After record year, Israeli tech brain drain raises fears for future growth – report

Israel Innovation Authority says R&D activity and management of startups are increasingly moving abroad amid AI-related changes, and as strong shekel fuels costs

While Israel’s vaunted high-tech industry continued to show peak performance over the past year, local startups are increasingly moving operations outside the country, draining the nation of engineers, tech personnel, and managers, the Israel Innovation Authority (IIA) cautioned in its annual report. The trend underscored deeper concerns about the economy’s main growth engine, the report warned.

In a worrying sign, the number of tech employees based in Israel declined amid a trend of relocation requests and as local tech companies continue to expand their operations, management, and R&D activity outside the country, according to the IIA, which is in charge of directing the nation’s tech policies.

Most of the growth in R&D operations was recorded in Eastern Europe and the United States, as the fast appreciation of the shekel, which has gained more than 20 percent over the past 12 months, has been driving up costs of hiring and expanding operations in Israel.

“Israeli high-tech is currently at a crossroads. On the one hand, while many countries around the world slowed down, Israel continues to build breakthrough companies, attract investment, and lead at the forefront of global technology,” outgoing Israel Innovation Authority CEO Dror Bin told The Times of Israel. “On the other, part of the activity, workforce, and capital is moving outside Israel.”

“This may not be a trend felt overnight, but over time it could erode the relative advantage upon which the startup nation was built,” Bin said.

High-tech contributed to about half of the economy’s growth in 2025, and its share of GDP reached a record high of 18.3 percent, cementing the sector as a major pillar of the Israeli economy, according to the IIA’s annual report. It contributed 1.44 percentage points out of Israel’s total GDP growth of 2.9%.

The high-tech sector’s contribution to the Israeli economy stems in large part from taxes paid by the workers in the sector, and hence a wave of tech employees and managers departing will affect state revenues and the entire economy.

“Israeli high tech became so successful that now it’s coming back to bite it, because it created such an influx of investments coming into Israel, which changed the shekel-dollar exchange rate, and Israeli high tech has to adapt,” said Bin. “Our main challenge now is not only to continue to generate innovation, but also to ensure that this innovation continues to create value, jobs, and growth here in Israel.”

For the first time in a decade, the number of R&D employees in Israel declined, with about 3,500 fewer roles, according to the IIA’s findings. As of March 2026, the share of employees based in Israel in private local tech companies stood at only 62%, down from 69% in 2019, as startups have continued to shift R&D activity outside the country, the IIA said.

The share of senior tech executives based in Israel declined by about 9.6%, while the number of senior executives working in the US grew — a trend that may indicate the relocation of decision-making and management of Israeli companies outside the country, the report said.

The shekel, which has been trading around a 33-year-high against the dollar, has been hurting many Israeli tech firms’ profits, as they mainly sell globally and earn mostly in dollars. However, they pay workers’ salaries, overhead costs, taxes and other expenses in shekels, which have become more expensive due to the strength of the local currency.

“One of the few things companies are doing in order to cope with the shekel-dollar exchange rate is to recruit people outside of Israel instead of in Israel,” said Bin. “Many of the Israeli high-tech companies already have R&D centers in Eastern Europe and in India, so they can just increase the number of people they have there.”

“Another measure is to lay off people to decrease the cost in Israel altogether, and another way is to decrease salaries,” Bin said.

At the same time, local companies are increasingly spending funds on integrating artificial intelligence tools into their day-to-day workflows, which is making some jobs obsolete.

“All of these measures are very painful, but to sustain competitiveness, there is no other way for Israeli executives and entrepreneurs,” said Bin. “But eventually those companies are going to be leaner and faster, using AI to progress quickly, to turn them more competitive.”

Last week, Wix, Rapyd, and Amdocs became the latest Israeli tech firms to join a wave of layoffs to tighten operations, cut costs and reorganize their staff amid pressure to adapt to the new automation era.

The wave of layoffs is also sweeping through startups and smaller tech firms in Israel. Israel-based AI startup AI21 Labs, a natural language processing (NLP) startup, announced a major organizational restructuring, cutting about 60% of its staff, or about 110 employees, according to reports in the Hebrew press.

After a decade-long decline, the number of newly founded startups in Israel stood at 775 in 2025, compared to about 750 in 2024 and 743 in 2023. Last year’s figure is still significantly below the peak of more than 1,400 new companies that were established in 2014, according to the IIA.

Against the backdrop of two years of prolonged war on multiple fronts, Israel continued to maintain its status as one of the world’s top technology hubs, ranking in 2025 as the fourth-largest globally for capital raising, behind San Francisco, New York, and Boston, and ahead of London, Paris, and Singapore, according to the report. Local tech companies and startups raised a total of about $15 billion, an increase of 30% compared to 2024.

2025 was a record year for exits, as major acquisitions of Israeli tech companies, including Wiz, CyberArk, and Armis, pushed the annual transaction value to $84 billion. High-tech exports reached a record $85 billion, accounting for 58% of total Israeli exports last year.

“As the economy’s primary growth engine, the State of Israel must continue placing innovation at the top of its national priorities, not only for the economy, but also for the resilience and future of the country as a whole,” said Israel Innovation Authority chairman Alon Stopel. “The strength of Israeli high-tech over the next decade also depends on decisive government action.”

“Consistent and large-scale public investments in Israeli high-tech, alongside the creation of an environment that enables innovation to flourish specifically from Israel, are the central strategic investments capable of ensuring Israel’s continued economic growth,” said Stopel.