For years, Israel's economy has enjoyed the benefits of investments in both defensive and offensive cyber technologies. The success has been so significant that, in recent years, around 40% of global cyber investments have come from Israel, second only to the US, the world leader. One in three companies valued at over $1 billion, known as “unicorns,” is Israeli. In the past year, exports from Israel's cyber companies totaled $ 11 billion.
Israeli cyber companies have become a major growth engine for the economy, which, as a small “landlocked” country, is heavily reliant on the global economic system. This dependence comes with its own set of challenges. When we look at the broader hi-tech sector, we find that, according to the Central Bureau of Statistics, hi-tech workers accounted for about 10% of the total workforce in recent years, even amid the ongoing conflict.
The number of hi-tech workers, accounting for 16% of employees in the business sector, rose by 0.8% over the past year (as of August), reaching 400,900. The average number of hi-tech workers in 2023 was 397,300, and in 2024, it stands at 397,400.
Wages in hi-tech grew by 6.7% over the past year (as of August), reaching NIS 29,650 per month. In hi-tech services, wages rose by 7.3% to NIS 33,242 per month. Hi-tech service exports for the past year (as of August) totaled $59.9 billion, compared to $55.1 billion the previous year and $49 billion two years ago. This means that even amid the ongoing war, hi-tech service exports grew by 22.2% over two years – a remarkable achievement.
Hi-tech service exports are part of the broader business services export category, which, by nature, relies on the digital sector. Overall, business service exports, including hi-tech, increased by 19.2% over the past two years, reaching $ 75 billion annually as of August. The total revenue from hi-tech sectors, including both industry and services for the local market and exports, rose by a real, seasonally adjusted rate of 9.8% over the past two years to August – an impressive feat.
Israeli hi-tech faces threat from AI
The hi-tech sector accounts for about 18% of Israel’s GDP, and taxes paid by hi-tech workers make up a third of the state’s revenue from salaried labor. According to data from the Innovation Authority, the share of hi-tech exports in total exports is expected to rise to 57.2%, up from 52.9% in 2023. This figure excludes exports from startups and diamonds. Around 40% of business product growth in recent years is attributed to the hi-tech sector, according to the Bank of Israel.
Israel’s reliance on service exports, particularly hi-tech, provides a shield against protective tariffs, such as those imposed by President Donald Trump, which have disrupted global trade. Unlike goods, service exports are tariff-free, and most are invisible. According to the Innovation Authority, only 7% of Israel’s hi-tech exports are at risk due to President Trump’s tariffs.
In 2024, hi-tech goods exports made up 28% of total hi-tech exports, down from 60% in 2013. In other words, Israel is exporting more intangible products and fewer tangible goods. Israel has consistently led the world in R&D expenditure as a percentage of GDP, currently at 6.4%, up from 4.2% in 2014. South Korea follows with 5%, and the US stands at 3.5%. OECD countries average 2.7%, and the EU is at around 2.2%.
But while things look good now, a major threat looms just around the corner – the artificial intelligence revolution, where Israel is falling behind both the US and China. Artificial intelligence requires massive data centers, which, in turn, demand substantial investments in electricity infrastructure in Israel, on top of the usual rise in electricity consumption driven by GDP growth.
National expenditure on civilian R&D, adjusted for constant 2015 prices, rose from 40 billion shekels in 2007-2011 to 94 billion in 2022-2023 – an increase of about 135%, according to the CBS. Israel’s electricity production capacity rose from 63.5 terawatt-hours in 2012 to about 74 terawatt-hours in 2022, and is expected to reach 78 terawatt-hours this year – a 23% increase between 2012 and 2025.
As long as electricity production capacity was driven by rising living standards and the needs of the economy – including water pumping, agriculture, industry, and electricity sales to the Palestinian Authority (which consumes 7% of the power) – this was manageable. However, artificial intelligence, a power-hungry technology, demands massive investments in electricity production. The gap between electricity production capacity and demand will continue to narrow, particularly during peak hours, as artificial intelligence becomes more widely used in daily life.
Yes, it is possible to use computing power from abroad, but will the undersea cables and satellites be sufficient? Take note of Google’s recent announcement in Australia, just last week, about the construction of an artificial intelligence center on Christmas Island, located about 350 kilometers south of Indonesia, in an agreement with the Australian Ministry of Defense. No further details were provided. The site is meant to help counter China’s expansion in the Indian Ocean, near Australia.
