The high-tech industry is the fastest-growing sector in the economy, with the highest productivity and the most significant contribution to the economy. The sector has become critical for the growth and prosperity of the Israeli economy, and the State of Israel needs to preserve and nurture this national resource in the face of increasing international competition – especially during times of economic slowdown.
Currently, about 14% of Israeli citizens work in technological and non-technological high-tech professions. The salaries in the tech sector are nearly three times higher than the rest of the economy, and job satisfaction in high-tech is twice that of other professions in the Israeli economy.
Highlights from the report:
- In the past decade, the high-tech sector has become the largest and fastest-growing industry in the Israeli economy. It is responsible for the largest share of exports from Israel, with the highest growth rate in the number of employees and the fastest increase in wages.
- Within a decade, the high-tech sector has transformed from one of the fastest-growing industries to the largest in terms of employment. From 2012 to early 2023, the average annual growth rate in the number of high-tech employees was 6.3%, compared to 2.2% for the overall economy. In other words, the high-tech sector grew at a rate three times faster than the general workforce.
- In 2022, the high-tech sector accounted for 18.1% of Israel's GDP, making it the largest sector in terms of economic output. The output of the high-tech sector grew more than twofold within a decade, reaching 290 billion shekels in 2022.
- Most of the employment growth in the high-tech sector in recent years has been driven by technological roles rather than non-technological roles.
- Wage gaps in Israel continue to widen, with the average salary in the high-tech sector standing at 28,385 shekels in 2022 – more than 2.7 times higher than the average salary in the rest of the economy (10,452 shekels). Since 2012, the salaries of high-tech employees have increased by 9,465 shekels, compared to an increase of 2,290 shekels for employees in other sectors.
- Labor productivity in the high-tech sector, calculated as the output per hour worked by an employee, stood at 337 shekels per hour in 2022 – nearly twice the productivity per hour in the overall economy (178 shekels). However, in the financial and insurance services sector, as well as the electricity, water, sewage, and waste management services, the productivity of employees is higher than in the high-tech sector.
- 91% of R&D in Israel is carried out by the private sector, the highest percentage among OECD countries. Israel has the lowest percentage of government funding for R&D among OECD countries, with only 9% of national R&D expenditure funded by the government.
- According to OECD data, Israel is the only country among the organization's member states where more than 50% of R&D is funded by sources outside the country. Specifically, the weight of foreign capital in Israeli venture capital in the years 2022-2021 is at least 75%-80%.
- Investments in Israeli startups have grown more than fivefold from 2013 to early 2023, with a total of around $95 billion raised during these years. This places Israeli innovation in sixth place globally in terms of capital raised for startups during the period examined.
- Since the second half of 2022, there has been a decline in the volume of investments in Israel. In total, in 2022, investments in startups in Israel decreased by almost half (45%) compared to the previous year, amounting to $15.9 billion. The main decline in capital raising in 2022 resulted from a decrease in large-scale investments of over $50 million, intended to support the continued growth of mature startups in Israel.
- Preliminary data regarding startup investments in 2023 indicate that the downward trend in investments is continuing in the first and second quarters of the year (the data is still subject to updating). Unless a significant reversal occurs, it appears that the decline in investments in Israeli startups is expected to persist in the current year compared to the growth trend observed in recent years. If this assessment materializes, it serves as a warning sign for the Israeli high-tech industry that requires appropriate preparedness.
- Compared to other hubs worldwide, startup investments in Israel decreased by over 70% in the first quarter of the year compared to the corresponding quarter last year. This is a sharper decline than in other examined locations.
- Since the beginning of the year, Israeli technology companies have shown negative returns compared to technology companies traded on the NASDAQ. Traded companies in Israel have been "punished" by the market with particularly low returns. In the first quarter of 2023, the return on the index of the top 100 technology companies traded on NASDAQ was close to 24%, while the Tel Aviv Technology Index experienced a 1% decline during the same period. This means that while NASDAQ has begun to recover and technology stocks have started to rise, there is no similar trend in Tel Aviv. Additionally, the stock return of Israeli companies on NASDAQ in the first quarter was 10.8% - a higher return than that of traded technology companies in Tel Aviv, but lower than that of the NASDAQ Technology 100 Index.
