The Israel Innovation Authority released a report today examining the state of the Israeli technology industry a year after the start of the Swords of Iron war. The industry is vital to Israel's economy: high-tech accounts for over half of the country's exports, a fifth of its GDP, and a quarter of state revenues from income tax and companies tax, according to figures from the Ministry of Finance.
Among the worrying points raised by the report is the growing concentration of investment in cybersecurity, and also in late-stage startups. It finds that 60% of investments during the period of the war have been in large financing rounds by established companies, with cybersecurity attracting 35% of total investment, which is double the proportion in previous years. In addition, according to the report's findings, substantial gaps have opened up between returns on investment in Israeli companies and on companies elsewhere in the world. The Tel Aviv Technology Index has risen by just 14% since the outbreak of war on October 7 last year, which compares with a 31% rise in the Nasdaq index.
A further concern is a standstill in the number of people employed in the technology sector, which has remained stable at about 400,000 since 2022. Moreover, the employment mix has changed, with growth in research and development jobs but a decline in product and business jobs, which is liable to restrict the industry's ability to grow in the long term.
Nevertheless, the report also points to signs of strength. Israel has maintained its status as a focus of technology investment, and is ranked third in the world in that respect, after San Francisco and New York. According to the report, since mid-2022, investment in Israeli technology companies has stabilized at around $2 billion per quarter, which is similar to the levels seen in 2018-2019, before the peak of 2021. Moreover, since the outbreak of war, the change in investment in Israeli technology companies compared with a year previously has been similar to the average change in the main technology hubs around the world.
In addition, the report finds that there has been no substantial change in the number of foreign venture capital funds active Israel. Foreign funds account for about two-thirds of venture capital activity in Israel.
Israel Innovation Authority CEO Dror Bin told "Globes": "Israeli high tech has been in the midst of a severe storm since the start of the global crisis in mid-2022, and since the beginning of 2023 when Israel experienced political instability, and from the fourth quarter of 2023 we have been at war. Despite all this, the amount of investment since the war started has been similar to the previous year, and we are not seeing a decline in employment. This is all good news, indicating the robustness of the technology sector. Nevertheless, there are matters of concern, such as the fact that growth has mainly been in R&D at the expense of business roles, which is liable to harm long-term growth. Another concern is the growing dependence on cybersecurity."
Recommendation to increase government investment
Among the report's recommendations is higher government investment in high tech, particularly in early-stage startups and in fields where the availability of capital is low. The Authority also calls for steps to be taken to reduce uncertainty in the business environment, vis-a-vis foreign investors, with the aim of preserving Israel's status as a global leader in technological innovation. "Two important things need to happen in the budget and the Economic Arrangements Law," adds Bin. "One is a taxation package for foreign investors and multi-national companies, whereby we try to create an environment for them not necessarily of less tax, but of greater certainty, to compensate for the uncertainty that currently exists in Israel, and the second thing, as happened this year, is a larger budget."