Israel has witnessed a substantial setback in its foreign direct investment (FDI) landscape, registering a 77.6% decline during the initial quarter of 2023 when compared to the same period in the preceding year, according to data unveiled in a report published by the Ministry of Finance.
The figures elucidate a stark contrast, with Israel attracting a modest $2.6 billion (NIS 10.19 billion) in FDI inflows throughout the first quarter of 2023, in stark juxtaposition to the robust $11.63 billion it drew in the corresponding months of 2022. This downward trajectory is primarily attributed to a confluence of global and domestic challenges, as highlighted in the report.
Global dynamics, such as the depreciation in valuations of prominent US technology companies and the ripple effects of the Ukraine conflict, have cast a shadow on Israel’s FDI landscape. In addition to these global factors, the nation contends with internal uncertainties, which further exacerbate the prevailing slump in FDI.
Beth Morrissey, Managing Partner at Kleiman International Consultants, an emerging markets advisory firm headquartered in Washington, DC, pointed to the broader global context. “The first quarter’s downturn can be attributed to the judicial overhaul and rising political risk within Israel,” she elucidated. However, Morrissey also underlined that this dip had commenced earlier, partly stemming from soaring real estate prices, spurred by both local and international tech executives.
Moreover, the report paints a broader picture of the ramifications of this FDI contraction. It reveals that the value of average tech exit transactions plummeted by a staggering 80%, while foreign company greenfield investments saw a 50% decline in value, corroborating the profound implications of this economic shift.
In 2022, Israel successfully attracted a total of $29.32 billion in FDI, a feat marked by a significant presence of US-based investors, who accounted for approximately $21 billion (72%) of this influx. British investors contributed $2.4 billion (8% of all FDI), with Germany, Switzerland, France, Japan, and Canada also featuring prominently as major investors. This stood in contrast to the preceding years, with Israel drawing $46.9 billion in FDI inflows in 2021 and $26.4 billion in 2020, according to data sourced from the Ministry of Finance.
Diving into the sectors capturing the lion’s share of FDI, the report reveals that around 54% of all FDI into Israel in 2022 was directed towards the software and IT services industry. Additional notable sectors receiving investment included life sciences, internet-related endeavours, and miscellaneous technology.
Israel’s recent tumultuous political landscape, characterised by proposed judicial reforms, has been a critical factor in its FDI downturn. The controversial reforms, which seek to reshape the country’s legal system, sparked significant backlash and street protests. Despite the passage of the law in July, the country’s Supreme Court is currently deliberating on challenges to this legislation, with a decision expected in the coming weeks, potentially further dividing the nation’s political landscape.
Analysts have raised concerns about the potential repercussions of these reforms on Israel’s tech ecosystem. Detractors argue that the changes could compromise the nation’s judicial independence and cast a shadow on the overall business environment. Morrissey emphasised the business community’s apprehensions, with some expressing concerns about a possible brain drain as educated and tech-savvy entrepreneurs contemplate relocating to Western Europe. Additionally, the adoption of a new two-year budget, projecting wider deficits due to substantial spending, could heighten investor apprehensions and potentially lead to credit rating downgrades. These factors collectively contribute to the evolving landscape of FDI in Israel, necessitating careful monitoring and strategic planning in the months ahead.