A 17-year record in acquisitions of Israeli startups by foreign investors set in July-September 2017 is arousing concern among economists about the ability of the Israeli economy to maintain and develop its know-how. Figures published last Thursday by the Central Bureau of Statistics show that the volume of exports of startups reached a peak of NIS 5.6 billion in the third quarter (NIS 4.86 billion seasonally adjusted). This is the highest quarterly figure since the dot.com bubble in 2000, and concern is being raised about the large-scale export of Israeli high-tech knowhow, from which the Israeli economy could have derived many billions in profits in the coming years.
In order to realize the macroeconomic significance of this figure, it is necessary to take into account that the Central Bureau of Statistics excludes startups from its general export figures, and therefore reported that Israeli exports grew by only 0.4% in the third quarter. If startups are included in exports, however, the result is that exports grew by the extraordinary rate of 18.5%. The exceptional size of the amount is likely to indicate a large one-time deal, or that the figure is very volatile.
The Central Bureau of Statistics refuses to divulge identifiable particulars about the deals behind such figures, but a little research shows that it did not include the sale of Mobileye to Intel, as many assumed. The Central Bureau of Statistics defines a startup as a company with negligible sales, and considers the acquisition by foreign owners of companies whose added value production activity leaves Israel to be exports. Mobileye, on the other hand, has very substantial revenue, and its main activity is slated to remain in Israel, not move overseas, following the acquisition deal. For this reason, it appears that the main activity behind the record acquisitions is exits of Israeli startups sold to investors.
Research conducted by Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) shows that the quarterly figure for exits is the highest reported in Israel other than in 2000 at the height of the dot.com bubble. The probe shows, however, that what is involved is a real phenomenon, not a one-time. In addition to a bit of national pride, however, there are also very dubious consequences for the future of the economy and the effect on the rate of exchange.
The research found that exports of startups is the main growth engine of exports of services from Israel, a field of endeavor that has moved the economy forward in recent years. In August alone, exports of services were up 8.6%, completing a 34.1% rise over the past 12 months. The entire rise in exports of services in August, however, resulted from startups acquired and removed from the economy; excluding these companies, exports of services fell 0.6%, completing a more modest (but still impressive) 9.5% increase over the past year.
According to Harel chief economist Ofer Klein, the pattern is alarming Israeli economic leaders. "In our opinion, continuation of this trend in the future will be a problem," he writes. "Up until now, most of the companies acquired by foreigners continued operating in Israel and contributing to employment and output. Once these companies are moved out of the economy, their future contribution to the economy will be lost. On the financial side, the sale of these companies brings dollars into the economy and strengthens the shekel and current tax revenues. In the future, however, they will be lacking in the import and exports accounts, exports of goods, and revenue of the companies that have been moved."
Another problem with the exporting of Israeli knowhow is on the exchange rate. Not long ago, Israel decided to restrict exports of natural gas, among other things because of the argument that large-scale exports are liable to cause the "Dutch disease" - excessive appreciation in the local currency, leading to severe damage to the Israeli economy's competitiveness, and even to its degeneration. In the case of the exchange rate, it makes no difference whether the dollars are obtained from gas ports or the sale of startups; both of them bring about the Dutch disease to the same extent.
Published by Globes [online], Israel Business News - www.globes-online.com - on November 19, 2017
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