Will faltering investment numbers threaten Israeli hi-tech’s growth?


In the past decade, the hi-tech sector has emerged as the largest and fastest-growing industry in the Israeli economy, according to a recent “State of the High-Tech Industry in Israel 2023”  report by the Innovation Authority. The sector has witnessed remarkable growth, becoming the primary driver of Israel’s exports and contributing significantly to the country’s GDP. However, the report also highlights some challenges that the industry currently faces.

The report reveals that the hi-tech sector is responsible for the largest share of Israel’s exports and has experienced the highest growth rate in the number of employees and wages. It has transformed from one of the fastest-growing industries to the largest employer in the country. The average annual growth rate of hi-tech employees was 6.3% compared to 2.2% for the overall economy, indicating a threefold faster growth rate in the hi-tech sector. Most of the employment growth in recent years has been driven by technological roles rather than non-technological positions.

In 2022, the hi-tech sector accounted for a significant 18.1% of Israel’s GDP, making it the largest sector in terms of economic output. Over the past decade, the sector’s output has more than doubled, reaching NIS 290 billion in 2022. 

The wage gap is getting bigger

Despite the industry’s success, wage gaps in Israel continue to widen. The average salary in the hi-tech sector in 2022 was NIS 28,385, more than 2.7 times higher than the average salary in the rest of the economy. Moreover, labor productivity in the hi-tech sector was nearly twice as high as the overall economy. However, other sectors such as financial and insurance services and utilities had even higher productivity levels.

The report highlights that 91% of research and development (R&D) in Israel is carried out by the private sector, the highest percentage among OECD countries. The government’s funding for R&D in Israel is the lowest among OECD countries, accounting for only 9% of national R&D expenditure. Additionally, more than 50% of R&D in Israel is funded by sources outside the country, primarily foreign capital.

The Jerusalem hi-tech scene is constantly growing, with hundreds from the local ecosystem attending community events. (credit: Troy O. Fritzhand)

Investments could plummet

Investments in Israeli startups have experienced significant growth, raising around $95 billion from 2013 to early 2023, making Israel the sixth-largest hub globally in terms of capital raised. However, the report also notes a decline in investments since the second half of 2022. In 2022, investments in startups decreased by nearly half, and preliminary data for 2023 indicate a continuing downward trend. This decline in investments raises concerns for the Israeli hi-tech industry and its future growth.

The Israeli hi-tech sector’s decline is further reflected in stock market performance. Israeli technology companies have shown negative returns compared to their NASDAQ counterparts. While NASDAQ has seen recovery and rising technology stocks, the Tel Aviv Technology Index has experienced a decline. This trend, combined with layoffs in the industry, points to a challenging period for the Israeli hi-tech sector.

Dror Bin, CEO of the Israel Innovation Authority, noted: “We have seen a sharp decline in investments and even a decrease in employment in the high-tech sector in recent quarters. The past teaches us that usually, two quarters after the recovery begins in the stock market, as reflected in the rise of the NASDAQ index, there is also an increase in capital raising and employment in the Israeli high-tech industry. Given the rise in the NASDAQ as presented since the beginning of the year, under normal circumstances, one could expect an increase in fund raising and employment in Israel during the summer months, and I hope that will indeed be the case.”

The report emphasizes the critical nature of the coming months for the Israeli hi-tech industry. Historically, a recovery in the stock market has led to an increase in capital funding and employment in the hi-tech sector. However, unless a significant reversal occurs, the decline in investments and the number of employees in Israeli startups is expected to continue in the current year, indicating a potential separation between the Israeli hi-tech industry and global trends.

Despite the challenges, Israel remains a prominent startup hub on a global scale. The country has the third-largest number of technology companies that have raised funding globally, with software-related fields, fintech, and cybersecurity leading the way. The Israeli hi-tech sector contributes significantly to the country’s exports, and Israel has the highest national expenditure on R&D as a percentage of GDP among OECD countries.

Dr. Ami Appelbaum, Chairman of the Israel Innovation Authority, acknowledged the challenges faced by the Israeli hi-tech industry due to global economic factors and a decrease in capital raised, while highlighting recent warnings from global credit rating agencies who have shown concern for Israel’s economy in the face of the government’s proposed judicial reform.

“Concerns about the corporate structure in Israel and warnings from global rating agencies have joined a complex global economic period that began in 2022 with the halt of the extensive capital inflows that governments worldwide provided to stimulate markets during the COVID-19 pandemic. This period continued with the Russia-Ukraine conflict, challenges in global supply chains, and a rise in global inflation and interest rates. All these factors have caused significant difficulties for the Israeli high-tech industry, resulting in a 70% decrease in capital raised in Israel,” he said.

“Concurrently, innovation is intensifying exponentially and will determine which countries lead in national and economic resilience. We are at the threshold of a period in which three domains of innovation are poised to transform the world as we know it: Generative AI, quantum computing and communication, and innovation in climate-related fields. The need to preserve Israel’s national resilience does not allow the country to slow down innovation in any of these areas and lag behind,” Appelbaum concluded. “It is a period of deep economic and social crisis, but also a period that presents opportunities if we can navigate wisely.”