Roman Kurnovskii

INVESTOR AND EMPLOYEE SENTIMENT CHANGES IN ISRAEL'S IT INDUSTRY IN LIGHT OF THE IMPLEMENTED JUDICIAL REFORM

R.M. Kurnovskii

PhD student of the Department of International Economic Relations, Faculty of Economics, Peoples' Friendship University of Russia, Moscow, Russia

Abstract:

The judicial reform in Israel may have both positive and negative implications for the country's IT industry. On the one hand, increasing the efficiency and transparency of the judicial system may provide a more favorable environment for businesses, potentially leading to new investments and talent attraction. On the other hand, the complexities and extended duration of legal proceedings might decrease investment activity and increase business costs.

Keywords: Judicial reform, IT industry, Israel, efficiency, transparency, investments, talent.

Introduction

Israel's IT industry is one of the country's leading economic sectors, generating tens of billions of dollars in exports annually. In 2022, the IT industry accounted for 18.1% of the country's entire GDP [6]. In recent years, it has experienced rapid growth, driven by a number of factors, including the availability of highly qualified specialists, a favorable investment climate, and the growing demand for innovations from global companies.

In 2023, the Israeli government introduced a judicial reform bill to the Knesset aimed at increasing the efficiency and transparency of the judicial system. The bill provoked a mixed reaction in society, including within the IT community [8].

Research Objective

The purpose of this article is to analyze the changes in the sentiment of investors and employees in Israel's IT industry in the context of the implemented judicial reform.

Research Methodology

The study utilized the method of analyzing data from open sources, including media articles, blog and social media posts, as well as data from surveys and research.

Main Text

The judicial reform introduced to the Knesset by Israel in 2023 caused a mixed reaction in society, including in the IT community.

Among investors, there is a wide range of opinions regarding the judicial reform. Some investors view the reforms as creating a favorable environment for the growth of the IT industry. They note that improving the efficiency of the judicial system will allow for faster dispute resolution, which will help reduce risks and increase the country's investment attractiveness.

Other investors fear that the reforms could lead to a decrease in the level of protection for property rights and investments. They point out that new laws could make legal proceedings more complex and lengthy, which could negatively impact the country's business climate.

There is also a wide spectrum of opinions among IT company employees. Some employees believe that the reforms are necessary to increase the transparency and efficiency of the judicial system. They note that this could help reduce corruption and abuse by officials.

Other employees fear that the reforms could diminish the protection of workers' rights. They point out that the new laws could make legal proceedings regarding labor disputes more complex and lengthy, which could negatively affect the situation of workers in the country.

Israel's economy has already suffered in anticipation of new protests and the possibility of widespread instability.

Reuters reported that startup funding in Israel's booming tech sector fell by nearly 70% in the first half of 2023 since proposals for judicial reform were first unveiled [7].

According to a recent survey by the Israel Innovation Authority, the country's political uncertainty prompted up to 80% of new Israeli startups to register abroad by March of this year, compared to 20% in 2022, and fundraising by tech companies had already fallen by 65% in 2022. The reaction to the reforms "threatens to push the economy into a permanent slowdown in growth rates," Nicholas Farr, an economist at Capital Economics, wrote in a note [5].

"The high-tech sector needs stability, clear rules of the game, and the certainty that... they will be given a fair trial," said Karnit Flug, former governor of the Bank of Israel and currently vice president of the Israel Democracy Institute, adding that otherwise investors will not want to invest [4].

The rating agency Moody's directly points to the impact of the judicial reform on the economy and the state system.

"We believe that the comprehensive nature of the government's plans could significantly weaken the independence of the judiciary and disrupt the balance between the various branches of government," Moody's analysts write.

"Some of our earlier concerns regarding the impact of the reform on the Israeli economy are beginning to materialize. Venture capital and investments in Israeli high-tech companies declined significantly in the first half of 2023 to $3.7 billion. This is the lowest figure since 2019. There are signs that Israel is falling out of global trends in the high-tech industry," the report states [1].

According to the Central Bureau of Statistics of Israel, the highest number of open vacancies was observed in the post-pandemic period [3].

Data from the Central Bureau of Statistics of Israel confirms that there was a significant increase in the number of open vacancies in the post-pandemic period. In August 2022, there were 157,309, which is 57% more than in August 2021. This growth was driven by several factors, including the post-pandemic economic recovery, increased demand for labor from technology companies and other sectors, and higher immigration rates to Israel.

In July 2023, the number of open vacancies decreased by 24% compared to July 2022, down to 119,465. This decline may be due to several factors, including:

  • Deterioration of the global economic situation. As a result of the war in Ukraine, inflation, and other economic problems, many companies are cutting costs and postponing expansion plans;
  • A slowdown in the growth of the Israeli economy. In recent months, the growth rate of the Israeli economy has slowed, which can also lead to a decrease in labor demand;
  • Concerns among some employers and investors regarding the judicial reform in Israel. The Knesset passed a judicial reform law that introduces a series of changes to the Israeli judicial system. These changes have raised concerns among some employers and investors who believe they could lead to increased litigation costs and decreased business environment stability.

