Israeli tech sector warns of economic hit from Netanyahu’s hardline policies

Israel’s technology sector has put Benjamin Netanyahu’s hardline new government on notice, warning that its controversial plans to curb the powers of the judiciary could damage the country’s $500bn economy.

On Tuesday, more than 100 Israeli tech groups gave staff permission to join a “warning strike” in Tel Aviv against the plans, which would give the government and its allies control over the appointment of judges, and severely limit the top court’s ability to strike down government decisions.

The hour-long protest drew only a thousand people. But it was the latest in a series of warnings from Israel’s business community about the reform, which critics fear will give the government — widely regarded as the most rightwing in Israeli history — close to unchecked power.

Last week, two former central bank chiefs said that, if enacted as planned, the overhaul could raise Israel’s cost of borrowing. Earlier this month, Standard and Poor’s said it could ultimately harm Israel’s credit rating.

The tech sector’s warnings carry particular resonance given its key role in the economy of the self-styled Startup Nation, where it accounts for around a sixth of gross domestic product, and more than half of exports. In the past two years alone, Israeli tech groups have attracted $42bn of funding.

“Tech is a strategic sector for Israel,” said Assaf Rappaport, chief executive of Wiz, a cloud security start-up, who took part in the protest. “Without democracy, without a system of judicial certainty, the economy cannot thrive, start-ups cannot thrive, tech cannot thrive.”

Government officials argue the changes are needed to rein in a judiciary that has become too activist. But to many tech executives and investors, the proposals look more like a power grab and a recipe for erratic policymaking that could erode the country’s business-friendly framework.

“It becomes a conversation on almost every call [with investors and customers],” said Merav Bahat, founder of the cyber security company Dazz. “The people who are buying goods and technology from us want to buy them from companies that are stable.”

One concern cited by tech workers is that, in combination with the open hostility to minorities displayed by some members of the government — which is dominated by figures with unabashedly ultranationalist, anti-Arab and homophobic views — the judicial reform could make Israel a less attractive place to work.

But the biggest fear is that, in the longer term, the legal uncertainty spawned by the changes could make investors wary about investing in the country, and even prompt founders to start their companies elsewhere.

“At the moment, people are sitting on the fence trying to see what will happen. But I can tell you what will,” said Eran Shir, founder of Nexar, a tech group focused on the automotive sector.

“If I’m starting a new company tomorrow, and I have the option to build it as a US company or an Israeli one, why would I build it as an Israeli one when there is so much uncertainty? . . . I don’t want to take the risk.”

Wiz’s Rappaport said given its relatively small domestic market, Israel was particularly vulnerable to capital and staff being shifted elsewhere.

“We love the Israeli talent and the amazing people that we have here. But there are so many other places in the world with amazing talent that are competing with Israel,” he said.

“The Israeli economy is very, very small. For most of our start-ups and tech companies, and even the multinationals here, the customers are mainly in the US and Europe, and most of our employees are also outside Israel.”

Adam Fisher, managing partner at Bessemer Venture Partners, which has invested $1.5bn in about 50 Israeli start-ups, said he did not expect a “tsunami” of companies pulling out of Israel. But if the reform were passed as planned, there was a risk the country would become “disadvantaged over time”.

“From my experience in other countries, what [could happen] is that when there’s an opportunity to expand an operation in Israel, it’s put off,” he said. “When there’s an opportunity to hire more people, it’s decided to hire somewhere else. Where there’s an investment opportunity in two geographies, the one in Israel may take more time.”

Others are less pessimistic. “I’m not a fan of the reform, but I also don’t think the situation is as bad as it could be,” said Yaron Carni, from Maverick Ventures Israel, a venture capital fund that has raised $180mn over three funds since 2013. “Governments come and go. And reforms come and go. But technology is here to stay. Technology is going to eat the world.”

Netanyahu, Israel’s prime minister, has sought to parry concerns about the overhaul’s economic impact. Last week, he touted a $2bn sale of sovereign bonds as proof that investors still trusted Israel. On Wednesday, he claimed the reforms would strengthen the economy by reducing “superfluous legal processes”.

“Nobody will harm intellectual property rights and the honouring of agreements,” he added. “There is no reason for fear-mongering.”

What worries investors, however, is that if the judicial overhaul is passed, they would have scant recourse against a government that decided to break such promises.

“When the government can do whatever it pleases, it creates a sense of arbitrary rule,” said Bessemer’s Fisher. “Investors like ourselves look at the situation, and you realise: ‘well, that’s the law now — but it can change on a whim’.”