Google is now making its largest-ever investment in Germany’s information infrastructure, as well as in renewable energy and innovation. Google is investing between 10 and 15 billion dollars in artificial intelligence data farms in Visakhapatnam, Andhra Pradesh, India. Earlier, Google announced it would invest 5 billion euros in artificial intelligence infrastructure in Belgium.
Israel faces a critical gap in access to computing infrastructure by its companies and research institutions, which hinders the development and implementation of solutions, particularly in artificial intelligence. This infrastructure gap could significantly impact Israel’s ability to advance in AI and other technological sectors, despite its strengths in research and development. Israel’s investment in computing infrastructure stands at 2.4% of GDP, compared to 3.7% in OECD countries.
Multinational companies, including those on which Israel depends – such as the defense establishment, which relies on Microsoft’s cloud services – are building information infrastructure in Israel, including local cloud regions. Microsoft, Amazon, and now Nvidia are investing in Israel. But will there be enough electricity to power this infrastructure?
The government must ensure that Israeli companies also enter this field, despite the fact that these are investments worth tens of billions of dollars, requiring enormous cooling systems. Engineering solutions must be developed to meet the growing cooling needs of modern data centers, which require high-power supplies.
Analysts estimate that building an artificial intelligence center with a one-gigawatt capacity costs between $15 and $20 billion, with some estimating the cost could reach $35 billion. Israeli firms don’t have such capabilities, but they must raise capital and enter into partnerships, or start small with smaller data and artificial intelligence centers.
These are crucial not only for the business sector but also for military and defense needs, which will require enhanced capabilities in missile defense, air defense, and offensive operations. A war with lions is a thing of the past.
In fact, the entire Israeli economy depends on hi-tech, and it will increasingly rely on artificial intelligence. Success depends on the excellence of Israelis, who must rapidly deepen their expertise in this field. Without hi-tech, Israel’s economy cannot survive. Without prioritizing artificial intelligence, Israeli hi-tech will stagnate, and without it, Israel’s economy won’t be strong enough to sustain the growing defense budget.
The Finance Ministry recognizes this challenge. The ministry has announced a new tax reform aimed at easing operations and making the Israeli hi-tech sector more attractive. The reform includes a series of legislative steps and changes to the tax authority’s procedures, removing existing barriers and providing incentives for the growth of Israeli hi-tech companies, increasing multinational hi-tech activity in Israel, and encouraging the acquisition of Israeli hi-tech firms.
The Finance Ministry hopes to leverage global anti-Semitism to benefit the Israeli economy, encouraging the rapid return of hi-tech workers to Israel. The government will encourage investment in companies throughout the hi-tech lifecycle, from incorporation and early-stage fundraising to growth stages, advanced fundraising, and ultimately IPOs or sales to multinational companies.
The ministry will act to regulate the activities of investment funds in hi-tech, both Israeli and foreign, and investors. The plan is to enact legislation to increase transparency and certainty in tax matters, remove investment barriers for investment bodies and companies in direct investment in hi-tech, provide regulatory easing to promote mergers and acquisitions, enhance tax certainty for multinational companies – especially during the acquisition of Israeli firms and R&D centers – and take steps to provide tax incentives for the rapid return of talented Israelis from abroad.
In the document published jointly by the Finance Ministry and the Innovation Authority, which outlines what needs to be done, there is no mention of investment in artificial intelligence or the critical issue of electricity infrastructure.
The main focus is on tax relief. The document, released by the Finance Ministry after work by inter-agency teams within the government, the tax authority, and the Innovation Authority, does not address the urgent need for increased investment in AI, or the need to collaborate with the Energy Ministry to expand electricity production and distribution across Israel, both to keep up with growing investment and to defend against missile threats.
There is no mention of collaboration or boosting the education system, from early childhood through to universities, in mathematics, computer science, and the sciences. Additionally, there is no mention of the need to involve the Communications Ministry in expanding undersea cables and installing additional satellite communication dishes to maintain uninterrupted data flow between Israel and the rest of the world.
The document also fails to note that Israel’s relative penetration of AI and research on the subject is significantly lower than that of other developed nations, despite Israel having the highest concentration of AI talent, according to the AI Index Report 2025. We cannot live by cyber success alone. Not forever strong.