Israel's Technology Economy

How Israel built one of the world's most concentrated technology and start-up sectors, and the factors economists credit and question.

Israel, a country of around 10 million people, has one of the world’s highest concentrations of technology start-ups and one of the highest rates of spending on research and development relative to GDP. Its technology sector, sometimes nicknamed “Silicon Wadi”, produces a large share of its exports.

What drove it

Economists and writers point to several factors:

High R&D spending: Israel spends around 5 to 6 percent of GDP on research and development, among the highest in the world, mostly by businesses.
Venture capital: in 1993 the government launched the Yozma programme, which co-invested with foreign venture capital firms and helped create a domestic venture industry.
Skilled immigration: in the 1990s, around a million immigrants arrived from the former Soviet Union, many of them engineers and scientists.
Military technology units: compulsory military service and elite technology units train young people in engineering and cybersecurity, and many later found companies.
Universities and research institutes.
Foreign companies: many global technology firms set up research centres in Israel.

Exits and scale

Many Israeli start-ups are sold to larger foreign companies rather than growing into giants at home. Notable examples include the sale of the navigation app Waze to Google in 2013 and of Mobileye, which makes driver assistance technology, to Intel in 2017.

A divided economy

Israel’s economy is sometimes described as two economies. The high-productivity technology sector employs a relatively small share of workers, while other sectors have much lower productivity. Some communities have low participation in the workforce. Economists at the Bank of Israel and OECD have highlighted this gap and the high cost of living.

A government that took a minority stake

Under Yozma, the government offered to invest alongside foreign venture capitalists in new Israeli funds and gave investors an option to buy out the government's share cheaply if the funds succeeded. This limited the government's control while sharing early risk. Private venture funds multiplied, and the programme is often studied as a model of well-designed public support.

Thinking one policy created the tech sector

Israel's technology sector grew from many interacting factors: immigration, military training, universities, venture capital and global company investment. Copying a single policy, like Yozma, without these conditions is unlikely to produce the same results.

Key takeaways

Israel has one of the world's highest levels of R&D spending relative to GDP.
The Yozma programme of 1993 helped build a venture capital industry.
Soviet-era immigration, military tech units and universities supplied talent.
A productivity gap separates the tech sector from the rest of the economy.