- Since the beginning of the year, a change in trend has been observed in the recruitment of employees for Israeli high-tech companies, demonstrated by employee layoffs, which may impact the entire Israeli economy after years of growth in the number of employees in the industry. Since 2023, the crisis in the high-tech sector has deepened: not only were fewer positions opened by companies for recruitment, as was the case in the second half of 2022, but the increased layoffs led to a reduction in the number of employees in the industry. In the first quarter of 2023, the number of employees in high-tech services decreased by 2,250, and in April, it further declined by approximately 3,400 individuals.
- The coming months will be critical for the Israeli high-tech sector. We learn from the past that usually, two quarters after the recovery begins in the stock market, reflected in the rise of the NASDAQ index, there is also an increase in capital funding and employment in the Israeli high-tech industry. Considering the rise of NASDAQ as presented since the beginning of the year, under normal circumstances, an increase in capital raising and employment in Israel could have been expected during the summer months of 2023. Based on the indications presented so far, supported by April and May data, there is a genuine concern of a separation trend between the Israeli high-tech industry and global trends.
- As of April 2023, there were 9,093 technology companies in Israel that raised money from investors throughout their existence. This places the Israeli startup ecosystem as the third largest globally in this measure, highlighting Israel as a prominent startup hub on a global scale.
- The maturation of the industry and the establishment of mature companies in Israel over the past decade are reflected in a five-fold growth in the average funding round size, from $3.3 million in 2013 to $16.7 million in 2022. The main contribution to this significant growth in funding round sizes came from large funding rounds of $50 million and even $100 million.
- This year, a special section of the report is dedicated to the climate tech sector: there are approximately 516 technology companies operating in the climate tech field in Israel. Around 24% of climate tech companies in Israel operate in the energy sector, while approximately 37% are involved in agriculture, food, and water. The pace of fundraising for climate tech companies has grown threefold from less than half a billion dollars in 2018-2019 to over $2.5 billion in 2021. In total, approximately $7.2 billion was raised during this period by 344 companies in the climate tech sector. Climate tech startups have doubled each year over the past decade.
- An examination conducted by the Innovation Authority reveals that the Authority's investments are focused on high-risk areas where the private sector tends to invest less. Approximately 30% of the Authority's investments in 2022 were directed toward life sciences, which includes pharmaceuticals, medical devices, and biotechnology, compared to only 7.5% of private sector investments allocated to these segments.
We are a software nation!
- Organizational software, fintech, and cybersecurity have significant relative advantages for Israel. Over 40% of new startups established each year operate in these fields, over half of the investments flow into these areas, and the majority of specialized funds that have made more than ten investments in a specific technological field focus on these domains.
- 65% of companies established in the past decade were in software-related fields.
- In 2022, 70% of the total investments were in software domains, compared to 48% a decade ago (in 2013).
- Over 80% of specialized funds (those that have made at least ten investments in a specific technological field in five years) specialize in software, with the majority focusing on organizational software, fintech, and cybersecurity (73% out of 82%). We identified 384 specializations among these funds (a fund can have more than one specialization). Contribution of the high-tech sector to the Israeli economy: Macro data:
- In 2022, the Israeli high-tech sector accounted for 48.3% of Israel's total exports, amounting to $71 billion. Over the past decade, high-tech exports from Israel have more than doubled. The growth has predominantly been driven by the expansion in software services (the high-tech services sector).
- In 2021, the national expenditure on R&D as a percentage of GDP stood at 5.6%, equivalent to 88 billion shekels. This is the highest national expenditure on R&D as a percentage of GDP among OECD countries.
Analysis of Human Capital Data - We are still a developer-based hub.
- Despite the resources and efforts invested in diversity, and despite the accelerated growth in high-tech employment, there are still significant gaps between different population groups in high-tech. Over the years, there have been minimal fluctuations in the composition of the high-tech population.
