Experts warn overreliance on R&D and offshore production threatens economic resilience

 Israel’s global reputation as a powerhouse of innovation is increasingly being questioned by economists and industry experts who warn that the country’s declining manufacturing base could pose long-term economic and strategic risks.

While Israel continues to excel in research and development (R&D), critics argue that it has failed to keep pace with a global shift toward strengthening domestic manufacturing capabilities—a trend now being led by the United States, Europe, and China.

“R&D IS BRAIN — MANUFACTURING IS HEART”

Experts say Israel’s economic model, which emphasizes innovation and high-tech exits, overlooks a critical component of sustainable growth: industrial production.

“R&D is the brain, but manufacturing is the heart,” one industry analyst said. “As you move up the value chain, the profits and strategic value increase significantly. Intellectual property alone cannot match the long-term economic impact of producing final goods.”

According to this view, while R&D offers speed and flexibility, manufacturing provides depth, stability, and irreplaceable national value.

DEPENDENCE EXPOSED DURING CRISIS

Recent geopolitical tensions and supply chain disruptions have highlighted Israel’s dependence on foreign manufacturing. The need to import critical materials, including ammunition during wartime, has been cited as a stark example of this vulnerability.

Prime Minister Benjamin Netanyahu has recently called for strengthening local manufacturing, signaling growing recognition at the highest levels of government that reliance on external suppliers carries significant risks.

Despite its technological edge, Israel’s industrial sector has been steadily eroding. Analysts point to several key factors: limited government support, heavy regulation, high energy costs, and a shortage of skilled technical labor.

The result has been a steady relocation of manufacturing facilities overseas, while domestic industrial zones are increasingly converted into real estate projects. Many companies now prefer importing goods rather than producing them locally due to economic constraints.

GLOBAL SHIFT TOWARD INDUSTRIAL POLICY

Other major economies are moving in the opposite direction. The United States has committed tens of billions of dollars to domestic semiconductor production through the CHIPS and Science Act, while the European Union has set a target for industry to account for 20% of GDP. Meanwhile, China continues to expand its manufacturing base after decades of sustained investment.

Industry leaders, including Tim Cook, have emphasized that advanced manufacturing is not a commodity but a concentration of deep engineering expertise—one that is difficult to rebuild once lost.

Economist Stanley Fischer warned as early as a decade ago that economies lacking a strong production base struggle to achieve sustainable growth.

A MISSED OPPORTUNITY AND A PATH FORWARD

Experts argue that Israel is uniquely positioned to reverse the trend. With world-class technological capabilities and growing global demand for both security and civilian solutions, the country could integrate innovation with advanced local manufacturing.

“If Israel combines its technological strengths with domestic production, it can move from being a supplier of ideas to a full-scale industrial power,” one analyst said.

There are precedents: Israel has successfully built globally competitive industries in sectors such as water technology, cybersecurity, and defense when supported by targeted government policy.

CALLS FOR POLICY SHIFT

To rebuild its manufacturing base, experts propose a multi-pronged strategy:

• Reintroducing industrial and engineering education at earlier stages
• Launching a large-scale, multi-year government investment plan worth tens of billions
• Reducing regulatory burdens and lowering energy costs for manufacturers
• Encouraging multinational corporations to establish production facilities alongside R&D centers in Israel

They stress that modern industry is no longer “low-tech,” but rather Industry 4.0—an advanced integration of artificial intelligence, automation, and precision engineering.

A QUESTION OF NATIONAL RESILIENCE

As global competition intensifies, the debate over Israel’s economic direction is shifting from growth to resilience.

“If Israel does not invest now in production infrastructure and human capital,” one expert warned, “it may find itself with exceptional ideas—but without the capacity to turn them into reality.”

For policymakers, the message is increasingly clear: rebuilding domestic manufacturing is no longer just an economic priority—it is a matter of national independence.