The “State of the High-Tech Sector in Israel 2024” report was released by the Israel Innovation Authority. The latest report highlights continued growth in some key areas, with positive trends in several macroeconomic indicators. However, a shadow lurks beneath this optimism. The report also reveals a concerning decline in indices related to crucial business activities. This mixed picture underscores the need to address underlying issues to ensure the sector’s long-term health.
The report indicates that Israeli high-tech faces a crossroads after a period of rapid growth since 2018. The question is whether, looking forward, high-tech will return to a growth trajectory, enter a stagnation phase similar to the post-dot-com bubble burst in 2001, or, worse, shift towards contraction.
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However, Israel’s high-tech sector exhibited resilience in 2023 despite facing challenges. Here’s a breakdown of the positive indicators:
Job growth: Employment increased by a significant 2.6%, reaching 396,000 with 10,000 new hires.
GDP contribution: The high-tech sector’s contribution to GDP reached nearly one-fifth (19.7%) at around 340 billion shekels.
Export powerhouse: The sector maintained a strong export share of 53%, totaling 73.5 billion dollars, reflecting its consistent global impact.
However, a closer look reveals some cause for concern. While employment growth continues, it’s significantly slower, barely keeping pace with population increases. More importantly, key business activity indicators have fallen back to 2018 levels or even lower. This is particularly evident in the sharp 55% decline of investment in Israeli startups during 2023. Later funding rounds were hit the hardest, raising questions about the sector’s ability to sustain itself and grow in the future. To address this, strategic initiatives are needed to reignite investment and innovation in the coming years.
The Authority also said that sustaining high-tech employment above population growth (around 2% annually) is crucial for Israel’s economic well-being. This continued expansion fuels the sector’s positive impact on GDP, exports, and tax revenue. Furthermore, the high-tech sector’s web of international connections, from startup investors to multinational employers and collaborators, makes it highly sensitive to Israel’s global standing. In short, the sector’s success is intricately linked to Israel’s economic and international health.
“The importance of high-tech is increasing as the state’s security and civil funding needs rise,” said the Authrity. “Therefore, it is crucial to maintain the significant economic activity of the sector, which generates substantial tax revenues for the country. The report shows that the average salary in high-tech has increased nearly four times more than the average salary rise in other sectors over the past decade. Damage to Israel’s reputation due to the current situation, which may result in declines in various activity indicators mentioned above, puts the future of Israeli high-tech at risk in the short term and beyond.”
It added that the downgrade of Israel’s credit rating already reflects foreign investors’ concerns about the future of the Israeli economy. Despite the centrality of high-tech in Israel’s economy, government investment in high-tech in Israel is lower than that of countries ranked above Israel in innovation indices like the US, UK, and Korea. The sector may struggle to weather crises as it relies heavily on foreign investments and lacks a significant local safety net.
To address these challenges, the Israel Innovation Authority recommends managing market expectations and creating certainty, especially given the sector’s reliance on foreign investments. One possible way to increase certainty is through a multi-year government investment plan in high-tech.
