Here’s a picture of the situation in July 2023. Israel is no longer the Start-Up Nation. It’s a nation in crisis. It’s a political, social and international crisis, but its effects will be economic. The greatest harm will be in the high-tech sector. The government is showing strange apathy toward the crisis in the best case, and more likely schadenfreude – enjoyment in the troubles of others.
From their standpoint, high-tech belongs to “those people from Tel Aviv” who are demonstrating against them, so there’s no reason to do anything about the issue. In the past, Prime Minister Benjamin Netanyahu boasted about Israeli high-tech (not that he was connected with establishing the sector, but that’s a subject for another article). But he hasn’t held any deliberations about the crisis in the sector. Nor have Finance Minister Bezalel Smotrich or Economy Minister Nir Barkat been dealing with it.
That’s a dangerous failing and reckless conduct on their part. Professionals – most notably the Bank of Israel, the Finance Ministry’s chief economist and the Israel Innovation Authority – have been warning the government for many months now about critical harm in the sector. No one in the government has been listening, and no one is doing anything to prevent it.
That’s a serious strategic error. Harming the high-tech sector creates a shock wave that will be very apparent in Dimona and Kiryat Shmona, in the defense budget and in the welfare budget. Half of Israel’s exports come from the high-tech sector, and their contribution to the state’s revenues is decisive. In addition, each high-tech worker creates three or four “second tier workers” who manufacture the desk that the high-tech employee is sitting at, or provide the catering or marketing, the advertising and design, the accounting or legal counsel. It’s an industry that creates industry. When it stops, the screech of the brakes is painfully audible throughout the economy. That’s exactly what’s happening now.
The figures that I present here are the results of a survey from Start-Up Nation Central that was sent to about 8,000 executives and company founders in the high-tech sector, as well as forecasts from the Israel Innovation Authority.
Alarm No. 1: New companies moving abroad
According to a report from the Israel Innovation Authority, until January 2023, more than 80 percent of new companies established in Israel were also registered as Israeli companies. Immediately after Justice Minister Yariv Levin’s judicial coup speech, the figure reversed and close to 80 percent of the new companies that were established by Israeli entrepreneurs in the first quarter were registered abroad.
The primary reason why the companies aren’t located in Israel is concern about a dramatic decline in their attracting of customers. Half of the startups believe the government coup would make it substantially more difficult to attract clients from abroad. Sixty-three percent of investors believe that the Yariv Levin-Simcha Rothman coup would adversely affect their company’s ability to acquire clients. The second concern is over their ability to attract capital. Eighty-four percent of the investors believe that the governmental upheaval would have a negative effect on their ability to raise capital from abroad.
Alarm No. 2: Loss of personnel
Following a loss of cash, there’s the loss of a skilled workforce. Currently, about a third of the companies are considering transferring their workers out of Israel, including 35 percent of which plan to take the initiative to offer “relocation packages” to their workers. Nearly half of the companies expressed concern over their ability to retain their leading engineers and programmers. Fifty-one percent reported that they plan to lay off more than 20 percent of their workforce if the economic situation continues to decline.
Alarm No. 3: Decline in investments
Investments in Israeli high-tech plummeted in the first half of 2023 by 68 percent compared to the first half of 2022 – that’s according to data from the Startup Nation Policy Institute.
This is no longer just significant harm, it’s critical. Seventy-seven percent of all high-tech companies report growing difficulties they encounter in raising funds from foreign investors. Almost 80 percent of companies that started raising capital report a cancellation of meetings since the judicial upheaval began. Thirty-one percent of them say that so many meetings were canceled that they had to halt their drive to raise money.
Alarm No. 4: Revenue crisis
The umbrella organization of Israel’s high-tech industries, IATI, along with Deloitte Israel, a leading professional services forum, published a comprehensive report in February highlighting the contribution of the high-tech industry to Israel’s economy. More than 50 percent of Israel’s exports come from high-tech, amounting to $67 billion. Thirty-four percent of the revenues collected by income tax authorities come from high-tech employees. The state collects 50 billion shekels ($13.5 billion) a year in taxes from this industry. The direct contribution of the high-tech industry to the country’s GDP was 240 billion shekels. This is more than the defense, health and education budgets combined. All this is now in clear and present danger.
Some of the damage caused recently will take years to repair. Some of it can be fixed faster. What should the government do to stop the collapse? First, it should announce that it is desisting from destroying democracy. That will give this industry some certainty and lead to the stabilization of the economy. Subsequently, the government must develop some growth engines. It’s inconceivable that a government seeking longevity distributes 14 billion shekels as part of the so-called “coalition funds” given to sectorial interests, while cutting 100 million shekels from the Innovation Authority at this critical juncture. Even according to a Bank of Israel report, this authority needs to be dramatically expanded.
The government must continue with the plan calling for diverting one million people to the high-tech industry, which was launched by the previous government. It must undertake an unprecedented national initiative of technology education, including engineering, programming, short courses geared to rapid training, home learning and programs for job retraining. The state must invest, through the Innovation Authority, in startups dealing with the development of technology education.
If this government doesn’t wake up, other ones will. Greece and Cyprus are already working on incentives geared at Israeli companies and their employees. Other countries won’t be far behind. If the judicial coup doesn’t stop, 2023 will be marked in history as a year of disaster for Israel’s high-tech industry.
Yair Lapid is leader of the opposition and former prime minister.