As we do each year, the Israel Innovation Authority is proud to present its annual report outlining the current state of the Israeli innovation industry. This year’s situation report differs from previous years due to the structural changes that have occurred in the global economy in general and, specifically in the Israeli economy. These developments stem, among others from an unprecedented flow of capital initiated by governments in most countries worldwide in the wake of the Covid crisis. The end of 2021 was marked by a deceleration in the flow of capital and a parallel bearish trend on global stock markets. Israel too has witnessed a certain deceleration in the rate of capital investment in high-tech companies during the first quarter of 2022 after reaching an impressive peak of 27 billion dollars in 2021. This past year was also a record year in the number of companies growing into complete companies reaching a value of over 1 billion dollars (“unicorns”), their number now standing at more than 40. Another record registered in 2021 was the number of companies initiating IPOs – more than 75 companies. These record achievements led to accelerated growth in the demand for professional high-tech workers, both in R&D and business roles, a demand that led to fierce competition for human resources and a resultant increase in salaries.

Despite all these milestones, there is no guarantee that Israel’s high-tech industry will continue to grow and lead the world. Innovative technologies are being developed at an ever-growing rate and their assimilation is accompanied by huge investments that are changing global lifestyles and balances of power. Countries that meet the pace of research, development, and assimilation of innovation for the benefit of their economies, their citizens’ welfare, and their national resilience will become influential global forces. Countries that fail to invest, develop, and adopt accelerated innovation will be left behind economically, socially, and military-wise. These developments present Israel with several complex and broad challenges that require a combined government-private sector effort to enable the high-tech industry to continue growing and lead the Israeli economy. The high-tech industry’s centrality to the Israeli economy and its role as the State of Israel’s primary economic growth engine – demonstrated by this year’s high-tech exports exceeding 50% of total Israeli exports for the first time– requires its ongoing rapid development to ensure national resilience.

The challenges to the Israeli innovation hub are manifold and intensifying. The shortage of skilled workers in development roles leads to the transfer of R&D activity to other countries, resulting in new jobs being created there rather than in Israel. While total investment in Israeli R&D, including the private sector, is the highest in the world – more than 5% of GDP (!), the ecosystem focuses on a relatively limited range of software-based technological fields and suffers from low government investment in R&D compared to the rest of the world. This reality also hinders the ecosystem’s development in other technological fields. Regulatory and bureaucratic obstacles impair the competitive ability and assimilation of innovation in Israel and prevent the implementation of innovative Israeli technologies in the local economy. These obstacles are also sometimes the reason that Israeli companies transfer activity overseas or even choose to operate there from the outset. These factors may potentially lead to Israel losing its position of global leadership, a trend already expressed today by various global innovation leadership rankings. For example, in the 2021 Global Innovation Index (GII) , Israel dropped to being 15th in the overall ranking. As detailed in this report, the Israeli government and the Innovation Authority are therefore acting via different methods to develop new tools aimed at adapting policy and action to contend with the various challenges.

We wish to thank the Economy and Research Division of the Innovation Authority for preparing the report and for raising the issues relevant to the continued prosperity of the Israeli high-tech industry and Israeli economy. We wish to thank all the Innovation Authority employees for their intense and high-quality work throughout the year, the team of professional experts and all members of the research committees, especially the public representatives, for their dedication and professionalism. We also thank the members of the Innovation Authority Board for their important work in delineating its policy and all the Authority’s many partners, both within and outside the government, for their endeavor in advancing Israeli innovation.

Dr. Amiram Applebaum
Chief Scientist, Ministry of Economy and Industry
Chairman of the Board, Israel Innovation Authority

Dror Bin
Israel Innovation Authority