Is Israel becoming a victim of its own economic success?

Israel's technology sector has rarely appeared stronger. High-tech exports reached a record $85 billion in 2025, accounting for 58% of the country's exports.

The sector contributed 18.3% of GDP and almost half of Israel's economic growth.

Venture capital funding rebounded sharply, while acquisitions involving companies such as Wiz, CyberArk and Armis helped drive annual exit activity to a record $84 billion.

The industry's success, however, is increasingly accompanied by an unexpected development. The Israel Innovation Authority's latest annual report warns that research and development activity, senior management functions and portions of the technology workforce are increasingly moving abroad.

For the first time in a decade, the number of R&D employees in Israel declined, while the share of workers based in Israel at domestic technology companies fell from 69% in 2019 to 62% in 2026.

The proportion of senior executives located in Israel has also declined as decision-making increasingly migrates overseas.

The development is striking because it comes during one of the strongest periods in the industry's history. Normally, companies relocate activity when growth weakens. Israel faces the opposite challenge. Success itself may be changing the economics of remaining in Israel.

Dror Bin, the outgoing chief executive of the Israel Innovation Authority, recently described the country's technology sector as standing at a crossroads. While Israeli companies continue to attract investment and build globally competitive businesses, part of the workforce, capital and operational activity is steadily shifting abroad.

"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 warned.

The Israel Innovation Authority's report suggests this process is already underway. Much of the recent expansion in R&D operations has taken place outside Israel, particularly in Eastern Europe and the United States. The decline in the number of Israel-based senior executives points in the same direction.

The immediate temptation is to blame geopolitics. Israel remains engaged in a prolonged regional conflict, uncertainty remains elevated and investor sentiment continues to fluctuate with developments on the battlefield. Yet the underlying forces appear broader and potentially more durable.

Technology itself is changing.

For three decades Israel benefited from a simple economic proposition. The country lacked abundant natural resources and a large domestic market, but it possessed a deep pool of highly educated engineers and entrepreneurs.

Scarce technical talent became Israel's comparative advantage. Global technology companies established development centers in the country, venture capital flowed into startups and software exports became a key engine of economic growth.

The success of that model depended on scarcity. The harder it was to find highly skilled engineers, the higher the premium investors and employers were willing to pay for Israeli talent.

Today, that scarcity is gradually eroding. Companies can increasingly recruit talent globally, distributed work has weakened geographical constraints, and artificial intelligence is beginning to automate tasks previously performed by highly paid professionals.

And the AI is perhaps the most significant of these changes.

The latest generation of AI systems is not merely improving productivity at the margins. Increasingly, it is performing tasks that once required highly trained knowledge workers.

Software development, quality assurance, customer support, content generation and data analysis are all being reshaped by AI-assisted workflows. The technology is unlikely to eliminate demand for engineers altogether, but it is changing the relationship between output and headcount.

The issue matters particularly for Israel because of the central role high-tech plays in the economy. According to the Israel Innovation Authority, employment in the sector rose to approximately 400,000 workers in 2025, representing 11.4% of total employment in Israel.

High-tech has become not merely an important industry but one of the country's primary sources of growth, exports and tax revenues.

Alex Zabrzezinski, chief economist at Meitav, argues that Israel faces a "triple risk" from the accelerating adoption of artificial intelligence. As he notes in his weekly review, Israel's service exports, "which are the engine of economic growth, are concentrated in the software, computing services and software license industries" – areas that are at the forefront of exposure to competition from AI applications.

The challenge extends beyond exports. AI adoption allows companies to become more efficient, while Israel's reliance on high-tech employment is unusually high, with the sector's share of employment roughly double the European average.

At the same time, the strengthening of the shekel is squeezing competitiveness and profitability, adding pressure at a moment of rapid technological change.

Evidence of adjustment is already emerging. In recent months, several prominent Israeli technology companies, including Wix, Rapyd and Amdocs, have announced workforce reductions as they streamline operations and adapt to changing market conditions.

Smaller firms have followed a similar path. AI21 Labs reportedly reduced its workforce by about 60% as part of a major restructuring effort.

The implications may extend well beyond software.

Much of the recent attention surrounding artificial intelligence has focused on digital applications. However, a growing number of companies are attempting to bring AI into the physical world through robotics and automation.

BMW recently announced plans to deploy humanoid robots developed by Hexagon Robotics in production facilities in Europe. On the surface, the announcement may appear incremental. Industrial automation has existed for decades. The more important development lies in how these machines are trained.

Arnaud Robert, president of robotics at Hexagon, points to advances in imitation learning, a process that allows robots to learn by observing human workers through videos or motion sensors.

According to Robert, the technology can reduce training times from months to days. The goal is straightforward: a robot observes a human completing a task and learns to replicate it.

"The best translation is when the teacher and the student have the same form factor," Robert said, explaining why humanoid robots may prove particularly effective at learning from people.

He described a future in which a robot could observe a worker performing a task and then carry it out independently, suggesting that such capabilities may be only a year or two away.

Bill Ray, distinguished vice-president analyst at Gartner, estimates that within three to five years, robots may be capable of performing simple tasks after receiving voice instructions.

Whether those timelines prove accurate remains uncertain. Humanoid robots remain expensive, their capabilities remain limited and widespread deployment is far from guaranteed.

Yet the direction of the emerging trend is difficult to ignore. Artificial intelligence is steadily moving beyond digital tasks and into the physical economy.

For Israel, the trend matters because the country's economic success has become concentrated in precisely the activities most exposed to automation and productivity gains.

The challenge is not that AI will suddenly replace software engineers. Rather, companies may simply require fewer of them to achieve the same output.

That shift is occurring simultaneously with another long-term trend: the globalization of talent.

Remote work, distributed development teams and cloud-based collaboration have weakened the importance of geography. Israeli companies can increasingly hire engineers in Eastern Europe, India or the United States without sacrificing operational efficiency.

As firms become more international, management functions often follow customers, investors and strategic partners abroad.

Only at this point does the shekel enter the picture.

The strength of the Israeli currency is not the primary cause of these changes, but it may be accelerating them. Over the past year, the shekel has appreciated sharply against the dollar, reaching levels not seen in decades.

For many technology companies, this creates an uncomfortable mismatch. Revenues are largely earned in dollars, while salaries, taxes and operating expenses are paid in shekels.

A stronger currency effectively raises labor costs when measured against international competitors. On its own, that would not necessarily trigger relocation decisions. However, when companies are simultaneously adopting AI, reducing headcount requirements and expanding global hiring strategies, exchange-rate pressures become harder to ignore.

This is the paradox facing the Israeli economy. The technology sector has generated extraordinary wealth, attracted global investment and strengthened the country's currency.

Those achievements helped transform Israel into one of the world's leading innovation centers. Yet some of the same forces are now creating incentives for companies to place a growing share of future activity elsewhere.

However, investors should resist drawing overly pessimistic conclusions. Israel remains one of the world's leading technology hubs. Its universities, entrepreneurial culture, cybersecurity expertise and venture capital ecosystem continue to provide formidable advantages.

The country ranked as the world's fourth-largest center for technology fundraising in 2025, behind only San Francisco, New York and Boston.

The larger question is where the economic benefits of future innovation will ultimately accrue. The risk is not that Israeli technology companies stop succeeding. It is that an increasing proportion of the jobs, management functions and value creation associated with that success occur outside Israel.

That would represent a different kind of challenge. For much of the past three decades, Israel's growth model relied on the scarcity of highly skilled human capital.

Artificial intelligence, global labor markets and a strong currency are all reducing that scarcity at the same time. Success has not become a liability. But it may be reshaping the very foundations on which that success was built.