Approximately half of Israel’s economic growth in recent years stems directly from high-tech. The high-tech industries account for more than 16% of Israel’s total gross domestic product (GDP), or 20% when including satellite industries. Indirectly, an additional 10% of revenues can be attributed to businesses and individuals providing services to the local high-tech sector, which directly employs around 12% of the national workforce. This sector is responsible for over one-third of Israel’s exports, totaling over $170 billion last year. It also includes research and development (R&D), which generated an additional $14 billion in exports in 2022. The high-tech industry embodies globalization in Israel: its employees speak English, its clients are global, and thus its mobility potential is high. Therefore, one of the key questions when examining the war’s impact on Israel is its effect on this sector.

This question revolves around three key risks: human capital, demand, and investments. Regarding human capital, the concerns are the extent to which it is at risk of absenteeism and whether there is a significant threat of skilled workers leaving Israel permanently due to the situation. The second question concerns customers: Will demand for Israeli high-tech products decline? The third concerns the sector’s ability to raise funds, as capital and strategic investments are its lifeblood.

Low Risk of Significant Relocation Among High-Tech Employees

High-tech employees are primarily young people aged 26–45, and many are currently enlisted in the military. In the immediate term, the answer to the industry’s vulnerability is evident. Israelis in this age group tend to prioritize military service over enticing offers from numerous companies that invite them to work abroad. However, working abroad is often not practically feasible due to network security restrictions. Connecting to foreign servers is deemed too risky for companies, which usually prohibit it.

Beyond the immediate term, where companies in the sector are forced to slow operations, the issue largely depends on the existential risk to Israel and whether many professionals in the industry will prefer to relocate during or after the war. This risk is more plausible for those who have directly experienced the war’s trauma in southern Israel or for soldiers fighting on the front lines.

Regarding these risks, it is essential to note that while terrorist organizations pose a tangible threat to Israeli civilians, they do not present an existential danger to Israel. Such a risk could arise only in a global war that might develop from the current localized conflict. However, in such a scenario, many other countries would also find themselves at the center of that war. Security experts from Israel and around the world estimate that this war does not constitute an existential threat to Israel, even if it escalates to involve more than one or two fronts.

The risk of significant numbers of high-tech workers relocating also appears low. Experience suggests that war tends to increase patriotic sentiment. Moreover, a successful resolution to the war could leave Israel in a much better security position than before. Naturally, some Israelis may move to places perceived as safer on a small scale, but this will not jeopardize the industry, which continues to draw in a steady influx of young professionals each year.

The War Drives Demand for Technology

The most significant advantage of Israel’s high-tech industry is its unique human capital: a high percentage of Israelis graduate from academic and technological high schools. However, the most notable advantage is that they move on to three years of military service after high school. In many ways, military service is akin to entering the workforce before continuing their academic studies. A significant proportion of those enlisted gain experience in technological roles—both in production and, more commonly, as end users. This extensive experience gives them a perspective vastly different from their global peers studying computer science, for example, without having experienced its practical application.

In this context, the war is boosting demand for technology. Many soldiers are currently engaged in technological challenges, and companies across various industries are being recruited to develop weapons and defense systems for the military. On a global scale, military research and development is often underreported in statistics, but Israel invests heavily in this area, much of which remains classified. Thus, alongside the war’s negative impacts on the industry, its contributions to the sector should also be considered.

Resilience to Crises in the Blue Ocean

The risk of decreased demand is the lowest among the dangers posed by the war. Israel’s high-tech industry is globally diversified and has demonstrated tremendous resilience to crises. Operating in a “blue ocean” (markets with high demand and little competition), the Israeli high-tech sector leads in unique developments across cybersecurity, defense, healthcare, automotive, and other fields. Even when the industry faced concerns about dealing with a strong shekel—which characterized Israel until early 2022 when the dollar-to-shekel exchange rate was about 3—the scale of Israeli exports was unaffected. Not even the COVID-19 crisis hurt the sector; in 2020, Israel entered the list of the top 20 economies in terms of GDP per capita for the first time, ranking 19th—ahead of Canada, the UK, Japan, France, Italy, and more.

Following the COVID-19 crisis, Israel quickly returned to its pre-crisis low debt-to-GDP ratio of 60%, compared to 130% in the United States. Over the past 12 months, inflation dropped to 3.8% and is expected to reach 3.2% by the end of 2023.

A Prolonged War Could Harm the Industry

The war may affect the scale of investment in the sector, particularly in the short term. This leaves us with the critical question of the war’s duration and potential impact. The longer the war lasts, the more significant the damage will be. It’s likely that not only the high-tech sector will suffer from a prolonged war—lasting more than six to eight months—but also other parts of the economy. Should the war extend beyond that, it will likely be at a lower intensity or escalate into a global conflict, which would, of course, have broader implications—not just for Israel’s economy.

Three weeks after the war broke out, the shekel weakened against the dollar by 6%, leading stock indices in Israel to drop by about 12%-15%. Israel’s growth projections were revised downward to 2.8% for 2023 and 3.2% for 2024. The country’s debt-to-GDP ratio is expected to reach 65% by the end of the year—still half that of the United States. Inflation in Israel remains restrained and is projected to stand at 3.2%, with full employment. Israel’s foreign currency reserves are substantial, meaning that from a macroeconomic perspective, the country can withstand the war under a reasonable scenario.

In many ways, as history shows, Israel’s darkest hours in terms of security threats are also often its finest as a people. Many high-tech professionals have taken up global advocacy, joined the war effort, and contributed to national resilience through volunteering and mutual assistance.

Once again, we are reminded we are one nation and why we came together here.

"The most significant advantage of Israel’s high-tech industry is its unique human capital"
photo: Popel Arseniy/Shutterstock.com