For over 20 years, Israel’s economy has demonstrated continued strength, growth and stability. Despite the 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.
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, it now appears on the radar of many leading international companies, who closely track trends evolving in Israel with an eye to investing in and acquiring innovative technology. Companies working in cyber security; automotive technology (aimed at autonomous driving solutions); artificial intelligence (AI), including big data, deep learning and the Internet of Things (IOT); and fintech are expected to continue to attract significant non-Israeli investment well into 2018.
The local hi-tech economy is greatly influenced by global trends. In 2017, international interest in Israeli technology remained strong, as reflected by the volume of international investments in, and acquisitions of, Israeli-based tech companies. Such international interest is also reflected in the continued presence of more than 200 development centres of multinational top-tier corporations.
Traditionally, it was US companies who 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 throughout 2018.
The local technology ecosystem also continues to expand, 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. Many international companies have decided to invest in incubators and accelerators as a way of spotting future stars with original ideas and technology. Major financial institutions sponsor such developments, recognising the potential opportunities for their own businesses.
The Israeli government endeavours to support the technology ecosystem, including through the new National Authority for Technological Innovation (NATI), which replaced the Office of the Chief Scientist (OCS). Following the 2016 introduction of an important amendment to the R&D Law, limitations on the transfer of OCS-sponsored technology were eased. In addition, in 2017, new relevant tax rules came into effect. These rules provide benefits to multinational companies holding their intellectual property in Israel, regulate the taxation of online-based businesses and employee incentives, and expand the scope of tax deferrals for corporate restructuring.
Infrastructure – Electricity, Gas and Transportation
In September 2017, the Israeli government published a five-year development plan, with the intention of modernising Israeli infrastructure. This plan led to the initiation by government offices of a large number of infrastructure projects, including those related to transportation, electricity, water, gas, roads and waste treatment.
The government of Israel has started taking measures towards reducing emissions and achieving, by 2020, the target of energy produced from renewable sources representing at least 10% of total energy consumption. As part of these measures, the Electricity Authority advertised its intention to issue a series of tenders, over the next couple of years, for the construction of photovoltaic power stations, with a total capacity of 1,200 MW.
The commercialisation of the Israeli offshore gas fields has seen some recent significant developments. In 2016, the Israeli government adopted an amended regulatory framework for the exploitation of offshore gas fields, breaking the impasse that held back the commercialisation of Israel’s natural gas resources.
To generate more competition and enable the supply of gas from the various fields, the government is tendering new Mediterranean oil and gas exploration concessions. It is also making significant efforts to encourage new international players to submit bids for the exploration of Israel’s rich offshore subsoil. This subsoil remains for the most part still unexplored, despite the highly encouraging findings of an international study.
On the development side, Greek company Energean has acquired the concessions for the Karish and Tanin fields which, once developed, will introduce competition to the Tamar and Leviathan fields. The Israeli government’s decision to allow the construction of an offshore open-access pipeline, as part of the Karish infrastructure, is also aimed at boosting competition.
The investment in transportation infrastructure is focused on rail projects. These include extension of the current Jerusalem Light Rail, construction of the Tel Aviv Light Rail, and extending and modernising Israeli railroads.
Investments and Capital Markets
Israeli hi-tech and low-tech companies continue to attract local and international investors, ranging from early-stage angel investors through to venture capital and private equity funds.
In contrast to 2016, and in light of high US IPO activity in 2017, Israeli companies seeking an exit have also set their sights on IPOs, in addition to M&A and private equity transactions.
The efforts of the Tel Aviv Stock Exchange (TASE), and the easing of certain requirements introduced by the Israel Securities Authority (ISA), have begun to bear fruit. In 2017, more than 15 new companies (either local or foreign) joined TASE and the trading volumes on TASE rose.
The continuing rise in the housing market remains a contentious topic, on the public, political and economic fronts. In 2017, the government continued to promote various solutions aimed at cooling the housing market. These solutions include government-sponsored construction, low-rent housing projects, opening the market to non-Israeli construction companies, and new taxation for investors in residential projects. It is yet to be seen if these measures will succeed in stabilising housing prices in 2018.
Another issue on the local economic agenda for 2018 is the still-awaited implementation of measures to increase competition. These measures were brought into legislation in 2013, through the Law for Promotion of Competition and Reduction of Concentration, which was adopted following the 2011 “social protest." Though the final target date for diversification has been set for 2019, it is anticipated that in 2018 several of Israel’s holding companies will commence the disposition of certain financial and non-financial assets, to conform to requirements to eliminate concentration of assets and to break down pyramid holding structures. These disposals are expected to be of interest to foreign buyers, particularly the sell-off of certain financial businesses.
Local Legal Environment
The strong economic conditions and vibrant business climate continue to affect the local legal environment. The ongoing international interest in Israeli companies, assets and technologies, the complex infrastructure projects in planning and under construction, and the ever-complicated regulatory environment require local law firms to continue to broaden their capabilities. Although Israel has a large per capita concentration of legal professionals, the competence required to service cross-border clients is limited to a smaller circle of law firms, namely those with an international mindset.