claim that by weakening the system of checks and balances within Israel’s political system, the so-called “reform” is likely to lead to hesitance from investors as the country becomes a less-reliable destination for investment.

Several credit-rating organizations, including S&P, JPMorgan and Moody’s, have raised concerns for investors regarding the overhaul’s potential negative effect on Israel’s economy. If investors have already started to get cold feet, it is likely that if the overhaul is enacted, the hi-tech sector would suffer a major loss in funding. That could lead to the sector’s flight to other countries, where investors would feel safer investing their money.

According to Gabai, it is still too early to definitively say how much of the Start-Up Nation’s decline can be chalked up to the judicial overhaul’s negative perception throughout the global investment community.

It is still clear that it is doing something – and not something good, he said.

“In the last quarter, we saw Silicon Valley changing trends with what seems to be a first quarter where the trend is going up,” Gabai said. “London is still on the same negative trajectory, though, which means that it’s very hard for us as researchers to distinguish between the effects of the global recession and what’s happening locally in Israel.”

“However, it’s very clear that the political instability is not contributing anything positive to Israeli hi-tech and the investment in Israeli start-ups,” he said. “This is what I’m most concerned about – not just the $1.7b. data point. It is the trend that’s worrying. If the political instability would stop next week, I would absolutely regain my optimism.”