For over 20 years, Israel’s economy has demonstrated continued strength, growth and stability. Despite many internal and external challenges emanating from its unique position, Israel has evolved into the “Start-Up Nation” of technological innovation, with a strong local currency, an active local economy and robust export industries. The Covid-19 pandemic has highlighted the strengths and durability of the Israeli economy, and emphasised Israel’s position in the global economy.
The impact of Covid-19 on Israel’s economy has been relatively contained, with its GDP expected to shrink by only 5% compared to 2019. The government has launched numerous programmes and funds, committing over EUR20 billion in state aid for health care and civil provisions, expanding the social security net, business continuity initiatives and economic acceleration plans.
Innovation and technology
In the innovation and technology spheres, the “Start-Up Nation” remains active and growing. Indeed, Israel is widely celebrated as a centre of technological excellence. As a result, Israel is on the radar of many leading international and multinational companies who closely track trends evolving in Israel with an eye to investing in and acquiring innovative technology. Companies working in cybersecurity; healthcare; artificial intelligence (AI), including big data and deep learning; fintech; foodtech; femtech; and automotive technology are expected to continue to attract significant non-Israeli investment.
The local high-tech economy is greatly influenced by global trends. Despite the Covid-19 pandemic, which has slowed down transactions globally, international interest in Israeli technology remains strong. In 2020, investments in Israeli start-ups exceeded the amounts invested in 2019, shifting from seed investments to larger investments in more established companies. Such international interest in Israeli innovation and technology is also reflected in the continued presence of more than 350 development centres of multinational top-tier corporations. The Covid-19 pandemic has also created new opportunities for innovation and technology in the fields of cybersecurity, healthcare, fintech, industry 4.0 and agritech/foodtech. As a result, Israel has seen a flurry of new start-ups in these fields.
Traditionally, US companies led the way in making investments in Israel. Though US interest remains strong, in recent years, Europe, China and Japan have begun to catch up, a trend that will most likely continue into the new decade. Additionally, with the recent accords between Israel, the UAE and Bahrain, investors from these countries are looking to invest in Israeli companies and reap technological and economic benefits going forward.
The local technology ecosystem is now fully expanded, branching out from the traditional centres in Tel Aviv, Haifa and Herzliya to Jerusalem, the Galilee and Be’er Sheva. This has led to the creation of numerous working spaces, accelerators, incubators and early-stage funds. International companies continue to open R&D centres throughout the country, as well as investing in incubators and accelerators as a way of spotting future stars with original ideas and technology. Major financial institutions and strategic players sponsor such developments, recognising the potential opportunities for their own businesses.
The Israeli government endeavours to support the technology ecosystem, including through the Israeli Innovation Authority (IIA), which in 2016 replaced the Office of the Chief Scientist (OCS). After start-up companies faced difficulties raising investments during the initial stages of the Covid-19 pandemic, the IIA stepped in and increased the funding available to start-ups, giving such companies the lifeline needed to continue.
Furthermore, long-term changes under the 2016 overhaul of the R&D Law have made IIA-sponsored technology more accessible to foreign investors and purchasers, as such sponsored technology may now be transferred outside of Israel. Israeli taxation rules also provide benefits to multinational companies holding their intellectual property in Israel, offer capital gains exemptions to foreign investors, and provide tax benefits for corporate restructuring.
In addition to the IIA, the Israeli government initiated new incentive programmes for local institutional investors, aimed at increasing their investment in the local innovation ecosystem through governmental underwriting for such investments. It also encouraged individuals, partnerships and certain corporations to invest in Israeli early-stage start-up companies, by allowing a recognition of equity investment as a deductible expense for tax purposes.
Infrastructure – electricity, gas and transportation
Israel is in the midst of an infrastructure boom. The annual investment in infrastructure for the next ten years is expected to more than double, from USD6 billion to USD14 billion.
