A new report warns that the government should invest more in research and development to keep the tech sector growing

Israel’s tech industry is the jewel in the economy’s crown, having led to explosive growth over the past decade and boosted the country’s reputation as a high-tech nation, but the industry suffers from serious challenges such as a lack of diversity and an acute shortage of talent that can seriously hamper its ability to compete in years ahead, according to the latest report of the Israel Innovation Authority (IIA) released on Wednesday.

These issues, combined with insufficient government spending on research and development and the growing disparity between the technology sector and traditional sectors, could hinder Israel from emerging on the world stage in the coming decades, High tech state 2022 The report noted.

“On the one hand, we are a very large part of the ecosystem globally, and we are in a very good position and compete effectively,” Sagi Dagan, vice president of growth at the Institute of Internal Auditors, told The Times of Israel in a telephone briefing, publishing the report.

On the other hand, we see a decline in infrastructure [needed] for a high-tech future. We need to make the right decisions for the future, and manage our risks.”

Dagan said Israel needs to consider what its technology ecosystem will look like in 2030-2040. “We are already seeing threats,” he explained, “such as the Israeli government’s low spending on research and development as a percentage of GDP, and the decline in resources devoted to industry and academia to drive breakthrough developments forward.” This type of government investment is usually directed at what is considered “high-risk” development in areas such as food, science, agriculture, transportation, energy and space to ensure long-term security and growth, and where there may be a shortage of private financing.

Dagan noted that competing technology ecosystems such as Paris, Berlin, Singapore and Boston are seeing relatively more support.

View of the Tel Aviv Stock Exchange. November 29, 2020 (Miriam Alster / FLASH90)

Over the years, government investment in research and development in growing and future sectors, as a percentage of GDP, has seen a steady decline. The authors of the IIA report wrote on Wednesday that the continued growth of the Israeli high-tech industry in the face of global competition is jeopardized by significantly lower government investment compared to other countries.

The numbers are worrying. The IIA report indicated that the Israeli government’s share of investment in research and development is the lowest among all OECD countries, at 9.6% in 2019 (for which the most recent data is available) which is well below the average The adult is 23.8%. In comparison, South Korea’s share of R&D investment was just over 20%, Sweden at 24%, France at over 31%, the UK at 27% and the US at 20%.

At the same time, Israel ranks first among the OECD rankings in research and development expenditures as a percentage of GDP, at 5.4% in 2019, double the OECD average of 2.7%. The report stated that Korea got 4.8%, Sweden 3.5%, France 2.4%, the United Kingdom 1.7% and the United States also got 3.5%.

Moreover, Israel has fallen behind in the Global Innovation Index (GII) rankings in recent years, dropping to 15th place in 2021, down from 10th place in 2019.

One of the important questions the government must answer, Dagan said, is, “Are we doing a long-term risk analysis and putting public investments in the right places?”

Dagan suggested that the size of the ecosystem has grown exponentially in the past decade to become a much larger industry, but the government’s allocation of resources has not been proportionately adjusted.

He explained that over the past two years, since the outbreak of the COVID-19 epidemic, two important processes have taken place. First, the Israeli tech industry has seen a huge amount of investment and exits – in 2021, Israeli companies raised more than $25 billion in funding, surpassing $10 billion in 2020, a previous record. Second, the risks to the sector have grown accordingly.

SentinelOne rings the closing bell at the New York Stock Exchange, June 30, 2021, in celebration of its initial public offering. To honor the occasion, Tomer Weingarten, Co-Founder and CEO of SentinelOne, Center with Arm Raised, joined John Tuttle, NYSE Vice Chairman and Commercial Director, 2nd from Right (NYSE)

“There has been a lot of investment and that’s a source of pride; 25% of the income tax came from technology, and half of our exports are from technology. Israel is a small country, we don’t have a lot of natural resources, we have little gas and little phosphate from the Dead Sea. Our resources,” Dagan said. Natural is our brain, our knowledge… that we use in high-tech.

At the same time, “the risks have also increased, and we have no alternatives, we have to invest in these areas,” he said. “The tech sector saved the economy during the pandemic, what would have happened if the tech sector wasn’t that strong?”

By risk, Dagan and others point to issues such as the lack of diversity and inclusion in the tech sector where the proportion of workers from Arab and ultra-Orthodox communities did not rise, at 4.7%, and workers from outside central Israel represented about 33%.

The report stated that “high tech maintains its homogeneity as a Jewish industry” and a male-majority industry. Less than 20% of salaried employees are Arab, most of its employees are ultra-Orthodox men, women make up less than a third of all salaried employees in the industry, and ultra-Orthodox men and women make up only 3%.

The lack of diversity is also linked to a lack of deep technical talent, and sought-after candidates often have backgrounds in engineering and development or recent graduates from elite intelligence units in the IDF.

Illustrative: Ultra-Orthodox Jewish women work on computers at their desks at the office of Comex software company in downtown Holon near Tel Aviv, April 17, 2016 (AFP Photo/Menahem Kahana)

Israel has about 13,000 vacancies, as of a separate 2021 report by the Institute of Internal Auditors (IIA) that tracks “human capital.” The next report is due in the coming weeks.

Another area where there are challenges is the number of collaborations between academia and industry, of which no more than 15% are with Israeli companies. Up to half of the collaborations are with US multinationals Microsoft and IBM, according to the study.

“Increasing cooperation between growing Israeli technology companies and academia will also expose companies to a high-quality source of advanced manpower and knowledge. This will allow them to expand their capabilities, continue to innovate and be competitive in the global market.”

These issues can be addressed through government support that prioritizes education, funding of universities and academic initiatives, and investments in the research and development sector.

“All the challenges are linked together, and we need a set of actions,” Dagan said.

On some positive notes, the Israeli technology industry has grown to about 362,000 workers, who make up 10.4 percent of all employees in Israel, according to the report of the Institute of Internal Auditors (IIA), and the rate of increase in the number of high-tech employees in 2021 was eight times higher than the rest Economy.

(By comparison, the proportion of high-tech employees in Ireland was 9.2%, Sweden 5.7%, Germany 5.3%, the Netherlands 4.3%, and the United Kingdom 5.5%, according to Eurostat data.)

In addition, computer science has become the most popular undergraduate degree in Israeli universities, and the number of students studying the subject, partially or fully, has risen to about 10.8% of all undergraduates.

About 40% of male students and 13% of female students in undergraduate degree programs were studying subjects such as civil or mechanical engineering as of 2021, which count as working toward a career in the technology sector, the report said.

And while the tech industry saw record funding in 2021, mostly in areas such as enterprise software, cybersecurity and fintech, the market value of Israeli tech companies on Nasdaq has fallen by about 10% in recent months.

The value of Israeli technology companies traded in Tel Aviv 35 also decreased by 9.5%, according to the report, according to the report that these trends indicate a decline in private investments in Israel and the United States during the first quarter of 2022, compared to the same period last. public.

Economists have warned that after a boom year for Israeli technology in 2021, a market correction was expected in 2022.

The CEO of the International Institute of Internal Auditors, Dror Ben, said the overall successes of the Israeli high-tech sector “blurred the challenges we might face in the future.”

The report shows that the continued prosperity of the industry is under threat from the excessive concentration of the industry, both geographically and demographically. In addition, due to the relatively low government investment in pioneering research and development, there are higher risks compared to competing countries.

Dr. Amy Appelbaum, President of the Institute of Internal Auditors, warned in a statement that “Israel cannot bury its head in the sand and we expect that without long-term investment in high-tech, the key export sector of the economy will continue to lead in the world arena.”

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