According to data from the Central Bureau of Statistics of Israel, the number of vacancies in the IT industry continues to decline, although the rate of decline has slowed [3].

According to the Central Bureau of Statistics of Israel, as of July 1, 2023, the number of people employed in the country's IT sector is 3,664 thousand [3]. In July 2022, the number of people employed in the IT industry was 3,641 thousand.

Data from the Central Bureau of Statistics of Israel confirms that the number of people employed in the country's IT sector increased by 23 thousand from July 2022 to July 2023. This means that Israel's IT sector continues to grow and is one of the most important sectors of the country's economy.

There are several factors that may explain the employment growth in the Israeli IT sector. These include:

  • Expansion of the Israeli IT industry. In recent years, the Israeli IT industry has been expanding rapidly, leading to the creation of new jobs;
  • An increase in the level of education in information technology. Israeli universities and colleges produce a large number of qualified IT professionals, providing the IT sector with a steady influx of labor.

Nevertheless, the growth of employed people in the IT industry has been insignificant; this is possibly characterized by a wait-and-see attitude toward the implemented judicial reform, as well as overall economic problems in the world.

Despite these problems, the Israeli IT sector remains one of the most dynamic and promising sectors of the country's economy. Employment growth in this sector is expected to continue in the coming years.

Analysis of Factors Influencing the Sentiments of Investors and IT Company Employees

A number of factors influence the sentiment of investors and IT company employees, including their expectations from the reforms and their understanding of potential risks and benefits.

Expectations from the reforms. Investors and IT company employees hope that the judicial reform will lead to the following positive consequences:

  • Improved efficiency of the judicial system.
    An efficient judicial system is essential for protecting property rights and investments, as well as ensuring business stability. Investors and IT employees hope the reforms will reduce the time and costs associated with litigation.
  • Increased transparency of the judicial system.
    A transparent judicial system helps reduce corruption and abuse by officials. Investors and IT employees hope the reforms will make the judicial system more accessible and understandable to the public.
  • Reduction of corruption and abuse by officials.
    Corruption and official abuse can damage business and investment opportunities. Investors and IT employees hope the reforms will reduce the level of corruption in the judicial system.
  • Improved protection of property rights and investments.
    The protection of property rights and investments is a key factor for business development. Investors and IT employees hope the reforms will create a more favorable legal framework for doing business.
  • Improved protection of workers' rights.
    The protection of workers' rights is an important factor in attracting and retaining qualified personnel. Investors and IT employees hope the reforms will create a fairer and more transparent system of labor relations.

Potential risks and benefits. Investors and IT company employees are also aware that the judicial reform could have negative consequences, including:

  • Complication and increased duration of legal proceedings.
    New laws and procedures could make litigation more complex and lengthy. This could lead to higher business costs and decreased investment activity.
  • Decreased level of protection for property rights and investments.
    New laws could lead to a lower level of protection for property rights and investments. This could negatively impact the investment climate in the country.
  • Decreased level of protection for workers' rights.
    New laws could lead to a lower level of protection for workers' rights. This could negatively impact the situation of workers in the country.
  • Personal experience interacting with the judicial system.
    Personal experience interacting with the judicial system can also influence the sentiment of investors and IT employees. If they have had negative impressions from the judicial system's work, they may be more critical of the reforms [2].

Investors and IT employees who have positive experiences with the judicial system are more likely to have a positive attitude toward the reforms. They will view them as an opportunity to improve the status quo.

Investors and IT employees who have negative experiences with the judicial system are more likely to be skeptical of the reforms. They will fear that the reforms will not achieve the desired results.

Possible Consequences of the Judicial Reform for the Israeli IT Industry

The judicial reform can have both positive and negative consequences for the Israeli IT industry.

Positive consequences:

  1. Increasing the efficiency and transparency of the judicial system could create a more favorable business environment, which could help attract new investments and talent. This could lead to the growth of Israel's IT industry and transform the country into one of the world's leading innovation hubs;
  2. A more efficient judicial system will allow disputes to be resolved faster and more easily, which could reduce risks and lower business costs. A more transparent judicial system will help reduce corruption and abuse by officials, which could also create a more favorable investment climate.

Negative consequences:

  1. The complication and increased duration of legal proceedings could lead to lower investment activity and higher business costs. This could negatively affect the development of Israel's IT industry;
  2. New laws and procedures could make litigation more complex and lengthy. This could lead to higher business costs, as companies will be forced to spend more time and resources on litigation.

Ultimately, the success of the judicial reform will depend on how well it meets the expectations of investors and IT company employees. If the reforms are implemented successfully, they could contribute to the growth of Israel's IT industry and the country's transformation into a leading global innovation hub.

In the short term, the implementation of the judicial reform could lead to a slight decrease in investment activity in Israel's IT industry. Investors will weigh the potential risks and benefits of the reforms and make capital allocation decisions in Israel with these factors in mind.

