Israel - Country Commercial Guide
Digital Economy
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Overview

Over the past few decades, Israel’s digital economy has become a global powerhouse, driven by government support, a skilled workforce, and a culture of innovation. The Digital Israel initiative promotes digital integration across sectors like education, healthcare, and government, while supporting startups through grants, tax incentives, and favorable regulations. 

The Israeli government established The National Digital Agency, an organization assigned with promoting the digital revolution in the public sector. The Agency reports to the Ministry of Economy and Industry, serves as the technological headquarters of government ministries and public bodies, and improves government services for residents and businesses in Israel. 

Despite Israel’s success in areas such as cybersecurity, artificial intelligences and fintech, Israel faces challenges including talent shortages, regulatory complexities, and the need to ensure that digital advancements benefit all citizens.

Israel’s digital economy is highly export-oriented, with a significant portion of the products and services developed in the country being sold abroad. The tech sector plays a vital role in Israel’s exports yet presents various opportunities to U.S. companies. 

Market Challenges 

Regulatory Environment

Market entry

Entering the Israeli market, particularly in the digital economy, presents both significant opportunities and challenges for foreign companies. Israel’s reputation as a global technology hub, along with its innovation-driven economy, makes it an attractive destination for international businesses. However, navigating the market entry process requires a thorough understanding of the local regulatory environment, cultural dynamics, and competitive landscape.

By leveraging local partnerships, understanding regulatory requirements, and taking advantage of government incentives, foreign companies can effectively navigate the challenges of entering the Israeli market and capitalize on the country’s thriving digital economy. 

Public Sector Procurement

Israel is a signatory to the WTO Agreement on Government Procurement (GPA). Additionally, under Israel’s Public Procurement Law, all Government of Israel entities and government-owned companies are required to procure goods or services by issuing a tender.

As a result of the extensive use of closed tendering processes, foreign companies will not always be aware of major tenders. There isn’t single centralized Israeli government website where public procurements are advertised. 

The Israel Innovation Authority (IIA), established by the Ministry of Economy and Industry plays a pivotal role in public sector procurement, particularly for projects that involve innovative technologies and research and development (R&D). The IIA supports public sector entities in identifying and procuring innovative solutions that address specific challenges or strategic goals.

The IIA often facilitates partnerships between public sector agencies and private companies, including startups, to develop and implement new technologies. These partnerships may involve joint R&D efforts, pilot projects, and the commercialization of innovative solutions. It also provides grants and financial incentives to companies involved in public sector projects, particularly those that contribute to the country’s strategic technological goals. These grants can help offset the costs of R&D and product development, making it easier for companies to participate in public tenders.

Foreign companies are encouraged to participate in Israel’s public sector procurement, particularly in areas where they can offer unique technologies or expertise. However, foreign companies must navigate the local regulatory landscape and may need to partner with Israeli firms to increase their chances of success in competitive tenders.

Data Privacy

Israel’s data privacy framework is well-developed and internationally recognized, particularly due to its alignment with the General Data Protection Regulation (GDPR). The Protection of Privacy Law provides a solid foundation for the protection of personal data, supported by active enforcement by the Privacy Protection Authority (PPA). 

Israel is recognized by the European Union as providing an adequate level of data protection, allowing for the free flow of personal data between the EU and Israel. This adequacy status is crucial for Israeli companies that do business with European partners or handle the data of EU citizens. In early 2024, Israel received an approval for the renewal of the adequacy, which required the Israeli government to update its data protection practices, ensuring that they meet the stringent requirements of European regulations. There is also a focus on enhancing transparency and accountability, requiring organizations to be more explicit about their data processing activities and ensuring that individuals are fully informed of their rights.

The PPA is responsible for enforcing data privacy laws and overseeing compliance, investigating complaints, and it has the authority to impose penalties for violations of data protection regulations. The PPA also provides guidance to organizations on best practices for data protection and regularly updates its regulations to keep pace with technological developments and global privacy trends. 

Cross Border Data Flows

Cross-border data flows are integral to Israel’s digital economy, enabling its tech sector to thrive on a global scale. Israel’s regulatory framework, bolstered by the EU’s adequacy decision and robust international agreements, facilitates these flows while maintaining high standards of data protection. However, the challenges of data control, compliance with diverse global standards, and the impact of emerging technologies require continuous adaptation of Israel’s regulatory approach. As the global landscape of data protection evolves, Israel’s proactive engagement in international discussions and regulatory updates will be crucial to sustaining its position in the global digital economy. 

