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4 February 2021

How Israel became a tech powerhouse

Israel's start-up sector has an outsized global influence, but remains held back by major political and structural issues.

By Cristina Lago

Israel has earned a reputation in recent years as a tech powerhouse. It has the second highest concentration of high-tech companies in the world after Silicon Valley and the largest number of start-ups per capita in the world.

But how did a state the size of New Jersey with nine million inhabitants become a technology giant and a favourite destination for tech multinationals?

To understand Israel’s position as a technology pioneer, it is necessary to look at the country’s history and the priority it gives to higher education and state-backed research. More than three decades before the State of Israel was established in 1948, European Jewish immigrants founded the country’s first university: the Technion – Israel Institute of Technology.

David Ben-Gurion, Israel’s first prime minister and one of its founders, put great emphasis on science and technology as drivers of the Zionist national project. He was fascinated by 20th century technology, and written correspondence from the 1950s reveals the statesman’s interest in the then nascent fields of artificial intelligence and machine learning.

“From day one, it was decided by our founding fathers that we should put more emphasis in the ‘quality factor’ than in the ‘quantity factor’,” says Professor Isaac Ben-Israel, former Israeli MP and chairman of the Israel Space Agency and the Israel National Council for Research and Development.

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Ben-Gurion thought that if Israel was to survive in a region surrounded by enemies that heavily exceeded it in terms of people and size, it would need to focus on skills development, particularly those involving technology.

“When they [Israel’s founders] said quality, they meant two things: quality of the people, which is largely [achieved through] education, and quality of the science and technology. And this is still the same until today,” Ben-Israel tells me.

Another source of high-tech development comes from the Israeli military, the IDF, a pivotal institution in a country that spends 5.3 per cent of its GDP on defence – among the highest globally – and where the development of sophisticated military technology and equipment takes a large share of its resources.

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Examples of IDF technology development include a $100m contract signed in 2014 between the Ministry of Defence and Motorola to manufacture a next-generation military smartphone, tennis ball-sized devices equipped with cameras and infrared that allow remote 360-degree vision, or drones with 36-hour life able to carry out long-range missions.

The army serves as a start-up incubator and accelerator, and it is not unusual for ex-army officials to found businesses when they return to civil life. Cybersecurity, a subject which is part of Israel’s high-school curriculum and occupies much of the IDF’s strategy, has found its way to the commercial sector.

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“We were not the first to invent or use cyber technology for intelligence; many countries had already at least 30 years of experience,” says Ben-Israel. “But we were the first to ‘take it out of the closet’, to make it a legitimate subject for industry, economy, academic research… not only the intelligence of security missions. And in high-tech, when you are the first, you keep your advantage for many years.”

But army technology is also used for controversial practices in the occupied West Bank and certain groups within Israel. The World Association for Christian Communication (WACC), a communications rights NGO with consultative status with the UN, says that Israel’s control of Palestinian information and communication technology (ICT) infrastructure has allowed for mass surveillance of Palestinians and civil rights restrictions.

A start-up nation

Israel’s reputation as “start-up nation” is well justified; it has the highest number of start-ups per capita worldwide (with around one start-up per 1,400 inhabitants) and it also ranks among the top countries for patents per capita.

“Silicon Wadi”, the coastal plain region where most high-tech companies in Israel are based, is second only to the Silicon Valley in terms of the number of business start-ups. Every major tech corporation has headquarters there and high-tech clusters continue to thrive thanks to government incentives and policies, and to venture capital (VC).

In addition to Israelis’ entrepreneurial mindset and culture, multinationals setting up research and development centres play a critical role within the start-up ecosystem, says Fiona Darmon, general partner at VC and private equity firm Jerusalem Venture Partners (JVP).

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Israel has over 300 R&D centres and in 2018 it invested more in R&D than any other country (4.95 per cent of its GDP), according to the World Economic Forum. Most of the investment went into computer systems, artificial intelligence, medical research and cybersecurity.

“That [R&D investment] has a huge role in the ecosystem because it’s validating the education and the skills,” adds Darmon. “It’s the source of new start-ups, not just acquisition. It’s a shortcut: by embracing a start-up, you are embracing a relationship with a multinational or capital from a multinational.”

Structural issues

But not everyone in Israel has benefited from the success of its tech scene. Arab citizens (some prefer to self-identify as either Palestinians or Israelis) have traditionally been excluded as a result of what Hans Shakur, director of Tsofen, a non-profit organisation promoting high-tech within the Israeli-Arab society, calls “subjective, objective and structural issues”.

With the exception of the Druze, Arab citizens in Israel are exempt from the compulsory military service. This already leaves Arab citizens at a disadvantage to their Jewish counterparts, who acquire valuable technological skills in the military. In civil society, Shakur explains, Arab citizens cannot access referral “friends bringing friends” programmes or tech networks that would land them jobs in the sector. Tsofen identified these gaps and began developing Arab-Israeli tech talent by investing in training, mentorship and network-building among Arab candidates in high tech.

“However, it’s not enough to integrate Arab engineers into Israeli high tech – the talent pool is getting bigger and bigger – but the time has come to capitalise on this talent to attract and bring high-tech companies to Arab cities [within Israel] and outsource projects to Arab cities,” says Shakur.

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Shakur says that in 2008 there were only 350 Arab engineers in the Israeli high-tech sector (accounting for less than 20 per cent of the people with the required academic background to work in the sector). By 2019, that number had increased to 6,600. Although this is a positive development, 42 per cent of graduates with the required qualifications are still not getting job offers in the sector.

However, Shakur is optimistic about the progress and the possibilities that bridging this gap can bring. He also thinks that strengthening the tech ecosystem by replicating it in Arab-majority cities and regions, such as the Triangle (a concentration of Israeli-Arab towns and villages adjacent to the Green Line) or the Negev, can attract both Jewish and Arab start-ups and high-tech engineers.

“Why not exploit this opportunity and create a better reality for all?” asks Shakur. “Eventually the economy will benefit from the growth and there will be better living standards for everybody.”