Israel's Treasury Warns of Slowdown in Hi-tech Industry

Reports says sector suffers shortage of skilled staff as Israel’s innovative edge dulls.

Intel plant in Kiryat Gat: Still Israel’s best workplace.
Alberto Denkberg

Startup Nation isn’t what it once was, the Finance Ministry said in a report on Sunday that found that high-technology no longer leads Israeli economic growth and is suffering a dangerously tightening supply of skilled workers.

“Since the last global economic crisis [in 2008], there has been a major slowdown in the sector’s growth rate and it has ceased to be an engine of economic growth,” the treasury said, warning that Israel was losing its innovative edge.

In the years 1998 through 2012, high-tech grew at a rate of 9% annually. Since 2010, however, the industry has been growing at about half the rate of the overall economy. While exports for the sector grew 10% a year from 2002 to 2012, its share of total exports has more recently been falling from 39% in 2009 to as little as 34% in recent years. A jump back up to 39%, the report said, was due to a surge of exports by Intel’s Israeli semiconductor plant.

The treasury reports came a day after the Organization for Economic Cooperation and Development reported that Israel has lost the No. 1 spot it long held to South Korea. In 2014, South Korea spent 4.3% of its gross domestic product on R&D – regarded as a major barometer of high-tech prowess – while Israel spent 4.1%, making it No. 2.

Israeli startup companies raised a record $4.43 billion of capital last year, another important industry barometer. The treasury report said Israel, like the United States, had seen a recovery in venture capital since the 2008 crisis, but warned that the growth is unlikely to continue much longer.

“The shocks in recent months in the global capital markets are likely to hurt the [high-tech] sector, whose activity is traditionally tied to the Nasdaq index, with a delay of about one quarter,” it said.

The treasury report pointed to evidence that Israeli high-tech was experiencing a severe and growing manpower shortage. High-tech, which the treasury says includes electronics, software, research and development as well as pharmaceuticals and aviation, has seen its share of the Israeli labor force stuck at about 12% for a decade.

A shortage of trained graduates is creating a supply shortage that prevents tech companies from growing. It’s also caused wages to rise, undermining Israel’s cost advantage versus the U.S, especially in the key area of multinational R&D centers. Israel is home to about 250 tech companies, including outposts of companies like Apple, Google and Facebook.

Average salaries at R&D centers in Israel have grown from less than 60% of a U.S. salary in 2009 to close to 80%, the report cited as the most serious example. But similar trends also occurred in software, financial technology and information technology, it said.

The shortage isn’t likely to be eased anytime soon, the treasury said.

The percentage of Israelis earning degrees in the exact sciences has been falling sharply since 2004, when the rate was more than 13%. In 2014, it was about 8.5%, which it attributed to the growth of academic colleges over the past two decades, which turn out fewer science graduates.

Israel is not alone in producing fewer science graduates, the ministry said, but the decline has been much sharper in Israel than elsewhere: Among OECD countries the rate has slipped as well, but only from about 10% to about 8.5%, it said.