The high-tech industry is maturing

does Israeli regulation also need to move up a grade?

The maturation of the Israeli high-tech industry, reflected among others by the wave of Israeli growth companies’ stock offerings, is a positive sign for the economy. Nevertheless, it also raises a series of questions that the government will need to contend with: the mature companies newly registered on the stock exchange will have new needs or such that existed previously on a much smaller scale.

Among others, the companies will want to continue growing inorganically i.e., by acquiring companies in Israel and overseas to obtain access to their intellectual property and their technological talent. This may require the financial and banking systems in Israel to make changes and adjustments in order to offer lines of credit, loans, and other financing products that are suited to global companies growing rapidly, whose risk levels are still high, and that may not yet be profitable. Furthermore, it will be necessary to ensure that the M&A activity of Israeli and foreign companies is subject to transparent regulation, including aspects related to taxation and competition. Some of the companies’ needs e.g., the ability to easily transfer employees and employ foreign experts in Israel, have already been addressed in recent years.

The Israeli capital market and its various financial players will also need to take the next step and broaden their expertise in this field. For example, the institutional entities will need to ensure that their analysis departments specialize in relevant areas so that they can invest in the public technology companies which will become part of the financial portfolio of Israeli savers. Banks too will need to develop expertise and learn how to evaluate risk so they can offer loans to the Israeli companies. Furthermore, as more technology companies are listed for trade in Tel Aviv, the more the Israeli capital market will be exposed to shockwaves in the worlds of technology, thereby raising the risk of adversely affecting the local stock exchange where the mix of companies traded is increasingly changing. This in turn, may also affect the pension savings of Israeli citizens, increasing their exposure to fluctuations should the pension and insurance entities increase their investments in this field.

As this trend continues, questions may arise regarding Israeli labor laws and their compatibility to management of global public companies. This is especially pertinent for Israeli companies that become large multinational corporations obligated to act with transparency towards investors and which are required to guarantee business continuity and the focus of their activity, or those whose activity is in Israel. There are also general economic ramifications for the employees of these companies. For example, Israel currently has the opportunity to become a world pioneer in enforcing transparency with employees possessing stock options who today receive only minimal information from their employers. In addition, a new wave of people getting rich from high-tech may lead to increased inequality in the economy. Such a development could cause negative sentiment towards employees and senior managers in high-tech and influence decisionmakers when deciding future policy.

At the same time, this recent trend, most of which was characterized by fewer openings of new R&D centers alongside an increase in the rate of Israeli companies’ stock offerings, has had no unequivocal short-term influence on state revenue from corporate tax. Indeed, an analysis conducted by Deloitte for the National Economic Council showed that the rate of tax paid by R&D centers according to the ‘Cost-Plus’ method does not fundamentally differ from corporate tax paid by Israeli companies.16 Nevertheless, the impact of the Biden administration’s Acceleration Program, and the G7 declaration calling for a minimal global rate of corporate tax may change this situation.

The change in the mix of Israeli companies, and their reliance on mature Israeli technology companies, will require the Innovation Authority and the government to examine the variety of existing supportive tools for encouraging R&D. Today, most of the Authority’s support programs are focused on early-stage companies. Nevertheless, economic theory indicates that a stock offering generally leads to a decline in the level of a company’s innovation and there may be room for expanding the Authority’s support for companies’ R&D that is considered high-risk.

Ultimately, Israeli regulators and legislators must examine the ramifications of the hightech situation on their field. The more the government accompanies the industry and is attentive to the regulatory aspects of its needs, the more the industry can continue growing and prospering, thereby recontributing to economic growth. On the other hand, difficulties posed by the government for the high-tech companies that are global by nature may cause them to transfer activity to overseas markets offering more attractive or comfortable conditions that will enable them to sustain their growth.