A year after the beginning of the ‘Swords of Iron’ War on October 7, 2023, the Innovation Authority is publishing a situation report aimed at examining the war’s ramifications on Israeli high-tech. As a sector that is based predominately on foreign players, high-tech is currently contending with a sensitive situation where the risk and uncertainty surrounding investing in and managing Israeli businesses are on the rise. Considering high-tech’s importance to the Israeli economy as its primary growth engine, and ahead of upcoming budget discussions, we decided to examine several prominent metrics related to the sector.
Throughout the past year, the Israeli economy has been contending with a growing deficit and the need to finance the cumulative costs of the war. As we showed in the Innovation Authority’s annual report and in the report on the high-tech sector’s contribution to state revenues (published in conjunction with the Chief Economist in the Ministry of Finance), the high-tech sector accounts for more than half of Israeli exports, a fifth of GDP, and is responsible for about a quarter of total state revenues from salaried employee’s income tax and corporate taxation.
Summary
A year after the events of October 7, Israeli high-tech is contending with a complex situation. From a positive perspective, Israeli high-tech has shown strength expressed in a stable level of total investments and continued global leadership in this metric and in high-tech employment stability. On the other hand, high-tech has undergone several significant crises over the past three years: the global economic downturn that began with the outbreak of the Russia-Ukraine war; an increase in local instability as the result of the political crisis; and the onset of the “Iron Swords” war following the terror attack of October 7. These crises have led to a situation whereby, after a decade of growth in high-tech, there has been no growth in the sector’s central metrics for over two years.
Since the second half of 2022, the total number of employees in high-tech has remained almost unchanged and stands at approx. 400,000. Accordingly, high-tech employees’ relative share of the total number of employees in the Israeli economy has remained steady at 11%. Because high-tech employees contribute significantly to state revenues from income tax, this stagnation may affect state revenues in the years to come – this, during a period in which the state budget is already contending with a deepening deficit, raising the need for growth-stimulating measures.
In 2023, the last year for which data is available that enables an international comparison, the number of high-tech employees in Europe grew by 5%, in the US by 2.8%, and in Israel by 2.6%, close to the population’s natural growth rate. At the same time, it is important to discern the internal trends that characterize the high-tech sector: employment in R&D jobs in high-tech continued to increase in recent years, whereas product and business jobs saw a decline in employment numbers over the same period.
Looking ahead, an examination of the high-tech services companies’ expectations regarding the hiring of employees over the coming year reveals that, as of July 2024, approximately 9 months since the onset of the war, almost a quarter (23%) of the companies expect an increase in their hiring of employees over the coming year. These figures reflect a less pessimistic atmosphere among high-tech services companies in 2024 than that observed in July 2023 when only 10% of the companies expected an increase in the hiring of new employees.
In terms of investment, the total capital raised by technology companies in Israel between October 7 and a year later on 6.10.2024 – the period of the war – stands at about 9 billion dollars. This sum is similar to the sums raised during parallel periods in recent years, except for the record years of 2020- 2022.
A comparison of the total investments in Israeli startups during the war period reveals that the total investments was the world’s fourth largest. Specifically, total investments in Israel were higher than hubs such as Paris, London and Los Angeles and lower only than those of Silicon Valley, New York and Boston. Examining the change in total investments over this period in relation to the parallel period last year reveals that it is similar to the average change in the group of the leading global hubs.
Furthermore, analysis of the data reveals no significant change in the number of venture capital funds active in Israel over the war period, and primarily in the number of foreign funds that constitute over 60% of the active VC funds in Israel.