Israel’s technological sector is experiencing difficulties as a result of series of unfavorable events in the past period. The October 7 attacks have shocked Israeli economy disrupting the technological sector, creating short-term opportunities, however, it also led to increased security concerns, political instability, and economic challenges that threaten its resilience and growth in the long-term.

Israel’s technology sector which is recognized as one of the most advanced globally, stands as the most productive segment of the nation’s economy. It has been instrumental as an economic engine for Israel, providing resilience during economic downturns and enabling swift recoveries. Employing approximately 12 percent of the national workforce, it contributes 20 percent to the gross domestic product and accounts for over half of the country’s exports.^[1] The seamless connection to the global economy, created opportunities for investment and Israel’s R&D sector currently relies on foreign investments, with contributions reaching as high as fifty percent.^[2] Therefore, Israel’s pillar of progress is one of the most important aspects of the country’s economic well-being.

Even though six hundred start-up companies were founded and USD eight billion raised by technological companies in 2023, it nevertheless is a 60 percent decrease in comparison to the previous year.^[5] Investment levels have plummeted to figures reminiscent of 2018, with a notable reduction in the number of fundraising rounds and early-stage investments.

Moreover, the judicial reforms pursued by the Israeli government in July 2023, aimed at reducing the powers of the Supreme Court, have ignited widespread protests and raised significant concerns among investors and analysts. This political turmoil has contributed to the decline of the shekel and stock market’s underperformance, casting a shadow over foreign investments that were previously robust. There is growing apprehension that these reforms could destabilize the investment climate in Israel’s critical technology sector, potentially affecting the overall economic landscape and the country’s credit rating.^[6] Compounding these concerns, in August 2023, there was a notable trend of Israeli technological startups incorporating in the United States. This shift is driven by favorable business conditions in the US and uncertainties surrounding Israel’s legal and tax environment. While these judicial reforms do not directly impact the technological sector, the perceived instability has prompted entrepreneurs to seek more stable environments abroad.

The Israeli technological sector has a history of resilience, government support, and ongoing innovation and technological advancements and bears the potential to leverage these factors to sustain future growth and maintain global competitiveness.

The history of resilience in the face of adversity, coupled with its proven capabilities in innovation and problem-solving, forms a robust foundation for future recovery and success of the Israeli technological sector. Its record of accomplishment suggests that it can navigate these challenges effectively, ensuring continued growth and development.^[7] Despite the immediate negative impacts, historically the sector’s long-term growth trajectory remained upward. This resilience is partly due to a strong entrepreneurial culture that emphasizes adaptability and problem-solving, characteristics that are crucial in times of crisis, further underscoring its potential for recovery and sustainable development. Moreover, Israeli technology companies are renowned for their agility, cutting-edge research, and ability to quickly bring new products to market. The country’s ability in fields such as cybersecurity, medical technology, agricultural technology, and more recently, artificial intelligence, exemplifies its innovative capacity. In the context of current circumstances, the immediate surge in demand for defense technologies can provide a crucial short-term boost for technological companies as Israeli companies are well-positioned to capitalize on this demand. Additionally, the presence of R&D centers for major multinational corporations, highlights Israel’s strategic importance in the global technology landscape.

The ongoing war also presents challenges for the Israeli technological sector that threaten its growth and competitiveness. These include security and geopolitical instability, market volatility, labor shortages and talent drain, as well as funding shortages. These issues further undermine investor confidence, disrupt operations, and limit the sector’s capacity for innovation and expansion. Long-term implications, however, could hamper the technological sector’s standing as the pillar of progress.

Security and geopolitical instability are key challenges that shape the current trajectory of Israel’s pillar of progress. The ongoing conflict and political instability are expected to continue influencing the sector. Despite its historical resilience, prolonged local political instability, as well as the mobilization of employees from the technological sector in response to October 7 attacks align neatly to create “a perfect storm,” which is further intensified by the industry’s reliance on foreign investment and multinational corporations. In addition, concerns about the relocation of intellectual property and operations due to local instability highlight the risk of a brain drain and loss of competitive advantage.^[14] To make matters worse, the prospect of introducing economic sanctions on Israel will create even more challenges for Israeli economy, consequently to the country’s pillar of progress as well.^[15][16][17] Undoubtedly, the ongoing war and escalating geopolitical tensions^[18] have created a climate of uncertainty, and coupled with the current political instability creates a volatile business environment that is undermining investor confidence and deters foreign investments.

Market volatility derives from war-induced economic disruptions, also driven by global economic conditions and investment trends. It leads to instability of financial markets and currency, further deterring investments. In Israel’s context, a 60 percent decline in venture capital investments and a significant decrease in fundraising rounds highlight a severe contraction in available capital. Additionally, 42 percent of foreign venture capitalists refrained from investing in Israeli startups in 2023, exacerbating the sector’s challenges. While technological sector employment grew by 2.6 percent in 2023, this rate is significantly lower than in previous years and barely outpaces population growth.^[19] The broader global recession and local political instability have further deepened the economic downturn, reducing consumer and enterprise spending on technology, increasing operational costs, and elevating the cost of capital. Short-term impacts include difficulties in planning and executing growth strategies, cost-cutting measures, and a dampened entrepreneurial spirit. Long-term consequences on the other hand, will likely stifle innovation, leading to a talent drain, and hinder the sector’s dynamism.

