Exit strategy? 90% of entrepreneurs: If we start a company today, it will be outside of Israel

In almost ironic proximity, two studies have been published that illustrate the depth of the dependence of Israel's economy on high-tech and the magnitude of the danger it faces if the sector is harmed. On Sunday, the Israel Advanced Technology Industries (IATI) unveiled a report conducted with Deloitte Israel on the contribution of the high-tech industry to the local economy. Although there is no surprise in the fact that Israel is dependent on high-tech, the extent of the reliance shows how important the industry actually is.

The most interesting figure reveals that 45%, i.e. almost half of the growth in Israel between 2017 and 2021, originates in high-tech. The direct contribution of the high-tech industry to GDP amounted to NIS 240 billion (approximately $65 billion) or 16% in 2021, and its total contribution, together with satellite industries, reached NIS 360 billion ($100 billion). Deloitte estimates the indirect contribution to other industries at NIS 70 billion ($19 billion) to NIS 120 billion ($32.6 billion) a year, with this section including direct purchases by high-tech companies from local suppliers, ranging from raw materials to catering and cleaning services. "This rolling value drives the economy, and it is much greater than the impact measured by the actual expenses of the companies," the study read.

Protests against the judicial coup.

Even at the individual level of high-tech workers, some of whom are leading the protest against the judicial coup, their relatively high contribution to the state coffers stands out. High-tech workers, who make up about 12% of the total workforce in the country, contributed 34% of income tax from employees in 2021 and 65% of total individual taxation. The total contribution of the employees to the state coffers was, according to Deloitte's estimate, about NIS 50-60 billion ($13.6-16.3 billion). The meaning of this figure is that the employees of the high-tech sector contribute to state taxes three times more than their relative share among the employees.

The authors of the report state that its purpose is not "to glorify the industry, but to truly examine its contribution, to identify the places where there is a clear contribution compared to those where the contribution is a potential that has not yet been realized."

The Deloitte report was written long before the current upheaval in Israel, between May and October 2022. It is therefore skewed favorably by 2021, which was an exceptional year by any standard. However, the authors of the report also noted the growth that continued in the industry last year. In the last five years, Israeli high-tech grew at an average annual rate of almost 11%, compared to a much lower growth rate of about 4% in the rest of the economy in Israel.

Decision makers should be losing sleep over the data in the Deloitte as its publishing coincided with a new survey conducted by Michal Tsur, co-founder and president of the software company Kaltura, and by Adam Fisher, a partner in the American venture capital fund Bessemer Venture Partners, which showed that 90% of the entrepreneurs and executives of high-tech companies say that if they had to re-establish the company today, they would incorporate it outside of Israel.

Particularly disturbing was the fact that 80% of the large companies (companies that employ more than 100 people) admitted to having discussed the option of Corporate Inversion. Corporate Inversion is an operation that takes from a few weeks to a few months, depending on the size of the company, in which a new company is registered abroad and the activity in Israel becomes a wholly owned subsidiary of the foreign company. Corporate Inversion has consequences for Israel's tax revenues in the immediate term and in the longer term consequences for the intellectual property of the companies and the center of business activity, that is, the employment of workers abroad at the expense of activity in Israel.

Israeli high-tech companies used to incorporate outside of Israel, mainly in the state of Delaware in the U.S. Until 15-20 years ago, American investors would be more comfortable investing in such Israeli companies, which also benefited from tax benefits in the U.S. Since then Israel has created more favorable conditions for the companies and has also lowered the corporate tax. With the impending judicial coup, the issue of returning to being "Delaware companies" has become very acute and accounting offices and lawyers report an increased interest in the process.

In the "softer" questions of the survey, 63% of the respondents stated that they had received a request from the board or held a discussion with the management regarding the danger of the company's exposure to the shekel and 86% were asked by the investors about the legal reform. Around 71% of the managers stated that they feel that more conversations about relocation are being conducted by the employees than before.

VC funds, both Israeli and international, are also disturbed by the pending judicial coup in Israel and 71% of the fund managers who participated in the survey answered that they would currently prefer to invest in a company that is not registered in Israel. Some 23% stated that they had no preference on the subject and 6% preferred not to answer the sensitive question. About 83% of the respondents have initiated or know of other funds that are invested in their portfolio companies, which have initiated a discussion regarding corporate inversion.