{"id":8760,"date":"2024-06-04T05:26:23","date_gmt":"2024-06-04T05:26:23","guid":{"rendered":"https:\/\/innovationisrael.org.il\/en\/?post_type=press_release&p=8760"},"modified":"2024-06-17T08:14:15","modified_gmt":"2024-06-17T08:14:15","slug":"israels-high-tech-sector-navigates-uncertainty-annual-israel-innovation-authority-report-shows-resilience-and-challenges","status":"publish","type":"press_release","link":"https:\/\/innovationisrael.org.il\/en\/press_release\/israels-high-tech-sector-navigates-uncertainty-annual-israel-innovation-authority-report-shows-resilience-and-challenges\/","title":{"rendered":"Israel’s High-Tech Sector Navigates Uncertainty: Annual Israel Innovation Authority Report Shows Resilience and Challenges"},"content":{"rendered":"\n

\u2018State of the High-Tech Sector in Israel 2024\u2019 highlights continued growth in 2023 amid investors and companiesconcerns for the future<\/em><\/h3>\n\n\n\n
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The Israel Innovation Authority today released its annual report assessing the state of the Israeli high-tech sector, revealing a mixed landscape of both resilience and uncertainty. The “State of the High-Tech Sector in Israel 2024” report shows that despite numerous challenges over the past year, the sector has demonstrated growth, with several macroeconomic indicators trending upwards. However, the report also highlights a decline in some indices related to key business activities, reflecting underlying concerns for the sector.<\/p>\n\n\n\n

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Despite this year’s challenges, which have included political turmoil and the fallout from the ongoing war, several indicators have shown continued growth in the high-tech sector. Employment in the sector rose by 2.6% in 2023, reaching 396,000 high-tech employees, with an additional ten thousand people joining the sector during the year. Notably, the high-tech sector’s contribution to Israel’s GDP reached nearly one-fifth (19.7%) in 2023, approximately 340 billion shekels, while its share of Israeli exports stood at 53% last year, totaling 73.5 billion dollars, a consistent figure in recent years.<\/p>\n\n\n\n

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At the same time, however, employment growth in high-tech has significantly slowed, barely outpacing population growth rates, and various business activity indices have returned to 2018 levels or earlier. For example, investment in Israeli startups saw a sharp decline of around 55% in 2023, with later funding rounds suffering the most significant impact. This downturn raises concerns about the sector’s future sustainability and growth potential, highlighting the need for strategic initiatives to stimulate investment and innovation in the coming years.<\/p>\n\n\n\n

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Gila Gamliel, Minister of Innovation, Science and Technology:<\/strong> “Innovation is our most important natural resource, and the high-tech industry is the main growth engine of the Israeli economy. We see the high-tech industry continuing to develop and lead globally. However, to ensure that Israeli high-tech continues to grow and thrive, we as a government must continue to support companies and develop the necessary infrastructure. We will continue to act decisively and collaborate with all relevant parties to maintain our position as leaders in global technological innovation.”<\/cite><\/blockquote>\n\n\n\n
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Alon Stopel, Chairman of the Israel Innovation Authority: <\/strong>\u201cIsraeli high-tech is the leading industrial sector in Israel. Despite global and local challenges, it continued to grow in 2023, accounting for about 50% of exports, highlighting Israel’s technology-driven economy. However, continuous challenges and lack of human and geographic diversity require significant government involvement to maintain leadership. Unlike major global tech hubs, Israel’s government budget for R&D is relatively low. Most high-tech investments come from non-governmental sources, with a significant portion from foreign investors. Therefore, the resilience of the high-tech sector must be strengthened through diverse budgetary additions, including governmental, to address market failures and reduce dependency on external investments. We must focus efforts and gather additional resources to support the development of companies in later growth stages, challenging R&D in mature companies, and international collaborations in tech manufacturing. Driving Israel’s high-tech forward, as a beacon of success, is key to maintaining economic leadership and enhancing Israel\u2019s global impact.”<\/cite><\/blockquote>\n\n\n\n
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Dror Bin, CEO of the Israel Innovation Authority:<\/strong> “Despite numerous challenges in 2023, Israeli high-tech continued to grow. However, past success does not guarantee future success. The report indicates that Israeli high-tech is now at a crossroads: Israel’s excellent fundamental data has not changed; the country still has top-tier entrepreneurs, investors, and researchers. However, the high dependency on foreign investments and the increasing competition, backed by massive government investments in other global innovation hubs, require a reassessment of how the Israeli government invests in this sector, which contributes about 20% of the GDP and nearly half of the exports. In 2024, with special government funding, we launched several strategic initiatives, including the Fast Track, the Startup Fund, and the new Yozma Fund. However, significant additional government investment in the ecosystem is needed in the coming years to ensure the continued growth of Israel’s economic engine. This is the time to act, as the impact of the war, already reflected in the credit rating downgrade, could lead to a decrease in investments and capital inflows to Israel. In a sector reliant on foreign capital for growth, this is a significant threat, and we must ensure that a funding shortage scenario does not materialize.”<\/cite><\/blockquote>\n\n\n\n
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High-Tech State of Affairs – 2024\/Q1 Surveys<\/u><\/strong><\/h4>\n\n\n\n
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Surveys conducted as part of the annual report among 500 tech companies revealed concerns about the future, with a prominent percentage of startups (around 40%) engaged in fundraising anticipating lower valuation rounds (Down Rounds). The central impact of the October 7 events on tech companies has manifested in slowed business activity, product development delays, or failure to meet company goals. During the months of the war, Israeli startups reported scaling back their hiring plans for the upcoming year, primarily expected to hire local staff. Only 39% of startups raising capital are highly likely to secure the needed funds successfully.<\/p>\n\n\n\n

