Israeli police officers walk ahead of a demonstration by Israel’s hi-tech sector, as Israeli Prime Minister Benjamin Netanyahu’s nationalist coalition government presses on with its judicial overhaul, inÊTel Aviv, Israel, March 14, 2023. Photo: REUTERS/Nir Elias/File Photo

The government’s plan to overhaul the judicial system is harming investor confidence and pushing high-tech firms to relocate abroad, Israel’s state-backed agency that supports high-tech companies said on Monday.

A survey by the Israel Innovation Authority found 80% of startups established so far this year were opened outside Israel and that companies also intend to register their future intellectual property overseas – which would result in a severe blow to Israel’s tax coffers.

Israel’s high-tech sector employs 10% of the country’s workforce accounting for around 15% of economic output, more than half of exports and a quarter of tax income.

Proposals by Prime Minister Benjamin Netanyahu’s hard-right coalition to give the government greater say in the selection of judges while limiting the Supreme Court’s power to strike down legislation have worried current and potential investors.

Final approval has been delayed after widespread protests to try and find a compromise between proponents and opponents.

“Even if the legal-judicial crisis is solved, it will take time to reach a solution, and even after this, it will take time to build confidence with investors once more,” said Dror Bin, chief executive of the Innovation Authority, adding that the legal plan was exacerbating harm from a weaker economy.

In a report delivered to of Innovation, Science and Technology Minister Ofir Akunis, the authority cited a significant gap between tech stocks traded in Tel Aviv and on Nasdaq.

While the Nasdaq is up 17% this year, Israel’s tech index is down 4%.

Should the gap widen further, “many Israeli hi-tech companies will find it very hard to raise investment and will be forced to close or move to other countries,” it said.

It added that high-tech fundraising in the first quarter was just $1.7 billion, the lowest quarterly figure since 2019.

The authority recommended a number of steps such as easing regulations, incentives to encourage investment and incentives for startups to register intellectual property in Israel.

“The findings…require the government to take rapid action in order to reverse the worrying trends it highlights,” said Akunis, a long-time Netanyahu adviser.