Israel Keeps Its Economic Motor Humming

Chinese investors flock to the nation’s cutting-edge tech sector.

Israel remains one of the world’s leading technology and innovation hubs and an attractive global investment target, supported by prudent fiscal and monetary policies and a favorable macroeconomic environment.

While Israel’s export-driven economy is not immune to a slowdown in China, volatility in emerging markets or sluggish recovery in Europe and the US, the nation has shown itself to be economically and politically resilient and has strong growth potential, especially in cutting-edge and emerging technologies.

“Israel is a small, open economy,” says Leo Leiderman, chief economist at Bank Hapoalim, so global issues certainly have an impact on growth. But its exports are geographically diversified, which limits the fallout from any one factor, like China’s economic woes. Leiderman sees Israel’s GDP growing at a healthy 3% in 2016, up from a previously anticipated 2.5%.

Foreign investments, tax cuts, negative inflation this year due to a strong shekel, lower commodity prices and government policies that foster competition and lower consumer prices all contribute to the favorable economic climate.

On the flip side, a strong shekel makes it harder for Israeli industry to be as competitive on local and international markets, says Dan Catarivas, director of foreign trade and international relations at the Manufacturers Association of Israel. He also noted an expanded bureaucracy and new laws and regulations that he calls “anti-business.”

Also on the downside, regulatory uncertainty can be a market barrier in sectors like energy and financial services, experts say. And there’s been a surge of violence between Israelis and Palestinians this fall—although it hasn’t damanged Israel’s financial markets or currency, says Leiderman. He doesn’t think it will. “Even more significant
events, such as the Lebanon War in the summer of 2006, had little impact on the macroeconomy,” he says.

Technology is one of the main growth engines of the Israeli economy, fueled primarily by a strong and fast-growing venture capital (VC) community. There are over 50 VC funds in Israel today, both domestic and foreign. In the first half of 2015 alone, some 342 companies attracted $2.1 billion in investment, versus 334 companies that brought in $1.6 billion in the first half of 2014, according to IVC Research, which tracks Israel’s high-tech industry.

Leiderman sees the uptick continuing with “2015 going down in history” as the best year ever in terms of fresh capital flowing to high-tech companies.

Israel has developed unique know-how in tech subsectors that marry its leading military technologies with civil commercial needs. These R&D capabilities have fostered expertise in diverse areas, such as financial technology (fintech), advertising technology (adtech) and cybersecurity. In 2014, it built the Advanced Technologies Park in the city of Be’er Sheba in the south, which ties the park’s resident companies with the Israel Defense Forces’ technology campus. The venture has attracted worldwide interest, according to the trade association Israel Advanced Technology Industries.

Traditionally, most direct tech investments and VC financing has arrived from the US. But one of the most interesting developments in Israel’s tech arena is the rise of Chinese financing. In 2014, 12 Israeli VCs raised $914 million from the Chinese, a six-year high, according to IVC Research and KPMG. One leading Israeli fund, Jerusalem Venture Partners, had Chinese backing for 40% of its overall target of $180 million.

The trend continues in 2015. IVC estimates that Chinese investors will pour almost $500 million into Israeli tech this year. Altogether, 30 new Chinese investors have entered the Israeli market since 2012, working with 80 Israeli companies and 11 VC funds, the firm said.

Chinese investment operates on two levels. It’s made up of grassroots initiatives, yet at the same time is strategically supported from the top down by the governments of both nations, which see it as a tool to leverage their bilateral political relations. This dialogue led the Israeli government to approve a three-year action plan in 2014 focused on innovation, as well as a handful of other programs. The Israeli government’s goals include increased mutual investments, joint projects, doubling Israeli exports to China, and tripling the number of Chinese visitors to Israel in five years.

The other major economic stimulus lies in Israel’s recent massive offshore gas discoveries, which experts say could be a game changer in Israel and the eastern Mediterranean energy markets.

A natural gas field off Israel’s Mediterranean coast, the Royee prospect, was the third-largest discovery in Israeli waters, with an estimated 3.2 trillion cubic feet of gas. Israel’s Leviathan gas field has been the largest in the Mediterranean for years, although it may be challenged by a recent discovery at the Zohr field in Egypt.

“Gas production should ensure sustained current-account surpluses, which we forecast to average over 5% of GDP over 2015–2017,” predicts Paul Gamble, a senior director with Fitch Ratings.

Yet development of the natural gas sector has been on hold for the last few years because of governmental intervention, political squabbles and regulatory uncertainty. Israel’s so-called “doing business” indicators from the World Bank have slipped, notes Gamble. That puts the sector at risk even as the Zohr discovery raises the specter that Egypt will disappear as a customer.

“Regulatory stability is a necessity for convincing foreign international oil companies to come and invest huge amounts in exploration work,” says Yigal Landau, CEO of Ratio Oil Exploration, a leading Israeli energy firm.

On the internal political front, the Israeli government currently has only a one-seat majority in parliament, which constrains policymaking in various diplomatic and economic areas. And the geopolitical context can’t be discounted, although neither Israel’s internal and external security challenges nor the regional strife that surrounds it has traditionally had a significant impact on the strength and growth of its markets.

“The conflict in Syria poses risks to Israel and to other neighboring countries, although direct spill-over has so far been negligible,” says Gamble.

Overall, Israel’s economy has showed resilience and growth in complex political and economic times, particularly for the Middle East.

Central Bank: Central Bank of Israel

International Reserves

$81,786 billion

Gross Domestic Product (GDP)

$305.7 billion

Real GDP Growth




GDP Per Capita—Current Prices


GDP—Composition By Sector*








Public Debt (general government
gross debt as a % of GDP)




Government Bond Ratings

(foreign currency)

Standard & Poor’s


Moody’s Outlook

FDI Inflows

$10,766 million

$2,352 million

$4,932 million

* Estimates
Source: Country Economic Reports