The PPA plays an essential role in overseeing and regulating cross-border data flows. More specifically, it provides guidelines and regulations that help businesses navigate the complexities of international data transfers. The PPA also collaborates with international data protection authorities to harmonize regulations and facilitate cross-border data flows, ensuring that Israeli companies remain competitive in the global market.

Artificial Intelligence Regulation

Israel is at the forefront of artificial intelligence (AI) development with a thriving ecosystem of startups, research institutions, and multinational companies driving innovation in this field.

Israel is proactively developing its AI regulatory framework, with a strong focus on ethical considerations, sector-specific guidelines, and international collaboration.  In 2024, Israel announced its first comprehensive policy on AI regulation and ethics, demonstrating a commitment to responsible innovation amidst the increasing use of AI across sectors. The policy is a result of collaborative efforts between the Ministry of Innovation, Science and Technology, and the Ministry of Justice’s Office of Legal Counsel and Legislative Affairs, with the ultimate aim to address challenges such as bias, transparency, safety, accountability, and privacy. 

The future of AI regulation in Israel will likely involve a combination of sector-specific regulations, ethical guidelines, and overarching principles that govern the development and use of AI across different industries.

Cybersecurity Regulation

As cyber threats continue to evolve, Israel’s focus on innovation, international collaboration, and workforce development will be crucial in maintaining its leadership in global cybersecurity. 

Israel’s cybersecurity framework is the foundation of its national security and digital economy. With the National Cyber Directorate (NCD) as the prime leader, Israel has established a comprehensive and proactive approach to cybersecurity, supported by military expertise, public-private collaboration, and a thriving ecosystem of innovation. The NCD is the central body responsible for formulating and implementing Israel’s national cybersecurity policy. Established in 2018, the NCD consolidates the functions of various governmental cybersecurity bodies, providing a unified and strategic approach to national cyber defense.

The NCD’s responsibilities include setting cybersecurity standards, guiding public and private sector organizations in implementing security measures, and responding to cyber incidents across the country. The NCD also works closely with international counterparts including the U.S. National Institute of Standards and Technology (NIST) to share intelligence, develop best practices, and engage in joint cyber defense initiatives.

Digital Trade Barriers 

Data Localization

Israel, recognized for its advanced tech sector and strong cybersecurity, is increasingly focused on protecting its citizens’ data due to rising cyber threats and the global nature of digital services. 

Israel’s emphasis on national security has led to particular focus areas where data localization might be required. For instance, certain sensitive data related to defense, government operations, or critical infrastructure might be required to be stored within the country to prevent unauthorized access as well as to ensure that it remains under Israeli jurisdiction.

Technology Barriers

Israel is generally open to adopting global technology standards, which facilitate the entry of foreign technologies and support the integration of Israeli innovations into global markets. However, specific sectors, such as defense and telecommunications, may have stricter regulations that create barriers for foreign companies. Navigating Israel’s technology-related regulations, particularly in regulated sectors, can be challenging. These barriers may include requirements for local testing, certification, or compliance with specific technical standards.

Barriers to Internet Servies

Israel generally enjoys a free and open internet environment with relatively few restrictions on access to online services. However, there are regulations in place to prevent the spread of illegal content, protect children online, and maintain national security. The Israeli government has the authority to block access to websites that are deemed to pose a threat to national security or public order. Additionally, internet service providers may be required to comply with regulations related to data retention and lawful interception, particularly in cases involving criminal investigations or national security.

Foreign internet services operating in Israel must comply with local laws, particularly those related to content moderation and data privacy. Adjustments to their global operations, such as adapting content to meet Israeli regulations or establishing local legal entities is required. 

Third Country Influence

Israel is often influenced by the regulatory and policy decisions of larger economies, such as the United States, the European Union, and China. These influences can be seen in areas such as data privacy, cybersecurity, and technology standards. Israeli companies often navigate conflicting regulatory requirements from different regions. 

