Israel’s High-Tech Sector Rebounds, but Structural Shifts Deepen

After two years of slowdown, Israel’s high-tech sector returned to growth in 2025, reaffirming its central role as the economy’s primary engine. According to the Israel Innovation Authority’s High-Tech in 2025 report, high-tech output rose by 8.2%, accounting for roughly half of total economic growth and 58% of Israel’s exports.

The recovery was also reflected in capital markets. Fundraising by Israeli tech companies jumped 30% compared to 2024, reaching nearly $15 billion. Startup formation picked up pace with 775 new companies founded during the year, while exit activity surged to a record $84 billion in mergers, acquisitions, and IPOs. At the same time, the ecosystem continued to globalize, with 81 acquisitions of foreign companies by Israeli firms and growing participation from multinational corporations in Israel.

But beneath the headline recovery, the report points to a shift in what is driving growth. After years in which software and enterprise services dominated, 2025 was marked by a resurgence in hardware. Output in the hardware segment grew by 20.7%, adding about NIS 16 billion, while employment in this area rose by nearly 9%. Software employment, by contrast, stabilized.

Artificial intelligence is increasingly shaping these dynamics. Productivity per employee climbed to around NIS 793,000 annually, even as hiring in R&D slowed. The data suggests companies are producing more with fewer engineers, while expanding product and non-development roles. AI tools are also lowering barriers to entry, likely contributing to the rise in new startups after a decade of decline.

Investment patterns reflect the same transformation. Capital is flowing heavily into AI-related fields, from core models to chip infrastructure and computing systems, reinforcing both the software and hardware sides of the ecosystem. At the same time, funding is becoming more concentrated, with fewer companies capturing a larger share of capital, particularly in cybersecurity and enterprise software.

Despite these strengths, several warning signs are emerging. High-tech employment exceeded 400,000 workers but grew only modestly, and for the first time in over a decade, R&D employment declined. More Israeli companies are also expanding abroad, including in senior and engineering roles, particularly in the United States.

The sector’s heavy reliance on exports and foreign capital adds another layer of vulnerability. Currency fluctuations in 2025 reduced profitability and increased costs for Israel-based operations. Meanwhile, the gap between current output and the pre-2023 growth trend remains significant.

Overall, the sector is recovering – but it is also evolving. The central question ahead is whether these shifts represent healthy globalization and adaptation to the AI era, or the beginning of a more permanent redistribution of Israel’s high-tech center of gravity away from home.