For Israeli high-tech, the year 2022 contained two completely different periods. The first half was a continuation of the boom period that started in the middle of 2020 and lasted for about two years. But the second half was already marked by the slowdown in the global economy and the declines in the financial markets. In this half, we witnessed sharp drops in the market value of public companies, widespread layoffs and hiring freezes, and a decrease in investments in Israeli start-ups.
What is expected of this industry in the coming years in general, and in 2023 in particular? In this column, we will focus on the risks to the Israeli high-tech industry this year and the challenges that the new government will face in this field.
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Uri Gabai and Assaf Patir of Start-Up Nation Policy Institute.
(Michael Loubton)
Macroeconomic risks – the worldwide economy showed signs of slowing down in 2022, and it is likely that this trend will continue in 2023. As far as Israel is concerned, one can expect a continuation of the decline in investments, high inflation, and a decrease in demand for exporting products and services. We will analyze the impact of these factors on the high-tech industry in Israel:
Decrease in demand for exports – continued weakness in the global economy affects exports as a whole, but the intensity of the damage to the high-tech sector is usually less severe. Most of the companies in the sector are start-ups, whose main activity is research and development, and whose dependence on revenues is low. On the other hand, in recent years the share of growth companies, which are more sensitive in the short term to a drop in demand, has increased.
Inflation – 2022 was characterized by high inflation in most developed countries, and this phenomenon did not skip Israel, although in a moderate way compared to the US and Europe. In general, inflation hurts the sales of companies that cannot update prices easily (price rigidities). Most Israeli high-tech companies sell products to businesses (B2B), and even those that sell to private customers often sell online services that are less affected by rigidities. Furthermore, since wages in the sector have risen sharply in the past two years, the wage erosion caused by inflation may help companies survive the recession.
Decrease in investments – Israeli high-tech is most threatened by the decrease in investment. Currently the situation among Israeli companies is still good in historical comparison, because many companies took advantage of the good conditions in 2021 and at the beginning of 2022 (start-ups raised $15.5 billion in 2022 alone). At the same time, as the decline in investments continues, more companies (and especially those who did not have time to recruit recently) will find themselves facing a stalemate. In addition, the general decline in the value of assets will mean that certain companies will even have to deal with recruitment at a reduced value.
A decrease in the number of start-ups – in recent years there has been a continuous decrease in the number of new start-ups that open each year in Israel – between the years 2017 and 2021 the number of new start-ups decreased by 40% (we pointed out this phenomenon in several reports published by SNPI and the Innovation Authority). A deep global recession could further exacerbate this phenomenon due to the tendency of potential entrepreneurs to seek more secure employment options until the markets return to a positive trend. This is a phenomenon that threatens the main source of empowerment of Israeli high-tech and its long-term effects should not be underestimated if this downward trend continues.
Lagging in readiness for advanced technologies – Israel lags behind many countries in defining and developing national strategies for breakthrough technologies. Technologies such as artificial intelligence, quantum, and to some extent also blockchain, require coordinated government investment in appropriate infrastructure, supportive regulation, knowledge transfer between academia and industry, and training of appropriate personnel. The lack of proper preparation for the smart adoption of technological innovations may erode over time the technological advantage that Israel has enjoyed in recent decades.
Despite the importance of the issue in the Israeli government, it is not clear who is actually responsible for building such a strategy – is it the Innovation Authority? The National Research and Development Council (MOLMOP)? The Ministry of Science? Or maybe even the National Economic Council or the Budget Division in the Treasury Ministry? This lack of clarity means that there is no clear owner for this important issue, and strategic plans are made by ad hoc committees and not as part of systematic planning. This issue obviously refers to a longer term, but the new government can and should make the necessary changes in order to establish clear work procedures.
The Israeli innovation ecosystem stands on solid foundations and many years of experience in dealing with crises of various types. But the cooperation of the government, industry and civil society, whose goal is to understand the challenges detailed in this column (like others that will certainly arise during the next year) and to prepare for them ahead of time, may reduce the exposure of high -tech to these risks and significantly reduce the intensity of their damage.
Uri Gabai is the CEO of Start-Up Nation Policy Institute (SNPI) and Dr. Assaf Patir is SNPI Chief Economist
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