Labor shortage is one of the key issues that Israeli technological companies are experiencing amid the current conflict, as skilled professionals are seeking safer and more stable environments as well as mobilization efforts by the Israeli government in response to the October 7 attacks. Being the fifth sector of Israel’s output constituting over fifty percent of the country’s total exports, the technological sector unsurprisingly is the most affected by the current war. The troubles for the Israeli technological sector began in May 2022, related to the fall of the stock markets and the raised US Federal Reserve interest rates, which triggered lay-offs of around three thousand technological sector employees. The perceived political instability prior October 2023 coupled with concerns about legal and tax uncertainties triggered a shift among the country’s technological start-up companies and entrepreneurs to seek greater certainty abroad. This shift has highlighted the issues about the future economic ramifications for Israel.

Following the attacks in October, the technological sector experienced additional pressure, as the Israeli government called up around 360,000 reservists to fight. Among those, tens of thousands of employees from the technological sector were also being mobilized, which impacted the workforce availability in the sector, exacerbating the labor shortage in recent months. In fact, approximately two thousand workers in Israeli technological sector have been laid off in 2024.^[20] This substantial portion of the workforce being summoned for mobilization presented a challenge for the technological industry, as these individuals are crucial for driving innovation in Israel’s pillar of progress. Palestinian technological companies and workers on the other hand have relied on the outsourcing of work from Israel, but many contracts have been terminated following October 7. While the immediate effects are limited, a broader escalation of the conflict could have significant consequences for Israel’s technological industry, especially if the conflict becomes regional, as more people would be mobilized to join military.

The long-term impact of the conflict on Israel’s technological sector will likely be substantial, undermining its global standing and growth prospects unless effective measures are taken to mitigate the formidable challenges currently faced, with a peaceful conflict resolution as the most favorable course of action.

Israel’s security and geopolitical environment has always been tense, however, recent escalations in regional conflicts in other geopolitical hotspots as well, creates worse situation for Israel’s political and economic prospects, besides heightening the risks for businesses operating in the region currently. Moreover, the continuation of hostilities paint a bleak picture for the country’s technological sector. Even though Israel’s technological sector has historically demonstrated resilience and innovation, the above-mentioned challenges introduce layers of complexity that will likely deteriorate the technological sector’s ecosystem in the long term. Despite the opportunities, these risk factors collectively threaten to impede the sector’s growth and undermine its status as a pillar of Israel’s progress, should the conflict not be managed and resolved.

In context of local political instability, the concerns about the relocation of intellectual property and operations highlight the risk of a “brain drain” and loss of competitive advantage that the technological sector is having currently. Despite government efforts to support the sector and mitigate the initial shock from October 7 attacks, the continuous state of conflict will likely lead to an even more cautious approach from investors. As a result, reducing the influx of foreign investments necessary for startups and emerging technological companies to scale their operations and innovate is increased in likelihood. Given the prospects that the war will likely persist, the political environment will likely remain unstable, leading to more investors being hesitant to invest in the technological sector in Israel.

On the other hand, the international perception of Israel as a conflict zone and allegations for genocide from numerous human rights’ groups will likely further affect trade relations and market access, making it difficult for technological start-up companies to secure funding and scale their operations. The significant decline in investments and fundraising rounds in 2023 reflects a broader trend of risk aversion among investors, both domestic and foreign. This funding shortage will likely stifle innovation and limit the sector’s capacity for growth. Likewise, global public pressure, the prospect of introducing sanctions and exerting diplomatic pressure on the current administration over Israel’s modus operandi during the military operations in theater, will likely worsen investors’ confidence even more. Sanctions, boycotts, and other diplomatic measures will likely further isolate the sector and the country as a whole, limiting its ability to compete globally, and also raises the probability of recession. The overreliance on foreign investments, additionally exacerbates the situation creating a funding gap that would ultimately negatively influence Israel’s technological sector leading it to slowdown alongside Israel’s economy. Over time, this funding gap will likely slow the overall growth of the technological sector.

In addition, labor shortages pose additional challenges, exacerbating the “brain drain” phenomenon by impacting both the domestic workforce and the international talent pool. The mobilization requirement has already pulled a sizable number of young professionals away from the civilian workforce, which ultimately disrupted operations and aggravated talent shortages. Without a diverse and qualified workforce, the sector’s ability to innovate and compete globally is being compromised. Additionally, the ongoing conflict will likely deter foreign experts and skilled workers from relocating to Israel, and as other countries continue to invest in their own technological sectors and develop competitive ecosystems, Israel’s technological sector risks falling behind without decisive action to address underlying issues.