In the long term, if the reforms are implemented successfully, they could foster the growth of the Israeli IT industry. Increasing the efficiency and transparency of the judicial system can create a more favorable business environment, which will help attract new investments and talent.

However, since judicial reform is a relatively new phenomenon, it remains unclear how it will evolve in the future.

Research Results

Data analysis showed that there is a wide range of opinions regarding the judicial reform among investors and employees in Israel's IT industry.

Some investors view the reforms as a favorable environment for IT industry growth. They point out that increasing the efficiency of the judicial system will enable faster dispute resolution, thereby reducing risks and boosting the country's investment attractiveness.

Other investors worry that the reforms could diminish the protection of property rights and investments. They note that new laws could render legal proceedings more complex and prolonged, which could adversely affect the country's business climate.

A wide spectrum of opinions also exists among IT company employees. Some believe the reforms are necessary to enhance the transparency and efficiency of the judicial system. They observe that this could help curtail corruption and official abuses.

Other employees are concerned that the reforms might reduce the protection of workers' rights. They highlight that the new laws could make legal proceedings for labor disputes more complex and drawn-out, negatively impacting the status of workers in the country.

Discussion of Results

Based on the results obtained, the following conclusions can be drawn:

  • The judicial reform is ambiguous in nature and could have both positive and negative consequences for the Israeli IT industry;
  • A number of factors influence the sentiment of investors and IT company employees, including their expectations of the reforms and their understanding of potential risks and benefits.

Conclusion

Expectations from the reforms, understanding of potential risks and benefits, as well as personal experience with the judicial system—these are the main factors influencing the sentiment of investors and IT company employees. During the analysis, we found that IT companies in Israel have reduced the number of open vacancies, while slightly increasing the number of people employed in the IT sector. This can be characterized as a wait-and-see approach by IT companies: retaining hired qualified personnel while not hiring new staff.

The judicial reform is ambiguous and could have both positive and negative consequences for Israel's IT industry. The sentiment of investors and IT employees is influenced by several factors, including their expectations from the reforms, their understanding of potential risks and benefits, and their personal experience with the judicial system.

In the short term, the implementation of the judicial reform could lead to a slight decrease in investment activity in the Israeli IT industry. Investors will evaluate the potential risks and benefits of the reforms and make decisions about allocating capital in Israel taking these factors into account.

In the long term, if the reforms are successfully implemented, they could contribute to the growth of the Israeli IT industry. Increasing the efficiency and transparency of the judicial system could create a more favorable environment for business, which would help attract new investments and talent.

The development trends of the Israeli IT industry in the coming years will depend on several factors, including the implementation of the judicial reform, the state of the global economy, and geopolitical processes.

If the judicial reform is implemented successfully, it could contribute to the growth of the Israeli IT industry and transform the country into one of the world's leading centers of innovation.

References

  1. Moody's Report: Concerns over the Israeli economy begin to materialize // https://detaly.co.il/otchet-moody-s-opaseniya-po-povodu-izrailskoj-ekonomiki-nachinayut-sbyvatsya/
  2. High-tech community of Russian-speaking repatriates in Israel // https://t.me/startup\_nation\_12\_checks/1140
  3. Central Bureau of Statistics of Israel // https://www.cbs.gov.il/en/Statistics/Pages/Generators/Time-Series-DataBank.aspx?r=6bc7dfba-fd3e-4344-bdf0-48dfbcca0717\&uptodate=1
  4. Analysis: Israel's tech sector reels from SVB collapse, proposed judicial reform // https://www.reuters.com/technology/israels-tech-sector-reels-svb-collapse-proposed-judicial-reform-2023-04-03/
  5. Israel's judicial reform turmoil threatens economic growth, investment // https://www.reuters.com/world/middle-east/israels-judicial-reform-turmoil-threatens-economic-growth-investment-2023-07-30/
  6. State of High-Tech Industry in Israel report: ups but more downs // https://www.israel21c.org/state-of-high-tech-industry-in-israel-report-ups-but-more-downs/
  7. What are the Israeli judicial reforms and why are they causing such upheaval? // https://www.cbsnews.com/news/israel-judicial-reforms-netanyahu-what-are-changes-and-why-protests/
  8. Levin presented the reform in the judicial system: An override clause with a majority of 61 and a change in the committee for selecting judges // https://www.mako.co.il/news-politics/2023\_q1/Article-3593fb1c4dd7581027.htm

For Citation

@article{Kurnovskii2023IsraelSentiment,
author = {Kurnovskii, R. M.},
title = {Investor and Employee Sentiment Changes in Israel's IT Industry in Light of the Implemented Judicial Reform},
journal = {Political Science Issues},
year = {2023},
volume = {13},
number = {10-2 (98-2)},
pages = {5493--5503},
doi = {10.35775/PSI.2023.98-2.10-2.018},
language = {english}
}
Published Oct 31, 2023 | Updated Dec 31, 2024