The road ahead for Israel’s innovation ecosystem
Israel’s innovation success defied the odds. But with social rifts and global change, the nation’s technology sector faces a crossroads.
In a nutshell
- Israel rose as a tech power through reform, R&D and global opportunity
- Innovation is threatened by geopolitics and the global economic downturn
- Future developments will hinge on policy choices and adaptation to AI
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At the end of March 2025, two organizations were acquired. The Boston Celtics franchise, one of the most successful sports clubs in history with 18 championship titles, was acquired for $6 billion. Just a few days earlier, a small Israeli cybersecurity company named Wiz, founded only 6 years ago, was bought by Alphabet (Google’s parent company) for $32 billion – the largest acquisition in tech history.
This comparison illustrates the stark contrast between the legacy economy and the modern, software-driven one. This gap is only widening with the rise of artificial intelligence.
It is no coincidence that Wiz was founded in Israel. Despite its small population, lack of natural resources, geographic isolation and persistent geopolitical instability, the country ranks among the world’s top tech innovators.
One key indicator is research and development (R&D) spending. According to a 2023 publication from the Organisation for Economic Co-operation and Development, Israel invested 6.35 percent of its gross domestic product (GDP) in R&D in that year – more than double the OECD average and over three times the EU’s.
The innovation ecosystem that results from this R&D investment has tremendous value to the Israeli economy. Although only about 10 percent of the Israeli workforce is employed in tech, the sector contributes 18 percent of the country’s GDP and 35 percent of its income tax revenue.
How did Israel become a global innovation leader?
Many attribute Israel’s success in innovation to cultural traits, as well as mandatory experience in the military. While these certainly play a role, they do not fully explain Israel’s technological achievements.
A mere three decades ago, Israel was no outlier in terms of innovation. R&D investment stood at 2.5 percent of GDP – on par with the OECD average. But in the 1990s, a unique confluence of factors launched Israel into the global innovation spotlight.
Economic transformation
Israel’s transformation began with a crisis. Following the 1973 Yom Kippur War, military overspending and poor fiscal management led to a decade of stagnation, culminating in 450 percent inflation by 1984.
To avert collapse, then Prime Minister Shimon Peres implemented sweeping economic reforms: cutting public expenditure, liberalizing markets and shifting the economy toward private enterprise. These policies transformed Israel from a state-run to a market-driven economy and laid the foundation for a thriving innovation sector.
Strategic innovation support
A less-visible but nevertheless critical factor was the 1984 R&D Law and establishment of the Office of the Chief Scientist (now the Israel Innovation Authority). This organization has guided Israeli innovation policy ever since.
Its notable contribution came in the 1990s, when it launched key government programs that pushed forward Israel’s nascent tech industry. The Yozma program, for instance, created a thriving venture capital industry almost from thin air. Israel’s venture capital landscape now funnels billions into startups annually.
The internet revolution
Despite its high levels of human capital, until the 1990s Israel struggled in growing a globally competitive industry. Its small size and geographical isolation put it at a disadvantage every time it manufactured and exported physical goods. But with the rise of the internet, ideas and services – not goods – became the primary export.
Israel’s strengths in military-developed information and communication technology (ICT), as well as excellent academic research, suddenly had global reach. Software, unlike physical goods, does not require shipping or economies of scale, making distance from markets irrelevant. Israeli strengths met global opportunity at the right moment.
Human capital from the former Soviet Union
The 1990s also brought over a million immigrants to Israel from the former Soviet Union, many of whom were engineers, scientists and highly educated professionals. They dramatically expanded Israel’s talent pool at a critical moment when the tech ecosystem was just taking off.
Peace process and global investment
At the same time, the Oslo peace process improved Israel’s image globally. While in retrospect the Oslo Accords failed to bring peace, they helped put Israel on the map for foreign investors. Foreign capital flowed in, catalyzing entrepreneurship and supercharging Israel’s emergence as a tech hub.
All these factors led to a surge in innovation activity and formed one of the most surprising success stories in the history of modern innovation.
Expansion and slowdown in the tech sector
In the 1990s, the dominant force in the industry were cyber and ICT infrastructure companies, mainly stemming from military expertise.
A pivotal moment came in 1998 when Mirabilis – the maker of instant messaging client ICQ – was acquired for $407 million, igniting Israel’s startup culture. This culture kept the tech industry dynamic, and every year a few hundred Israeli startups were founded, according to the most cutting-edge technologies and global demand.
By the second decade of this century, large businesses had begun turning to Israel for its ICT expertise. During that decade, the number of R&D centers in Israel owned by multinational companies more than doubled, surpassing 400.
Even the Covid-19 pandemic caused only a brief pause. In 2021, Israeli startups raised $28 billion – more than most European countries in absolute terms. But this ascent began stalling in mid-2022. What started as a global economic slowdown soon evolved into Israel’s most severe crisis in decades, culminating in the October 7, 2023, attacks and ongoing multifront conflict.
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Yet over the past two years, key indicators have flatlined or declined. Tech-sector employment has stalled since mid-2022. Venture capital investment has reverted to 2018 levels (in real terms). In 2023, more Israeli startups shut down than were founded for the first time in two decades, and R&D spending fell in 2023 for the first time in 15 years.
This slowdown is not unique to Israel. Aside from Big Tech leaders in AI, much of the global tech ecosystem has cooled. However, Israel’s internal crises – social polarization, political instability and war – have deepened the downturn, clouding the country’s innovation outlook.
Scenarios
Today, Israeli innovation stands at a fork in the road. Two diverging futures are possible.
Likely: Return to business-as-usual
In this optimistic scenario, instability in Israel gradually subsides. Israel’s wars wind down, the social rift narrows and perhaps a landmark U.S.-Israel-Saudi Arabia deal helps stabilize the region.
Technologically, AI transitions from foundational development to practical application. Israeli startups, known for their agility, find niches where they can thrive. Venture capital flows return, startups flourish and Israel resumes its upward trajectory.
Less likely: Israel’s innovation advantage is lost
The second scenario is more sobering. In it, the very factors that powered Israel’s technological rise now combine to threaten its future.
A prolonged multifront conflict in the Middle East demands vast resources, both financial and human. With many reservists drawn from the young, male-dominated tech sector, productivity suffers. Government budgets shift toward security, leaving less for R&D and innovation.
Big technological shifts create new winners and losers. Japan lost its technological edge with the shift from hardware to the internet and software economy. At the same time, Israel found that its internal capabilities are fitting to the new ICT era and became a global innovation leader.
The AI revolution is undoubtedly a huge technological development. Israeli capabilities may not suit this new era as well as the previous one. So far, progress is driven by large companies with data and computing power – resources Israel lacks. If the government fails to invest strategically, Israel may find itself misaligned with the technologies of the future.
In the 1990s, Israel gained a massive injection of skilled talent. Now the trend is reversing. The Israel Innovation Authority estimates that since October 7, 2023, over 8,000 tech workers have left the country. According to the 2025 Stanford AI Index, Israel ranked highest in AI expert emigration in 2024. This brain drain threatens the very core of Israel’s innovation advantage.
Public-private partnership was a cornerstone of Israel’s innovation success. But this relationship is fraying. Many tech leaders have protested against the judicial overhaul, while the current government – Israel’s most religious and right-wing ever – stands ideologically opposed to the secular, liberal tech elite. Innovation policy risks becoming politicized, undermining long-standing consensus.
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