ByNews Desk- The Cradle
Investor confidence in the Israeli tech sector has been shaken by uncertainty following the government's proposed judicial reform
The paper stated that some previous worries had already materialized. The Innovation Authority assessed that between 50 and 80 percent of startups founded by Israeli entrepreneurs have now been incorporated overseas. This means that while these firms still have offices in Tel Aviv, much of their economic activity has shifted abroad, along with the tax revenue that accompanies it.
The paper noted that this trend that strengthened in March and assessed that “within a very short time, we are liable to reach a situation in which the vast majority of companies founded will be through incorporation overseas, amounting to over 80%.”
According to the Innovation Authority, if more and more start-up tech companies establish their headquarters abroad, this will have a cascading effect, causing the companies to also move their finance, business development, marketing, sales, operations, and production functions outside the country as well.
This will further damage the growth of the Israeli technology industry, and by extension, the broader Israeli economy.
The paper noted further that “continued uncertainty will lead to a situation in which many decisions that have been delayed in the expectation that the uncertainty will be dispelled and matters will become clear will reach a point at which they have to be made, and then we can expect to see non-linear behavior, meaning that the changes in the nature of the high-tech companies’ activity will be rapid and will encompass most of the companies in the field.”
Last month, Moody’s Investors Service downgraded Israel’s economic outlook in part due to the uncertainty created by the proposed judicial overhaul. Though the overhaul plans were recently delayed, the business news site The Circuit noted that “startup founders are making contingency plans that include transferring key employee teams to other countries and shifting money from domestic accounts.”
The Israeli tech sector is particularly vulnerable because some 90 percent of the capital invested in new startups comes from foreign sources, and can easily be shifted to investments in other countries if conditions in Israel are not optimal.
“The foreign capital is neither Zionist nor anti-Zionist,” Avi Hasson, CEO of Start-Up Nation Central, told The Circuit. “It came to Israel based on the unique ideas, talent, and ecosystem that are here, and it will equally move out if it doesn’t feel that it has the conditions to generate exceptional returns.”
Israeli Prime Minister Benjamin Netanyahu has sought to pass new judicial reform legislation following his return to power following elections in December of last year. To form a government, Netanyahu orchestrated an alliance with right-wing extremist settler politicians Itamar Ben Gvir and Bezalel Smotrich.
CNN noted that if passed, the judicial reform legislation would “give the Israeli parliament, the Knesset, and therefore the parties in power, more control over Israel’s judiciary. From how judges are selected, to what laws the Supreme Court can rule on, to even giving parliament the power to overturn Supreme Court decisions.”
Critics suggest this would help Netanyahu further avoid prosecution on bribery charges.
Israelis have organized demonstrations to oppose the reform legislation each week for the past three months, with some protests reaching up to 500,000 participants.
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