Israeli High-Tech Industry Faces Slowdown Amid War and Economic Pressures - Recruitment Slows

The Israel Innovation Authority published its annual report today, summarizing the state of the country's high-tech sector since the outbreak of the Iron Swords War on October 7. The report highlights concerning trends, including a slowdown in recruitment, changes in the industry’s workforce composition, and declining attractiveness to foreign investors.

As of mid-2022, Israel’s high-tech workforce has remained stagnant, with around 400,000 employees. Although 2023 saw a slight increase of 2.6% in employment, it was below the growth rates in the US (2.8%) and Europe (5%). This trend reflects a slowdown in hiring, though the war itself was not identified as the primary cause. Instead, the Israel Innovation Authority points to broader economic pressures, such as public protests against legal reforms.

High-Tech Employment Trends

The report notes a 3.8% increase in high-tech employment between the fourth quarter of 2023 and the first half of 2024, despite a sharp drop in the third quarter of 2023. Interestingly, the defense sector, despite the ongoing conflict, did not contribute significantly to this increase. The main challenge appears to be a steady decline in product management and lower-tier roles, while the proportion of R&D personnel has risen. By mid-2024, R&D workers made up 52% of the high-tech workforce, compared to 37% in 2012.

This trend suggests that companies may be shifting parts of their operations overseas or halting early-stage development due to difficulties in securing funding.

Investment Decline and Sector Concentration

The first half of 2024 saw high-tech investments total approximately $4.75 billion, a sharp 60% drop from the $12 billion invested in 2022. While this figure marks an improvement over the second half of 2023, when $3.9 billion was raised, it reflects a continued decline in overall investment in the industry.

In a global context, Israel raised $8.8 billion since October 7, placing it behind only San Francisco and New York in capital raised. However, this figure is misleading as the bulk of investments were funneled into cyber, corporate software, and fintech sectors, with cyber alone accounting for 35% of total capital raised. Other areas of the industry have seen a decline in funding, raising concerns about the long-term sustainability of the broader tech ecosystem in Israel.

Looking Ahead: Challenges for Decision Makers

The report raises critical concerns for policymakers, particularly as Israel's attractiveness to investors wanes and recruitment slows. The current trend suggests a potential risk of further stagnation or decline if investments and talent development do not broaden beyond the concentrated sectors of cyber and fintech.

With economic and geopolitical pressures mounting, the decisions made in the coming months could significantly shape the future of Israel’s high-tech sector.