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Furthermore, data collected from 30 Israeli venture capital funds, in collaboration with the Israeli Advanced Technology Industries (IATI), indicate that nearly 40% of these funds witness at least one company in their portfolio relocating intellectual property abroad due to local instability. Almost a quarter of venture capital funds estimate that over 30% of their portfolio companies have either shifted significant operations abroad in the past year or plan to do so in the coming year, not solely due to organic growth.<\/p>\n\n\n\n

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Regarding investment activity in Israel, venture capital funds anticipate that foreign funds will reduce their investments in Israeli startups in the coming year more than in Israeli funds. They believe that local instability negatively impacts how Israeli startups are perceived and has already led to the relocation of operations and intellectual property out of Israel. According to the funds, these trends may intensify in the coming year.<\/p>\n\n\n\n

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Challenges and the Importance of High-Tech to the Israeli Economy<\/u><\/strong><\/strong><\/h4>\n\n\n\n
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The report indicates that Israeli high-tech faces a crossroads after a period of rapid growth since 2018. The question is whether, looking forward, high-tech will return to a growth trajectory, enter a stagnation phase similar to the post-dot-com bubble burst in 2001, or, worse, shift towards contraction.<\/p>\n\n\n\n

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The role of high-tech as an “economic shock absorber” has been significant for the economy, especially during crisis periods like the COVID-19 pandemic and geopolitical upheavals in 2023. Evaluating the period from 2018 to 2023, high-tech accounted for over 40% of Israel’s GDP growth, consistently mirroring economic growth in recent years. The centrality of high-tech to Israel’s economy resembles natural resources in other countries, but unlike resource-reliant nations, Israel relies on high-tech, and the number of employees in this sector directly impacts economic activity and growth.<\/p>\n\n\n\n

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Continued employment growth in high-tech above the natural population growth rate (about 2% per year) is critical for its positive influence on the economy, including its contribution to GDP, exports, and tax revenues. Moreover, the sector’s extensive international connections (investors in startups, multinational corporations as significant employers and acquirers of startups, clients of Israeli companies, international research and industrial collaborations) underscore its sensitivity to Israel’s international relations.<\/p>\n\n\n\n

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The importance of high-tech is increasing as the state’s security and civil funding needs rise. Therefore, it is crucial to maintain the significant economic activity of the sector, which generates substantial tax revenues for the country. The report shows that the average salary in high-tech has increased nearly four times more than the average salary rise in other sectors over the past decade. Damage to Israel’s reputation due to the current situation, which may result in declines in various activity indicators mentioned above, puts the future of Israeli high-tech at risk in the short term and beyond. The downgrade of Israel’s credit rating already reflects foreign investors’ concerns about the future of the Israeli economy. Despite the centrality of high-tech in Israel’s economy, government investment in high-tech in Israel is lower than that of countries ranked above Israel in innovation indices like the US, UK, and Korea. The sector may struggle to weather crises as it relies heavily on foreign investments and lacks a significant local safety net.<\/p>\n\n\n\n

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To address these challenges, the Israel Innovation Authority recommends managing market expectations and creating certainty, especially given the sector’s reliance on foreign investments. One possible way to increase certainty is through a multi-year government investment plan in high-tech.<\/p>\n\n\n\n

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For continued long-term growth in high-tech, the Authority also recommends investing in quality education for all population groups across the country and at different stages of the educational and professional path. Additionally, given the growing competition with other innovation hubs, it is important to learn from places that have surpassed Israel in various innovation indices, such as London, where startup and innovation ecosystems have developed in recent years. In response to the challenges outlined in the report, the Israel Innovation Authority has presented several investment plans in the past year. Key initiatives include the Fast Track channel for companies with a short runway exceeding 400 million shekels, the launch of the Startup Fund with an investment volume of around half a billion shekels, and the Yozma Fund 2.0 totaling around 600 million shekels, expected to leverage around 2 billion shekels from Israeli institutional funds. Furthermore, the Venture Creation Incubators program was updated with a sum of approximately 150 million shekels.<\/p>\n\n\n\n

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Additional notable data from the report:<\/u><\/strong><\/h4>\n\n\n\n
The sector:<\/strong><\/h5>\n\n\n\n