Overview
Israel’s information and communication technology (ICT) developments were initially fueled by geopolitical needs. Defense-related research and development (R&D) had a significant impact on the start of Israel’s industrial sector, the higher educational system in the areas of science and engineering, the research community, and the structure of the ICT industry work force.
The government invested significant funding to develop defense-oriented equipment and capabilities. Demand for highly skilled workers, scientists, and engineers affected public resources allocated to universities and research institutions. However, not all investment in this area stem from the defense sector. Today, multinational companies account for a significant portion of the research spending in the Israeli industry. With more than 300 R&D centers in Israel, American companies constitute about 55% of all R&D centers in the country. Corporations such as Intel, IBM, Google, Cisco, Motorola, Philips, Apple, Microsoft, and many others have invested and set up research centers in Israel to take advantage of the local talent.
According to Statista in 2022, Israel was ranked number one for a leading country for R&D expenditure as per GDP, and attracts the second-highest rate of venture capital funding per capita in the world, after Singapore.
Israel’s increasing globalization and the rising demand for advanced technologies, including cloud computing, IoT, and artificial intelligence, are driving the growth of the ICT market. The country’s projected GDP growth indicates a positive trajectory, further supporting the expansion of the ICT market.
According to some analysts, the Israel ICT market size is projected to experience notable growth with an expected increase from USD 50.74 billion in 2023 to USD 59.88 billion by 2028. This signifies a Compound Annual Growth Rate (CAGR) of 3.37% during the forecast period (2023-2028). Several factors contribute to this upward trend, including the growing focus on digital technology, cybersecurity, artificial intelligence, robotics, and healthcare IT within Israel.
Leading Sub-Sectors
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.
Cloud computing and the provision of internet-based business and consumer services are areas where over 100 Israeli software companies actively contribute. These fields are viewed as the next frontier in the IT market. Israel holds notable strengths in organizational software, fintech, and cybersecurity. These sectors offer substantial comparative advantages for the country’s tech industry.
It’s important to note that these industries account for more than 40% of new businesses founded each year in Israel and draw more than half of all investments. Many specialist funds that have invested in more than ten times also concentrate on these sectors.
Israel’s expertise in IT, software, and the internet underscores its position as a key player in the worldwide digital landscape. The country’s innovative contributions continue to shape and propel advancements in these industries globally.
As a result, 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, American 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.
Telecommunications
Israel’s telecommunication market is characterized by high mobile penetration and a significant number of service providers including Bezeq International, Pelephone, HOT Mobile, Cellcom, 013 NetVision, Partner, 012 Smile, Golan Telecom, Rami Levi Telecom, and others. Israel’s telecommunication network is one of the most sophisticated in the world.
In September 2020, 5G network officially launched across Israel. Partner, Hot Mobile and Pelephone were the first to offer the 5G network to their clients. Several companies have since formed strategic partnerships to jointly own 5G frequencies: Partner and Hot Mobile have joined forces; Cellcom, Xphone and Golan Telecom have united; while Pelephone competed alone and owns its own frequencies.
The Israeli Ministry of Communication announced it will be shutting down the 2G and 3G networks in order to accommodate the new technology and the 5G cellular network. Doing so will enable the development and growth of small industries and businesses in various areas. The process began in early 2022 and is scheduled to end by the end of 2025.
Beginning in 2020, the Ministry of Communications has prioritized the improvement the nation’s telecom infrastructure. In June 2021, the Ministry announced the operation of the fiber optics infrastructure plan which has led to Israel making significant strides toward the full deployment of fiber optic infrastructure all over the country. The Ministry of Communications has also set a goal to achieve 92% of homes connected to fiber optic by the end of 2025
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 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.
Artificial Intelligence (AI)
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 Israel Innovation Authority and the Office of the 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 there has been a significant increase in analytics development and Artificial Design Intelligence.
Cloud Computing
Cloud computing has gained wide adoption among ICT market vendors, providing numerous benefits for application development, testing, resource management, data storage, backup, and orchestration services. This technology is being embraced across various sectors in Israel, including IT and telecom, healthcare, Banking Financial and Insurance (BFSI), manufacturing, retail, media, and entertainment.
Microsoft plans to establish its first cloud in Israel, enabling the provision of local cloud services through data centers across the country. This development demonstrates the growing importance and demand for cloud computing solutions in Israel.
The BFSI sector has witnessed increased deployment of cloud-based services for secure payment gateways. Key players in the ICT market have upgraded their existing data centers with cloud computing solutions, driving market growth. For instance, Israel signed contracts worth USD 1 billion with Google and Amazon Web Services (AWS) to offer cloud services to the public sector and military, showcasing the expanding presence of cloud providers in the country.
Opportunities
There is a growing appetite among businesses and individuals in Israel to explore and adopt digital technologies. This demand is driven by the need for improved operational efficiency, enhanced customer experiences, and the pursuit of innovation across industries.
Growth in the ICT market will rely on a combination of new services and networks. Over the coming years, most of the growth in the Israeli telecom and audiovisual market will arise from mobile and pay-tv. Smartphone adoption is estimated to grow by 85% by 2025. Furthermore, the growing population of adults in the country is increasingly using smartphones which will increase spur the demand for additional ICT products and services.
The growing demand of cloud technology is critical to the enhancement of the ICT sector in Israel. Issues such as network management, providing support for new applications and creating innovative ways to better monetize subscribers and decrease operating expenses are becoming critically important in all sectors. These challenges provide substantial opportunities for U.S. companies interested in expanding in Israel’s ICT sector.
Resources
Ministry of Communication
Israel Advanced Technology Industries
Israel Innovation Authority
Startup Nation Central
Trade Policy Information System (TPIS)
Local trade shows:
CybeTech Tel Aviv – January 29-31, 2024
AI Week – February 5-7, 2024
For more information, please contact Commercial Specialist Christina Azar at Christina.Azar@trade.gov