New Report Shows Israel Doesn’t Invest Enough In R&D

The Israel Innovation Authority (IIA) released its annual comprehensive report, “The State of High-Tech” this week reviewing the successes, shortfalls, and overall trends Israel’s high-tech ecosystem exhibited during 2021 compared to years prior. 

In the past year, high tech exports accounted for 50 percent of the country’s exports for the first time and employment in the industry rose above 10 percent of all employees.

Of the report’s many findings, one of the more notable conclusions the Authority highlighted traced to Israel’s R&D expenditure. While Israel ranks first place on the OECD list of R&D expenditure as a percentage of GDP crossing the 5 percent threshold in 2020, the report found the country to rank in last place for the rate of government R&D investment as a proportion of all investments in the field. The Israeli government funded less than 10 percent of R&D expenditure in 2019, representing 0.5 percent of GDP. 

For comparison, the rate in the US exceeded 20 percent, exemplifying 0.66 percent of GDP. The rate in Germany and France grew to 30 percent, constituting between 0.69-0.88 percent of GDP. The gaps in GDP between Israel and these other countries translate to extra annual R&D government investment ranging from NIS 2.4 to 5.7 billion.

“Over the years, government investment in research and development in growing and future segments, as a percentage of GDP, has been steadily declining. The continued growth of the Israeli high-tech industry in the face of global competition is at risk due to substantially low government investment vis-à-vis other countries,” the IIA said in a statement. 

In 2021 capital investments in startups accumulated to roughly $27 billion – more than twice the amount of 2020 – the report shows. Fifty-six percent of high-tech investments in 2021 were allocated towards three main industry verticals: enterprise software (25 percent), fintech (17 percent), and cyber (14 percent). Israel raked in 21.7 percent of the world’s cyber investments, according to a report from Crunchbase.

Eighty-eight investments in 2021 were classified as “mega-rounds” valued at $100 million or more, but during the same period, the market value of Israeli technology companies on NASDAQ fell by around 10 percent.

Tel Aviv was found to host a third of Israel’s high-tech companies, including 25 percent of industry employees. Jerusalem is mostly home to small and medium high-tech companies, while Haifa is mainly dominated by multinational companies. Meanwhile, the growth rate of Beersheba’s startup ecosystem is picking up momentum, adding 30 startups from 2015-2020.

Israel ranks first place in terms of collaborations between academia and industry, according to the Global Innovation Index, but only 15 percent of the collaborations are with Israeli companies while around 50 percent are with multinational technology companies Microsoft and IBM. 

Israel leads the world in the employment rate of high-tech workers. Around 362,000 people were hired into the country’s high-tech sector, representing 10.4 percent of all employees in Israel. The country with the next highest percentage of high-tech employees is Ireland with 9.2 percent. However, Israel’s high-tech sector experienced a 6 percent decline in the number of ultra-Orthodox employees (700 employees) and a relatively small 200-worker increase in the number of Arab employees.

Israel descended to 15th place in the Global Innovation Index in 2021, continuing its downward trend from its 13th place ranking in 2020 and its 10th place ranking in 2019.