Israel’s New Foreign Investment Regulator and China

On October 30^th the Prime Minister’s Office announced a decision by the Israeli security cabinet to establish an inter-ministerial committee to review the national security implications of foreign investment in Israel. The committee will be headed by a representative of the Finance Ministry and will include representatives of the Defense Ministry and the National Security Council and observers from the Foreign Ministry, Economy and Industry Ministry and the National Economic Council. And while China isn’t mentioned anywhere in the decision, press reports and statements by government officials make it clear that both Israeli concerns about Chinese investment and US pressure were behind the decision.

The October 30^th decision was the culmination of years of discussions and its timing raises questions because the current government is a “transitional government” ruling without a parliamentary majority and is in power only because neither current PM, Bibi Netanyahu, nor Blue and White Party leader, Benny Gantz, have been able so far to form a government in the aftermath of the two parliamentary elections held in Israel since April 2019. Yet, despite being a transitional government, the security cabinet decided that now is the time to institute a potentially radical reform in Israel’s foreign investment landscape with reverberations that may impact Israel’s foreign relations with the US and China as well as the hi-tech sector which drives much of Israel’s economic growth. Or is it as radical a change as it may appear to be at first glance?

Though the press release leaves open many procedural questions, it’s clear that the committee’s purview and powers will be much narrower than those of the US government’s Committee on Foreign Investment in the United States (CFIUS) or those created by the Canadian Investment Canada Act (ICA). While both CFIUS and the ICA grant broad powers to both block pending investments and to force divestment from completed investments on national security grounds, the Israeli committee’s role will be limited to advising existing regulators regarding the national security issues arising from transactions that already fall under their regulatory purview. In addition, while CFIUS and ICA apply to all foreign investments that raise national security concerns, the committee’s advisory powers will only come into play in connection with transactions in the areas of finance, communications, infrastructure, transportation, and energy. So, it appears that hi-tech investments will not be affected by the security cabinet’s decision.

Concerns that the government was preparing to adopt a cumbersome foreign investment regulatory scheme which would deter Chinese investment have hung over Israel’s hi-tech sector for years, and as Chinese investors have come to play an ever more important role in the Israeli hi-tech sector by providing both much needed funding and market access to Israeli startups, those concerns have only increased. While the publication of the security cabinet’s decision may cause some actors in the hi-tech sector to breathe a sigh of relief, that may be premature. Was this the Israeli government’s final word on this issue and, if so, will it satisfy the US (which is, after all, Israel’s most important strategic partner), or was it the most the government can do at the moment due to the lack of the Knesset majority needed to adopt the legislation that would be required to implement a comprehensive foreign investment regulatory regime like CFIUS or the ICA? Only time will tell.