ISRAELI TECH SCENE: IS IT TIME TO GO?

In a recent interview with CNN’s Fareed Zakaria, Prime Minister Benjamin Netanyahu indirectly acknowledged the impact of his disruptive policies on his nation’s future. When questioned on the rising tendency amidst Israel’s tech innovators to seek greener pastures overseas, Mr Netanyahu brushed it aside, stating that it would be the loss of the tech entrepreneurs as nowhere else would they get the same safety net provided by the Israeli government. Allaying fears, the beleaguered prime minister opined that it was a passing fad and that Israel was so deeply entrenched as the ‘fount of technology and innovation’ that the exodus would have little impact.

There was an element of truth in what Mr Netanyahu said- Israel has for decades nurtured an ecosystem that encouraged innovation to bloom, allowing the natural genius of the Jewish people to flourish in a land that they could finally claim as their own.

Unsurprisingly, Israel has enjoyed a technology boom for the last five decades, coming up with technological solutions that ensured not only the political survivability of this tiny nation surrounded by large enemies but also made its hardworking people prosperous and world leaders in many tech arenas. It has been the nursery for numerous tech start-ups emerging as global leaders in their respective industries. But the claim that the exodus will have little impact on the vibrantly inno- vative tech industry must be taken with a pinch of salt.

Several factors have contributed to the growing sentiment among Israeli tech leaders that it might be time to leave their homeland. These factors can be broadly categorized as push factors, which make staying in Israel less appealing, and pull factors, which make other countries more attractive.

HOW REAL IS THE DANGER?

After the coming to power of an ultra-right-wing coalition, the ecosystem has been taking a battering exposing fears that Israel will lose its attractiveness for FDI if it structurally weakens its centrist policies and the rule of law.

These negative sentiments have been all-pervasive, spreading across the entire spectrum of the Israeli business community and critical organs like defence. The negativity has been especially noteworthy in the tech industry as the tech leaders have been most vocal about it.

Worryingly, some of the best names in the Israeli tech world have publicly announced their decision to explore fresh horizons. Adam Neumann, Co-founder of WeWork, has reportedly been considering a move to New York City, where he believes there are greater opportunities for collaboration and growth. Shai Agas-

Founder of Better Place, has expressed interest in relocating his electric vehicle infrastructure company to Silicon Valley, where he sees potential for increased investment and access to a more extensive network of partners. Gil Shwed, Founder and CEO of Check Point Software Technologies, has been exploring options for expanding his cybersecurity company’s operations in Europe and the United States.

Several factors have contributed to the growing sentiment among Israeli tech leaders that it might be time to leave their homeland. These factors can be broadly categorized as push factors, which make staying in Israel less appealing, and pull factors, which make other countries more attractive.

Push Factors

Israel’s tumultuous geopolitical landscape has always been a concern for businesses operating in the country. Ongoing regional conflicts and tensions can create uncertainty and adversely impact investor confidence.

Israel has a very high cost of living, with cities like Tel Aviv ranking after Singapore and New York as the third most expensive cities to live in as per the website Visual Capitalist (the list includes three of the least expensive cities to live in India-Bangalore (161), Chennai (164) and Ahmedabad (165)). Obviously, start-ups would have to pay higher salaries to keep their employees happy, and operating costs would increase.

Population base matters when scouting high-quality talent to man the tech entities or conduct cutting-edge research. With a population of only 9.65 million (Bangalore Metro area has over 13 million inhabitants), Israel has hard pressed to find new talent, despite being known for the large number of world-class STEM graduates that its academic institutions churn out.

There is, therefore, a significant talent gap in the tech industry. As the demand for skilled professionals grows, Israeli tech leaders may find it increasingly challenging to build and scale their companies.

Israel’s relatively small population translates into an insignificant domestic market forcing the industry to look at exports as the chief source of revenue.

With the unstable domestic situation and worsening external relations that such disruptions can potentially engender, Israel- based tech market may not be able to unlock new export opportunities. Countries like India, which have a significant and growing tech partnership with Israel, should be justifiably concerned.

Pull Factors

Tech leaders may be attracted to the prospect of moving their operations to countries with larger markets, such as the United States or China or even India. This could provide them with a more extensive customer base and increased growth potential. Relocating to a larger tech hub may provide Israeli tech leaders with more significant investment opportunities and access to a more extensive network of partners, suppliers, and customers.

