Marking one year since the onset of the “Iron Swords” War, the Israel Innovation Authority unveiled a comprehensive report providing a fresh perspective on the Israeli high-tech sector and how the ongoing war has influenced its development. As a pivotal pillar of Israel’s economy, the high-tech industry contributes over half of the country’s exports, a third of employee income tax revenue, and a fifth of its gross domestic product (GDP). However, due to its heavy reliance on foreign investment, the industry is now facing heightened risks and increasing uncertainty, which could have significant implications for the overall Israeli economy.
The report shows that while Israeli high-tech remains third globally in capital raising, behind Silicon Valley and New York, the capital raised between October 2023 and August 2024 matches the previous year’s figures. However, employment growth has stalled, with increasing uncertainty.
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Dr. Alon Stopel, Chairman of the Israel Innovation Authority: “The war and its accompanying challenges have led to a halt in employment growth, particularly in business and product roles. This is a clear warning sign. The high-tech industry is becoming more focused on technological roles, indicating that business growth is happening outside of Israel. If this continues, it will harm economic growth and limit opportunities for individuals in supporting roles to enter the high-tech sector. We must create mechanisms to balance and incentivize growth to maintain the global competitiveness of Israeli tech hub.”
Dror Bin, CEO of the Israel Innovation Authority: “The report demonstrates the significant appeal of Israeli tech companies for investors, even during times of crises. However, it also reveals a notable slowdown in employment growth, early-stage investments, and other indicators. To ensure that high-tech returns to rapid growth after the crisis, we must direct investments into young startups, early-growth stage companies, and various technology fields, not just large firms and cybersecurity. Increasing government investment in high-tech, as was done in 2024, could help.”
Employment Stagnation: A Risk to the National Economy
Over the past decade, Israeli high-tech has experienced consistent employment growth. However, in the last two years, this growth has slowed significantly. This poses a challenge to the Israeli economy, as high-tech workers contribute substantially to state tax revenues. The report warns that without significant employment growth, state tax revenues could be adversely affected, especially amid a deepening deficit.
Israeli High-Tech: Maintaining Investment Attractiveness Despite Employment Stagnation
Despite the security situation, Israel remains a significant destination for foreign investments. However, the report highlights a slowdown in employment growth, which had been a key driver of economic expansion over the past decade. Since 2022, employment growth has nearly ceased, with the number of employees steady at around 400,000, representing about 11% of Israeli workers—a rate that has also stagnated.
Despite this stagnation, Israeli high-tech has maintained stability in capital raising, with nearly $9 billion raised by Israeli technology companies between October 2023 and August 2024. This places Israel as the third-largest global hub for capital raising, behind Silicon Valley and New York, and ahead of other tech hubs such as London and Paris.
Employment Gaps and Focus on R&D – For the First Time, During the Past Six Months, Over Half of High-Tech Employees Are in R&D Roles
The report also notes a shift in the employment mix within high-tech: while R&D roles have continued to grow, employment in product and business roles has declined. This creates an industry primarily focused on research and development, limiting opportunities for those in non-technical roles and constraining the sector’s ability to grow as an employer in Israel.
Concentrated Investments in Mature Companies and Cybersecurity
The report reveals that while the total investments in tech companies remained stable, it notes a trend of concentrating investments in mature companies, particularly within the cybersecurity sector. Nearly 60% of investments during the war period were directed toward large fundraising rounds (over $50 million), mostly in established companies. The cybersecurity sector has become particularly dominant, accounting for about 35% of total investments during this period, double the figure from previous years.
This trend reflects the success of the cybersecurity field in Israel but also highlights the risk of reduced investments in young startups and other sectors. Ensuring sufficient capital for investments across diverse fields is crucial to fostering innovation and supporting new companies that are fundamental to Israel’s future growth.
High Salaries but Growing Gaps
While employment in high-tech remains stagnant, salaries have continued to rise, widening the wage gap between high-tech and other sectors. The average high-tech salary in Q2 2024 is approximately NIS 31,500, 2.8 times the national average wage. This increase indicates a growing demand for technological talent.
Recovery Signs in Some Hubs, Israel Lags Behind
The report also highlights the widening return gaps between Israeli technology companies and NASDAQ-listed firms. While NASDAQ recorded a 31% return since the outbreak of the war, the Tel Aviv Technology Index rose by only 14%, underscoring the intensifying competition in global capital markets. Notably, until early 2023, NASDAQ 100 and Tel Aviv Technology displayed similar returns.
So, the Israel Innovation Authority found that one year after the “Iron Swords” War, it is evident that Israeli high-tech has shown remarkable resilience. However, the challenges outlined in the report necessitate proactive measures to sustain its role as a central engine of growth it said.
The Innovation Authority recommended the following steps:
Regular Monitoring: Track key indicators such as employment mix, new company registrations, capital raising, and global impact.
Increasing Government Investments: Expand government investment in high-tech, particularly in young startups, early-stage companies, and technology fields with limited private capital.
Reducing Uncertainty: Stabilize local business conditions to attract foreign investments and ensure continued growth.