- For the first time, the report includes Perlmutter Committee recommendations adopted by the government, stating that in 2022 there were 508.4 thousand employees in high-tech and tech positions in the economy - a total of 14% of employees in Israel. In 2014, the rate stood at 10.6%, representing a significant increase of 32%.
- 14% of employees in the economy hold tech positions - about 400,000 in the high-tech sector (in technology and non-technology positions) and an additional 100,000 in technology positions outside the tech sector.
- The technological workers represent the main growth engine in the tech sector, whose numbers have doubled in the past decade compared to a growth of less than 30% during the same period in non-technological and technological positions outside the tech sector.
- However, there is significant heterogeneity in the preferences for non-technological positions among women - ultra-Orthodox and Arab women choose very few nontechnological jobs in high-tech, only 8% for ultra-Orthodox and 4% for Arab women out of all women in tech positions.
- The percentage of women working in non-technological positions is almost twice that of men (among the non-ultra-Orthodox Jewish population - 41% for women compared to 23% for men).
- A decline in the number of employees in high-tech services was observed, for the first time since COVID-19, during the first quarter of 2023. This decline joins a consistent decrease in the number of job vacancies since the beginning of 2022. April data indicate a further decline, but these are not final figures.
International Comparison - Israeli high-tech versus growing competition worldwide
- The Israeli innovation hub presented good results in the past decade - raising $95 billion for startups. Behind the United States (Boston - $140 billion, New York - $205 billion, San Francisco - $476 billion), but more than European hubs like London - $85 billion, Paris - $40 billion, and Berlin - $36 billion.
- The number of active startups in Israel ranks third after San Francisco and New York (about 9,000, compared to approximately 14,500 and 12,500).
- The rate of major funding rounds (over $50 million) is high in Israel even in international comparison, indicating maturity (8.7% of rounds. For comparison, in developed ecosystems in the US such as San Francisco, San Diego, and Boston, the figure is 10%-11%).
- However, the decline in the number of startups continues - the estimate for 2022 is 600-700 startups, compared to over 700 in 2021 and over 1,000 in 2019.
- Competition from European hubs, mainly London and Paris, is growing. In 2013, Israeli funding was double that of London and five times that of Paris. In 2022, London surpassed Israel in terms of funding, and Paris narrowed the gap, so Israel is only 1.5 times larger than Paris.
- In the Global Innovation Index, Israel dropped from 15th place to 16th in 2022.
Akunis: Calling on investors
Minister of Innovation, Science, and Technology, Ofir Akunis stated: “The Government will continue to care for and support the Israeli high-tech sector. There has been a noticeable slowdown in international markets, including the high-tech sector. Our role as a government is to ensure that Israel's main growth engine of the past two decades continues to move forward, strengthen, and to lead and inspire on the global stage.
As we speak, in the Finance Committee of the Knesset, we are nearing the end of the process to pass legislation to encourage capital investments. In the coming weeks, we will announce further decisions that will support Israeli innovation. I call on investors from around the world to continue investing in Israeli high-tech, science, and technology.”
Bin: No Parallel
Dror Bin, Israel Innovation Authority CEO: “The Israeli economy's dependence on the high-tech sector has significantly grown in the past decade; therefore, we must do everything necessary to preserve the industry and continue nurturing its competitiveness in the global market. 91% of investments in Israeli high-tech are funded by the private sector - there is no parallel to this anywhere else in the world. Furthermore, around 80% of venture capital investments in high-tech are based on foreign funds.
The Israeli high-tech industry is unique and different, and such a model does not exist in any other market worldwide. The Israeli economy relies on high-tech products, exports, and high-tech taxes. However, the sector is dependent on the private sector and foreign, non-local investors. This is an exceptional situation in the global economy - the entire Israeli economy is highly reliant on the behavior of this sector and the preservation and cultivation of trust from foreign investors in it.”
Bin added: “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 fundraising and employment in Israel during the summer months, and I hope that will indeed be the case.”
Appelbaum: Exponential growth
Dr. Ami Appelbaum, Chairman of Israel Innovation Authority, said, ‘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. 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. It is a period of deep economic and social crisis, but also a period that presents opportunities if we can navigate wisely.”