Even more important, these tech countries operating from other countries may offer a larger and more diverse talent pool, enabling Israeli tech leaders to build more robust and competitive teams.

After all, with images of rocket attacks and suicide bombings filling TV news screens on an almost daily basis, Israel holds little attraction for the talented but unadventurous expat techies seeking to sell their skills abroad. And if such countries have a low cost of living, so much the better.

ARE THE PROPOSED JUDICIAL REFORMS TO BE BLAMED?

The judicial changes in Israel are set to impact all businesses, but the tech sector’s response is particularly critical due to its significant contribution to the nation’s economy. High-tech products and services account for 54 per cent of Israel’s exports, as reported by the Israel Innovation Authority, a government support agency.

Israeli entrepreneurs have established over 90 “unicorns” or privately held companies valued at over $1 billion, such as Moon Active and eToro. The departure of top-earning individuals and the companies they lead could have severe consequences, considering 20 per cent of the population generates 81 per cent of the nation’s tax revenue.

The recently formed government, which includes ultra-Orthodox and ultranationalist party members, heavily depends on government subsidies. Ultra-Orthodox parties need these subsidies as a low number of their members participate in the labour market, while ultranationalist parties require funds to maintain settlements in the West Bank.

Implications

A Times of Israel article, sounding the warning bell, claims that the health tech subsector could be the worst impacted. This sector needs massive amounts of longterm foreign investments, top scientific brains and international academic and commercial collaborations, making it the most vulnerable if Israel loses its perception as a liberal democracy with a functional rule of the law.

Health tech leaders are already reporting a steady drop in FDI, and their top-notch researchers mining for opportunities abroad.

It must be noted that health tech constitutes 20 per cent of the tech ecosystem in Israel, with over 1500 companies employing some 30,000 employees, sustained by FDI worth more than $4.6 billion in the last two years alone. According to Israel Innovation Author- ity figures, in 2022 alone, health tech alone saw investments worth $ 2 billion.

Early this month, 56 American economists sent a letter to Mr Netanyahu arguing that his government’s judicial proposals “would adversely affect the Israeli economy by weakening the rule of law and thereby moving Israel in the direction of Hungary and Poland.”

Historically, bolstered by its impeccable reputation for high-quality scientific culture, Israel has attracted a disproportionate amount of funding from the EU as grants for academic and commercial R&D; all this may seem a backslide as the EU gets distracted by the unending political turmoil and rise of the extreme right, tightening its purse strings.

IS THERE A SILVER LINING?

While the potential departure of some of Israel’s tech leaders may seem concerning, it is essential to consider the potential benefits. Brain drain is always a worrying development for any nation that prides itself as a cradle of innovation- the departure of tech leaders would be the worst drain.

On the other hand, Israeli tech leaders relocating their businesses to other countries may increase global awareness and recognition of Israeli innovation. Israeli tech leaders relocating to other countries may forge new international partnerships and facilitate cross-border collaboration, which could benefit the broader Israeli tech sector.

The departure of established tech leaders could create space for a new generation of entrepreneurs to emerge and build their businesses within Israel. This could lead to the development of a more diverse and robust start-up ecosystem in the country. The potential exodus of tech leaders may prompt the Israeli government to address the concerns driving this trend. This could include implementing policies to improve the business environment, reduce the cost of living, and invest in the local tech talent pool.

The prospect of Israeli tech leaders leaving the country raises several important questions and concerns about the future of the nation’s technology sector. While the potential exodus may have some negative implications, such as brain drain and a loss of innovation, it could also lead to new opportunities for international expansion, collaboration, and the development of a stronger startup ecosystem.

Ultimately, whether to leave Israel will depend on each tech leader’s circumstances and goals. As the global technology landscape evolves, Israeli tech leaders must carefully weigh the potential benefits and drawbacks of relocating their businesses, considering both the short-term and long-term implications for themselves, their companies, and the broader Israeli tech sector.

For India, the concern should come as a wake-up call because it has seldom given importance to this brain drain for the last seven decades of its independence when its most talented people have been lured overseas. India, too, needs to finally plug this hole, albeit in a democratic manner.