Israeli hi-tech runs risk of splitting thanks to global market uncertainty

Israel’s hi-tech industry faces an uncertain future, according to a position paper prepared by the Israel Innovation Authority’s research wing. The paper analyzes the current and future macroeconomic environment and its influence on the hi-tech industry, offering possible solutions to deal with the situation.

The paper presents some concerning figures that highlight the challenges faced by the hi-tech industry. The gap between the technological stock index return on the Tel Aviv Stock Exchange and that of Nasdaq is increasing, raising fears that there will be a “splitting” between the global and Israeli markets which could make it difficult for many Israeli hi-tech companies to raise investment and may force them to close or move to other countries.

What does the survey show?

Additionally, an industry survey revealed that there has been a significant increase in the number of Israeli companies established abroad. Today, 80% of companies are already opened overseas. While the companies mainly register abroad for technical reasons, the survey shows that they also intend to register their future intellectual property overseas. As a result of these developments, companies that aren’t located in Israel will pay significantly fewer taxes, which could severely harm the state’s income.

Investments in Israeli hi-tech during the first quarter of 2023 stood at only $1.7 billion, the lowest quarterly figure since 2019. This trend is expected to continue, resulting in significantly lower investments in 2023 compared to recent years. While investments have been lower around the world during the current period, there are some local elements unique to Israel that have contributed to this decline as well, the paper states.

Additionally, there has been a significant decline in the number and range of hi-tech investments, and the number of start-ups being opened in Israel each year has been decreasing: the number of new start-ups hit a record high in 2015 at 1,386, and has since fallen to 728 in 2021 and an estimated 630 in 2022.

“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,” said Innovation, Science and Technology Minister Ofir Akunis. “The fact that the deceleration in human 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 the jewel in the crown of the Israeli economy.”

The paper argues that the most significant step that the government can take to reduce the problems that have been detected is to remove uncertainty by passing the “Law to Encourage a Knowledge-Intensive Industry,” updating and implementing the Innovation Authority tracks, examining the need to update the regulatory environment, assessing the need to update incentives for start-ups to register intellectual property in Israel, and accelerating the implementation of multi-year government programs for technological infrastructure.

Israel Innovation Authority CEO Dror Bin said addressing the concerns highlighted in the paper is to adequately defend the Israeli hi-tech sector against uncertainty.

“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.”