Last year (2022) and the beginning of 2023 have been a complex and challenging period for the global economy, for the Israeli economy and, consequently, for Israeli high-tech. As 2023 began, the cheap state-funded capital provided worldwide to contend with the Covid pandemic “disappeared”, the Russia-Ukraine war broke out triggering extensive economic sanctions against Russia, supply chains became clogged, inflation increased, and central banks began raising interest rates worldwide as global stock markets declined sharply. All these generated a process of a marked downturn in venture capital investments both globally and in Israel. Towards the end of 2022, and with the onset of 2023, the global crisis was exacerbated on a local level by the uncertainty resulting from Israeli political circumstances.

The global crisis and local uncertainty are a cause for concern with regard to the Israeli innovation industry and its continued position as a world leader. This report – that relates to data for 2022 and initial figures for Q1 2023 – seeks to sketch an updated situation report of the innovation industry.

The first section of the report looks at high-tech’s importance for the Israeli economy – almost one fifth of Israeli GDP (18%) – by far the fastest growing sector over the past decade, total exports that doubled in the same period, productivity that is 90% higher than the economy’s average, and a rapidly growing number of employees (401,900 salaried employees in high-tech in 2022, a figure that is growing at an annual rate triple that of the economy’s average). This and other data presented in the report leads to a clear conclusion: an underperforming Israeli high-tech sector will lead to severe consequences for the Israeli economy.

On a global level, the Israeli innovation hub competes directly with other tech hubs around the world for investments, human capital, and knowledge – and, in practice, to be the place where solutions for the toughest global challenges will be found. It is in this light that the report examines the performance of the Israeli high-tech sector in relation to other innovation hubs to which Israel compares itself, in addition to comparisons with the other sectors of the local economy.

Data presented in the report reveals that while Israel has competed head-on with the world’s largest hubs for investments in startups (95 billion dollars over the past decade, 6th in the world) and for opening new startups (9,093 companies – 3rd in the world). The growth of European hubs such as those in Paris and London, which constitute direct competitors for investment and talent, has significantly intensified their competition over the past two years.

Another issue addressed by the report is the cornerstones on which Israeli high-tech is based. The data presented in the report indicates that Israeli high-tech depends almost entirely on the private sector and on foreign investors. In practice, a unique situation exists in Israel relative to the rest of the world as far as distribution of investments in R&D between local and foreign entities is concerned. According to OECD data, Israel is the only member country in which entities outside the country fund more than half of all R&D performed in the private sector. Moreover, the small share of the state in R&D investments is especially prominent with only 9% of the national expenditure on R&D being funded by the government – the lowest ratio of all OECD countries.
Furthermore, an Innovation Authority evaluation of IVC data pertaining to the venture capital field in Israel that funds the lion’s share of high-tech, reveals that the share of foreign investors between 2018-2022 was at least 75%-80%.

The report also addresses the concern that high-tech is digressing from the global trend (a concern that is addressed in detail in a position paper published by the Authority), high-tech’s thematic concentration (in three main fields – organizational software, fintech and cyber), the decline in the number of new startups and the drop in the scope of their fundraising, changes in the labor market, ramifications of technological changes such as the flourishing of generative AI, and more.

In light of this analysis, the State of Israel must compose a strategic plan based on four areas of activity to maintain its position as a global leader of innovation and to expand innovation’s impact on the local economy.

First, it must identify the future of innovation trends that can constitute new growth engines. To do so, Israel must incentivize high-tech’s thematic diversification. In other words, it must channel resources to new markets in which there will be a demand for new technologies. One of these areas is climate-tech. The climate chapters in the report provide a glimpse of Israel’s great potential to become an exporter of global solutions in this field. It is important to note that investment in this area is not defined solely in terms of financial investment, but also by actions that can help these areas to develop, among others by removing regulatory barriers.

Second, Israel must also strive to increase the demographic and geographic diversification of its high-tech that can no longer remain exclusively in the center of the country where it relies on homogeneous human capital that has limited scope for expansion. It must expand to other areas around the country where Israel has comparative advantages it can utilize (e.g., climate and agriculture), and must increase integration of sectors of the population that are currently significantly underrepresented in local high-tech.

Third, Israel must create incentives that will further encourage entrepreneurship, the opening of additional companies characterized by large innovation potential and high-risk, and the provision of a supportive framework for those companies to enable them to grow as Israeli companies and to succeed globally.

Fourth, Israel must develop a facilitating regulatory approach that will lead to the assimilation of innovation in the local market’s public and private sectors to improve productivity in all sectors of the economy on the one hand, while, on the other hand, creating “sandboxes” that will accord local high-tech a competitive advantage.

We are pleased to note that the steps we have mentioned are not theoretical. The Innovation Authority is already promoting them in conjunction with other government departments, academia, and the defense system. The Authority currently leads four national programs in verticals that could be “the technologies of the future” – artificial intelligence, bio-convergence (a technology that combines biology and engineering), quantum, and climate-tech. The Authority is also striving, and will strive even more this year, to grow startups and promote high-tech initiatives and diversification – thematic, geographic, and demographic.

We wish to thank the Innovation Authority’s Economy and Research Department for preparing this impressive report portraying a complex situation report of today’s innovation industry. We wish to thank all the Innovation Authority employees for their high-quality and devoted work throughout the year, the team of professional experts and members of the research committees, especially the public representatives, for their dedication and professionalism. We also thank the Innovation Authority’s Board for its important work in delineating policy and all the many partners of the Authority from within and outside government for their endeavor in advancing innovation in Israel.

Dr. Amiram Appelbaum
Chief Innovation Scientist at the Ministry of Innovation,
Science and Technology, Chairman of the Board
of the Israel Innovation Authority.

Dror Bin
CEO of the Israel Innovation Authority