High-tech boom may be over, Israel’s chief scientist warns

A lack of skilled workers is a central obstacle for growth of startups and more established tech companies

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

An Israeli system engineer keeps watch over a production line at the Teva factory in Jerusalem. (Olivier Fitoussi/Flash90)
An Israeli system engineer keeps watch over a production line at the Teva factory in Jerusalem. (Olivier Fitoussi/Flash90)

Israel’s high-tech industry will lack more than 10,000 engineers and programmers in the coming decade if the government doesn’t take immediate action to prepare students to meet the shortfall, the Ministry of Economy and Industry’s chief scientist warned in a new report.

“Thanks to the extensive activity in Israel over the past two decades, we have accomplished extraordinary achievements, but it looks like the ‘seven good years’ are over and that we are approaching our glass ceiling,” said Avi Hasson, the ministry’s chief scientist and chairman of the Israel Innovation Authority, which published the report last week and presented it to Prime Minister Benjamin Netanyahu. Hasson was alluding to the biblical story of Joseph, who correctly foretold seven good years followed by seven bad years for ancient Egypt.

A lack of skilled human resources is a central obstacle for growth, both for startups and for more established Israeli technology companies, according to the report. The shortage in the number of engineers is the result of a decline in the share of Israelis graduating in the sciences, which fell from 13 percent in 2004 to 8.7% in 2014.

In the fields of computer science, math and statistics, the number of students has dropped from 3,000 graduates in 2004 to 2,250 in 2014.

Even if the gap were to be addressed today by the government through several key educational programs, it may take a decade for those efforts to bear fruit, the report said.

Economy Ministry chief scientist Avi Hasson (Courtesy)
Economy Ministry chief scientist Avi Hasson (Courtesy)

“If we do not take the appropriate measures now, they will be forced upon us in a few years from a position of weakness and after a lot of potential has been squandered,” Hasson said. “If we are wise enough to enact the necessary policy changes, there is a good chance we can succeed in renewing Israeli high-tech’s rapid growth, and increase innovation-fueled growth in the economy in general.”

According to the report, Israel in 2014 lost its top position among developed countries for national expenditures on civilian R&D as a percentage of GDP. It noted that Israel’s annual investment has remained static over the last decade, while other countries like South Korea have expanded such investment significantly.

Israel’s government R&D expenditure as a percentage of GDP declined to 0.52% in 2015 from 0.8% in 2002, the report said, noting that in the coming years there will be a need for an additional annual investment of at least NIS 450 million ($117 million) to close the gap. Israel should legislate government expenditures on national innovation as a fixed percentage of its state budget or, alternately, of GDP, the report recommended.

Meanwhile, the ease of doing business in Israel, as measured by two international indices — the Global Innovation Index and the World Economic Forum’s Global Competitiveness Index — is also deteriorating compared to the rest of the world.

“If we are able to allocate more resources toward technological innovation and expand its influence on the entire economy, we can better prepare the Israeli innovation industry for its next leap forward,” Hasson said.

The report also warns that new OECD guidelines for the taxation of multinational corporations operating locally may affect their volume of activity in Israel. Currently, there are more than 300 R&D centers belonging to multinational corporations in Israel, which for the most part pay taxes abroad on the products they develop in Israel.

China, which is undergoing a technological revolution and a liberalization of its economy, presents a huge opportunity that all Israeli high-tech companies must look into, the report said. Chinese involvement in the local industry has grown both in terms of investments and strategic cooperation and since 2012 more than 30 investors have come from China and Hong Kong to Israel.

“Despite this generally positive trend, this is still only the tip of the iceberg regarding the potential for economic relations with this global giant,” the report said.

(Foreground L to R) Asaf Gendler, CEO of Israeli start-up Bidflyer, signs a partnership agreement with Kevin Yu, COO of Hainan Eco-Tech Group (Courtesy)
(Foreground L to R) Asaf Gendler, CEO of Israeli start-up Bidflyer, signs a partnership agreement with Kevin Yu, COO of Hainan Eco-Tech Group (Courtesy)


In 2015, several positive trends continued in Israel’s high-tech sector, with companies raising $4.4 billion and achieving exits worth $8 billion. The scope of high-tech fundraising, in 693 deals, and the net addition of companies to this sector, around 700, are at an all-time high, the report said. Even so, the overall picture reflects stability compared to previous years, “highlighting the need for updated policies in order to realize the potential of the Israeli innovation ecosystem and contribute to its significant leap forward.”

The report pinpoints a number of trends in the industry: startups are developing into more mature companies – for the first time ever the income of 30 startups grew by two-digit percentage points over the past three years; there is significant growth in the number of experienced entrepreneurs active in the local economy.; and 25% of all entrepreneurs in Israel in 2015 are veteran entrepreneurs who have at least two initiatives under their belt, as compared to 16% in 2010. This trend helps established companies grow at a faster pace, the report said.

In addition, companies are exiting via initial public offerings or mergers and acquisitions at a more developed stage: the value of the average exit has increased by more than 100% over the past five years – to $75 million in 2015 from $31 million in 2010 – in another testament to the maturing of the industry.

Because they are more mature, more diverse funding avenues are being sought, including bank loans. The relative share of bank loans to the high-tech sector is still small, constituting only 0.25% of the overall credit given by the banking system over the past year – 2.25 billion shekels out of a total of 900 billion shekels. This funding is expected to grow significantly in the coming years, and the authority is mulling the possibility of providing loan guarantees to boost bank lending to companies the sector, the report said.

“The Israeli technological industry’s promising results in 2015 and over the past few years in general are quite encouraging,” Hasson said. “Still, these companies’ ongoing success makes it that much more difficult to notice the deeper issues threatening Israel’s competitiveness and constitute a genuine obstacle for the industry’s long-term success.”

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