Both the United States and the European Union have significant influence over Israel’s intellectual property (IP) laws through trade agreements and international IP treaties. Israel’s IP regime is closely aligned with international standards, such as the World Intellectual Property Organization (WIPO) agreements but is also shaped by bilateral trade agreements with these major economies. Encouragement from both the United States and the EU has led Israel to strengthen its IP enforcement mechanisms, which impacts how companies in the digital economy protect their innovations and handle IP disputes. 

As a strong ally to the U.S., Israel had to protect sensitive data and ensure secure domestic networks, particularly with the expansion of its 5G infrastructure, the Israeli government has become more acutely aware of the risks of procuring low-cost, untrusted technologies and therefore prioritizes quality and reliability over price.

Digital Trade Opportunities

  • Cross-Sector Enabling Technologies
  • Communications and Networking Technologies 

Israel’s expertise in communications and networking technologies presents significant digital trade opportunities, both in terms of exporting products and services and forming strategic partnerships with global industry leaders. As the need for advanced digital infrastructure continues to grow, Israeli companies are well-positioned to play a key role in the global digital economy by providing the technologies that enable seamless communication and connectivity across sectors.

Israel is actively involved in the development and deployment of 5G networks, which are set to revolutionize industries by providing faster, more reliable connectivity. Creating direct opportunities for companies creating the components, software, and services that support these next-generation networks.

Israel’s innovation ecosystem has designed numerous Internet-of-Things (IoT) solutions that rely on advanced networking technologies. These solutions are applied across various industries, including healthcare, agriculture, smart cities, and industrial automation, creating opportunities for digital trade in IoT devices, platforms, and services. 

Artificial Intelligence 

Israel has become a prominent hub for AI innovation and research due to its vibrant tech ecosystem, renowned universities, and entrepreneurial culture. Academic institutions like Technion-Israel Institute of Technology and Hebrew University of Jerusalem have played a significant role in advancing AI research. 

The country’s startup culture is thriving, with numerous AI-focused startups addressing diverse industries such as healthcare, cybersecurity, finance, and autonomous systems. These startups benefit from the supportive ecosystem that provides resources, funding programs, and tax incentives for their growth. 

The Israeli government recognizes the importance of AI and actively supports its development through various initiatives. The IIA Chief Scientist offer support, funding, and collaborative opportunities for AI-driven projects and startups. This government backing further strengthens Israel’s position in the global AI landscape. The development of Israeli AI creates opportunities for collaboration between U.S. and Israeli advanced AI companies, especially in the field of defense, where we see there has been a significant increase in analytics development and Artificial Design Intelligence.

AI’s ability to integrate with other technologies such as IoT, big data, and blockchain creates opportunities for U.S. companies to offer inclusive digital solutions that address complex challenges across multiple sectors. This cross-sector integration enhances the value of AI technologies and expands its market potential. 

Specific Industry Sub-sectors 

Telecommunication

Israel continues to take steps to maintain its role as a leader for 5G cellular innovation. Thus far, the Israeli government has made investments of 24 million shekels (~$6.6 million) on projects that support innovators to design new applications to operate in a 5G network. These activities illustrate the depth of Israel’s commitment to drive new innovations in the 5G arena. The Ministry of Communications has also set a goal to achieve 92% of homes connected to fiber optic by the end of 2025. 

The development of 5G creates an opportunity for U.S. companies to supply the 5G ecosystem, starting with components to integrate with the 5G infrastructure, including, but not limited to mobile chipsets, modems, data center equipment, routers, fiber connectivity, IoT devices and more.  Additional opportunities are expected to arise as the 5G network expands, in areas such as smart cities, transportation, digital hospitals, and industry production and manufacturing. 

Software

The United States is the number one source for Israel’s imports of software and Information Technology (IT) equipment and services.  Israel has indeed emerged as a significant player in the digital world, particularly in the realms of IT, software, and the internet. The Israeli software market has experienced remarkable growth, expanding by nearly 400% in the past decade. 

Israeli software is integral to various technological devices, from PC motherboard chips to cell phones, and its applications span across business, consumer, and technical domains worldwide. Israel’s software industry has attracted attention from global technology leaders. Many companies, including HP, IBM, Microsoft, and Oracle, have established operations and manufacturing centers in the country. Additionally, U.S. companies have identified Israel as a prime destination to establish R&D centers. Having an R&D presence in Israel offers an opportunity for the American company to leverage local talent and enhance their existing technologies by collaborating with Israeli companies in various software fields. 

Digital Economy-related trade events