Israeli high-tech leading economy out of Covid crisis, but worrying trends loom

The Israel Innovation Authority's report warns that if the government does not reassess its policies toward the sector, high-tech growth will benefit the high-tech sector alone

Although a record number of Israeli startups are floating on the stock market, there has been a sharp decline in the number of new startups established annually, the Israel Innovation Authority's 2021 Innovation Report has found. The report reveals that the number of new startups established on an annual basis in Israel has plummeted, from 1,400 startups established in 2014, to 850 new startups in 2019 and an estimated 520 new startups in 2020. This figure represents a sharp drop of almost 70% in the number of new startups established each year compared to 2014. This has also been accompanied by a sharp decline in the establishment of multinational development centers in Israel, from 46 in 2016 to four in 2020.

 

"The influence of high-tech on the resilience of the Israeli economy requires the country to ensure the continued prosperity of the high-tech sector," said Dr. Ami Applebaum, Chairman of the Israel Innovation Authority. "At present, the number of new startups founded each year is sharply declining, the number of seed-level investment rounds is diminishing, and governmental research and development budgets are being cut on an annual basis – dramatically, relative to other countries. The State of Israel must continue to develop a robust response to the significant challenges facing the Israeli high-tech sector."

Dr. Ami Applebaum, Chairman of the Israel Innovation Authority. Photo: Amit Shaal

 

Only about 10% of Israeli employees work in the high-tech sector, but they are responsible for around 15% of Israel's Gross Domestic Product (GDP), 25% of the total income tax paid In Israel, 43% of exports, and 40% of the value of companies listed on the Tel Aviv 35 Index.

 

The 2021 Israel Innovation Authority Innovation Report also highlighted that Israel's internationally competitive position as the "Start-Up Nation" is eroding, and in recent years Israel has been on a declining trend, relative to other countries, according to global innovation indices.

 

The share of the state budget invested in the Israel Innovation Authority (i.e. the State of Israel's investment in supporting civilian research and development) has fallen sharply, from 1% in the early 2000s to less than 0.5% today – a significantly lower proportion than in world-leading countries in the field.

 

Nevertheless, the report stated that the total amount of capital raised by Israeli startups quadrupled within a decade and totaled $11.5 billion in 2020 - 20% more than the total amount of capital raised in 2019.

 

The number of investments exceeding $100 million has increased almost sevenfold in the last five years – from three investments in 2015 to 20 investments in 2020. In the first quarter of 2021 alone, there were 20 investments of over $100 million.

 

The value of high-tech exports is growing steadily, reaching almost $50 billion in 2020 – more than 40% of total exports.

 

Compared to 2019, 2020 saw a 50% increase in the number of Israeli technology companies floated on the stock markets. The number of listings of Israeli startups seeking to maintain their independence peaked in 2020, with Israeli companies achieving a record 31 initial public offerings (IPOs), primarily on the Tel Aviv and U.S. stock exchanges.

 

In an interesting change of trend, in 2020, multinational companies only opened four new research and development centers in Israel; they are, for the most part, usually established as part of mergers and acquisitions. This trend demonstrates the sector's maturity, with an increasing number of startups seeking to maintain their independence. Nonetheless, the workforce at these companies has expanded at the same high rate as the rest of this sector, and its share among the total high-tech sector has been maintained.

 

Contrary to the image of high-tech as a young sector, there has been an increase in the average age of employees in the high-tech industry – which is now higher than the average age of employees in the rest of the economy. The average age of high-tech employees in 2019 was 40.1, compared with the average working age in the rest of the economy which stood at 39.6.