Israel recorded a 77.6% decline in foreign direct investment (FDI) in the first three months of 2023 compared with the same period in 2022, according to figures from a report published by the Ministry of Finance.

Israel attracted just $2.6bn (NIS10.19bn) in FDI inflows during the first quarter of 2023, the report noted. In comparison, the country attracted $11.63bn in the first three months of 2022.

The report said that global challenges such as falling valuations of US technology companies, the impact of the Ukraine war as well as local uncertainties were contributing factors to this slump in FDI.

The drop in Israel’s FDI is partially due to global inflation and interest rates generally, according to Beth Morrissey, managing partner at Kleiman International Consultants, an emerging markets advisory based in Washington, DC.

“In the first quarter, it can be attributed to the judicial overhaul and rising political risk [in Israel], but the downturn had started earlier, driven partially by high real estate prices, pushed up by tech execs from Israel and overseas,” she said.

She added that in addition to the drop in FDI in the first quarter of 2023, the value of average tech exit transactions sank by 80% while foreign company greenfield investment declined 50% by value, citing ministry figures.

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Israel attracted a total of $29.32bn of FDI in 2022, according to the report. It added that about $21bn (or 72%) came from US-based investors. British investors accounted for $2.4bn (8% of all FDI), while other major investors included Germany, Switzerland, France, Japan and Canada.

By comparison, Israel attracted $46.9bn in FDI inflows in 2021 and $26.4bn in 2020, according to ministry data.

Approximately 54% of all FDI into Israel focused on the software and IT services industry in 2022, according to the report. Other major sectors receiving investment included life sciences, internet and miscellaneous technology.

A worsening political crisis hits Israel FDI

Since the beginning of 2023, Israel has been embroiled in domestic political turmoil after the government proposed judicial reforms that alter the country’s legal system.

In July, Israel’s parliament passed the law after strong backlash from the opposition parties and ongoing street protests. On 12 September, Israel’s Supreme Court heard challenges against the new law. A ruling is not expected for several weeks and could lead to further political division.

Analysts have raised concerns about the impact of the judicial reforms on Israel’s tech ecosystem. Critics argue that the reforms could undermine the country’s judicial independence and impact the business environment.

“The business community is worried about the undermining of rule of law, with some warning Israel’s backtracking on democracy will result in a huge brain drain as the well-educated, tech-savvy entrepreneurs relocate to western Europe,” said Morrissey. “In addition, the new two-year budget, projecting wider deficits on heavy spending, could result in credit rating downgrades, and this also weighs on investors.”