How Israel’s government can ensure tech sector recovery

Israel’s high-tech sector is a cornerstone of the country’s economy, accounting for around 14% of jobs and almost a fifth of the national GDP. For a decade, it has been Israel’s fastest-growing sector.

The country's usually vibrant technology industry has a global reputation as being a leading light when it comes to its innovation in fields including e-commerce, security and artificial intelligence. Like other industries around the world, the COVID-19 pandemic, subsequent inflation and the invasion of Ukraine have led to a downturn in the sector. But it has become more pronounced this year due to instability in Israel’s domestic politics.

Preliminary data from the IVC Research Center and LeumiTech showed on Wednesday that fundraising for Israeli technology firms fell more than 65% in the second quarter from over $5 billion in the same period in 2022.

Layoffs have become commonplace too. On Tuesday, Alphabet-owned Google announced it was cutting jobs at Israeli-founded mapping app Waze, as it merges the app’s advertising system with Google Ads technology.

Google, which acquired Waze for around $1.3 billion in 2013, said in a statement Tuesday, "In order to create a better, more seamless long-term experience for Waze advertisers, we've begun transitioning Waze's existing advertising system to Google Ads technology. As part of this update, we've reduced those roles focused on Waze Ads monetization.” The tech giant did not give the number of layoffs.

Earlier this month, Uber announced that it would cease operations in Israel. Job posting website ZipRecruiter said it would cut 20% of its employees due to market conditions. E-commerce giant Amazon axed dozens of jobs in Israel after shutting down its health bracelet Halo program.

A May report suggested that Israel’s tech layoffs would continue in 2023, adding that one-quarter of companies have stopped recruiting new staff and another quarter plan layoffs — many of those planning to let go 5% of their workforce.

On Monday, the state-backed Israel Innovation Authority said that the slowdown in the country’s technology sector has worsened this year, exacerbated by political turmoil. The report coincided with Prime Minister Benjamin Netanyahu’s sudden return to power at the end of last year as part of a far-right government and his controversial push to overhaul the justice system, which has sparked mass protests. The plan would limit the power of the Supreme Court. The shekel has taken a hit since it was introduced, and players in Israel’s technology sector warned that the proposed reforms would make the country less attractive to foreign investors.

The downturn in Israel's tech industry is caused by global external factors and the country’s domestic issues, according to Eugene Kandel, former chairman of Israel’s National Economic Council and professor of economics at the Hebrew University of Jerusalem.

“I think that once the world crisis ends, we will start seeing a similar development in Israel,” he told Al-Monitor. “The degree of the political uncertainty and the results of the legislation will determine to what extent and where these companies and founders register and operate.”

Omer Moav, a former Netanyahu advisor and a professor of economics at Warwick and Reichman University, told Al-Monitor, “There is a world slowdown in investments in the high-tech sector, but it is much worse in Israel. And it seems that the reason is the current Israeli government and in particular the judicial revolution, or the fear of such a revolution.”

The slowdown of investment in Israel’s high-tech sector began following the beginning of the invasion of Ukraine last year, similar to the rest of the world.

“But since the beginning of 2023 more or less, the decline in Israel is disconnected from the world economy, which shows indications of a slow recovery,” Moav added.

“The judicial reform, and probably other policies of the Israeli government, are a threat to stability and growth,” he said. “With a weak judicial system, investors worry about the protection of property rights," he added, noting that these fears are compounded by a "budget that neglects growth-promoting investment, such as investment in infrastructure and skills, and rather does the opposite of encouraging less participation in the labor force of the ultra-orthodox, in addition to nominations to senior positions in the public sector based on political connections, not on skills.“

Israeli startups are increasingly being domiciled abroad, and several technology firms have reported moving funds out of Israel as a result of the investment uncertainty. On Monday, the Israel Innovation Authority said that when two quarters after the US stock markets begin to recover — as seen in 2023 — capital raising and employment in Israel, including in its high-tech sector, would be expected to increase. But this has not been seen in the stock markets this year: In 2023, the Nasdaq has risen 29%, while Israel’s main tech index is only up 7.8%. The state agency said there was “a genuine concern” of a separation trend between the industry and the global economic trajectory.

Asked how Israel can get its technology sector to rebound, Kandel said, “Develop a long-term strategy and supporting policies and stop playing with fire.”