In the transportation sector, major projects in almost all subsectors – railways, metro systems, new roads, tunnels and bridges, and seaport expansion – all saw a significant rise in volume, including the publication of new tenders.
Specifically, the period from late 2019 into 2020 was marked by a slew of major tenders and awards in the rail industry (light rail, regular rail and high-speed), including for projects in Jerusalem, Tel Aviv and Haifa-Nazareth. These tenders all involved consortia consisting of major international players.
In the electricity sector, the Israeli government continues to take measures toward reducing CO2 emissions. In a recent decision, the government reaffirmed that by 2030, 30% of the total energy production in Israel will be from renewable sources and 70% from natural gas. Accordingly, several projects for photovoltaic and gas-operated power plants are being promoted and are expected to be tendered in the next year.
More notably, the government launched a major reform in the electricity sector, offering for sale five of the Israel Electric Corporation's most aged gas power plants. In 2019, a Sino-Israeli consortium acquired the first power station, and in 2020, an Israeli consortium acquired the second.
In the gas sector, Israel continues to benefit from the huge gas discoveries of the last decade. The development of the Tamar and Leviathan gas fields, the fourth and sixth largest gas discoveries in the past decade, has led to substantial investments in gas infrastructures.
A major change is also occurring in the shipping sector, with two new seaports expected to open in 2021. Israel’s largest existing seaport, located in Haifa, is also expected to be privatised in 2021, with the government keen on foreign companies’ involvement in the purchase.
Investments and capital markets
Israeli high-tech and older economy companies continue to attract local and international investors, ranging from early-stage angel investors through to venture capital, private equity and hedge funds.
Strategic mergers and acquisitions, as well as private equity transactions, continue to dominate the local exit market. Certain Israeli companies seeking an exit have also set their sights on IPOs, which have flourished in 2020.
For years, Israel’s capital market was considered less attractive, and many Israeli companies chose IPOs in US and other international markets. The privatisation of the Tel Aviv Stock Exchange (TASE), completed in 2019, has turned it into a more favoured venue for Israeli companies seeking access to the international markets. The Israel Securities Authority also launched a number of new initiatives aimed at easing certain regulatory requirements and enabling more fundraising channels on the TASE.
These processes have marked 2020 as a turning point for TASE, with over 30 IPOs completed, or scheduled to be completed, until the end of the year, compared to only seven in 2019. In addition, 2020 saw a rise of 60%, compared to 2019, in trading volumes on the TASE. The 2020 wave of IPOs included companies from a variety of sectors, such as technology, green energy and foodtech, adding to newcomers from the real estate and finance sectors, as was the trend in recent years.
TASE has also established a new platform allowing start-ups and special purpose partnerships to raise funds from institutional investors, without being subject to full-blown prospectus requirements. The new platform, “TASE UP”, provides new, early-stage financing options and also increases institutional investors’ exposure to the start-up sphere.
Similar to other jurisdictions, navigating the Israeli regulatory landscape remains a challenge for both local and international companies. Despite the Israeli government's initiatives to ease the regulatory burden, multiple governmental agencies and offices continue to require licences, approvals and certifications to set up and operate new and existing ventures. Securities, banking, competition, environment, public procurement, consumer protection, communications, health, importation and standards are some of the areas covered by the regulatory agencies. Recent years have also seen the introduction of new regulatory requirements covering the areas of privacy and data protection and certain capital market niches, including cryptocurrencies and crowdfunding. Financial regulators are now encouraging the non-banking financial sector to compete actively with banks. One of the positive impacts of Covid-19 is the payment sector’s increasing adoption of long-awaited NFC payment solutions.
Local legal environment
Looking at 2020 as a whole, Covid-19 has had only a limited effect on Israel’s strong economic conditions and vibrant business climate. Local law firms must continue to broaden their capabilities to service the international interest in Israeli companies, assets and technologies; the complex infrastructure projects in planning and under construction; and the ever-complicated regulatory environment.